As filed with the Securities and Exchange Commission on April 28, 2000
File Nos.
33-23493
811-5583
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 32 (X)
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 33 (X)
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
(formerly Franklin Valuemark Funds)
(Exact Name of Registrant as Specified in Charter)
777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
----------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
KAREN L. SKIDMORE, ESQ., 777 MARINERS ISLAND BLVD., SAN MATEO, CA 94404
-----------------------------------------------------------------------
(Name and Address of Agent for Service of Process)
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[X] on May 1, 2000 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] (date) pursuant to paragraph (a)(1) of Rule 485
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on [ ] pursuant to paragraph (a)(2) of Rule 485
If appropriate, check the following box:
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
<PAGE>
Prospectus
Franklin Templeton
Variable Insurance
Products Trust
Class 1 Shares
May 1, 2000
[GRAPHIC OMITTED]
As with all fund prospectuses, the SEC has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.
<PAGE>
Contents
FRANKLIN TEMPLETON VARIABLE
- ------------------------------INSURANCE PRODUCTS TRUST
<TABLE>
<S> <C> <C>
Information about each fund i Overview
you should know before
investing Individual Fund Descriptions
FA-1 Franklin Aggressive Growth
Securities Fund
FGC-1 Franklin Global Communications
Securities Fund
FGH-1 Franklin Global Health Care
Securities Fund
FGI-1 Franklin Growth and Income
Securities Fund
FH-1 Franklin High Income Fund
FI-1 Franklin Income Securities Fund
FL-1 Franklin Large Cap Growth
Securities Fund
FM-1 Franklin Money Market Fund
FN-1 Franklin Natural Resources
Securities Fund
FRE-1 Franklin Real Estate Fund
FRD-1 Franklin Rising Dividends
Securities Fund
FS-1 Franklin Small Cap Fund
FSP-1 Franklin S&P 500 Index Fund
FSI-1 Franklin Strategic Income
Securities Fund
FT-1 Franklin Technology Securities Fund
FUS-1 Franklin U.S. Government Fund
FV-1 Franklin Value Securities Fund
FZ-1 Franklin Zero Coupon Funds --
2000, 2005, 2010
MD-1 Mutual Discovery Securities Fund
MS-1 Mutual Shares Securities Fund
TA-1 Templeton Asset Strategy Fund
TD-1 Templeton Developing Markets
Securities Fund
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
TGI-1 Templeton Global Income
Securities Fund
TG-1 Templeton Growth Securities Fund
TI-1 Templeton International
Securities Fund
TIS-1 Templeton International
Smaller Companies Fund
TP-1 Templeton Pacific Growth
Securities Fund
Additional Information, All Funds
1 Distributions and Taxes
</TABLE>
- ------------------------------FUND ACCOUNT INFORMATION
<TABLE>
<S> <C> <C>
Information about fund 2 Buying Shares
account transactions 2 Selling Shares
and services 2 Exchanging Shares
2 Fund Account Policies
3 Questions
</TABLE>
- ------------------------------FOR MORE INFORMATION
<TABLE>
<S> <C>
Where to learn more about Back Cover
each fund
</TABLE>
<PAGE>
Franklin Templeton
Variable Insurance Products Trust
OVERVIEW
- --------
[GRAPHIC OMITTED]
Franklin Templeton Variable Insurance Products Trust (the Trust), formerly
Franklin Valuemark Funds, currently consists of twenty-nine (29) separate
funds, offering a wide variety of investment choices. Each fund generally has
two classes of shares, class 1 and class 2. The funds are generally only
available as investment options in variable annuity or variable life insurance
contracts. The accompanying contract prospectus indicates which funds and
classes are available to you.
INVESTMENT CONSIDERATIONS
/bullet/ Each fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.
/bullet/ No single fund can be a complete investment program; consider
diversifying your fund choices.
/bullet/ You should evaluate each fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.
RISKS
/bullet/ There can be no assurance that any fund will achieve its investment
goal.
/bullet/ Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risks before investing.
/bullet/ All securities markets, interest rates, and currency valuations move
up and down, sometimes dramatically, and mixed with the good years can
be some bad years. Since no one can predict exactly how financial
markets will perform, you may want to exercise patience and focus not
on short-term market movements, but on your long-term investment
goals.
/bullet/ Fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency of the U.S. Government. Fund shares involve investment risks,
including the possible loss of principal.
More detailed information about each fund,
its investment policies, and its particular
risks can be found in the Trust's Statement of
Additional Information (SAI).
MANAGEMENT
The funds' investment managers and their affiliates manage over $229 billion in
assets. In 1992, Franklin joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers organization became part of the
Franklin Templeton organization four years later. Today, Franklin Templeton
Investments is one of the largest mutual fund organizations in the United
States, and offers money management expertise spanning a variety of investment
objectives.
i
<PAGE>
Franklin Aggressive Growth Securities Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies demonstrating
accelerating growth, increasing profitability, or above-average growth or
growth potential as compared with the overall economy. An equity security
represents a proportionate share of the ownership of a company; its value is
based on the success of the company's business, any income paid to
stockholders, the value of its
- --------------------------------------------------------------------------------
The fund invests primarily in the common stocks of aggressive growth companies.
- --------------------------------------------------------------------------------
assets, and general market conditions. Common and preferred stocks, and
securities convertible into common stock are examples of equity securities.
The fund invests in small, medium, and large capitalization companies with
strong growth potential. Although the fund seeks investments across a large
number of sectors, it expects to have substantial positions in the technology
sector (including computers and telecommunications), and significant positions
in other sectors including, for example, health care (including biotechnology),
consumer products, and consumer services (including media, broadcasting, and
entertainment). Typically, however, the fund will be invested in a variety of
industries and a wide variety of companies within sectors.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager focuses on sectors that have exceptional
growth potential and fast growing, innovative companies within these sectors.
The manager relies on a team of analysts to provide in-depth industry
expertise, and uses both qualitative and quantitative analysis to evaluate
companies for sound financial records, and strength and quality of management,
among other factors.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the
shorter term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company
fails to meet those projections. Growth stocks may also be more expensive
relative to their earnings or assets compared to value or other stocks. Because
the fund's manager uses an aggressive growth strategy, an investment in the
fund involves greater risk and more volatility than an investment in a growth
fund investing entirely in proven growth stocks.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions,
including increases
FA-1 Franklin Aggressive Growth Securities Fund - Class 1
<PAGE>
in interest rates because of their reliance on credit, and their growth
prospects are less certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the fund,
or only in very limited quantities. Thus, when the fund's size is smaller, any
gains from IPOs will have an exaggerated impact on the fund's reported
performance than when the fund is larger.
SECTOR FOCUS By focusing on particular sectors from time to time, the fund
carries greater risk of adverse developments in a sector than a fund that
always invests in a wide variety of sectors.
Technology companies Technology and biotechnology industry stocks can be
subject to abrupt or erratic price movements. They have historically been
volatile in price, especially over the short term, due to the rapid pace of
product change and development affecting such companies. Prices often change
collectively without regard to the merits of individual companies.
Health care companies The activities of health care companies may be partially
funded or subsidized by federal or state governments. If government funding and
subsidies are reduced or discontinued, the profitability of these companies
could be adversely affected. Health care companies may also be affected by
government policies on health care reimbursements, regulatory approval for new
drugs and medical instruments, and similar matters. They are also subject to
legislative risk, i.e., the risk of a reform of the health care system through
legislation.
Telecommunications, media, and broadcasting companies These companies operate
under international, federal, and state regulations, and therefore, may be
adversely affected by changes in such regulations. The telecommunications,
media, and broadcasting sectors have been undergoing deregulation leading to
increased competition, which may adversely affect the companies in these
sectors.
Consumer products, services, and entertainment companies These companies have
historically been sensitive to the economy in general, through changes in
consumer spending patterns. These companies may be adversely affected by
changes in consumer opinion or demand for a given product or service.
PORTFOLIO TURNOVER The manager's aggressive growth strategy may cause the
fund's portfolio turnover rate to be higher than that of other funds. High
turnover generally increases the fund's transaction costs.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FA-2 Franklin Aggressive Growth Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
Because the fund is new, it has no performance history.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN AGGRESSIVE GROWTH SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets) 1,2
<TABLE>
<CAPTION>
Class 1
- -------------------------------------------------
<S> <C>
Management fees 0.50%
Other expenses 0.22%
----
Total annual fund operating expenses 0.72%
====
</TABLE>
1. The management fees shown are based on the fund's maximum contractual
amount. Other expenses are estimated.
2. The manager and administrator have agreed in advance to waive or limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund so that total annual fund operating expenses do not exceed
1.00% of average net assets for the current fiscal year. After December 31,
2001, the manager and administrator may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
- ---------------------------------
<S> <C> <C>
Class 1 $74 $230
</TABLE>
FA-3 Franklin Aggressive Growth Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Michael McCarthy Mr. McCarthy has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1999 and has been with the Franklin Templeton Group since 1992.
J. P. Scandalios Mr. Scandalios has been a manager of the fund since its inception in
SENIOR SECURITIES ANALYST, ADVISERS 1999. Before joining the Franklin Templeton Group in 1996, he was with
Chase Manhattan Bank.
Conrad Herrmann, CFA Mr. Herrmann has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, ADVISERS 1999 and has been with the Franklin Templeton Group since 1989.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. The fee is equal
to an annual rate of:
/bullet/ 0.500% of the value of net assets up to $500 million;
/bullet/ 0.400% of the value of net assets over $500 million up to and including
$1 billion;
/bullet/ 0.350% of the value of net assets over $1 billion up to and including
$1.5 billion;
/bullet/ 0.300% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
/bullet/ 0.275% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
/bullet/ 0.250% of the value of net assets over $11.5 billion up to and
including $16.5 billion;
/bullet/ 0.240% of the value of net assets over $16.5 billion up to and
including $19 billion;
/bullet/ 0.230% of the value of net assets over $19 billion up to and including
$21.5 billion; and
/bullet/ 0.220% of the value of net assets over $21.5 billion.
The manager is contractually obligated to limit management fees so that Total
annual fund operating expenses do not exceed 1.00% of the fund's class 1 net
assets in 2000.
FA-4 Franklin Aggressive Growth Securities Fund - Class 1
<PAGE>
Franklin Global Communications Securities Fund
(previously Franklin Global Utilities Securities Fund)
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's investment goals are capital appreciation and current income.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of U.S. and non-U.S.
communications companies.
These are companies that are primarily engaged in the development, manufacture
or sale of communications services and communications equipment. These may
include, for example, companies that provide:
- --------------------------------------------------------------------------------
The fund concentrates in common stocks of U.S. and non-U.S. companies engaged
in the public utilities industry, predominantly communications companies.
- --------------------------------------------------------------------------------
/bullet/ cellular and other wireless communications, paging, and local and wide
area network and data services or equipment;
/bullet/ local and long distance telephone services or equipment;
/bullet/ satellite, microwave, cable and other pay television services or
equipment; and
/bullet/ Internet-related services or equipment, including Internet service, web
hosting and web content, Internet portals, data warehouse and other
related service.
The fund may buy communications companies anywhere in the world, including
emerging markets, but generally invests a greater percentage of its assets in
U.S. companies than in companies in any other single country. An equity
security represents a proportionate share of the ownership of a company; its
value is based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions. Common
and preferred stocks, and securities convertible into common stock are examples
of equity securities.
The fund also may invest a significant portion of its assets in small-cap
companies, which have market capitalization values (share price multiplied by
the number of common stock shares outstanding) of less than $1.5 billion.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined "blend" of growth and value strategies. Relying on a
team of analysts to provide in-depth industry expertise, the manager looks for
companies that will position the fund to benefit from potential future
technological advances and increasing worldwide demand in the communications
industries of the public utilities sector. As a "bottom-up" investor focusing
primarily on individual securities, the fund's manager will focus on the market
price of a company's securities relative to its evaluation of the company's
potential long-term earnings, asset value and cash flow. A company's historical
value measures, including price/earnings ratio, profit margins, and liquidation
value, will also be considered, but are not limiting factors.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goals.
FGC-1 Franklin Global Communications Securities Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
UTILITIES INDUSTRY, PREDOMINANTLY COMMUNICATONS COMPANIES
By concentrating in the utilities industry sector, and by investing
predominantly in communications companies, the fund carries much greater risk
of adverse developments in that sector, and among those companies, than a fund
that invests more broadly. The securities of communications companies may
experience more price volatility than securities of companies in some other
industries. Communications companies are subject to a variety of risk factors
including: significant competitive pressures, such as new market entrants,
aggressive pricing and competition for market share; and the risks that new
services, equipment or technologies will not be accepted by consumers and
businesses or will become rapidly obsolete. These factors can affect the
profitability of communications companies and, as a result, the value of their
securities. In addition, many wireless telecommunication and Internet-related
companies are in the emerging stage of development and are particularly
vulnerable to the risks of rapidly changing technologies, as well as the
potential of both accidental and deliberate disruption or failure of services
or equipment. Prices of these companies' securities historically have been more
volatile than other securities, especially over the short term.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions,
currencies, and interest rate movements around the world, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
- --------------------------------------------------------------------------------
Utility companies in the U.S. and in non-U.S. countries have generally been
subject to substantial government regulation. Major changes in government
policies, ranging from increased regulation or expropriation to deregulation,
privatization or increased competition, may dramatically increase or reduce
opportunities for these companies. For example, while certain companies may
develop more profitable opportunities, others may be forced to defend their core
businesses and may be less profitable.
In addition, electric utility companies have historically been subject to price
regulation; risks associated with high interest costs on borrowings or reduced
ability to borrow; restrictions on operations and increased costs due to
environmental and safety regulations; regulators disallowing these higher costs
in rate authorizations; difficulties in obtaining fuel for electric generation
at reasonable prices; risks associated with the operation of nuclear power
plants; and the effects of energy conservation and other factors affecting the
level of demand for services.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
BLEND STYLE STOCK INVESTING A "blend" strategy results in investments in both
growth and value stocks, or in stocks with characteristics of both. Growth
stock prices reflect projections of future earnings or revenues, and can,
therefore, fall dramatically if the company fails to meet those projections.
Value stock prices are considered "cheap" relative to the company's perceived
value and are often out of favor with other investors. However, if other
investors fail to recognize the company's value (and do not become buyers, or
become sellers), or favor investing in faster-growing companies, value stocks
may not increase in value as anticipated by the manager and may even decline
further. By combining both styles, the manager seeks to diversify the risks and
lower the volatility, but there is no assurance this strategy will have that
result.
INTEREST RATE Rate changes can be sudden and unpredictable. Increases in
interest rates may have an effect on the types of companies in which the fund
invests because they may find it more difficult to obtain credit to expand, or
may have more difficulty meeting interest payments. Utility company stocks
often pay relatively high dividends, so they are particularly sensitive to
interest rate movements. Therefore, like bonds, their stock prices may rise as
interest rates fall or fall as interest rates rise.
FGC-2 Franklin Global Communications Securities Fund - Class 1
<PAGE>
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions and
increases in interest rates, their growth prospects are less certain, and their
securities are less liquid. These companies may suffer significant losses, and
can be considered speculative. Technology industry stocks, in particular, can
be subject to abrupt or erratic price movements.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the fund,
or only in very limited quantities. Thus, when the fund's size is smaller, any
gains from IPOs will have an exaggerated impact on the fund's reported
performance than when the fund is larger.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FGC-3 Franklin Global Communications Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Franklin Global
Communications Securities
Fund - Class 1 1 39.42% 22.55% 14.05%
S&P 500 Index 2 21.04% 28.56% 18.21%
FT/S&P Actuaries World
Utilities Index 2 32.26% 24.70% 14.23%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The Financial Times/S&P Actuaries World Utilities Index includes
electric utilities, waterworks supply, natural gas and telephone companies.
Indices include reinvested dividends and/or interest. One cannot invest directly
in an index, nor is an index representative of the fund's investments.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN GLOBAL COMMUNICATIONS SECURITIES FUND 1 - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- -----------------------------------------------
<S> <C>
Management fees 2 0.48%
Other expenses 0.03%
----
Total annual fund operating expenses 0.51%
====
</TABLE>
1. Before November 15, 1999, the Franklin Global Utilities Securities Fund
2. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $52 $164 $285 $640
</TABLE>
FGC-4 Franklin Global Communications Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Alex W. Peters Mr. Peters has been a manager of the fund since 1999, and has been
PORTFOLIO MANAGER, ADVISERS with the Franklin Templeton Group since 1992.
Alan Muschott Mr. Muschott has been a manager of the fund since March 2000, and has
PORTFOLIO MANAGER, ADVISERS been with the Franklin Templeton Group since 1998.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal
year ended December 31, 1999, the fund paid 0.48% of its average daily net
assets to the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 20.45 20.33 18.18 17.90 14.42
---------------------------------------------------------
Net investment income .37 .76 .90 .91 .84
Net realized and unrealized gains 6.91 1.41 3.54 .29 3.54
---------------------------------------------------------
Total from investment operations 7.28 2.17 4.44 1.20 4.38
---------------------------------------------------------
Distributions from net investment income (.84) (.83) (.96) (.92) (.90)
Distributions from net realized gains (2.03) (1.22) (1.33) -- --
---------------------------------------------------------
Total distributions (2.87) (2.05) (2.29) (.92) (.90)
---------------------------------------------------------
Net asset value, end of year 24.86 20.45 20.33 18.18 17.90
=========================================================
Total return (%)+ 39.42 11.19 26.76 7.07 31.35
Ratios/supplemental data
Net assets, end of year ($ x 1 million) 987 987 1,130 1,202 1,423
Ratios to average net assets: (%)
Expenses .51 .50 .50 .50 .50
Net investment income 1.81 3.15 3.91 4.20 5.14
Portfolio turnover rate (%) 87.53 33.85 17.00 29.69 13.27
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1Based on average shares outstanding.
FGC-5 Franklin Global Communications Securities Fund - Class 1
<PAGE>
Franklin Global Health Care Securities Fund
(previously Global Health Care Securities Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
70% of its total assets in equity securities of companies in the health care
industry. These are companies whose principal assets or activities are in
research, development, production or distribution of products and services in
industries such as pharmaceutical; biotechnology; health care facilities,
information systems and personal products; medical supplies, technology and
services; and managed care companies. An equity security represents a
proportionate share of the ownership of a company; its value is based on the
success of the company's business, any income paid to stockholders, the value of
its assets, and general market conditions. Common and preferred stocks, and
securities convertible into common stock are examples of equity securities.
- --------------------------------------------------------------------------------
The fund concentrates in common stocks of U.S. and non-U.S. companies in the
health care industry
- --------------------------------------------------------------------------------
The fund may buy health care companies anywhere in the world, but generally
invests predominantly in U.S. companies. The fund also may invest a substantial
portion of its assets in small-cap companies which have market capitalization
values (share price multiplied by the number of common stock shares
outstanding) of less than $1.5 billion. From time to time, the fund also may
have a substantial portion of its assets in one or more industries of the
health care sector, such as pharmaceuticals.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined "blend" of growth and value strategies. As a "bottom-up"
investor focusing primarily on individual securities, the manager chooses
companies that fill particular health care niches and that it believes are
positioned for rapid growth in revenues, earnings or assets, and/or are selling
at reasonable prices using a company's historical value measures. The manager
relies on a team of analysts to provide in-depth industry expertise, and uses
both qualitative and quantitative analysis, to look for companies that will
position the fund to benefit from potential future technological advances and
increasing worldwide demand in the health care sector. In addition, the manager
evaluates companies on factors such as strength and quality of management,
strategic positioning in their industry and globally competitive advantages.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
HEALTH CARE COMPANIES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Government actions may affect
health care companies in many ways. For example, foreign, U.S. federal, or
state governments could discontinue subsidies of certain research or other
activities of some companies, which may have an adverse effect on these
companies. Stocks held by the fund, and especially health care providers and
pharmaceuticals, may also be affected by government policies on health care
reimbursements (such as Medicare and Medicaid), regulatory approval for new
drugs and medical instruments, or legislative reform of a health care system.
Health care companies are also subject to the risks of product liability
lawsuits and the risk that their products and services may rapidly become
obsolete.
FGH-1 Franklin Global Health Care Securities Fund - Class 1
<PAGE>
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions
around the world, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
BLEND STYLE STOCK INVESTING A "blend" strategy results in investments in both
growth and value stocks, or in stocks with characteristics of both. Growth stock
prices reflect projections of future earnings or revenues, and can, therefore,
fall dramatically if the company fails to meet those projections. Value stock
prices are considered "cheap" relative to the company's perceived value and are
often out of favor with other investors. However, if other investors fail to
recognize the company's value (and do not become buyers, or become sellers), or
favor investing in faster-growing companies, value stocks may not increase in
value as anticipated by the manager and may even decline further. By combining
both styles, the manager seeks to diversify the risks and lower the volatility,
but there is no assurance this strategy will have that result.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions,
including increases in interest rates because of their reliance on credit, and
their growth prospects are less certain.
For example, smaller companies may lack depth of management, or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative. Technology and biotechnology industry stocks, in particular, can be
subject to abrupt or erratic price movements.
FOREIGN SECURITIES Securities of companies located outside the U.S. may involve
risks that can increase losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country and Company General securities market and interest rate movements in
any country where the fund has investments are likely to affect the value of
the securities the fund owns that trade in that country. The political,
economic, and social structures of some countries the fund invests in may be
less stable and more volatile than those in the U.S. The risks of investing in
these countries include the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks. Non-U.S. companies may not be subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies, or may become illiquid. Non-U.S. currency exchanges, stock
exchanges, trading systems, brokers, and companies generally have less
government supervision and regulation than in the U.S. Emerging market
countries have additional, heightened risks including a greater likelihood of
currency devaluations, less liquidity, and greater volatility.
DIVERSIFICATION The fund is non-diversified as defined by the federal
securities laws. As such, it may invest a greater portion of its assets in one
issuer and have a smaller number of issuers than a diversified fund. Therefore,
the fund may be more sensitive to economic, business, political or other
changes affecting similar issuers or securities. The fund intends, however, to
meet tax diversification requirements.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FGH-2 Franklin Global Health Care Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
Past 1 Year 05/01/98
- -----------------------------------------------------------
<S> <C> <C>
Franklin Global Health Care
Securities Fund - Class 1 1 -8.10% -0.94%
S&P 500 Index 2 21.04% 19.84%
S&P Health Care Composite
Index 2 -8.24% 6.21%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. S&P Health Care Composite Index is a capitalization-weighted index
of all of the stocks in the S&P 500 index involved in the health care related
products or services. Indices include reinvested dividends and/or interest. One
cannot invest directly in an index, nor is an index representative of the fund's
investments.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN GLOBAL HEALTH CARE SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- --------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ----------------------------------------------
<S> <C>
Management fees 0.60%
Other expenses 0.22%
----
Total annual fund operating expenses 0.82%
====
</TABLE>
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $84 $262 $455 $1,014
</TABLE>
FGH-3 Franklin Global Health Care Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Evan McCulloch, CFA Mr. McCulloch has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1998, and has been with the Franklin Templeton Group since 1992.
Kurt von Emster, CFA Mr. Von Emster has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1998, and has been with the Franklin Templeton Group since 1989.
Rupert H. Johnson, Jr. Mr. Johnson has been a manager of the fund since its inception in 1998,
PRESIDENT, ADVISERS and has been with the Franklin Templeton Group since 1965.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. For the fiscal year
ended December 31, 1999, the fund paid 0.60% of its average daily net assets to
the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Year ended December 31
- ---------------------------------------------------------------------
1999 1 1998 2
----------------------
<S> <C> <C>
Per share data ($)
Net asset value, beginning of year 10.71 10.00
----------------------
Net investment income .01 .03
Net realized and unrealized gains (losses) (.88) .68
----------------------
Total from investment operations (losses) (.87) .71
----------------------
Distributions from net investment income (.02) --
----------------------
Net asset value, end of year 9.82 10.71
======================
Total return (%)+ (8.10) 7.10
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 11,307 8,990
Ratios to average net assets: (%)
Expenses .82 .84*
Net investment income .09 .84*
Portfolio turnover rate (%) 188.22 40.80
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
*Annualized.
1. Based on average shares outstanding.
2. For the period May 1, 1998 (effective date) to December 31, 1998.
FGH-4 Franklin Global Health Care Securities Fund - Class 1
<PAGE>
Franklin Growth and Income Securities Fund
(previously Franklin Growth and Income Fund)
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is to provide current income.
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks with current dividend yields above
market average.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in a broadly diversified portfolio of equity securities
that the fund's manager considers to be financially strong, but undervalued by
the market. To help identify such companies, the manager uses a current relative
yield analysis that focuses on a company's dividend yield (calculated by
dividing a stock's annual per share dividends by its per share market price).
Following this strategy, the fund will invest predominantly in common stocks
that have dividend yields at least equal to the yield of the Standard & Poor's
500 Index ("S&P/registered trademark/ 500"). The fund seeks current income
through receipt of dividends from its investments. An equity security represents
a proportionate share of the ownership of a company; its value is based on the
success of the company's business, any income paid to stockholders, the value of
its assets, and general market conditions. Common and preferred stocks, and
securities convertible into common stock are examples of equity securities.
The fund may invest up to 30% of its total assets in foreign securities,
including those in emerging markets, but currently intends to limit such
investments to 20%.
In addition to the fund's main investments, the fund may invest in any of the
following: common stocks with current dividend yields at or below the
S&P/registered trademark/ 500 average, convertible securities, debt securities,
and real estate investment trusts (REITs). The fund does not intend to invest
more than 15% of its assets in REITs.
A debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Common debt securities
are secured and unsecured bonds, bonds convertible into common stock, zero
coupon bonds, notes, and short-term debt investments. A convertible security is
generally a debt security or preferred stock that may be converted into common
stock. By investing in convertible equity and debt securities, the fund seeks
the opportunity to participate in the capital appreciation of underlying
stocks, while at the same time relying on the fixed income aspect of the
convertible securities to provide current income and reduced price volatility,
which can limit the risk of loss in a down equity market. REITs are usually
publicly traded companies that manage a portfolio of real estate to earn
profits and tend to pay high yields since they must distribute most of their
earnings.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value-oriented strategy. As a "bottom-up" investor
focusing primarily on individual securities, the manager focuses on the market
price of a company's securities relative to its evaluation of the company's
potential long-term earnings, asset value and cash flow, with a special
emphasis on current dividend yield. The manager believes that high relative
dividend yield is frequently a good indicator of value.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goals.
FGI-1 Franklin Growth and Income Securities Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country and Company General securities market and interest rate movements in
any country where the fund has investments are likely to affect the value of
the securities the fund owns that trade in that country. The political,
economic, and social structures of some countries the fund invests in may be
less stable and more volatile than those in the U.S. The risks of investing in
these countries include the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes, and certain custody and
settlement risks. Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies, or may become illiquid. Non-U.S. currency exchanges, stock
exchanges, trading systems, brokers, and companies generally have less
government supervision and regulation than in the U.S. Emerging market
countries have additional, heightened risks including a greater likelihood of
currency devaluations, less liquidity, and greater volatility.
REITS A REIT's performance depends on the types and locations of the properties
it owns and on how well it manages those properties. The value of a REIT may
also be affected by factors that affect the underlying properties, the real
estate industry, or local or general economic conditions.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FGI-2 Franklin Growth and Income Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Franklin Growth and Income
Securities Fund - Class 1 1 1.10% 16.24% 11.45%
S&P 500 Index/registered trademark/ 2 21.04% 28.56% 18.21%
Russell 3000 Value Index 2 6.65% 22.15% 15.31%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The unmanaged Russell 3000 Value Index measures the performance of
those 3000 companies with lower price-to-book ratios and lower forecasted growth
values. Indices include reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's investments.
FGI-3 Franklin Growth and Income Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN GROWTH AND INCOME SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 1 0.47%
Other expenses 0.02%
----
Total annual fund operating expenses 0.49%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $50 $157 $274 $616
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Frank Felicelli, CFA Mr. Felicelli has been a manager of the fund since 1995, and has been
SENIOR VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1986.
Derek Taner, CFA Mr. Taner has been a manager of the fund since March 2000, and has
PORTFOLIO MANAGER, ADVISERS been with the Franklin Templeton Group since 1991.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal
year ended December 31, 1999, the fund paid 0.47% of its average daily net
assets to the manager for its services.
FGI-4 Franklin Growth and Income Securities Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 20.36 21.01 17.55 17.14 13.42
---------------------------------------------------------
Net investment income .57 .69 .67 .62 .41
Net realized and unrealized gains (losses) (.16) .99 4.05 1.64 3.92
---------------------------------------------------------
Total from investment operations .41 1.68 4.72 2.26 4.33
---------------------------------------------------------
Distributions from net investment income (.79) (.69) (.64) (.41) (.20)
Distributions from net realized gains (2.20) (1.64) (.62) (1.44) (.41)
---------------------------------------------------------
Total distributions (2.99) (2.33) (1.26) (1.85) (.61)
---------------------------------------------------------
Net asset value, end of year 17.78 20.36 21.01 17.55 17.14
=========================================================
Total return (%)+ 1.10 8.33 27.74 14.19 32.83
Ratios/supplemental data
Net assets, end of year ($ x 1 million) 965 1,319 1,338 1,078 889
Ratios to average net assets: (%)
Expenses .49 .49 .49 .50 .52
Net investment income 2.94 3.27 3.53 4.06 3.30
Portfolio turnover rate (%) 39.80 27.32 36.71 23.01 116.54
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
FGI-5 Franklin Growth and Income Securities Fund - Class 1
<PAGE>
Franklin High Income Fund
(previously High Income Fund)
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is to earn a high level of current
income. Its secondary goal is capital appreciation.
- --------------------------------------------------------------------------------
The fund invests primarily in high yield, lower rated bonds.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in debt securities offering high yield and expected
total return. A debt security obligates the issuer to the bondholders, both to
repay a loan of money at a future date and generally to pay interest. Common
debt securities are secured and unsecured bonds, bonds convertible into common
stock, zero coupon bonds, notes, and short-term debt investments.
The fund may invest up to 100% of its assets in high yield, lower quality debt
securities ("junk bonds"). These securities are either rated below investment
grade (below the top four rating categories) by independent rating agencies
such as Standard & Poor's Ratings Group (S&P/registered trademark/) and Moody's
Investors Service, Inc. (Moody's), or are unrated securities the manager
determines are comparable. The fund generally invests in securities rated at
least Caa by Moody's or CCC by S&P or unrated securities the fund's manager
determines are comparable. The fund will not purchase defaulted securities. If,
however, a security is downgraded in rating or goes into default, the fund will
not automatically sell the security. Generally, lower rated securities pay
higher yields than more highly rated securities to compensate investors for the
higher risk.
The fund may invest up to 20% of its total assets in foreign securities,
including up to 10% in emerging markets, and will typically focus on dollar-
denominated corporate debt. Many debt securities of non-U.S. issuers, and
especially emerging market issuers, are rated below investment grade or are
unrated so that their selection depends on the manager's internal analysis.
While the fund also may invest in dividend-paying common or preferred stocks,
it more typically holds equity as a result of receiving those securities in a
corporate restructuring. An equity security represents a proportionate share of
the ownership of a company; its value is based on the success of the company's
business, any income paid to stockholders, the value of its assets, and general
market conditions. Common and preferred stocks, and securities convertible into
common stock are examples of equity securities.
PORTFOLIO SELECTION Yield and expected return are the primary criteria used by
the manager in selecting securities. The manager searches for securities it
believes offer opportunities for income today and growth tomorrow. It performs
independent analysis of the corporate debt securities being considered for the
fund's portfolio, rather than relying principally on the ratings assigned by
rating agencies. In its analysis, the manager considers a variety of factors,
including:
/bullet/ a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings
prospects;
/bullet/ the experience and strength of the company's management;
/bullet/ the company's sensitivity to changes in interest rates and business
conditions;
/bullet/ the company's debt maturity schedules and borrowing requirements; and
/bullet/ the company's changing financial condition and market recognition of
the change.
Because the manager focuses on individual securities rather than sector
allocation, from time to time the fund may have a significant portion of its
assets in one or more industries, including for example, telecommunications.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goals.
FH-1 Franklin High Income Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price.
- --------------------------------------------------------------------------------
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes. Increases in interest
rates may also have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or have more difficulty meeting interest payments. A sub-category of
interest rate risk is reinvestment risk, which is the risk that interest rates
will be lower when the fund seeks to reinvest interest payments, or the proceeds
from a matured debt security, resulting in less income received by the fund.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, thus, impact fund performance.
Lower-rated securities Securities rated below investment grade, sometimes
called "junk bonds," generally have more risk than higher-rated securities.
Companies issuing high yield debt securities are not as strong financially as
those with higher credit ratings. These companies are more likely to encounter
financial difficulties and are more vulnerable to changes in the economy, such
as a recession or a sustained period of rising interest rates, that could
prevent them from making interest and principal payments. If an issuer stops
paying interest and/or principal, payments may never resume. The fund may lose
its entire investment on bonds that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to changes in the ratings assigned by ratings agencies.
Prices are often closely linked with the company's stock prices and typically
rise and fall in response to factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price
swings due to changes in economic conditions, stock market activity, large
sustained sales by major investors, a high-profile default, or other factors.
High yield securities are also generally less liquid than higher-quality bonds.
Many of these securities do not trade frequently, and when they do trade their
prices may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, will increase or decrease the
fund's returns from its foreign portfolio holdings. Devaluations of currency by
a country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country and Company General securities market and interest rate movements in
any country where the fund has investments are likely to affect the value of
the securities the fund owns that trade in that country. The political,
economic, and social structures of some countries the fund invests in may be
less stable and more volatile than those in the U.S. The risks of investing in
these countries include the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks. Non-U.S. companies may not be subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies, or may become illiquid. Non-U.S. currency exchanges, stock
exchanges, trading systems, brokers, and companies generally have less
government supervision and regulation than in the U.S. Emerging market
FH-2 Franklin High Income Fund - Class 1
<PAGE>
countries have additional, heightened risks including a greater likelihood of
currency devaluations, less liquidity, and greater volatility.
TELECOMMUNICATIONS The securities of communications companies may experience
more price volatility than securities of companies in other industries. For
example, communications companies are subject to significant competitive
pressures, such as new market entrants, aggressive pricing and competition for
market share, and the potential for falling profit margins. Wireless
telecommunication and Internet-related companies are in the emerging stage of
development and are particularly vulnerable to the risks of rapidly changing
technologies, as well as the potential of both accidental and deliberate
disruption or failure of services or equipment.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FH-3 Franklin High Income Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- --------------------------------------------------------------------
<S> <C> <C> <C>
Franklin High Income Fund -
Class 1 1 -0.07% 8.94% 9.14%
CS First Boston Global High
Yield Index 2 3.28% 9.08% 11.06%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged CS First Boston Global High
Yield Index is a trader-priced portfolio constructed to mirror the high yield
debt market. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN HIGH INCOME FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- -------------------------------------------------
<S> <C>
Management fees 1 0.51%
Other expenses 0.03%
----
Total annual fund operating expenses 0.54%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $55 $173 $302 $677
</TABLE>
FH-4 Franklin High Income Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Jeff Holbrook, CFA Mr. Holbrook has been a manager of the fund since 1997, and has been
VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1992.
Chris Molumphy, CFA Mr. Molumphy has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, ADVISERS 1989, and has been with the Franklin Templeton Group since 1988.
R. Martin Wiskemann Mr. Wiskemann has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1989. Mr. Wiskemann has more than 30 years' experience in the
securities industry.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal
year ended December 31, 1999, the fund paid 0.51% of its average daily net
assets to the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 13.28 14.45 14.16 13.66 12.21
-------------------------------------------------------------
Net investment income 1.24 1.43 1.33 1.20 1.06
Net realized and unrealized gains (losses) (1.19) (1.25) .22 .56 1.30
-------------------------------------------------------------
Total from investment operations .05 .18 1.55 1.76 2.36
-------------------------------------------------------------
Distributions from net investment income (3.03) (1.27) (1.22) (1.20) (.91)
Distributions from net realized gains (.44) (.08) (.04) (.06) --
-------------------------------------------------------------
Total distributions (3.47) (1.35) (1.26) (1.26) (.91)
-------------------------------------------------------------
Net asset value, end of year 9.86 13.28 14.45 14.16 13.66
=============================================================
Total return (%)+ (.07) .99 11.47 13.90 19.76
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 314,131 446,609 496,036 446,096 360,904
Ratios to average net assets: (%)
Expenses .54 .53 .53 .54 .56
Net investment income 9.97 9.96 9.64 9.63 9.63
Portfolio turnover rate (%) 22.17 41.71 36.38 27.16 20.65
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
FH-5 Franklin High Income Fund - Class 1
<PAGE>
Franklin Income Securities Fund
(previously Income Securities Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is to maximize income while maintaining
prospects for capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest in both
debt and equity securities. The fund seeks income by investing in corporate,
foreign, and U.S. Treasury bonds. In its search for income-producing growth
opportunities, the fund invests in common stocks with attractive dividend yields
of companies from a variety of industries such as utilities, oil, gas, real
estate, and consumer goods. From time to time, the fund may invest a substantial
portion of its
- --------------------------------------------------------------------------------
The fund invests in high yield, lower-rated bonds, and stocks.
- --------------------------------------------------------------------------------
assets in certain sectors, including utilities.
A debt security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Common debt securities are
secured and unsecured bonds, bonds convertible into common stock, notes, and
short-term debt investments. An equity security represents a proportionate share
of the ownership of a company; its value is based on the success of the
company's business, any income paid to stockholders, the value of its assets,
and general market conditions. Common and preferred stocks, and securities
convertible into common stock are examples of equity securities.
The fund may invest up to 100% of its total assets in debt securities that are
below investment grade ("junk bonds"), including up to 5% in defaulted debt,
but the fund does not currently expect to invest more than 50% of its assets in
these securities. Investment grade debt securities are rated in the top four
rating categories by independent rating agencies such as Standard & Poor's
Ratings Group (S&P/registered trademark/) and Moody's Investors Service, Inc.
(Moody's). The fund generally invests in securities rated at least Caa by
Moody's or CCC by S&P or, if unrated, determined by the fund's manager to be
comparable. Generally, lower rated securities pay higher yields than more
highly rated securities to compensate investors for the higher risk.
The fund may invest up to 25% of its assets in foreign securities, including
those in emerging markets. It ordinarily buys foreign securities that are
traded in the U.S or American Depositary Receipts, which are certificates
issued by a bank or trust company that give their holders the right to receive
securities issued by a foreign or domestic company. Many debt securities of
non-U.S. issuers, and especially emerging market issuers, are rated below
investment grade or are unrated so that their selection depends on the
manager's internal analysis.
PORTFOLIO SELECTION The manager searches for undervalued or out-of-favor
securities it believes offer opportunities for income today and growth
tomorrow. It performs independent analysis of the debt securities being
considered for the fund's portfolio, rather than relying principally on the
ratings assigned by rating agencies. In analyzing both debt and equity
securities, the manager considers a variety of factors, including:
/bullet/ a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings
prospects;
/bullet/ the experience and strength of the company's management;
/bullet/ the company's sensitivity to changes in interest rates and business
conditions;
/bullet/ the company's debt maturity schedules and borrowing requirements; and
/bullet/ the company's changing financial condition and market recognition of
the change.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
FI-1 Franklin Income Securities Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes. Increases in interest
rates may have an effect on the types of companies in which the fund normally
invests because they may find it difficult to obtain credit to expand, or may
have more difficulty meeting interest payments.
- --------------------------------------------------------------------------------
Because the bonds and stocks the fund holds fluctuate in price with interest
rate changes and market conditions, the value of your investment in the fund
will go up and down. This means you could lose money.
- --------------------------------------------------------------------------------
Similarly, emerging market economies may be especially sensitive to interest
rate changes. A sub-category of interest rate risk is reinvestment risk, which
is the risk that interest rates will be lower when the funds seek to reinvest
interest payments, or the proceeds from a matured debt security, resulting in
less income received by the fund.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, thus, impact fund performance.
Lower-rated securities Securities rated below investment grade, sometimes
called "junk bonds," generally have more risk than higher-rated securities.
Companies issuing high yield debt securities are not as strong financially as
those with higher credit ratings. These companies are more likely to encounter
financial difficulties and are more vulnerable to changes in the economy, such
as a recession or a sustained period of rising interest rates, that could
prevent them from making interest and principal payments. If an issuer stops
paying interest and/or principal, payments may never resume. The fund may lose
its entire investment on bonds that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to changes in the ratings assigned by ratings agencies.
Prices are often closely linked with the company's stock prices and typically
rise and fall in response to factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price
swings due to changes in economic conditions, stock market activity, large
sustained sales by major investors, a high-profile default, or other factors.
High yield securities are also generally less liquid than higher-quality bonds.
Many of these securities do not trade frequently, and when they do trade their
prices may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Utility company stocks pay
relatively high dividends, so they are particularly sensitive to interest rate
movements: like bonds, when interest rates rise, their stock prices tend to
fall.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. Because
its value can be influenced by many different factors, a convertible security
is not as sensitive to interest rate changes as
FI-2 Franklin Income Securities Fund - Class 1
<PAGE>
a similar non-convertible debt security, and generally has less potential for
gain or loss than the underlying stock.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country and Company General securities market and interest rate movements in
any country where the fund has investments are likely to affect the value of
the securities the fund owns that trade in that country. The political,
economic, and social structures of some countries the fund invests in may be
less stable and more volatile than those in the U.S. The risks of investing in
these countries include the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes, and certain custody and
settlement risks. Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies, or may become illiquid. Non-U.S. currency exchanges, stock
exchanges, trading systems, brokers, and companies generally have less
government supervision and regulation than in the U.S. Emerging market
countries have additional, heightened risks including a greater likelihood of
currency devaluations, less liquidity, and greater volatility.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FI-3 Franklin Income Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ---------------------------------------------------------------
<S> <C> <C> <C>
Franklin Income Securities
Fund - Class 1 1 -1.82% 9.74% 10.00%
S&P 500 Index 2 21.04% 28.56% 18.21%
Lehman Brothers
Government/Corporate
Bond Index 2 -2.15% 7.61% 7.65%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The Lehman Brothers Government/Corporate Bond Index is an unmanaged
index of fixed-rate U.S. Government and foreign and domestic corporate bonds
that are rated investment grade or higher and have maturities of one year or
more and at least $50 million outstanding. Indices include reinvested dividends
and/or interest. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
FI-4 Franklin Income Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN INCOME SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ----------------------------------------------------
<S> <C>
Management fees 1 0.48%
Other expenses 0.02%
----
Total annual fund operating expenses 0.50%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $51 $160 $280 $628
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Charles B. Johnson Mr. Johnson has been a manager of the fund since its inception in 1989,
CHAIRMAN OF THE BOARD, ADVISERS and has been with the Franklin Templeton Group since 1957.
Frederick G. Fromm Mr. Fromm has been a manager of the fund since 1998, and has been
VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1992.
Christopher Molumphy Mr. Molumphy has been a manager of the fund since February 2000, and
SENIOR VICE PRESIDENT, ADVISERS has been with the Franklin Templeton Group since 1988.
</TABLE>
The fund pays Advisers a fee for managing its assets and providing certain
administrative facilities and services for the fund. For the fiscal year ended
December 31, 1999, the fund paid 0.48% of its average daily net assets to the
manager for its services.
FI-5 Franklin Income Securities Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------
19991 1998 1997 1996 1995
---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 16.92 18.37 17.21 16.47 14.31
---------------------------------------------------------
Net investment income 1.19 1.37 1.40 1.32 1.16
Net realized and unrealized gains (losses) (1.43) (1.07) 1.38 .44 1.96
---------------------------------------------------------
Total from investment operations (.24) .30 2.78 1.76 3.12
---------------------------------------------------------
Distributions from net investment income (1.46) (1.42) (1.33) (.87) (.89)
Distributions from net realized gains (.53) (.33) (.29) (.15) (.07)
---------------------------------------------------------
Total distributions (1.99) (1.75) (1.62) (1.02) (.96)
---------------------------------------------------------
Net asset value, end of year 14.69 16.92 18.37 17.21 16.47
=========================================================
Total return (%)+ (1.82) 1.64 17.09 11.28 22.40
Ratios/supplemental data
Net assets, end of year ($ x 1 million) 775 1,186 1,407 1,351 1,267
Ratios to average net assets: (%)
Expenses .50 .49 .50 .50 .51
Net investment income 7.41 6.94 7.53 7.96 8.05
Portfolio turnover rate (%) 11.89 12.22 14.68 15.28 33.14
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
FI-6 Franklin Income Securities Fund - Class 1
<PAGE>
Franklin Large Cap Growth Securities Fund
(previously Franklin Capital Growth Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of U.S. large-cap growth
companies. Large-cap companies are those with market capitalization values
(share price multiplied by the number of common stock shares outstanding) of
$8.5 billion or more, at the time of purchase. Growth companies in which the
fund may invest include those that are expected to have revenue growth in
excess of the economy as a whole either through above-average industry
expansion or market share gains. These companies
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks of large-cap growth companies.
- --------------------------------------------------------------------------------
generally dominate, or are gaining market share in, their industry and have a
reputation for quality management, and superior products and services.
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any
income paid to stockholders, the value of its assets, and general market
conditions. Common and preferred stocks, and securities convertible into common
stock are examples of equity securities.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for growth in revenues, earnings or assets. In choosing investments,
the manager will focus on companies that have exhibited above average growth,
strong financial records, and large market capitalization. In addition, the
manager also considers management expertise, industry leadership, growth in
market share and sustainable competitive advantage. Although the manager will
search for investments across a large number of industries, it expects to have
significant positions in the technology sector (including computer hardware and
software, telecommunications, and electronics).
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Large-capitalization stocks tend
to go through cycles of doing better -- or worse -- than the stock market in
general. In the past, these periods have lasted for several years.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company
fails to meet those projections. Growth stocks also may be more expensive
relative to their earnings or assets compared to value or other stocks.
TECHNOLOGY COMPANIES Technology industry stocks can be subject to abrupt or
erratic price movements. They have historically been volatile in price,
especially over the short term, due to the rapid pace of product change and
development affecting such companies. Prices often change collectively without
regard to the merits of individual companies.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FL-1 Franklin Large Cap Growth Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 05/01/96
- -----------------------------------------------------
<S> <C> <C>
Franklin Large Cap Growth
Securities Fund - Class 1 1 31.65% 22.85%
S&P 500 Index 2 21.04% 26.79%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
FL-2 Franklin Large Cap Growth Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN LARGE CAP GROWTH SECURITIES FUND1 - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES 1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- --------------------------------------------------
<S> <C>
Management fees 2 0.75%
Other expenses 0.02%
----
Total annual fund operating expenses 0.77%
====
</TABLE>
1. On 2/8/00, a merger and reorganization was approved that combined the fund
with a similar fund of Templeton Variable Products Series Fund effective
5/1/00. The table shows total expenses based on the fund's assets as of
12/31/99 and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management fees 0.75%; Other expenses 0.02%; and Total annual fund
operating expenses 0.77%.
2. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $79 $246 $428 $954
</TABLE>
FL-3 Franklin Large Cap Growth Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Kent Shepherd, CFA Mr. Shepherd has been a manager of the fund since April 1999, and has
VICE PRESIDENT, ADVISERS been with the Franklin Templeton Group since 1991.
Jason R. Nunn Mr. Nunn has been a manager of the fund since September 1999. Before
PORTFOLIO MANAGER, ADVISERS joining the Franklin Templeton Group in 1998 he worked in corporate
finance with Alex, Brown & Sons.
Conrad B. Herrmann, CFA Mr. Herrmann has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, ADVISERS 1996, and has been with the Franklin Templeton Group since 1989.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal
year ended December 31, 1999, the fund paid 0.75% of its average daily net
assets to the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31
- -----------------------------------------------------------------------------------------------
1999 2,3 1998 1997 1996 1
----------------------------------------------
<S> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 16.08 13.42 11.36 10.00
----------------------------------------------
Net investment income .11 .10 .06 .03
Net realized and unrealized gains 4.96 2.62 2.02 1.33
----------------------------------------------
Total from investment operations 5.07 2.72 2.08 1.36
----------------------------------------------
Distributions from net investment income (.08) (.06) (.02) --
Net asset value, end of year 21.07 16.08 13.42 11.36
===============================================
Total return (%)+ 31.65 20.29 18.31 13.60
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 407,515 220,952 109,355 44,667
Ratios to average net assets: (%)
Expenses .77 .77 .77 .77*
Net investment income .63 1.00 .72 .96*
Portfolio turnover rate (%) 41.78 12.17 19.90 3.91
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
*Annualized
1. For the period May 1, 1996 (effective date) to December 31, 1996.
2. Based on average shares outstanding.
3On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the fund with a similar fund of the Templeton Variable
Products Series Fund (TVP), effective May 1, 2000. The table above only
reflects fund statistics of the fund, which was the surviving fund of the
merger, and not of the TVP fund. The fund statistics are for the year ended
December 31, 1999.
FL-4 Franklin Large Cap Growth Securities Fund - Class 1
<PAGE>
Franklin Money Market Fund
(previously Money Market Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's goal is high current income, consistent with liquidity and
capital preservation. The fund also seeks to maintain a stable share price of
$1.00.
MAIN INVESTMENTS The fund invests exclusively in U.S. dollar denominated money
market debt instruments, including those issued by:
/bullet/ U.S. and foreign banks;
/bullet/ U.S. or foreign corporations; and
/bullet/ the U.S. Government, its agencies or authorities.
A debt instrument obligates the issuer both to repay a loan of money at a
future date and generally to pay interest. Money market securities are
- --------------------------------------------------------------------------------
The fund invests exclusively in money market securities.
- --------------------------------------------------------------------------------
high-quality, short-term (maturing in 13 months or less) debt instruments that
may have fixed, floating or variable interest rates. Common money market
securities are U.S. Treasury bills, U.S. Government agency securities, bank
certificates of deposit, repurchase agreements, short-term corporate
obligations, bankers acceptances (credit instruments guaranteed by a bank), and
commercial paper. Commercial paper may be either unsecured promissory notes
issued by larger corporations or financial firms or asset backed (that is,
backed by a pool of assets representing the obligations of a number of different
parties). At any time, the fund may have a significant portion of its
investments in one or more of these money market instruments.
Under the SEC's money fund rules, the fund maintains a dollar-weighted average
portfolio maturity of 90 days or less and only buys securities:
/bullet/ with remaining maturities of 397 days or less, and
/bullet/ that the manager determines present minimal credit risks, and
/bullet/ that are rated in the top two short-term rating categories by
independent rating agencies or, if unrated, determined by the manager
to be comparable.
No more than 25% of the fund's total assets may be invested in money market
securities issued by foreign banks or foreign branches of U.S. banks. The fund
may acquire securities on a when-issued or delayed delivery basis, lend
portfolio securities, and invest up to 10% of its assets in illiquid
investments.
PORTFOLIO SELECTION In selecting investments, the manager uses a conservative
investment approach, focusing on the highest quality and the most liquid of
eligible money market securities. The manager then assesses the relative value
of each security meeting its stringent credit criteria in order to find the
best combination of assets that it believes will maximize the fund's yield
relative to its investment environment expectations. The manager also monitors
short-term interest rates, economic conditions, and Federal Reserve monetary
policy to determine the portfolio maturity it believes will provide a high
overall return to the fund.
FM-1 Franklin Money Market Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund tries
to keep a $1 share price, it is possible to lose money by investing in the
fund.
- --------------------------------------------------------------------------------
INTEREST RATE Changes in interest rates can be sudden and unpredictable. Rate
changes occur in response to general economic conditions and also as a result of
actions by the Federal Reserve Board ( the "Fed"). A reduction in short-term
interest rates will normally result in reduced interest income to the fund and
thus a reduction in dividends payable to shareholders. An increase in short-term
interest rates will normally have the effect of increasing dividends to
shareholders.
CREDIT The fund's investments in securities which are not backed by the full
faith and credit of the U.S. Government depend on the ability of the issuer to
meet interest or principal payments. Changes in an issuer's financial strength
may affect the debt security's value and, thus, impact the value of fund
shares. Even securities supported by credit enhancements have the credit risk
of the entity providing credit support.
FOREIGN SECURITIES The fund's investments in foreign money market securities
are always dollar denominated. Nonetheless, securities or credit support,
issued by a foreign entity are subject to possible adverse foreign economic,
political or legal developments that may affect the ability of that entity to
meet its obligations. In addition, non-U.S. companies are not subject to the
same disclosure, accounting, auditing and financial reporting standards and
practices as U.S. companies. Non-U.S. stock exchanges, trading systems,
brokers, and companies generally have less government supervision and
regulation than in the U.S.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Securities purchased on a when-
issued or delayed delivery basis are subject to market fluctuations and their
value at delivery may be higher or lower than the purchase price.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FM-2 Franklin Money Market Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. Of course, past performance cannot predict
or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ------------------------------------------------------------------
<S> <C> <C> <C>
Franklin Money Market Fund
- Class 1 1 4.76% 5.23% 4.86%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
- --------------------------------------------------------------------------------
[GRAPHIC OMITTED]
FEES AND EXPENSES
- -----------------
FRANKLIN MONEY MARKET FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- --------------------------------------------------
<S> <C>
Management fees 1 0.52%
Other expenses 0.01%
----
Total annual fund operating expenses 0.53%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $54 $170 $296 $665
</TABLE>
FM-3 Franklin Money Market Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal
year ended December 31, 1999, the fund paid 0.52% of its average daily net
assets to the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 1.00 1.00 1.00 1.00 1.00
---------------------------------------------------------------
Net investment income .05 .05 .05 .05 .06
Distributions from net investment income (.05) (.05) (.05) (.05) (.06)
---------------------------------------------------------------
Net asset value, end of year 1.00 1.00 1.00 1.00 1.00
===============================================================
Total return (%)+ 4.76 5.22 5.24 5.16 5.74
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 364,028 414,341 367,449 408,930 429,547
Ratios to average net assets: (%)
Expenses .53 .45 .45 .43 .40
Expenses excluding waiver and payments by affiliate .53 .53 .53 .53 .53
Net investment income 4.64 5.08 5.11 5.04 5.58
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
FM-4 Franklin Money Market Fund - Class 1
<PAGE>
Franklin Natural Resources Securities Fund
(previously Natural Resources Securities Fund)
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is to provide current income.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies principally engaged
in the natural resources sector. These are companies that own, produce, refine,
process or market natural resources. They may also provide support services for
natural resources companies, for example, develop technologies or provide
services, supplies or equipment related to natural resources. The natural
resources sector includes industries such as energy services and technology;
integrated oil; oil and gas exploration and production; chemicals; forest and
paper products; steel, iron ore, and aluminum production; gold and precious
metals; building materials; and environmental services. The manager expects to
invest primarily in the energy industries (gas, exploration and production, oil
services, and pipeline and distribution).
The fund generally invests in mid-cap companies with market capitalization
values (share price multiplied by the number of common stock shares
outstanding) greater than $1.5 billion, but may invest substantially in
small-cap companies. An equity security represents a proportionate share of the
ownership of a company; its value is based on the success of the company's
business, any income paid to stockholders, the value of its assets, and general
market conditions. Common and preferred stocks, and securities convertible into
common stock are examples of equity securities.
- --------------------------------------------------------------------------------
The fund concentrates in common stocks of U.S. and non-U.S. companies in the
natural resources sector.
- --------------------------------------------------------------------------------
The fund may buy natural resource companies anywhere in the world, including
emerging markets, but generally invests a greater percentage of its assets in
U.S. companies than any other single country. In addition, the fund will be
exposed to emerging markets through developed market companies, which often own
or depend on natural resource assets in emerging markets countries.
In addition to its main investments, and depending upon market conditions, the
fund may invest significantly in equity securities outside the natural
resources sector. The fund may invest in companies involved in the development
and/or production of alternative energy sources.
The fund also may seek to generate additional income by investing up to 5% of
its total assets in covered call and put options.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
using a combined "bottom-up" and "top-down" strategy. As a "bottom-up" investor
focusing primarily on individual securities, the manager looks for companies it
believes are positioned for growth in revenues, earnings or assets, and are
selling at reasonable prices relative to other companies in the industry. The
manager relies on a team of analysts to provide in-depth industry expertise and
uses both qualitative and quantitative analysis to choose companies it believes
are highly profitable with skilled management, and that have strong growth
profiles and solid financials, as well as companies with sustainable
competitive advantages either through strategic asset bases or technological
expertise. These are all factors the manager believes point to strong long-term
growth potential.
This "bottom-up" approach is combined with a "top-down" analysis of
macroeconomic trends, market sectors, and industries to take advantage of
varying sector reactions to economic events. For example, the manager evaluates
business cycles, yield curves, countries' changing market, economic and
political conditions, the relative interest rates among currencies, and values
between and within markets.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goals.
FN-1 Franklin Natural Resources Securities Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
NATURAL RESOURCES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. The securities of companies in
the natural resources sector may experience more price volatility than
securities of companies in other industries. For example, commodity prices and
the supply or demand for commodities change dramatically for reasons beyond a
company's control. In addition, supply and demand factors may dictate the
prices at which a company acquires raw materials or sells its products or
services. These factors can affect the profitability of companies in the
natural resources sector and, as a result, the value of their securities.
In addition, the fund may from time to time invest significantly in a
particular industry or group of industries within the natural resources sector;
such a strategy may expose the fund to greater investment risk than a more
diversified strategy within the sector.
Energy companies Companies that are involved in oil or gas exploration,
production, refining, marketing or distribution, or any combination of the
above are greatly affected by the prices and supplies of raw materials such as
oil or gas. The earnings and dividends of energy companies can fluctuate
significantly as a result of international economic, political, and regulatory
developments.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions
around the world, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
BLEND STYLE STOCK INVESTING A "blend" strategy results in investments in both
growth and value stocks, or in stocks with characteristics of both. Growth stock
prices reflect projections of future earnings or revenues, and can, therefore,
fall dramatically if the company fails to meet those projections. Value stock
prices are considered "cheap" relative to the company's perceived value and are
often out of favor with other investors. However, if other investors fail to
recognize the company's value (and do not become buyers, or become sellers), or
favor investing in faster-growing companies, value stocks may not increase in
value as anticipated by the manager and may even decline further. By combining
both styles, the manager seeks to diversify the risks and lower the volatility,
but there is no assurance this strategy will have that result.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and
FN-2 Franklin Natural Resources Securities Fund - Class 1
<PAGE>
a greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes
than U.S. markets, resulting in less liquidity and more volatility than in the
U.S. Short-term volatility in these markets can be disconcerting and declines
in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to foreign investments in foreign courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions,
including increases in interest rates because of their reliance on credit, and
their growth prospects are less certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative.
INTEREST RATE Rate changes can be sudden and unpredictable. Increases in
interest rates may have an effect on the types of companies in which the fund
invests because they may find it more difficult to obtain credit to expand, or
may have more difficulty meeting interest payments.
DERIVATIVE SECURITIES, INCLUDING COVERED CALLS AND PUTS The performance of
derivative investments, depends, at least in part, on the performance of an
underlying asset such as stock prices. Derivative securities used by this fund
may involve a small investment relative to the risk assumed. Their successful
use will depend on the manager's ability to predict market movements, and their
use may have the opposite effect of that intended, if for example, the fund has
a stock called away at an unfavorable price, or is required to purchase stocks
put to it at an unfavorable price, in relation to the current market.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FN-3 Franklin Natural Resources Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -----------------------------------------------------------------
<S> <C> <C> <C>
Franklin Natural Resources
Securities Fund - Class 1 1 32.25% -3.17% 0.37%
S&P 500 Index 2 21.04% 28.56% 18.21%
FT/S&P Actuaries World:
Energy 50%, Basic
Industries 50%
Composite Index 2 24.91% 11.20% 7.55%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The Financial Times/S&P Actuaries World: Energy 50%, Basic
Industries 50% Composite Index is a composite of companies of which 50% are in
the energy sector and 50% are in the basic industries sector. Indices include
reinvested dividends and/or interest. One cannot invest directly in an index,
nor is an index representative of the fund's investments.
FN-4 Franklin Natural Resources Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN NATURAL RESOURCES SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 1 0.62%
Other expenses 0.04%
----
Total annual fund operating expenses 0.66%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ---------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $67 $211 $368 $822
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Michael R. Ward Mr. Ward has been a manager of the fund since 1999, and has been with
PORTFOLIO MANAGER, ADVISERS the Franklin Templeton Group since 1992.
Steve Land Mr. Land has been a manager of the fund since 1999, and has been with
PORTFOLIO MANAGER, ADVISERS the Franklin Templeton Group since 1997.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal
year ended December 31, 1999, the fund paid 0.62% of its average daily net
assets to the manager for its services.
FN-5 Franklin Natural Resources Securities Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- --------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 8.39 11.41 14.29 14.08 14.09
-----------------------------------------------------------
Net investment income .06 .15 .15 .15 .22
Net realized and unrealized gains (losses) 2.64 (3.02) (2.83) .44 .12
-----------------------------------------------------------
Total from investment operations 2.70 (2.87) (2.68) .59 .34
-----------------------------------------------------------
Distributions from net investment income (.16) (.15) (.20) (.20) (.20)
Distributions from net realized gains -- -- -- (.18) (.15)
-----------------------------------------------------------
Total distributions (.16) (.15) (.20) (.38) (.35)
Net asset value, end of year 10.93 8.39 11.41 14.29 14.08
===========================================================
Total return (%)+ 32.25 (25.38) (18.98) 4.00 2.35
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 42,861 45,927 74,924 109,579 105,109
Ratios to average net assets: (%)
Expenses .66 .64 .69 .65 .66
Net investment income 0.64 1.21 1.00 1.00 1.40
Portfolio turnover rate (%) 51.19 64.68 85.22 21.77 15.66
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
FN-6 Franklin Natural Resources Securities Fund - Class 1
<PAGE>
Franklin Real Estate Fund
(previously Real Estate Securities Fund)
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is to earn current income.
- --------------------------------------------------------------------------------
The fund concentrates in securities of companies in the real estate industry,
primarily equity REITs.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in securities of companies operating in the real estate
industry, including:
/bullet/ companies qualifying under federal tax law as real estate investment
trusts (REITs),
/bullet/ real estate operating companies,
/bullet/ real estate services companies, and
/bullet/ homebuilding and developing companies that derive at least half of
their assets or revenues from the ownership, construction, management
or other services, or sale of residential, commercial or industrial
real estate.
REITs are real estate investment trust companies, usually publicly traded, that
manage a portfolio of income-producing real estate properties such as
apartments, hotels, office buildings, or shopping centers. Equity REITs take
ownership positions in real estate and their shareholders receive income from
the rents received, and receive capital gains on the properties sold at a
profit. The fund generally invests in medium-cap (less than $5 billion) to
small-cap (less than $1.5 billion) REITs, because that is reflective of the
industry itself. Market capitalization is defined as share price multiplied by
the number of common stock shares outstanding.
In addition to the fund's main investments, the fund may invest in equity
securities of issuers engaged in businesses whose products and services are
closely related to the real estate industry, and issuers whose principal
business is unrelated to the real estate industry but which have very
significant real estate holdings believed to be undervalued relative to the
company's securities. An equity security represents a proportionate share of
the ownership of a company; its value is based on the success of the company's
business, any income paid to stockholders, the value of its assets, and general
market conditions.
The manager seeks to manage the risks of industry concentration by diversifying
into different types of real estate investments, although such risks cannot be
eliminated. Historically, there has been a relatively low correlation between
the real estate market and the broader equity market. While there is no
certainty that this trend will continue in the future, investments in real
estate securities may be a useful way to diversify one's overall portfolio.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined strategy. As a "bottom-up" investor focusing primarily
on individual securities, the manager will focus on the market price of a
company's security relative to its evaluation of the company's potential
long-term earnings, asset value, and cash flow. Using both qualitative and
quantitative analysis and on-site visits, the manager evaluates security
characteristics, the strength and quality of management, and underlying
properties. In addition, the manager may consider other factors, such as the
supply and demand outlook for various property types and regional markets.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goals.
FRE-1 Franklin Real Estate Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the securities the fund holds fluctuate in price with real estate
market conditions, the value of your investment in the fund will go up and
down. This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
REAL ESTATE SECURITIES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Real estate values rise and fall
in response to a variety of factors, including local, regional and national
economic conditions, interest rates and tax considerations, the strength of
specific industries renting properties, and other factors affecting the supply
and demand for properties. When economic growth is slow, demand for property
decreases and prices may decline. Property values may decrease because of
overbuilding, increases in property taxes and operating expenses, changes in
zoning laws, environmental regulations or hazards, uninsured casualty or
condemnation losses, or a general decline in neighborhood values.
REITS Equity REITs can be affected by any changes in the value of the
properties owned. A REIT's performance depends on the types and locations of
the properties it owns and on how well it manages those properties or loan
financings. A decline in rental income could occur because of extended
vacancies, increased competition from other properties, tenants' failure to pay
rent or poor management.
A REIT's performance also depends on the company's ability to finance property
purchases and renovations and manage its cash flows. Because REITs are
typically invested in a limited number of projects or in a particular market
segment, they are more susceptible to adverse developments affecting a single
project or market segment than more broadly diversified investments. Loss of
status as a qualified REIT or changes in the treatment of REITs under the
federal tax law, could adversely affect the value of a particular REIT or the
market for REITs as a whole.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
INTEREST RATE Rate changes can be sudden and unpredictable. Rising interest
rates, which drive up mortgage and financing costs, can restrain construction
and buying and selling activity in the real estate market and make other
investments more attractive.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
signficant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions and
increases in interest rates, their growth prospects are less certain, and their
securities are less liquid. These companies may suffer significant losses and
can be considered speculative. Small cap REITs can be subject to greater risks
than mid- or large-cap issuers due to greater regional concentration and less
diversification in terms of the regions, clients and types of properties
available for investment.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FRE-2 Franklin Real Estate Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- --------------------------------------------------------------------
<S> <C> <C> <C>
Franklin Real Estate Fund -
Class 1 1 -6.14% 8.02% 9.02%
S&P 500 Index 2 21.04% 28.56% 18.21%
Wilshire Real Estate
Securities Index2 -3.20% 8.30% 4.11%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The Wilshire Real Estate Securities Index is a market-cap weighted
index of publicly traded real estate securities. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's investments.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN REAL ESTATE FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 1 0.56%
Other expenses 0.02%
----
Total annual fund operating expenses 0.58%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $59 $186 $324 $726
</TABLE>
FRE-3 Franklin Real Estate Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Douglas Barton, CFA Mr. Barton has been a manager of the fund since 1998, and has been
VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1988.
Samuel R. Kerner Mr. Kerner has been a manager of the fund since April 2000, and has
PORTFOLIO MANAGER, ADVISERS been with the Franklin Templeton Group since 1996.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal
year ended December 31, 1999, the fund paid 0.56% of its average daily net
assets to the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Year ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 19.93 25.60 22.15 17.40 15.31
--------------------------------------------------------------
Net investment income .88 1.45 .72 .79 .78
Net realized and unrealized gains (losses) (1.77) (5.60) 3.72 4.74 1.83
--------------------------------------------------------------
Total from investment operations (.89) (4.15) 4.44 5.53 2.61
--------------------------------------------------------------
Distributions from net investment income (1.73) (.94) (.67) (.78) (.52)
Distributions from net realized gains (2.39) (.58) (.32) -- --
Total distributions (4.12) (1.52) (.99) (.78) (.52)
--------------------------------------------------------------
Net asset value, end of year 14.92 19.93 25.60 22.15 17.40
==============================================================
Total return (%)+ (6.14) (16.82) 20.70 32.82 17.53
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 158,553 282,290 440,554 322,721 213,473
Ratios to average net assets: (%)
Expenses .58 .54 .54 .57 .59
Net investment income 4.83 5.44 3.59 4.80 4.74
Portfolio turnover rate (%) 10.27 13.21 11.62 10.32 22.15
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
FRE-4 Franklin Real Estate Fund - Class 1
<PAGE>
Franklin Rising Dividends Securities Fund
(previously Rising Dividends Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in the securities of companies that have:
/bullet/ consistently increased dividends in at least 8 out of the last 10
years and have not decreased dividends during that time;
/bullet/ increased dividends substantially (at least 100%) over the past ten
years;
/bullet/ reinvested earnings, paying out less than 65% of current earnings in
dividends (except for utility companies);
/bullet/ strong balance sheets, with (1) long-term debt that is no more than
50% of total capitalization or (2) senior debt that has been rated
investment grade by at least one of the major bond rating agencies
(except for utility companies); and
/bullet/ attractive prices, either (1) in the lower half of the stock's
price/earnings ratio range for the past 10 years or (2) less than the
average current market price/earnings ratio of the stocks comprising
the Standard & Poor's/registered trademark/ 500 Stock Index (this
criterion applies only at the time of purchase).
- --------------------------------------------------------------------------------
The fund will invest primarily in the common stocks of financially sound
companies that have paid consistently rising dividends.
- --------------------------------------------------------------------------------
The fund typically invests the rest of its assets in equity securities of
companies that pay dividends but do not necessarily meet all of these criteria.
Following these policies, the fund may invest primarily in equity securities
issued by mid- and small-cap U.S. companies, which generally have market
capitalization values (share price multiplied by the number of common stock
shares outstanding) less than $8 billion for mid-cap, and $1.5 billion for small
cap. An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities.
PORTFOLIO SELECTION The manager is a research driven, fundamental investment
adviser, pursuing a disciplined value-oriented strategy. As a "bottom-up"
adviser focusing primarily on individual securities, the manager will focus on
the market price of a company's securities relative to its evaluation of the
company's long-term earnings, and in particular a strong dividend record, asset
value, and cash flow potential. The manager seeks bargains among companies with
steadily rising dividends and strong balance sheets--out of favor companies
that might include companies that have stumbled recently, dropping sharply in
price, that offer, in the manager's opinion, excellent long-term potential.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
FRD-1 Franklin Rising Dividends Securities Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or if they become sellers), or favor investing in
faster-growing companies, value stocks may not increase in value as anticipated
by the manager, and may even decline further.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller companies can be
particularly sensitive to changing economic conditions, including increases in
interest rates because of their reliance on credit, and their growth prospects
are less certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products and services may not find an established market or may become
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FRD-2 Franklin Rising Dividends Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 5 Years 01/27/92
- -----------------------------------------------------------------
<S> <C> <C> <C>
Franklin Rising Dividends
Securities Fund - Class 1 1 -9.70% 15.65% 9.83%
Russell Mid-Cap Value
Index 2,3 -0.11% 18.01% 15.26%
Wilshire Target Mid-Cap
Growth Index 2 15.90% 17.02% 13.90%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The Russell Mid-Cap Value Index is an
unmanaged group of securities companies with lower price-to-book ratios and
lower forecasted group values. The Wilshire Target MidCap Company Growth Index
is an unmanaged group of securities of companies selected based on growth
characteristics from among the middle capitalization universe of the Wilshire
5000. Indices include reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's investments.
3. The Wilshire Index is being replaced with The Russell Index. The manager
believes the new index is more closely aligned with the universe of rising
dividends qualifiers, and more closely matches the fund's investments.
FRD-3 Franklin Rising Dividends Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN RISING DIVIDENDS SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 1 0.73%
Other expenses 0.02%
----
Total annual fund operating expenses 0.75%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $77 $240 $417 $930
</TABLE>
FRD-4 Franklin Rising Dividends Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisory Services, LLC (Advisory Services), One Parker Plaza, Ninth
Floor, Fort Lee, New Jersey, 07024, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Donald G. Taylor Mr. Taylor has been a manager of the fund since 1996. Before joining the
SENIOR VICE PRESIDENT, Franklin Templeton Group in 1996, he was a Portfolio Manager for
ADVISORY SERVICES Fidelity Management & Research Co.
William J. Lippman Mr. Lippman has been a manager of the fund since its inception in 1992.
PRESIDENT, ADVISORY SERVICES He has more than 30 years' experience in the securities industry and
joined the Franklin Templeton Group in 1988.
Bruce C. Baughman Mr. Baughman has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, 1992, and has been with the Franklin Templeton Group since 1988.
ADVISORY SERVICES
Margaret McGee Ms. McGee has been a manager of the fund since its inception in 1992,
VICE PRESIDENT, ADVISORY SERVICES and has been with the Franklin Templeton Group since 1988.
</TABLE>
The fund pays Advisory Services a fee for managing the fund's assets and
providing certain administrative facilities and services for the fund. For the
fiscal year ended December 31, 1999, the fund paid 0.73% of its average daily
net assets to the manager for its services.
FRD-5 Franklin Rising Dividends Securities Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- ------------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 18.11 19.68 15.40 12.66 9.97
---------------------------------------------------------------
Net investment income .22 .23 .22 .25 .27
Net realized and unrealized gains (losses) (1.57) 1.07 4.77 2.77 2.66
---------------------------------------------------------------
Total from investment operations (1.35) 1.30 4.99 3.02 2.93
---------------------------------------------------------------
Distributions from net investment income (.29) (.22) (.26) (.28) (.24)
Distributions from net realized gains (2.86) (2.65) (.45) -- --
---------------------------------------------------------------
Total distributions (3.15) (2.87) (.71) (.28) (.24)
---------------------------------------------------------------
Net asset value, end of year 13.61 18.11 19.68 15.40 12.66
===============================================================
Total return (%)+ (9.70) 6.92 33.03 24.18 29.74
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 450,549 751,869 780,298 597,424 463,253
Ratios to average net assets: (%)
Expenses .75 .72 .74 .76 .78
Net investment income 1.35 1.20 1.24 1.96 2.72
Portfolio turnover rate (%) 5.32 26.44 37.04 27.97 18.72
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
FRD-6 Franklin Rising Dividends Securities Fund - Class 1
<PAGE>
Franklin Small Cap Fund
(previously Small Cap Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in the equity securities of U.S. small capitalization
(small cap) companies. For this fund, small cap companies are those companies
with market cap values not exceeding (i) $1.5 billion; or (ii) the highest
market cap value in the Russell 2000 Index; whichever is greater, at the time
of purchase. That index consists of 2,000 small companies that have publicly
traded securities. Market capitalization is defined as share price multiplied
by the number of common stock shares outstanding. The manager may continue to
hold an investment for further capital growth opportunities even if the company
is no
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks of small cap U.S. companies.
- --------------------------------------------------------------------------------
longer small cap. In selecting companies, the fund may invest substantially in
technology sectors such as electronics, computer software and hardware,
telecommunications, Internet-related services, and health-care technology.
In addition to its main investments, the fund may invest in equity securities
of larger companies. When suitable opportunities are available, the fund may
also invest in initial public offerings of securities, and may invest a very
small portion of its assets in private or illiquid securities, such as late
stage venture capital financings. An equity security represents a proportionate
share of the ownership of a company; its value is based on the success of the
company's business, any income paid to stockholders, the value of its assets,
and general market conditions. Common and preferred stocks, and securities
convertible into common stock are examples of equity securities.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings or assets. The manager relies
on a team of analysts to provide in-depth industry expertise and uses both
qualitative and quantitative analysis to evaluate companies for distinct and
sustainable competitive advantages. Advantages, such as a particular marketing
or product niche, proven technology, and industry leadership are all factors
the manager believes point to strong long-term growth potential. The manager
diversifies the fund's assets across many industries, but from time to time may
invest substantially in certain sectors.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
FS-1 Franklin Small Cap Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company fails
to meet those projections. Growth stocks may also be more expensive relative to
their earnings or assets compared to value or other stocks. Because the fund's
manager uses an aggressive growth strategy, an investment in the fund involves
greater risk and more volatility than an investment in a growth fund investing
entirely in proven growth stocks.
SMALLER COMPANIES While smaller companies may offer opportunities for capital
growth, they also have significant risk. Historically, smaller company
securities have been more volatile in price and have fluctuated independently
from larger company securities, especially over the shorter-term. Smaller or
relatively new companies can be particularly sensitive to changing economic
conditions, including increases in interest rates because of their reliance on
credit, and their growth prospects are less certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the fund,
or only in very limited quantities. Thus, when the fund's size is smaller, any
gains from IPOs will have an exaggerated impact on the fund's reported
performance than when the fund is larger.
TECHNOLOGY COMPANIES Technology and biotechnology industry stocks can be
subject to abrupt or erratic price movements. They have historically been
volatile in price, especially over the short term, due to the rapid pace of
product change and development affecting such companies. Prices often change
collectively without regard to the merits of individual companies.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FS-2 Franklin Small Cap Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
Year 11/01/95
- -----------------------------------------------------------------------------
<S> <C> <C>
Franklin Small Cap Fund - Class 1 1 96.94%* 30.41%
S&P 500 Index 2 21.04% 27.11%
Russell 2000/registered trademark/ Growth Index 2 43.09% 17.29%
Russell 2500/registered trademark/ Index 2,3 24.14% 17.49%
</TABLE>
* Recently many individual stocks and sectors such as technology have
significantly exceeded historical norms; investors should generally not expect
such outsized gains to continue.
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks. The Russell 2000/registered
trademark/ Growth Index measures the performance of those Russell
2000/registered trademark/ companies with higher price-to-book ratios and higher
forecasted growth values. The Russell 2000/registered trademark/ Index consists
of the 2,000 smallest securities in the Russell 3000/registered trademark/
index; representing approximately 11% of the Russell 3000/registered trademark/
total market capitalization. The Russell 2500/registered trademark/ Index is an
unmanaged index of 2,500 companies with small market capitalizations. Indices
include reinvested dividends and/or interest. One cannot invest directly in an
index, nor is an index representative of the fund's investments.
3. The Russell 2500/registered trademark/ Index is being replaced with the
Russell 2000/registered trademark/ Growth Index, which more closely mirrors the
fund's growth style of investing.
FS-3 Franklin Small Cap Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN SMALL CAP FUND - CLASS 1 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES 1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 0.55%
Other expenses 0.27%
----
Total annual fund operating expenses 0.82%
====
</TABLE>
1. On 2/8/00, a merger and reorganization was approved that combined the fund
with a similar fund of Templeton Variable Products Series Fund, effective
5/1/00. On 2/8/00, fund shareholders approved new management fees, which apply
to the combined fund effective 5/1/00. The table shows restated total expenses
based on the new fees and assets of the fund as of 12/31/99, and not the assets
of the combined fund. However, if the table reflected both the new fees and the
combined assets, the fund's expenses after 5/1/00 would be estimated as:
Management fees 0.55%, Other expenses 0.27%, and Total annual fund operating
expense 0.82%.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $84 $262 $455 $1,014
</TABLE>
FS-4 Franklin Small Cap Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Edward B. Jamieson Mr. Jamieson has been a manager of the fund since its inception in 1995,
EXECUTIVE VICE PRESIDENT, ADVISERS and has been with the Franklin Templeton Group since 1987.
Michael McCarthy Mr. McCarthy has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1995. He joined the Franklin Templeton Group in 1992.
Aidan O'Connell Mr. O'Connell has been a manager of the fund since September 1998.
PORTFOLIO MANAGER, ADVISERS Before joining Franklin Templeton in May 1998, Mr. O'Connell was a
research analyst and a corporate financial analyst at Hambrecht & Quist.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. The fee is equal
to an annual rate of:
/bullet/ 0.550% of the value of net assets up to $500 million;
/bullet/ 0.450% of the value of net assets over $500 million up to and including
$1 billion;
/bullet/ 0.400% of the value of net assets over $1 billion up to and including
$1.5 billion;
/bullet/ 0.350% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
/bullet/ 0.325% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
/bullet/ 0.300% of the value of net assets over $11.5 billion up to and
including $16.5 billion;
/bullet/ 0.290% of the value of net assets over $16.5 billion up to and
including $19 billion;
/bullet/ 0.280% of the value of net assets over $19 billion up to and including
$21.5 billion; and
/bullet/ 0.270% of the value of net assets over $21.5 billion.
FS-5 Franklin Small Cap Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- ----------------------------------------------------------------------------------------------------------------
1999 2,3 1998 1997 1996 1995 1
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 13.72 15.05 13.20 10.24 10.00
-------------------------------------------------------------
Net investment income (loss) (.01) .07 .01 .02 .03
Net realized and unrealized gains (losses) 13.25 (.20) 2.24 2.95 .21
-------------------------------------------------------------
Total from investment operations 13.24 (.13) 2.25 2.97 .24
-------------------------------------------------------------
Distributions from net investment income (.08) (.01) (.03) (.01) --
Distributions from net realized gains (.01) (1.19) (.37) -- --
Total distributions (.09) (1.20) (.40) (.01) --
-------------------------------------------------------------
Net asset value, end of year 26.87 13.72 15.05 13.20 10.24
=============================================================
Total return (%)+ 96.94 (.98) 17.42 28.95 2.30
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 488,062 315,460 313,462 170,969 13,301
Ratios to average net assets: (%)
Expenses .77 .77 .77 .77 .90*
Net investment income (loss) (.05) .51 .06 .63 2.70*
Portfolio turnover rate (%) 39.49 53.01 64.07 63.72 16.04
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
*Annualized
1. For the period November 1, 1995 (effective date) to December 31, 1995.
2. Based on average shares outstanding.
3. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the fund with a similar fund of the Templeton Variable
Products Series Fund (TVP), effective May 1, 2000. The table above only
reflects fund statistics of the fund, which was the surviving fund of the
merger, and not of the TVP fund. The fund statistics are for the year ended
December 31, 1999.
FS-6 Franklin Small Cap Fund - Class 1
<PAGE>
Franklin S&P 500 Index Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is to match the performance of the Standard &
Poor's 500 Composite Stock Price Index (S&P 500 Index) before the deduction of
fund expenses.
MAIN INVESTMENTS Under normal market conditions, the fund uses investment
"indexing" strategies designed to track the performance of the S&P 500 Index.
The S&P 500 Index is a widely recognized, unmanaged stock market index, which
is dominated by the securities of large U.S. companies. This index includes the
securities of 500 companies from leading industrial sectors which represent a
substantial portion of the market value of all common stocks publicly traded in
the U.S. The S&P 500 Index weights stocks according to their market
capitalization (share price multiplied by the number of common stock shares
outstanding). Standard &
- --------------------------------------------------------------------------------
This index fund invests to match the performance of the S&P 500 Composite Stock
Price Index.
- --------------------------------------------------------------------------------
Poor's Corporation determines the composition of the S&P 500 Index and may
change the composition from time to time.
The fund may invest in the common stocks in the S&P 500 Index in approximately
the same proportions used in the S&P 500 Index. For example, if one company's
securities made up 5% of the S&P 500 Index, the fund may invest 5% of its total
assets in that company. This is called the "replication" method. Over time, the
fund will seek to invest at least 80% of its total assets in the common stocks
of companies included in the S&P 500 Index. The fund may also invest in a sample
of stocks found in the S&P 500 Index, selected on the basis of
computer-generated statistical data to resemble the full index in terms of
industry weighting, market capitalization, and other characteristics such as
beta, price-to-book ratios, price-to-earnings ratios and dividend yield. This is
called the "optimization" method. Using this method, the fund may not hold all
of the companies that are represented in the S&P 500 Index. An equity security,
or stock, represents a proportionate share of the ownership of a company; its
value is based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions.
When the manager determines that it would be cost-effective or otherwise
beneficial for the fund to do so, the fund may invest in derivative securities,
such as stock index futures and stock index options, as a method of gaining
market exposure in addition to, or instead of, investing directly in securities
in the S&P 500 Index. As part of a derivative strategy, the fund may invest a
small portion in short-term debt securities which may include U.S. government
securities, certificates of deposit, high-grade commercial paper, repurchase
agreements, other money market securities, and money market funds.
Derivative securities are used as an efficient, low-cost method of gaining
immediate exposure to a particular securities market without investing directly
in the underlying securities. The fund may also invest in derivative securities
to keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the stock market. The fund will not use derivative
securities for speculative purposes or as leveraged investments that magnify
the gains or losses of an investment.
PORTFOLIO SELECTION The manager uses various "indexing" strategies designed to
track the performance of the S&P 500 Index and does not seek to outperform the
market as a whole by researching and selecting individual securities. The
manager determines the mix of investments that it believes will, in a
cost-effective manner, achieve the fund's investment goal and manages cash
flows into and out of the fund.
TEMPORARY INVESTMENTS When the manager seeks to maintain liquidity, it may
invest all or substantially all of the fund's assets in short-term investments,
including cash or cash equivalents. Under these circumstances, the fund may
temporarily be unable to pursue its investment goal.
FSP-1 Franklin S&P 500 Index Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the
shorter term. These price movements may result from factors affecting individual
companies, industries, or the securities market as a whole. Large-capitalization
stocks tend to go through cycles of doing better -- or worse -- than the stock
market in general. In the past, these periods have lasted for several years.
S&P INDEX STOCKS Since the S&P 500 Index is market capitalization weighted,
stocks or sectors with significant market capitalizations can have a substantial
impact on the performance of the index. For example, in recent years the top ten
stocks in the index have come to account for nearly one quarter of its value and
its performance, and technology stocks have increased from about 13% to roughly
30% of the S&P 500 Index. Of course, historically the sectors dominating the
index have varied and the largest companies in the index have generally not made
up such a large portion of the index as they have recently. To the extent that
the fund's holdings are similar to the index, the same stocks and sectors that
impact the S&P 500 Index will also impact the fund.
INDEX TRACKING The fund's ability to track its targeted index may be affected
by transaction costs and fund expenses, cash flows, and changes in the
composition of that index. In addition, the fund's performance may not
precisely track the performance of its targeted index if the securities the
manager has selected do not precisely track that index. If securities the fund
owns underperforms those in that index, the fund's performance will be lower
than that index. Unlike an unmanaged index, the fund pays operating expenses
that may prevent the fund from precisely tracking an index's performance. Cash
inflows from investors buying shares could create large balances of cash, while
cash outflows from investors selling shares may require ready reserves of cash.
Either situation would likely cause the fund's performance to deviate from the
"fully invested" targeted index.
DERIVATIVE SECURITIES Stock index futures and stock index options are
considered derivative investments, since their value depends on the value of
the underlying asset to be purchased or sold. The fund's investment in
derivatives may involve a small investment relative to the amount of risk
assumed. To the extent the fund enters into these transactions, their success
will depend on the manager's ability to select appropriate derivative
investments . The fund could suffer losses if its derivative securities do not
correlate well with the indexes or securities for which they are acting as a
substitute or if the fund cannot close out a position because the trading
markets become illiquid.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FSP-2 Franklin S&P 500 Index Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
Because the fund is new, it does not have a full calendar year of performance.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN S&P 500 INDEX FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets) 1,2
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 0.15%
Other expenses 0.28%
----
Total annual fund operating expenses 0.43%
====
</TABLE>
1. The management fees shown are based on the fund's maximum contractual
amount. Other expenses are estimated.
2. The manager and administrator have agreed in advance to waive or limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund so that total annual fund operating expenses do not exceed
0.55% of the fund's average daily net assets for the current fiscal year. After
December 31, 2001, the manager and administrator may end this arrangement at
any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
- ------------------------------------------
<S> <C> <C>
Class 1 $44 $138
</TABLE>
FSP-3 Franklin S&P 500 Index Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers) 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, State Street Global Advisors (SSgA), Two
International Place, Boston, Massachusetts 02110, is the fund's sub-advisor.
SSgA is a division of State Street Bank and Trust Company. A team from SSgA
provides Advisers with investment management advice and assistance.
The fund's lead portfolio manager is:
<TABLE>
<S> <C>
Mark Boyadjian Mr. Boyadjian is a Chartered Financial Analyst and holds a Bachelor of
PORTFOLIO MANAGER OF ADVISERS Arts degree in Philosophy from University of California at Berkeley. Prior
to joining the Franklin Templeton Group in 1998, Mr. Boyadjian was a
portfolio manager at Scudder, Stevens & Clark.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. The fee is equal
to an annual rate of 0.15% of the fund's net assets. The manager is
contractually obligated to limit management fees and make certain payments to
reduce fund expenses as necessary so that Total annual fund operating expenses
do not exceed 0.55% of the fund's class 1 net assets in 2000.
"Standard & Poor's/registered trademark/", "S&P/registered trademark/" and "S&P
500/registered trademark/" are trademarks of The McGraw-Hill Companies, Inc.
and have been licensed for use by Franklin Templeton Distributors, Inc. The
fund is not sponsored, endorsed, sold or promoted by Standard & Poor's and
Standard & Poor's makes no representation regarding the advisability of
investing in the fund. Please see the SAI for more information.
FSP-4 Franklin S&P 500 Index Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Year ended December 31,
Class 1 1999 1
- ---------------------------------------------------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 10.00
-----
Net investment income .03
Net realized and unrealized gains .53
-----
Total from investment operations .56
-----
Net asset value, end of year 10.56
=====
Total return (%)+ 5.60
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 14,888
Ratios to average net assets: (%)
Expenses .55*
Expenses, excluding waiver by affiliate .98*
Net investment income 1.77*
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
*Annualized
1.For the period November 1, 1999 (commencement of operations) to December 31,
1999. Based on average shares outstanding.
FSP-5 Franklin S&P 500 Index Fund - Class 1
<PAGE>
Franklin Strategic Income Securities Fund
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is to earn a high level of current
income. Its secondary goal is long-term capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in U.S. and non-U.S. debt securities. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. There are no set percentage
limitations on the amount the fund invests in any particular types of debt
securities. Rather, the fund actively and flexibly shifts its investments among
various types of debt securities to respond to current and expected economic
conditions, including:
/bullet/ high yield corporate bonds;
/bullet/ emerging market bonds;
/bullet/ international bonds;
/bullet/ convertible securities, including preferred stocks and bonds
convertible into common stocks;
/bullet/ mortgage securities and other asset-backed securities;
/bullet/ U.S. Government bonds; and
/bullet/ preferred stock (non-convertible).
- --------------------------------------------------------------------------------
The fund invests primarily in U.S. and non-U.S. bonds, including high yield,
lower-rated bonds.
- --------------------------------------------------------------------------------
The fund may invest up to 100% of its assets in high yield, lower-quality and
defaulted debt securities ("junk bonds"). These securities are either rated
below investment grade (below the top four long-term rating categories) by
independent rating agencies such as Standard & Poor's Ratings Group
(S&P/registered trademark/) and Moody's Investors Service, Inc. (Moody's), or
are comparable unrated securities. Nevertheless, the fund generally invests in
non-investment grade debt securities rated at least Caa by Moody's or CCC by S&P
or unrated securities the fund's manager determines are of comparable quality.
Many debt securities of non-U.S. issuers, and especially emerging market
issuers, are rated below investment grade or are unrated so that their selection
depends on the manager's internal analysis. Generally, lower-rated securities
pay higher yields than more highly rated securities to compensate investors for
the higher risk.
The fund invests in many different securities issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities (U.S. Government
securities). In addition to U.S. Treasury notes and bonds, the fund invests in
mortgage-backed securities such as Government National Mortgage Association
("Ginnie Maes"), Federal National Mortgage Association, or Federal Home Loan
Mortgage Corporation obligations, and asset-backed securities such as Small
Business Administration obligations ("Sallie Maes"). The timely payment of
principal and interest on U.S. Treasury securities, Ginnie Maes, and Sallie
Maes, are backed by the full faith and credit of the U.S. Government.
Securities issued or guaranteed by FNMA, FHLMC, and certain other entities do
not carry this guarantee. The fund may also invest in mortgage-backed
securities issued by private entities, which are supported by the credit of the
issuer.
Derivative investments, such as forward currency exchange contracts, are used
to help manage interest rate and currency risks, increase liquidity, or invest
in a particular stock or bond in a more efficient way. The manager intends to
manage the fund's exposure to various currencies, and may from time to time
seek to hedge (protect) against currency risk, largely by using forward
currency exchange contracts (Hedging Instruments).
In addition to its main investments, the fund may also invest in equity
securities, largely common stock, or may receive other equities as a result of
a corporate restructuring. An equity security represents a proportionate share
of the ownership of a company; its value is based on the success of the
company's business, any income paid to stockholders, the value of its assets,
and general market conditions.
PORTFOLIO SELECTION The manager allocates its investments among the various
types of debt available based on its assessment of changing economic, market,
industry, and issuer conditions. The manager uses a "top-down" analysis of
macroeconomic trends, market sectors, and industries to take advantage of
varying sector reactions to economic events. For example, the manager evaluates
business cycles, yield curves, countries' changing market, economic, and
political conditions, the relative interest rates among currencies, and values
between and within markets.
This "top-down" approach is combined with a "bottom-up" fundamental analysis of
individual securities, including factors such as:
FSI-1 Franklin Strategic Income Securities Fund - Class 1
<PAGE>
/bullet/ a security's relative value based on anticipated cash flow, interest
or dividend coverage, asset coverage, and earnings prospects;
/bullet/ the experience and strength of the company's management;
/bullet/ the company's sensitivity to changes in interest rates and business
conditions;
/bullet/ the company's debt maturity schedules and borrowing requirements; and
/bullet/ the company's changing financial condition and market recognition of
the change.
In selecting debt securities, the manager conducts its own analysis of the
security's intrinsic value rather than simply relying on the coupon rate or
rating.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goals.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Changes in interest rates in markets around the world affect the prices of the
fund's debt securities. If rates rise the value of the fund's debt securities
will fall and so too will the fund's share price. This means you could lose
money.
- --------------------------------------------------------------------------------
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes. Increases in interest
rates may also have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or have more difficulty meeting interest payments. Stripped securities,
such as U.S. Treasury STRIPS, are extremely sensitive to changes in interest
rates (and prepayments), and their price will fluctuate more than the prices of
other interest-paying bonds or notes. A sub-category of interest rate risk is
reinvestment risk, which is the risk that interest rates will be lower when the
fund seeks to reinvest interest payments or the proceeds from a matured debt
security, resulting in less income received by the fund. With respect to the
fund's mortgage-backed securities, if rates fall, mortgage holders will
refinance their mortgage loans at lower interest rates, which will reduce the
fund's interest and yield.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, even securities supported by credit enhancements
have the credit risk of the entity providing credit support.
Lower-rated securities Securities rated below investment grade, sometimes
called "junk bonds," generally have more risk than higher-rated securities.
Companies issuing high yield debt securities are not as strong financially as
those with higher credit ratings. These companies are more likely to encounter
financial difficulties and are more vulnerable to changes in the economy, such
as a recession or a sustained period of rising interest rates that could
prevent them from making interest and principal payments. If an issuer is not
paying or stops paying interest and/or principal, payments may never resume.
The fund may lose its entire investment on bonds that may be, or are, in
default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to changes in the ratings assigned by ratings agencies.
Prices are often closely linked with the company's stock prices and typically
rise and fall in response to factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price
swings due to changes in economic conditions, stock market activity, large
sustained sales by major investors, a high-profile default, or other factors.
High yield securities are also generally less liquid than higher-quality bonds.
Many of these securities do not trade frequently, and when they do trade their
prices may be significantly higher or lower than expected. At times, it may be
difficult to sell these
FSI-2 Franklin Strategic Income Securities Fund - Class 1
<PAGE>
securities promptly at an acceptable price, which may limit the fund's ability
to sell securities in response to specific economic events or to meet
redemption requests.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic, and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies, and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
MORTGAGE SECURITIES AND ASSET-BACKED SECURITIES Ginnie Maes, and other
mortgage- and asset-backed securities, differ from conventional debt securities
because principal is paid back over the life of the security rather than at
maturity. The fund may receive unscheduled prepayments of principal due to
voluntary prepayments, and refinancing or foreclosure on the underlying
mortgage or other loans. During periods of declining interest rates, principal
prepayments generally increase. The fund may be forced to reinvest returned
principal at lower interest rates, and there may be less potential for capital
appreciation. In periods of rising interest rates, prepayments can decline,
thus extending the security's maturity which may in turn cause the security's
price to fall. Credit enhancements, if any, may be inadequate in the event of
default.
DERIVATIVE SECURITIES, INCLUDING HEDGING INSTRUMENTS The performance of
derivative investments, which includes Hedging Instruments, depends, at least
in part, on the performance of an underlying asset such as stock prices or
currency exchange rates. Hedging Instruments used by this fund may involve a
small investment relative to the risk assumed. Their successful use will depend
on the manager's ability to predict market movements, and their use may have
the opposite effect of that intended. Risks include potential loss to the fund
due to the imposition of controls by a government on the exchange of foreign
currencies, delivery failure, default by the other party, or inability to close
out a position because the trading market becomes illiquid.
DIVERSIFICATION The fund is non-diversified as defined by the federal
securities laws. As such, it may invest a greater portion of its assets in one
issuer and have a smaller number of issuers than a diversified fund. Therefore,
the fund may be more sensitive to economic, business, political or other
changes
FSI-3 Franklin Strategic Income Securities Fund - Class 1
<PAGE>
affecting similar issuers or securities. The fund intends, however, to meet tax
diversification requirements.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. Illiquid
securities may not be readily sold or may only be resold at a price
significantly lower than if they were liquid.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FSI-4 Franklin Strategic Income Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
Because the fund is new, it does not have a full calendar year of performance.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN STRATEGIC INCOME SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets) 1,2
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 0.43%
Other expenses 0.52%
-----
Total annual fund operating expenses 0.95%
=====
Waiver/expense reduction (0.20%)
-----
Net annual fund operating expenses 0.75%
=====
</TABLE>
1. The management fees shown are based on the fund's maximum contractual
amount. Other expenses are estimated.
2. The manager and administrator had agreed in advance to waive or limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund so that total fund operating expenses do not exceed 0.75%
of the fund's average daily net assets for the current fiscal year. After
December 31, 2001, the manager and administrator may end this arrangement at
any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses are BEFORE WAIVER and remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
- ------------------------------------------
<S> <C> <C>
Class 1 $97 $303
</TABLE>
FSI-5 Franklin Strategic Income Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers) 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California, 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI),
500 East Broward Blvd., Ft. Lauderdale, Florida 33394, through its Templeton
Global Bond Managers division (Global Bond Managers), is the fund's
sub-advisor. A team from Global Bond Fund Managers provides Advisers with
investment management advice and assistance.
The team responsible for the fund's management is:
<TABLE>
<S> <C>
Eric G. Takaha, CFA Mr. Takaha has been a manager of the fund since its inception in 1999,
VICE PRESIDENT, ADVISERS and has been with the Franklin Templeton Group since 1989.
Chris Molumphy, CFA Mr. Molumphy has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, ADVISERS 1999, and has been with the Franklin Templeton Group since 1988.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. The fee is equal
to an annual rate of:
/bullet/ 0.425% of the value of net assets up to and including $500 million;
/bullet/ 0.325% of the value of net assets over $500 million up to and including
$1 billion;
/bullet/ 0.280% of the value of net assets over $1 billion up to and including
$1.5 billion;
/bullet/ 0.235% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
/bullet/ 0.215% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
/bullet/ 0.200% of the value of net assets over $11.5 billion up to and
including $16.5 billion;
/bullet/ 0.190% of the value of net assets over $16.5 billion up to and
including $19 billion;
/bullet/ 0.180% of the value of net assets over $19 billion up to and including
$21.5 billion; and
/bullet/ 0.170% of the value of net assets over $21.5 billion.
The manager is contractually obligated to limit management fees and make
certain payments to reduce fund expenses as necessary so that Total annual fund
operating expenses do not exceed 0.75% of the fund's class 1 net assets in
2000.
FSI-6 Franklin Strategic Income Securities Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP. Their report, along with the financial statements,
are included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Year ended December 31,
Class 1 1999 1
- ----------------------------------------------------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 10.00
-----
Net investment income .38
Net realized and unrealized gains (.12)
-----
Total from investment operations .26
Distributions from net investment income (.30)
-----
Net asset value, end of year 9.96
=====
Total return (%)+ 2.61
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 4,741
Ratios to average net assets: (%)
Expenses .75*
Expenses, excluding waiver by affiliate 1.46*
Net investment income 7.52*
Portfolio turnover rate (%) 9.96
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
*Annualized
1. For the period July 1, 1999 (commencement of operations) to December 31,
1999. Based on average shares outstanding.
FSI-7 Franklin Strategic Income Securities Fund - Class 1
<PAGE>
Franklin Technology Securities Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies expected to benefit
from the development, advancement, and use of technology. These may include,
for example, companies in the following areas:
- --------------------------------------------------------------------------------
The fund concentrates in common stocks of technology companies.
- --------------------------------------------------------------------------------
/bullet/ Technology services, including Internet services, data processing,
technology consulting and implementation services, and electronics
distributors;
/bullet/ Computer software;
/bullet/ Computing hardware, peripherals, and electronic components;
/bullet/ Semiconductors, semiconductor fabrication equipment, and precision
instruments;
/bullet/ Telecommunications, including communications equipment and services;
/bullet/ Media and information services, including cable television,
broadcasting, satellite and media content;
/bullet/ Health-care technology and biotechnology; and
/bullet/ Aerospace and defense technologies.
The fund may invest in companies of any size, and may, from time to time,
invest a significant portion of its assets in smaller companies. The fund may
invest up to 35% of its total assets in foreign securities.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings or assets. The manager relies
on a team of analysts to provide in-depth industry expertise and uses both
qualitative and quantitative analysis to evaluate companies for distinct and
sustainable competitive advantages. Such advantages as a particular marketing
niche, proven technology, strong management, and industry leadership are all
factors the manager believes point to strong growth potential.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money
over short or even extended periods.
- --------------------------------------------------------------------------------
TECHNOLOGY COMPANIES By focusing on technology industries, the fund carries much
greater risks of adverse developments among such industries than a fund that
invests in a wider variety of industries. Prices often change collectively
without regard to the merits of individual companies. Technology company stocks
can be subject to abrupt or erratic price movements and have been volatile,
especially over the short term, due to the rapid pace of product change and
development affecting such companies. Technology companies are subject to
significant competitive pressures, such as new market entrants, aggressive
pricing, and competition for market share, and the potential for falling profit
margins. These companies also face the risks that new services, equipment or
technologies will not be accepted by consumers and businesses or will become
rapidly obsolete. These factors can affect the profitability of technology
companies and, as a result, the value of their securities. In addition, many
Internet-related companies are in the emerging stage of development and are
particularly vulnerable to the risks of rapidly changing technologies. Prices of
these companies' securities historically have been more volatile than other
securities, especially over the short term.
FT-1 Franklin Technology Securities Fund - Class 1
<PAGE>
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company
fails to meet those projections. Growth stocks also may be more expensive
relative to their earnings or assets compared to value or other stocks. Because
the fund's manager uses an aggressive growth strategy, an investment in the
fund involves greater risk and more volatility than an investment in a growth
fund investing entirely in proven growth stocks.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies may offer opportunities for capital
growth, they also have significant risk. Historically, smaller company
securities have been more volatile in price and have fluctuated independently
from larger company securities, especially over the shorter-term. Smaller or
relatively new companies can be particularly sensitive to changing economic
conditions, including increases in interest rates because of their reliance on
credit, and their growth prospects are less certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the fund,
or only in very limited quantities. Thus, when the fund's size is smaller, any
gains from IPOs will have an exaggerated impact on the fund's reported
performance than when the fund is larger.
DIVERSIFICATION The fund is non-diversified as defined by federal securities
laws. As such, it may invest a greater portion of its assets in one issuer and
have a smaller number of issuers than a diversified fund. Therefore, the fund
may be more sensitive to economic, business, political or other changes
FT-2 Franklin Technology Securities Fund - Class 1
<PAGE>
affecting similar issuers or securities. The fund intends, however, to meet tax
diversification requirements.
LIQUIDITY The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. Illiquid
securities may not be readily sold or may only be resold at a price
significantly lower than if they were liquid.
PORTFOLIO TURNOVER Because of the fund's emphasis on technology stocks, the
fund's portfolio turnover rate may exceed 100% annually, which may involve
additional expenses to the fund, including portfolio transaction costs.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FT-3 Franklin Technology Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
Because the fund is new, it has no performance history.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN TECHNOLOGY SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets) 1
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 0.55%
Other expenses 0.38%
----
Total annual fund operating expenses 0.93%
====
</TABLE>
1. The management fees shown are based on the fund's maximum contractual
amounts. Other expenses are estimated.
2. The administrator and manager have agreed in advance to waive or limit their
respective fees and assume as their own expense certain expenses otherwise
payable by the fund so that total annual fund operating expenses do not exceed
1.05% of the fund's class 1 net assets during the current fiscal year. After
December 2001, the administrator and manager may end the arrangement at any
time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
- ------------------------------------------
<S> <C> <C>
Class 1 $95 $296
</TABLE>
FT-4 Franklin Technology Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Ian Link, CFA Mr. Link has been a manager of the fund since its inception, and has
VICE PRESIDENT, ADVISERS been with the Franklin Templeton group since 1989.
Canyon Chan, CFA Mr. Chan has been a manager of the fund since its inception, and has
VICE PRESIDENT, ADVISERS been with the Franklin Templeton group since 1991.
Conrad Herrmann, CFA Mr. Herrmann has been a manager of the fund since its inception, and
SENIOR VICE PRESIDENT, ADVISERS has been with the Franklin Templeton group since 1989.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. The fee is equal
to an annual rate of:
/bullet/ 0.550% of the value of net assets up to and including $500 million;
/bullet/ 0.450% of the value of net assets over $500 million, up to and
including $1 billion;
/bullet/ 0.400% of the value of net assets over $1 billion, up to and including
$1.5 billion;
/bullet/ 0.350% of the value of net assets over $1.5 billion, up to and
including $6.5 billion;
/bullet/ 0.325% of the value of net assets over $6.5 billion, up to and
including $11.5 billion;
/bullet/ 0.300% of the value of net assets over $11.5 billion, up to and
including $16.5 billion;
/bullet/ 0.290% of the value of net assets over $16.5 billion, up to and
including $19 billion;
/bullet/ 0.280% of the value of net assets over $19 billion, up to and including
$21.5 billion; and
/bullet/ 0.270% of the value of net assets over $21.5 billion.
The manager is contractually obligated to limit management fees so that Total
annual fund operating expenses do not exceed 1.05% of the fund's class 1 net
assets in 2000.
FT-5 Franklin Technology Securities Fund - Class 1
<PAGE>
Franklin U.S. Government Fund
(previously U.S. Government Securities Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is income.
MAIN INVESTMENTS Under normal market conditions, the fund will invest in a
portfolio limited to U.S. Government securities, primarily fixed and variable
rate mortgage-backed securities. The fund currently invests a substantial
portion of its assets in Government National Mortgage Association obligations
("Ginnie Maes").
- --------------------------------------------------------------------------------
The fund invests primarily in mortgage-backed U.S. Government securities.
- --------------------------------------------------------------------------------
Ginnie Maes represent an ownership interest in mortgage loans made by banks and
other financial institutions to finance purchases of homes. The individual loans
are packaged or "pooled" together for sale to investors. As the underlying
mortgage loans are paid off, investors receive periodic principal and interest
payments. Ginnie Maes carry a guarantee backed by the full faith and credit of
the U.S. Government. The guarantee applies only to the timely payment of
principal and interest on the mortgages in the pool, and does not apply to the
market prices and yields of the Ginnie Maes or to the net asset value or
performance of the fund, which will vary with changes in interest rates and
other market conditions. Ginnie Mae yields (interest income as a percent of
price) have historically exceeded the current yields on other types of U.S.
Government securities with comparable maturities, although interest rate changes
and unpredictable prepayments can greatly change total return.
In addition to Ginnie Maes, the fund may invest in mortgage-backed securities
issued or guaranteed by the Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation, or other U.S. Government agencies. The fund may also
invest in U.S. Government securities backed by other types of assets, including
business loans guaranteed by the U.S. Small Business Administration, and
obligations of the Tennessee Valley Authority. Finally, the fund may invest in
U.S. Treasury bonds, notes and bills, and securities issued by U.S. Government
agencies or authorities. Securities issued or guaranteed by FNMA, FHLMC, TVA
and certain other entities are not backed by the full faith and credit of the
U.S. Government, but are generally supported by the creditworthiness of the
issuer.
These debt securities may be fixed-rate, adjustable-rate, a hybrid of the two,
or zero coupon securities. Zero coupon securities are debt securities that make
no periodic interest payments but instead are sold at substantial discounts
from their value at maturity. The zero coupon bonds purchased by the fund are
typically those which are issued or created by the U.S. Government or its
agencies, where the interest coupons have been "stripped off" a bond and the
rights to principal and interest payments are sold separately. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest.
PORTFOLIO SELECTION The manager generally buys, and holds, high quality
securities which pay high current interest rates. Using this straightforward,
low turnover approach, the manager seeks to produce high current income with a
high degree of credit safety and lower price volatility, from a conservatively
managed portfolio of U.S. Government securities.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
FUS-1 Franklin U.S. Government Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price. This means you could lose money over short or even
extended periods.
- --------------------------------------------------------------------------------
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. Zero coupon bonds are more sensitive to
interest rate changes and their price will fluctuate more than the prices of
interest-paying bonds or notes for comparable maturities. In general, securities
with longer maturities are more sensitive to these price changes. A sub-category
of interest rate risk is reinvestment risk, which is the risk that interest
rates will be lower when the fund seeks to reinvest interest payments or the
proceeds from a matured debt security, resulting in less income received by the
fund.
GINNIE MAES Ginnie Maes, and other mortgage and asset-backed securities, differ
from conventional debt securities because principal is paid back over the life
of the security rather than at maturity. The fund may receive unscheduled
prepayments of principal due to voluntary prepayments, refinancing or
foreclosure on the underlying mortgage or other loans. During periods of
declining interest rates, the volume of principal prepayments generally
increases as borrowers refinance their mortgages at lower rates. The fund may
be forced to reinvest returned principal at lower interest rates, reducing the
fund's income. For this reason, Ginnie Maes may be less effective than other
types of securities as a means of "locking in" long-term interest rates and may
have less potential for capital appreciation during periods of falling interest
rates than other investments with similar maturities. A reduction in the
anticipated rate of principal payments, especially during periods of rising
interest rates, may increase the effective maturity of Ginnie Maes making them
more susceptible than other debt securities to a decline in market value when
interest rates rise. This could increase volatility of the fund's returns and
share price.
CREDIT The fund's investments in securities which are not backed by the full
faith and credit of the U.S. Government depend upon the ability of the issuing
agency or instrumentality to meet interest or principal payments, and may not
permit recourse against the U.S. Treasury. Accordingly, the issuers of some
securities considered to be U.S. Government securities may be unable to make
principal and interest payments when due.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FUS-2 Franklin U.S. Government Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ------------------------------------------------------------
<S> <C> <C> <C>
Franklin U.S. Government
Fund - Class 1 1 -0.94% 7.57% 7.45%
Lehman Brothers
Intermediate Government
Bond Index 2 0.49% 6.93% 7.10%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. Lehman Brothers Intermediate Government
Bond Index is an unmanaged index of fixed-rate bonds issued by the U.S.
Government and its agencies that are rated investment grade or higher and have
one to ten years remaining until maturity and at least $100 million outstanding.
Indices include reinvested dividends and/or interest. One cannot invest directly
in an index, nor is an index representative of the fund's investments.
FUS-3 Franklin U.S. Government Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN U.S. GOVERNMENT FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 1 0.49%
Other expenses 0.02%
----
Total annual fund operating expenses 0.51%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $52 $164 $285 $640
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Jack Lemein Mr. Lemein has been a manager of the fund since its inception in 1989,
EXECUTIVE VICE PRESIDENT, ADVISERS and has more than 30 years experience in the securities industry.
Roger Bayston, CFA Mr. Bayston has been a manager of the fund since 1993, and has been
SENIOR VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1991.
T. Anthony Coffey, CFA Mr. Coffey has been a manager of the fund since 1996, and has been
VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1989.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal
year ended December 31, 1999, the fund paid 0.49% of its average daily net
assets to the manager for its services.
FUS-4 Franklin U.S. Government Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- ----------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 13.89 13.92 13.47 14.00 12.57
-------------------------------------------------------------
Net investment income .83 .99 1.00 .75 .93
Net realized and unrealized gains (losses) (.96) .01 .21 (.31) 1.46
-------------------------------------------------------------
Total from investment operations (.13) 1.00 1.21 .44 2.39
-------------------------------------------------------------
Distributions from net investment income (1.98) (1.03) (.76) (.97) (.96)
-------------------------------------------------------------
Net asset value, end of year 11.78 13.89 13.92 13.47 14.00
=============================================================
Total return (%)+ (.94) 7.44 9.31 3.62 19.46
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 515,033 710,832 765,084 843,858 643,165
Ratios to average net assets: (%)
Expenses .51 .50 .50 .51 .52
Net investment income 6.25 6.22 6.49 6.66 6.72
Portfolio turnover rate (%) 7.90 31.34 16.84 12.93** 18.68*
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
*The portfolio turnover rate excludes mortgage dollar roll transactions.
**The portfolio turnover rate excludes transactions related to the liquidation
of the Investment Grade Intermediate Bond Fund and the Adjustable U.S.
Government Fund and mortgage dollar roll transactions.
1. Based on average shares outstanding.
FUS-5 Franklin U.S. Government Fund - Class 1
<PAGE>
Franklin Value Securities Fund
(previously Value Securities Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term total return.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies of various sizes that
the fund's manager believes are selling substantially below the underlying
value of their assets or their private market value (what a sophisticated
investor would pay for the entire company). Following this strategy, the fund
will invest in companies with, for example:
/bullet/ Stock prices that are low relative to current or historical earnings,
book value, cash flow, or sales--all relative to the market, a
company's industry or a company's earnings growth.
/bullet/ Recent sharp price declines ("fallen angels") but that still have
significant growth potential in the manager's opinion.
/bullet/ Valuable intangibles not reflected in the stock price such as
franchises, distribution networks or market share for particular
products or services, underused or understated assets or cash,
tax-loss carry forwards, or patents and trademarks.
- --------------------------------------------------------------------------------
The fund invests primarily in the common stocks of companies the manager
believes are undervalued.
- --------------------------------------------------------------------------------
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities. The fund may invest primarily in small-cap
companies, with market capitalization values (share price multiplied by the
number of common stock shares outstanding) of less than $1.5 billion. The fund
may also invest up to 25% of its total assets in foreign securities, including
those in emerging markets, but does not currently intend to invest more than
10%.
PORTFOLIO SELECTION The manager is a research driven, fundamental investment
adviser, pursuing a disciplined value-oriented strategy for this fund. As a
"bottom-up" adviser focusing primarily on individual securities, the manager
will focus on the market price of a company's securities relative to its
evaluation of the company's potential long-term earnings, asset value and cash
flow. The manager seeks bargains among the "under researched and unloved" - out
of favor companies that offer, in the manager's opinion, excellent long-term
potential that might include current growth companies that are being ignored by
the market, former growth companies that have stumbled recently, dropping
sharply in price but that still have significant growth potential in the
manager's opinion, or companies that are a potential turnaround or takeover
target.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in
FV-1 Franklin Value Securities Fund - Class 1
<PAGE>
such stocks if it believes the market may have overreacted to adverse
developments or failed to appreciate positive changes. However, if other
investors fail to recognize the company's value (and do not become buyers, or
become sellers), or favor investing in faster-growing companies, value stocks
may not increase in value as anticipated by the manager and may even decline
further.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
The fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may also
include companies reporting poor earnings, companies whose share prices have
declined sharply (sometimes growth companies that have recently stumbled but
have "fundamentals" the manager believes are good), turnarounds, cyclical
companies, or companies emerging from bankruptcy, all of which may have a higher
risk of being ignored or rejected, and therefore, undervalued by the market.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions,
including increases in interest rates because of their reliance on credit, and
their growth prospects are less certain.
For example, smaller companies may lack depth of management, or may have
limited financial resources for growth or development. They may have limited
product lines or market share. Smaller companies may be in new industries, or
their new products or services may not find an established market or may become
quickly obsolete. Smaller companies' securities may be less liquid which may
adversely affect their price. Investments in these companies may be considered
speculative.
DIVERSIFICATION The fund is non-diversified as defined by federal securities
laws. As such, it may invest a greater portion of its assets in one issuer and
have a smaller number of issuers than a diversified fund. Therefore, the fund
may be more sensitive to economic, business, political or other changes
affecting similar issuers or securities. The fund intends, however, to meet tax
diversification requirements.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund. These include currency risks
(fluctuations in currency exchange rates; devaluations by governments; and the
new euro currency) and country and company risks (political, social, and
economic instability; less liquid securities or markets; restrictions on
removal of currency and other assets; punitive taxes; custody and settlement
risks; less government supervision and regulation of foreign markets and their
participants; and less stringent disclosure, financial accounting or reporting
standards). Emerging market countries have heightened risks including a greater
likelihood of currency devaluations, less liquidity, and greater volatility.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FV-2 Franklin Value Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 05/01/98
- -------------------------------------------------------------
<S> <C> <C>
Franklin Value Securities Fund
- Class 1 1 1.65% -13.03%
Russell 2000 Value Index 2 -1.49% -9.52%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged Russell 2000 Value Index
measures the performance of companies with lower price-to-book ratios and higher
forecasted growth values. One cannot invest directly in an index, nor is an
index representative of the fund's portfolio.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN VALUE SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 0.60%
Other expenses 0.21%
----
Total annual fund operating expenses 0.81%
====
</TABLE>
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $83 $259 $450 $1,002
</TABLE>
FV-3 Franklin Value Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisory Services, LLC (Advisory Services), One Parker Plaza, Ninth
Floor, Fort Lee, New Jersey, 07024, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
William J. Lippman Mr. Lippman has been a manager of the fund since its inception in 1998.
PRESIDENT, ADVISORY SERVICES He has more than 30 years' experience in the securities industry and
joined the Franklin Templeton Group in 1988.
Bruce C. Baughman Mr. Baughman has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, 1998, and has been with the Franklin Templeton Group since 1988.
ADVISORY SERVICES
Margaret McGee Ms. McGee has been a manager of the fund since its inception in 1998
VICE PRESIDENT, and has been with the Franklin Templeton Group since 1988.
ADVISORY SERVICES
</TABLE>
The fund pays Advisory Services a fee for managing the fund's assets. For the
fiscal year ended December 31, 1999, the fund paid 0.60% of its average daily
net assets to the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- -----------------------------------------------------------------------
1999 2 1998 1
-------------------
<S> <C> <C>
Per share data ($)
Net asset value, beginning of year 7.79 10.00
------------------
Net investment income .05 .02
Net realized and unrealized gains (losses) .08 ( 2.23)
------------------
Total from investment operations .13 ( 2.21)
------------------
Distributions from net investment income (.02) --
------------------
Net asset value, end of year 7.90 7.79
==================
Total return (%)+ 1.65 (22.10)
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 11,320 9,013
Ratios to average net assets: (%)
Expenses .81 .83*
Net investment income .65 .95*
Portfolio turnover rate (%) 61.23 22.79
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
*Annualized
1. For the period May 1, 1998 (effective date) to December 31, 1998.
2. Based on average shares outstanding.
FV-4 Franklin Value Securities Fund - Class 1
<PAGE>
Franklin Zero Coupon Funds: maturing in December 2000, 2005, 2010
(previously Zero Coupon Funds, 2000, 2005, 2010)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL Each fund's investment goal is to provide as high an investment return as
is consistent with capital preservation.
- --------------------------------------------------------------------------------
Each fund seeks to return a reasonably assured targeted dollar amount,
predictable at the time of investment, on a specific date in the future by
investing primarily in zero coupon securities.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, each fund will invest at least
65% of its net assets in zero coupon debt securities, primarily U.S. Treasury
issued stripped securities and stripped securities issued by the U.S.
Government, and its agencies and authorities. The fund may also invest a lesser
amount in zero coupon securities issued by U.S. companies and stripped
eurodollar obligations, which are U.S. dollar denominated debt securities
typically issued by foreign subsidiaries of U.S. companies.
A debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Zero coupon securities
are debt securities that make no periodic interest payments but instead are
sold at substantial discounts from their value at maturity. The buyer receives
the rate of return by the gradual appreciation of the zero coupon bond, which
is redeemed at face value on the specified maturity date.
Stripped securities result from the separation of a bond's interest coupons
from the obligation to repay principal. An "interest only" strip is, in essence
a zero coupon bond, which has only the right to the repayment of principal.
Stripped U.S. Treasury securities are backed by the full faith and credit of
the U.S. Government. The guarantee applies only to the timely payment of
principal and does not apply to the market prices and yields of the zero coupon
bonds or to the net asset value or performance of the fund, which will vary
with changes in interest rates and other market conditions. Where the fund
invests in other than stripped U.S. Treasury securities, the zero coupon bonds
will be rated at least A by independent rating agencies such as Standard &
Poor's Ratings Group (S&P/registered trademark/) or Moody's Investors Services,
Inc. (Moody's) or, if unrated, securities determined by the Manager to be
comparable.
As a fund approaches its Target Date, its investments will be made up of
increasingly larger amounts of short-term money market investments, including
cash and cash equivalents.
PORTFOLIO SELECTION In selecting investments for the funds, the manager seeks
to keep the average duration of each fund to within twelve months of each
fund's maturity Target Date. Duration is a measure of the length of an
investment, taking into account the timing and amount of any interest payments
and the principal repayment. By balancing investments with slightly longer and
shorter durations, the manager believes it can reduce its unknown "reinvestment
risk." Since each fund will not be invested entirely in zero coupon securities
maturing on the Target Date but also will invest in money market securities,
there will be some reinvestment risk and liquidation costs.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
MATURITY Each fund matures on the third Friday of December of its specific
maturity year (Target Date). The Zero Coupon Fund - 2000 will mature on
December 15, 2000. On each fund's Target Date, the fund will be converted into
cash. At least 30 days prior to the Target Date, contract owners will be
notified and given an opportunity to select another investment option. If an
investor does not complete an instruction form directing what should be done
with the cash proceeds, the proceeds will be automatically invested in a money
market fund available under the contract and the contract owners will be
notified of such event.
FZ-1 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
Each fund's main risks can affect its share price, its distributions or income,
and therefore, the fund's performance.
If fund shares are redeemed prior to the maturity of the fund, an investor may
receive a significantly different investment return than anticipated at the
time of purchase. Therefore, the Zero Coupon Funds may not be appropriate for
contract owners who do not plan to invest for the long-term or until maturity.
- --------------------------------------------------------------------------------
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price. This means you could lose money.
- --------------------------------------------------------------------------------
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. Because zero coupon securities do not pay
interest, the market value of zeros can fall more dramatically than
interest-paying securities of similar maturities when interest rates rise. When
interest rates fall, however, zeros rise more rapidly in value. In general,
securities with longer maturities usually are more sensitive to price changes.
Thus, the Zero Coupon Fund 2010 may experience more volatility in its share
price than the Zero Coupon Fund 2000. A sub-category of interest rate risk is
reinvestment risk, which is the risk that interest rates will be lower when the
fund seeks to reinvest interest payments or the proceeds from a matured debt
security, resulting in less income received by the fund.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, thus, impact fund performance.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FZ-2 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
These bar charts and tables show the volatility of the funds' returns, which is
one indicator of the risks of investing in the funds. The bar charts show
changes in the funds' returns from year to year over the past ten calendar
years or since the funds' inception. The tables show how each fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the funds are
investment options. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ------------------------------------------------------------
<S> <C> <C> <C>
Franklin Zero Coupon Fund,
2000 - Class 1 1 3.07% 7.96% 8.23%
Merrill Lynch 1-Year Zero
Coupon Bond Index 2 4.34% 6.18% 6.25%
</TABLE>
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -------------------------------------------------------------
<S> <C> <C> <C>
Franklin Zero Coupon Fund,
2005 - Class 1 1 -5.88% 9.11% 8.88%
Merrill Lynch 5-Year Zero
Coupon Bond Index 2 -3.00% 7.21% 7.79%
</TABLE>
FZ-3 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 1
<PAGE>
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ----------------------------------------------------------------
<S> <C> <C> <C>
Franklin Zero Coupon
Fund, 2010 - Class 1 1 -12.24% 10.22% 9.25%
Merrill Lynch 10-Year Zero
Coupon Bond Index 2 -10.34% 9.17% 9.08%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged Merrill Lynch Zero Coupon
indices include zero coupon bonds that pay no interest and are issued at a
discount from redemption price. One cannot invest directly in an index, nor is
an index representative of the fund's investments.
FZ-4 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN ZERO COUPON FUNDS - CLASS 1:
MATURING IN DECEMBER 2000, 2005, 2010
This table describes the fees and expenses that you may pay if you buy and hold
shares of the funds. The tables and the examples do not include any fees or
sales charges imposed by the variable insurance contract for which the funds are
an investment option. If they were included, your costs would be higher.
Investors should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Zero Zero Zero
Coupon Coupon Coupon
Fund, Fund, Fund,
Class 1 2000 2005 2010
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge (load)
imposed on purchases 0.00% 0.00% 0.00%
Maximum deferred sales charge (load) 0.00% 0.00% 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Zero Zero Zero
Coupon Coupon Coupon
Fund, Fund, Fund,
Class 1 2000 2005 2010
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Management fees1 0.63% 0.63% 0.63%
Other expenses 0.02% 0.02% 0.02%
----------------------------------
Total annual fund operating expenses 0.65% 0.65% 0.65%
==================================
</TABLE>
1. The funds' administration fees are paid indirectly through the management
fees.
EXAMPLE
This example can help you compare the cost of investing in the funds with the
cost of investing in other mutual funds. They assume:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Each investment has a 5% return each year; and
/bullet/ Each fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ----------------------------------------------------------
<S> <C> <C> <C> <C>
Franklin Zero
Coupon Fund,
2000 - Class 1 1 $66 $208 $362 $810
Franklin Zero
Coupon Fund,
2005 - Class 1 $66 $208 $362 $810
Franklin Zero
Coupon Fund,
2010 - Class 1 $66 $208 $362 $810
</TABLE>
1. The fund will mature on December 15, 2000. See "Maturity" under "GOAL AND
STRATEGIES."
FZ-5 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Roger Bayston, CFA Mr. Bayston has been a manager of the fund since November 1999, and
SENIOR VICE PRESIDENT, ADVISERS has been with the Franklin Templeton Group since 1991.
Jack Lemein Mr. Lemein has been a manager of the fund since its inception in 1989,
EXECUTIVE VICE PRESIDENT, ADVISERS and has more than 30 years' experience in the securities industry.
T. Anthony Coffey, CFA Mr. Coffey has been a manager of the fund since 1989, and has been
VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1989.
</TABLE>
Each fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, each fund paid .63% of its average daily net assets to
the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
each fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the funds' Annual Report (available upon
request).
<TABLE>
<CAPTION>
Franklin Zero Coupon Fund, 2000 - Class 1 Year Ended December 31,
- -------------------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 14.81 15.14 15.19 15.73 13.62
----------------------------------------------------------------
Net investment income .98 1.22 1.15 .98 .75
Net realized and unrealized gains (losses) (.55) (.15) (.12) (.65) 2.03
----------------------------------------------------------------
Total from investment operations .43 1.07 1.03 .33 2.78
----------------------------------------------------------------
Distributions from net investment income (2.33) (1.21) (1.06) (.86) (.67)
Distributions from net realized gains (.34) (.19) (.02) (.01) --
----------------------------------------------------------------
Total distributions (2.67) (1.40) (1.08) (.87) (.67)
----------------------------------------------------------------
Net asset value, end of year 12.57 14.81 15.14 15.19 15.73
================================================================
Total return (%)+ 3.07 7.50 7.11 2.43 20.67
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 70,918 93,543 111,650 129,601 137,357
Ratios to average net assets: (%)
Expenses .65 .40 .40 .40 .40
Expenses excluding waiver and payments by affiliate .65 .66 .63 .62 .63
Net investment income 6.85 6.67 6.47 6.14 6.14
Portfolio turnover rate (%) 10.42 17.70 6.16 .58 1.63
</TABLE>
FZ-6 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 1
<PAGE>
<TABLE>
<CAPTION>
Franklin Zero Coupon Fund, 2005 - Class 1 Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 17.74 17.05 16.35 17.38 13.76
--------------------------------------------------------------
Net investment income .98 1.01 1.14 .96 .78
Net realized and unrealized gains (losses) (2.01) 1.03 .63 (1.13) 3.53
--------------------------------------------------------------
Total from investment operations (1.03) 2.04 1.77 (.17) 4.31
--------------------------------------------------------------
Distributions from net investment income (2.10) (1.10) (1.06) (.86) (.69)
Distributions from net realized gains (.10) (.25) (.01) -- --
--------------------------------------------------------------
Total distributions (2.20) (1.35) (1.07) (.86) (.69)
--------------------------------------------------------------
Net asset value, end of year 14.51 17.74 17.05 16.35 17.38
==============================================================
Total return (%)+ (5.88) 12.53 11.37 (.50) 31.76
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 65,895 84,487 77,296 82,603 83,222
Ratios to average net assets: (%)
Expenses .65 .40 .40 .40 .40
Expenses excluding waiver and payments by affiliate .65 .66 .65 .65 .66
Net investment income 5.93 5.82 6.16 6.15 6.19
Portfolio turnover rate (%) 15.87 3.87 4.52 2.06 1.72
</TABLE>
<TABLE>
<CAPTION>
Franklin Zero Coupon Fund, 2010 - Class 1 Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ()
Net asset value, beginning of year 19.05 17.83 16.29 18.04 13.02
--------------------------------------------------------------
Net investment income .99 1.09 1.02 1.02 .76
Net realized and unrealized gains (losses) (3.24) 1.39 1.54 (1.65) 4.75
--------------------------------------------------------------
Total from investment operations (2.25) 2.48 2.56 (.63) 5.51
--------------------------------------------------------------
Distributions from net investment income (2.14) (1.11) (1.01) (.88) (.49)
Distributions from net realized gains (.51) (.15) (.01) (.24) --
--------------------------------------------------------------
Total distributions (2.65) (1.26) (1.02) (1.12) (.49)
--------------------------------------------------------------
Net asset value, end of year 14.15 19.05 17.83 16.29 18.04
==============================================================
Total return (%)+ (12.24) 14.45 16.57 (2.69) 42.79
Ratios/supplemental data
Net assets, end of year ( x 1,000) 66,049 93,515 85,515 78,816 85,633
Ratios to average net assets: (%)
Expenses .65 .40 .40 .40 .40
Expenses excluding waiver and payments by affiliate .65 .66 .65 .65 .66
Net investment income 5.83 5.55 6.21 6.24 6.41
Portfolio turnover rate (%) 19.30 15.92 12.20 16.10 31.45
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
FZ-7 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 1
<PAGE>
Mutual Discovery Securities Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies of any nation that
the manager believes are available at market prices less than their value based
on certain recognized or objective criteria (intrinsic value). Following this
value-oriented strategy, the fund primarily invests in:
/bullet/ Undervalued Stocks Stocks trading at a discount to intrinsic value.
And, to a much smaller extent, the fund invests in:
/bullet/ Restructuring Companies Securities of companies that are involved in
restructurings such as mergers, acquisitions, consolidations,
liquidations, spin-offs, or tender or exchange offers.
/bullet/ Distressed Companies Securities of companies that are, or are about to
be, involved in reorganizations, financial restructurings, or
bankruptcy.
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks of U.S. and non-U.S. companies the
manager believes are undervalued.
- --------------------------------------------------------------------------------
The fund invests primarily in mid- and large-cap companies with market
capitalization values (share price multiplied by the number of common stock
shares outstanding) greater than $1.5 billion. The fund also may invest a
significant portion of its assets in small-cap companies. An equity security
represents a proportionate share of the ownership of a company; its value is
based on the success of the company's business, any income paid to stockholders,
the value of its assets, and general market conditions. Common and preferred
stocks, and securities convertible into common stock are examples of equity
securities.
While the fund generally purchases securities for investment purposes, the
manager may seek to influence or control management, or invest in other
companies that do so, when the manager believes the fund may benefit.
The fund may invest 50% or more of its total assets in foreign equity and debt
securities, which may include sovereign debt and participations in foreign
government debt. A debt security obligates the issuer to the bondholders or
creditors, both to repay a loan of money at a future date and generally to pay
interest.
The fund generally seeks to hedge (protect) against currency risks largely
using forward foreign currency exchange contracts (Hedging Instruments), where
available, and when, in the manager's opinion, it is economical to do so.
The fund's investments in Restructuring and Distressed Companies typically
involve the purchase of lower-rated or defaulted debt securities (junk bonds),
or comparable unrated debt securities, or the purchase of the direct
indebtedness (or participations in the indebtedness) of such companies.
Indebtedness generally represents a specific commercial loan or portion of a
loan made to a company by a financial institution such as a bank or insurance
company. Loan participations represent fractional interests in a company's
indebtedness and are generally made available by banks or insurance companies.
By purchasing all or a part of a company's direct indebtedness, a fund, in
effect, steps into the shoes of the lender. If the loan is secured, the fund
will have a priority claim to the assets of the company ahead of unsecured
creditors and stockholders. The fund generally makes such investments to
achieve capital appreciation, rather than to seek income.
The fund also may purchase trade claims and other similar direct obligations or
claims against a company in bankruptcy. Trade claims are generally purchased
from creditors of the bankrupt company and typically represent money due to a
supplier of goods or service to the company.
PORTFOLIO SELECTION The manager employs a research driven, fundamental value
strategy. In choosing equity investments, the manager focuses on the market
price of a company's securities relative to the manager's own evaluation of the
company's asset value, book value, cash flow potential, long-term earnings, and
multiples of earnings of comparable securities of both public or private
companies. Similarly, debt securities, including indebtedness, participations,
and trade claims, are generally selected based on the manager's own analysis of
the security's intrinsic value rather than the coupon rate or rating of the
security or investment. The manager examines each investment separately and
there are no set criteria as to specific value parameters, asset size, earnings
or industry type.
MD-1 Mutual Discovery Securities Fund - Class 1
<PAGE>
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The prices of debt securities of Restructuring or Distressed
Companies also may be "cheap" relative to the perceived value of the company's
assets. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions
around the world, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
The fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may also
include those of companies reporting poor earnings, companies whose share prices
have declined sharply (sometimes growth companies that have recently stumbled
but have "fundamentals" the manager believes are good), turnarounds, cyclical
companies, or companies emerging from bankruptcy, all of which may have a higher
risk of being ignored or rejected, and therefore, undervalued by the market.
RESTRUCTURING COMPANIES There can be no assurance that any merger or other
restructuring, or tender or exchange offer proposed at the time the fund
invests will be completed on the terms contemplated, and will therefore,
benefit the fund.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging
MD-2 Mutual Discovery Securities Fund - Class 1
<PAGE>
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than in the U.S. Short-term
volatility in these markets can be disconcerting and declines in excess of 50%
are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions and increases in
interest rates, their growth prospects are less certain and their securities
are less liquid. These companies may suffer significant losses, and can be
considered speculative.
CREDIT An issuer may be unable to make interest payments or repay principal.
Lower-rated and unrated debt securities, including Indebtedness and
Participations Junk bonds generally have more risk, fluctuate more in price,
and are less liquid than higher rated securities. Prices are especially
sensitive to developments affecting the company's business and to rating
changes, and typically rise and fall in response to factors that affect the
company's stock prices. Companies issuing such lower-rated debt securities are
not as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. Purchasers of
participations, such as the fund, must rely on the financial institution
issuing the participation to assert any rights against the borrower with
respect to the underlying indebtedness. In addition, the fund takes on the risk
as to the creditworthiness of the bank or other financial intermediary issuer,
as well as of the company issuing the underlying indebtedness. The fund may
lose its entire investment in defaulted bonds.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments which may involve a small investment relative to the
risk assumed. Their successful use will depend on the manager's ability to
predict market movements, and their use may have the opposite effect of that
intended. Risks include potential loss to the fund due to the imposition of
controls by a government on the exchange of foreign currencies, delivery
failure, default by the other party, or inability to close out its position
because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. Illiquid
securities may not be readily sold or may only be resold at a price
significantly lower than if they were liquid.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
MD-3 Mutual Discovery Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 11/08/96
- ----------------------------------------------------------------
<S> <C> <C>
Mutual Discovery Securities Fund -
Class 1 1 23.76% 12.08%
S&P 500 Index 2 21.04% 27.52%
Russell 2000 Index 2 21.26% 14.45%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The Russell 2000 Index measures the 2,000 smallest companies in the
Russell 3000 Index. Indices include reinvested dividends and/or interest. One
cannot invest directly in an index, nor is an index representative of the fund's
investments.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
MUTUAL DISCOVERY SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 0.80%
Other expenses 0.21%
----
Total annual fund operating expenses 1.01%
====
</TABLE>
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $103 $322 $558 $1,236
</TABLE>
MD-4 Mutual Discovery Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078, is the fund's investment manager.
Michael F. Price is Chairman of the Board of Directors of Franklin Mutual.
MANAGEMENT TEAM The team member primarily responsible for the fund's management
is:
<TABLE>
<S> <C>
David J. Winters Mr. Winters has been a manager of the fund since 1998. Before joining
SENIOR VICE PRESIDENT, ADVISERS the Franklin Templeton Group in 1996, he was a research analyst for
AND DIRECTOR OF RESEARCH Heine Securities Corporation (Heine), the predecessor of Franklin
FRANKLIN MUTUAL Mutual.
The managers listed above are part of a larger team of investment professionals with management
responsibility for all of the funds managed by Franklin Mutual, including this fund.
The team also includes:
Peter A. Langerman Mr. Langerman has been involved with the management of the fund
PRESIDENT AND CHIEF EXECUTIVE OFFICER since its inception in 1996. Before joining the Franklin Templeton Group
FRANKLIN MUTUAL in 1996, he was a research analyst for Heine.
Robert L. Friedman Mr. Friedman has been involved with the management of the fund since
SENIOR VICE PRESIDENT its inception in 1996. Before joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for Heine.
Lawrence N. Sondike Mr. Sondike has been involved with the management of the fund since
SENIOR VICE PRESIDENT its inception in 1996. Before joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for Heine.
Jeffrey A. Altman Mr. Altman has been involved with the management of the fund since its
SENIOR VICE PRESIDENT inception in 1996. Before joining the Franklin Templeton Group in 1996,
FRANKLIN MUTUAL he was a research analyst for Heine.
Raymond Garea Mr. Garea has been involved with the management of the fund since its
SENIOR VICE PRESIDENT inception in 1996. Before joining the Franklin Templeton Group in 1996,
FRANKLIN MUTUAL he was a research analyst for Heine.
In addition, the following Franklin Mutual employees serve as Assistant Portfolio Managers:
Jeff Diamond Mr. Diamond has been involved with the management of the fund since
ASSISTANT PORTFOLIO MANAGER 1998. Before joining the Franklin Templeton Group in 1998, he was a
FRANKLIN MUTUAL vice president and co-manager of Prudential Conservative Stock Fund.
Susan Potto Ms. Potto has been involved with the management of the fund since its
VICE PRESIDENT inception in 1996. Before joining the Franklin Templeton Group in 1996,
FRANKLIN MUTUAL she was a research analyst for Heine.
</TABLE>
The fund pays Franklin Mutual a fee for managing the fund's assets. For the
fiscal year ended December 31, 1999, the fund paid 0.80% of its average daily
net assets to the manager for its services.
MD-5 Mutual Discovery Securities Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Year ended December 31,
- ---------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 2
------------------------------------------------
<S> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 11.29 12.17 10.21 10.00
-----------------------------------------------
Net investment income .17 .20 .13 .02
Net realized and unrealized gains (losses) 2.48 (.76) 1.84 .19
-----------------------------------------------
Total from investment operations 2.65 (.56) 1.97 .21
-----------------------------------------------
Distributions from net investment income (.37) (.17) (.01) --
Distributions from net realized gains -- (.15) -- --
-----------------------------------------------
Total distributions (.37) (.32) (.01) --
-----------------------------------------------
Net asset value, end of year 13.57 11.29 12.17 10.21
===============================================
Total return (%)+ 23.76 (5.00) 19.25 2.10
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 202,777 224,656 198,653 5,418
Ratios to average net assets: (%)
Expenses 1.01 3 1.01 3 1.06 1.37*
Net investment income 1.42 1.94 1.19 2.11*
Portfolio turnover rate (%) 104.69 93.99 55.93 .14
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
*Annualized
1. Based on average shares outstanding.
2. For the period November 8, 1996 (effective date) to December 31, 1996.
3. Excluding dividend expense on securities sold short, the ratio of expenses to
average net assets was 0.99% and 1.00% for the years ended December 31, 1999
and December 31, 1998, respectively.
MD-6 Mutual Discovery Securities Fund - Class 1
<PAGE>
Mutual Shares Securities Fund
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is income.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies that the manager
believes are available at market prices less than their value based on certain
recognized or objective criteria (intrinsic value). Following this
value-oriented strategy, the fund primarily invests in:
/bullet/ Undervalued Stocks Stocks trading at a discount to intrinsic value.
And to a much smaller extent, the fund also invests in:
/bullet/ Restructuring Companies Securities of companies that are involved in
restructurings such as mergers, acquisitions, consolidations,
liquidations, spinoffs, or tender or exchange offers.
/bullet/ Distressed Companies Securities of companies that are, or about to be,
involved in reorganizations, financial restructurings, or bankruptcy.
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks of companies the manager believes
are undervalued.
- --------------------------------------------------------------------------------
The fund invests primarily in mid- and large-cap companies with market
capitalization values (share price multiplied by the number of common stock
shares outstanding) greater than $1.5 billion. The fund also may invest a
significant portion of its assets in small-cap companies, which have more risk.
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities.
While the fund generally purchases securities for investment purposes, the
manager may seek to influence or control management, or invest in other
companies that do so, when the manager believes the fund may benefit.
The fund's investments in Restructuring and Distressed Companies typically
involve the purchase of lower-rated or defaulted debt securities (junk bonds),
or comparable unrated debt securities, or the purchase of the direct
indebtedness (or participations in the indebtedness) of such companies. A debt
security obligates the issuer to the bondholders or creditors, both to repay a
loan of money at a future date and generally to pay interest. Indebtedness
generally represents a specific commercial loan or portion of a loan made to a
company by a financial institution such as a bank or insurance company. Loan
participations represent fractional interests in a company's indebtedness and
are generally made available by banks or insurance companies. By purchasing all
or a part of a company's direct indebtedness, a fund, in effect, steps into the
shoes of the lender. If the loan is secured, the fund will have a priority
claim to the assets of the company ahead of unsecured creditors and
stockholders. The fund generally makes such investments to achieve capital
appreciation rather than to seek income.
The fund may also purchase trade claims and other similar direct obligations or
claims against companies in bankruptcy. Trade claims are generally purchased
from creditors of the bankrupt company and typically represent money due to a
supplier of goods or services to the company.
The fund currently intends to invest up to approximately 20% of its total
assets in foreign equity and debt securities. The fund generally seeks to hedge
(protect) against currency risks, largely using forward foreign currency
exchange contracts, (Hedging Instruments), where available, and when, in the
manager's opinion, it is economical to do so.
PORTFOLIO SELECTION The manager employs a research driven, fundamental value
strategy. In choosing equity investments, the manager focuses
on the market price of a company's securities
relative to the manager's own evaluation of the company's asset value,
including an analysis of book value, cash flow potential, long-term earnings,
and multiples of earnings of comparable securities of both public or private
companies. Similarly, debt securities, including indebtedness, participations,
and trade claims, are generally selected based on the manager's own analysis of
the security's intrinsic value rather than the coupon rate or rating of the
security or investment. The manager examines each investment separately and
there are no set criteria as to specific value parameters, asset size, earnings
or industry type.
MS-1 Mutual Shares Securities Fund - Class 1
<PAGE>
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goals.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions,
the value of your investment in the fund will go up and down. This means you
could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The prices of debt securities of Restructuring or Distressed
Companies also may be "cheap" relative to the perceived value of the company's
assets. The manager may invest in such stocks if it believes the market may have
overreacted to adverse developments or failed to appreciate positive changes.
However, if other investors fail to recognize the company's value (and do not
become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may decline even further.
The fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may
also include those of companies reporting poor earnings, companies whose share
prices have declined sharply (sometimes growth companies that have recently
stumbled but have "fundamentals" the manager believes are good), turnarounds,
cyclical companies, or companies emerging from bankruptcy, all of which may
have a higher risk of being ignored or rejected, and therefore, undervalued by
the market.
RESTRUCTURING COMPANIES There can be no assurance that any merger or other
restructuring, or tender or exchange offer proposed at the time the fund
invests will be completed on the terms contemplated and will therefore, benefit
the fund.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country and Company General securities market and interest rate movements in
any country where the fund has investments are likely to affect the value of
the securities the fund owns that trade in that country. The political,
economic, and social structures of some countries the fund invests in may be
less stable and more volatile than those in the U.S. The risks of investing in
these countries include the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other
assets, nationalization of assets, punitive taxes and certain custody and
settlement risks. Non-U.S. companies are not subject to the same disclosure,
accounting, auditing and financial reporting standards and practices as U.S.
companies and their securities may not be as liquid as securities of similar
U.S. companies, or may become illiquid. Non-U.S. currency exchanges, stock
exchanges, trading systems, brokers, and companies generally have less
government supervision and regulation than in the U.S.
MS-2 Mutual Shares Securities Fund - Class 1
<PAGE>
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions and
increases in interest rates, their growth prospects are less certain and their
securities are less liquid. These companies may suffer significant losses, and
can be considered speculative.
CREDIT An issuer may be unable to make interest payments or repay principal.
Lower-rated and unrated debt securities, including Indebtedness and
Participations Junk bonds generally have more risk, fluctuate more in price,
and are less liquid than higher rated securities. Prices are especially
sensitive to developments affecting the company's business and to rating
changes, and typically rise and fall in response to factors that affect the
company's stock prices. Companies issuing such lower-rated debt securities are
not as strong financially, and are more likely to encounter financial
difficulties and be more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates. Purchasers of
participations, such as the fund, must rely on the financial institution
issuing the participation to assert any rights against the borrower with
respect to the underlying indebtedness. In addition, the fund takes on the risk
as to the creditworthiness of the bank or other financial intermediary issuer,
as well as of the company issuing the underlying indebtedness. The fund may
lose its entire investment in defaulted bonds.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments. Their successful use will depend on the manager's
ability to predict market movements, and their use may have the opposite effect
of that intended. Risks include potential loss to the fund due to the
imposition of controls by a government on the exchange of foreign currencies,
delivery failure, default by the other party, or inability to close out a
position because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. Illiquid
securities may not be readily sold or may only be resold at a price
significantly lower than if they were liquid.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
MS-3 Mutual Shares Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 11/08/96
- ---------------------------------------------------------
<S> <C> <C>
Mutual Shares Securities Fund -
Class 1 1 13.40% 10.86%
S&P 500 Index 2 21.04% 27.52%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
MS-4 Mutual Shares Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
MUTUAL SHARES SECURITIES FUND1 - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES 1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 0.60%
Other expenses 0.19%
----
Total annual fund operating expenses 0.79%
====
</TABLE>
1. On 2/8/00, a merger and reorganization was approved that combined the fund
with a similar fund of Templeton Variable Products Series Fund effective
5/1/00. The table shows total expenses based on the fund's assets as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management fees 0.60%; Other expenses 0.19%; and Total annual fund
operating expenses 0.79%.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $81 $252 $439 $978
</TABLE>
MS-5 Mutual Shares Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078, is the fund's investment manager.
Michael F. Price is Chairman of the Board of Directors of Franklin Mutual.
MANAGEMENT TEAM The team members primarily responsible for the fund's
management are:
<TABLE>
<S> <C>
Lawrence N. Sondike Mr. Sondike has been a manager of the fund since its inception in 1996.
SENIOR VICE PRESIDENT Before joining the Franklin Templeton Group in 1996, he was a research
FRANKLIN MUTUAL analyst for Heine Securities Corporation (Heine), the predecessor of
Franklin Mutual.
Susan Potto Ms. Potto has been an assistant portfolio manager of the fund since
VICE PRESIDENT January 2000. Before joining the Franklin Templeton Group in 1996, she
FRANKLIN MUTUAL was a research analyst for Heine.
</TABLE>
The managers listed above are part of a larger team of investment professionals
with management responsibility for all of the funds managed by Franklin Mutual,
including this fund.
The team also includes:
<TABLE>
<S> <C>
Peter A. Langerman Mr. Langerman has been involved with the management of the fund
CHIEF EXECUTIVE OFFICER since its inception in 1996. Before joining the Franklin Templeton Group
FRANKLIN MUTUAL in 1996, he was a research analyst for Heine.
Robert L. Friedman Mr. Friedman has been involved with the management of the fund since
SENIOR VICE PRESIDENT its inception in 1996. Before joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for Heine.
Jeffrey A. Altman Mr. Altman has been involved with the management of the fund since its
SENIOR VICE PRESIDENT inception in 1996. Before joining the Franklin Templeton Group in 1996,
FRANKLIN MUTUAL he was a research analyst for Heine.
Raymond Garea Mr. Garea has been involved with the management of the fund since its
SENIOR VICE PRESIDENT inception in 1996. Before joining the Franklin Templeton Group in 1996,
FRANKLIN MUTUAL he was a research analyst for Heine.
David J. Winters Mr. Winters has been involved with the management of the fund since
SENIOR VICE PRESIDENT 1998. Before joining the Franklin Templeton Group in 1996, he was a
AND DIRECTOR OF RESEARCH research analyst for Heine.
FRANKLIN MUTUAL
</TABLE>
In addition, the following Franklin Mutual employee serves as Assistant
Portfolio Manager:
<TABLE>
<S> <C>
Jeff Diamond Mr. Diamond has been involved with the management of the fund since
ASSISTANT PORTFOLIO MANAGER 1998. Before joining the Franklin Templeton Group in 1998, he was a
FRANKLIN MUTUAL vice president and co-manager of Prudential Conservative Stock Fund.
</TABLE>
The fund pays Franklin Mutual a fee for managing the fund's assets. For the
fiscal year ended December 31, 1999, the fund paid 0.60% of its average daily
net assets to the manager for its services.
MS-6 Mutual Shares Securities Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
requst).
<TABLE>
<CAPTION>
Class 1 Year Ended December 31,
- --------------------------------------------------------------------------------------------------
1999 1,2 1998 1997 1996 3
-------------------------------------------------
<S> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 11.96 12.18 10.35 10.00
------------------------------------------------
Net investment income .20 .28 .13 .02
Net realized and unrealized gains (losses) 1.41 (.25) 1.71 .33
------------------------------------------------
Total from investment operations 1.61 .03 1.84 .35
------------------------------------------------
Distributions from net investment income (.34) (.13) (.01) --
Distributions from net realized gains -- (.12) -- --
------------------------------------------------
Total distributions (.34) (.25) (.01) --
------------------------------------------------
Net asset value, end of year 13.23 11.96 12.18 10.35
================================================
Total return (%)+ 13.40 .09 17.73 3.50
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 448,278 482,444 387,787 27,677
Ratios to average net assets: (%)
Expenses .79 3 .79 4 .80 1.00*
Net investment income 1.59 2.60 2.10 2.56*
Portfolio turnover rate (%) 80.02 70.19 49.01 1.31
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
*Annualized
1. Based on average shares outstanding.
2. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the fund with a similar fund of the Templeton Variable
Products Series Fund (TVP), effective May 1, 2000. The table above only
reflects fund statistics of the fund, which was the surviving fund of the
merger, and not of the TVP fund. The fund statistics are for the year ended
December 31, 1999.
3. For the period November 8, 1996 (effective date) to December 31, 1996.
4. Excluding dividend expense on securities sold short, the ratio of expenses to
average net assets for Mutual Shares Securities Fund was 0.77% for the years
ended December 31, 1999 and December 31, 1998.
MS-7 Mutual Shares Securities Fund - Class 1
<PAGE>
Templeton Asset Strategy Fund
(previously Templeton Asset Allocation Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is high total return.
MAIN INVESTMENTS Under normal market conditions, the fund will invest in equity
securities of companies in any country, debt securities of companies and
governments of any country, and in money market instruments. The mix of
investments will be adjusted to capitalize on total return potential produced
by changing economic conditions throughout the world. While there are no
minimum or maximum percentage targets for each asset class, historically the
fund has been invested predominantly in stocks.
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any
income paid to stockholders, the value of its assets, and general market
conditions. Common and preferred stocks, and securities convertible into common
stock are examples of equity securities.
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks and bonds of U.S. and non-U.S.
countries.
- --------------------------------------------------------------------------------
A debt security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Common debt securities are
secured and unsecured bonds, bonds convertible into common stock, notes, and
short-term debt investments.
The fund's debt investments will be primarily "investment grade". These are
issues rated in the top four rating categories (AAA to BBB) by independent
rating agencies such as Standard & Poor's Ratings Group (S&P/registered
trademark/) or Moody's Investors Services, Inc. (Moody's) or, if unrated,
determined by the fund's manager to be comparable. The fund will not invest in
defaulted securities, but may invest in those which are rated below investment
grade. Many debt securities of non-U.S. issuers, and especially emerging market
issuers, are rated below investment grade or are unrated so that their
selection depends on the manager's internal analysis.
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to
its evaluation of the company's potential long-term earnings, asset value and
cash flow. A company's historical value measures, including price/earnings
ratio, profit margins, and liquidation value, will also be considered, but are
not limiting factors. As a "bottom-up" investor focusing primarily on
individual securities, the fund may from time to time have significant
investments in one or more countries, sectors or industries.
In choosing debt investments, the fund's manager allocates its assets among
issuers, geographic regions, and currencies based upon its assessment of
relative interest rates among currencies, the manager's outlook for changes in
interest rates, and credit risks. The manager typically does not use
derivatives to hedge (protect) its stock investments against currency risk,
believing the costs generally outweigh the benefits. Rather, the manager
intends to manage the fund's exposure to various geographic regions and their
currencies based on its assessment of changing market and political conditions.
With respect to debt securities, the manager may also from time to time make
use of forward currency exchange contracts (Hedging Instruments) for hedging
purposes.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
TA-1 Templeton Asset Strategy Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks and bonds the fund holds fluctuate in price with market
conditions and currencies around the world, the value of your investment in the
fund will go up and down. This means you could lose money over short or even
extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, thus, impact fund performance.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative
TA-2 Templeton Asset Strategy Fund - Class 1
<PAGE>
investments which may involve a small investment relative to the risk assumed.
Their successful use will depend on the manager's ability to predict market
movements, and their use may have the opposite effect of that intended.
More detailed information about the fund, its policies and risks can be found
in the SAI.
TA-3 Templeton Asset Strategy Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ---------------------------------------------------------------
<S> <C> <C> <C>
Templeton Asset Strategy
Fund - Class 1 1 22.86% 17.08% 13.08%
MSCI AC World Free
Index 2,3 26.82% 19.19% 11.7%
MSCI World Index 2 25.34% 20.25% 11.96%
JP Morgan Global
Government Bond Index 2 -5.08% 6.69% 7.81%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains. A
merger and reorganization was approved that combined the fund with a similar
fund of Templeton Variable Products Series Fund (TVP). The performance shown
reflects the performance of the TVP fund.
2. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International (MSCI) All Country World Free Index measures the performance of
securities located in 48 countries, including emerging markets in Latin America,
Asia, and Eastern Europe. The unmanaged MSCI World Index tracks the performance
of approximately 1500 securities in 23 countries and is designed to measure
world stock market performance. The unmanaged JP Morgan Global Government Bond
Index tracks the performance of government bond markets in 13 countries. One
cannot invest directly in an index, nor is an index representative of the fund's
portfolio.
3. The MSCI World Index is being replaced by the MSCI AC World Free Index
because it includes emerging markets which are also represented in the fund's
portfolio.
TA-4 Templeton Asset Strategy Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON ASSET STRATEGY FUND1 - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 0.60%
Other expenses 0.18%
----
Total annual fund operating expenses 0.78%
====
</TABLE>
1. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton Global Asset Allocation Fund, effective 5/1/00. The
shareholders of that fund approved new management fees, which apply to the
combined fund effective 5/1/00. The table shows restated total expenses based
on the new fund fees and the assets of the fund as of 12/31/99 and not the
assets of the combined fund. However, if the table reflected both the new fees
and the combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management fees 0.60%; Other expenses 0.14%; and Total annual fund
operating expenses 0.74%.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $80 $249 $433 $966
</TABLE>
TA-5 Templeton Asset Strategy Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite
2100, Fort Lauderdale, Florida 33394, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for managing the equity portion of the
fund is:
<TABLE>
<S> <C>
Gary Clemons, Mr. Clemons has managed the equity portion of the fund since 1995,
EXECUTIVE VICE PRESIDENT, TICI and has been with the Franklin Templeton Group since 1990.
Tucker Scott CFA, Mr. Scott has managed the equity portion of the fund since 1998. Before
VICE PRESIDENT, TICI joining the Franklin Templeton Group in 1996, he worked for Aeltus
Investment Management.
Peter A. Nori CFA, Mr. Nori has managed the equity portion of the fund since 1996, and has
SENIOR VICE PRESIDENT, TICI been with the Franklin Templeton Group since 1987.
</TABLE>
The fund's debt securities are managed by a team of Templeton Global Bond
Managers, a division of TICI.
The fund pays TICI a fee for managing the fund's assets. The fee is equal to an
annual rate of:
/bullet/ 0.65% of the value of the fund's net assets up to and including 200
million;
/bullet/ 0.585% of the value of the fund's net assets over $200 million up to
and including $1.3 billion; and
/bullet/ 0.52% of the value of the fund's net assets over $1.3 billion.
TA-6 Templeton Asset Strategy Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP (PWC), independent auditors, for the fiscal year
ended December 31, 1999, and by other auditors for the fiscal years before
1999. PWC's report for 1999, along with the financial statements, are included
in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- ---------------------------------------------------------------------------------------------------------------
1999 1,2 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 22.46 22.35 21.08 18.72 15.69
--------------------------------------------------------------
Net investment income .44 .69 .67 .63 .57
Net realized and unrealized gains 3.78 .75 2.44 2.76 2.87
--------------------------------------------------------------
Total from investment operations 4.22 1.44 3.11 3.39 3.44
--------------------------------------------------------------
Distributions from net investment income (.50) (.66) (.63) (.58) (.41)
Distributions from net realized gains (2.81) (.67) (1.21) (.45) --
--------------------------------------------------------------
Total distributions (3.31) (1.33) (1.84) (1.03) (.41)
--------------------------------------------------------------
Net asset value, end of year 23.37 22.46 22.35 21.08 18.72
==============================================================
Total return (%)+ 22.86 6.41 15.52 18.93 22.48
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 671,549 692,163 735,568 556,027 406,123
Ratios to average net assets: (%)
Expenses .74 .78 .74 .64 .66
Net investment income 2.06 2.88 3.32 3.56 3.73
Portfolio turnover rate (%) 45.34 43.18 45.27 57.50 43.02
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
2. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the Templeton Asset Allocation Fund, a series of
Templeton Variable Products Series Fund (TVP) with a similar fund of the
Franklin Variable Insurance Products Trust (VIP), effective May 1, 2000. The
table above only reflects fund statistics of the TVP fund, which was the
surviving fund of the merger, and not of the VIP fund. The fund statistics are
for the year ended December 31, 1999.
TA-7 Templeton Asset Strategy Fund - Class 1
<PAGE>
Templeton Developing Markets Securities Fund
(previously Templeton Developing Markets Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in emerging market equity securities. Emerging market
equity securities generally include equity securities that trade in emerging
markets or are issued by companies that derive significant revenue from goods,
services, or sales produced, or have their principal activities or significant
assets, in emerging market countries.
Emerging market countries generally include those considered to be emerging by
the World Bank, the International Finance Corporation, the United Nations, or
the countries' authorities. These countries are typically located in the
Asia-Pacific region, Eastern Europe, Central and South America, and Africa. The
fund may from time to time have significant investments in one or more
countries. Emerging market equity securities and emerging market countries are
more fully described in the SAI.
- --------------------------------------------------------------------------------
The fund invests primarily in the common stocks of companies located in, or
that have their principal activities in, emerging market countries.
- --------------------------------------------------------------------------------
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities.
In addition to its main investments, the fund may invest significantly in
securities of issuers in developed market countries.
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager may
make onsite visits to prospective companies to assess critical factors such as
management strength and local conditions. In addition, the manager focuses on
the market price of a company's securities relative to its evaluation of the
company's potential long-term (typically 5 years) earnings, asset value, cash
flow, and balance sheet. A company's historical value measures, including
price/earnings ratio, book value, profit margins and liquidation value, will
also be considered, but are not limiting factors. The manager typically does
not use derivatives to hedge (protect) its stock investments against currency
risk, believing the costs generally outweigh the benefits. Rather, the manager
intends to manage the fund's exposure to various geographic regions and to
their currencies, through its individual company investments, and based on its
assessment of changing currency rates, and market and political conditions. The
fund may have significant investments in particular sectors, such as
telecommunications and technology.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency
investments. Such investments may be medium-term (less than 5 years for this
fund) or short-term, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over
the long term, their value tends to go up and down more dramatically over the
short term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in
TD-1 Templeton Developing Markets Securities Fund - Class 1
<PAGE>
such stocks if it believes the market may have overreacted to adverse
developments or failed to appreciate positive changes. However, if other
investors fail to recognize the company's value (and do not become buyers, or
become sellers), or favor investing in faster-growing companies, value stocks
may not increase in value as anticipated by the manager and may even decline
further.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with emerging market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase the potential for losses in the fund.
Emerging markets in particular can experience significant price volatility in
any given year, and even daily. The fund should be thought of as a long-term
investment for the aggressive portion of a well- diversified portfolio.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
internal and external conflicts, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. In addition, political or economic
conditions may disrupt previously established securities markets, causing
liquid securities to become illiquid, particularly in emerging market
countries.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
TELECOMMUNICATIONS AND TECHNOLOGY COMPANIES These companies' stocks can be
subject to abrupt or erratic price movements. They have historically been
volatile in price, especially over the short term, due to the rapid pace of
product change and development affecting such companies. For example, these
companies are subject to significant competitive pressures such as new market
entrants, aggressive pricing and competition for market share, and the
potential for falling profit margins. Prices often change collectively without
regard to the merits of individual companies.
INTEREST RATE Rate changes can be sudden and unpredictable. Increases in
interest rates may have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or may have more difficulty meeting interest payments. Similarly,
emerging market economies may be especially sensitive to interest rate changes.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TD-2 Templeton Developing Markets Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 03/04/96
- ---------------------------------------------------------
<S> <C> <C>
Templeton Developing Markets
Securities Fund - Class 1 1 53.84% -5.30%
MSCI Emerging Markets Free
Index 2 66.41% 2.62%
MSCI World Index 2 25.34% 20.15%
IFC Investable Composite Index 67.11% 3.60%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains. A
merger and reorganization was approved that combined the fund with a similar
fund of Templeton Variable Products Series Fund (TVP). The performance shown
reflects the performance of the TVP fund.
2. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International (MSCI) Emerging Markets Free Index is a market
capitalization-weighted equity index comprising 26 of the 48 countries in the
MSCI universe. The MSCI World Index comprises the developed markets of 22
countries. The International Finance Corporation's Investable Composite Index is
an emerging markets index that includes 2,000 stocks from 18 countries including
Mexico, South Korea, Brazil, Jordan and Turkey. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.
TD-3 Templeton Developing Markets Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON DEVELOPING MARKETS SECURITIES FUND1 - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES 1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 1.25%
Other expenses 0.31%
----
Total annual fund operating expenses 1.56%
====
</TABLE>
1. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton Developing Markets Equity Fund effective 5/1/00.
The shareholders of that fund approved new management fees, which apply to the
combined fund effective 5/1/00. The table shows restated total expenses for the
fund based on the new fund fees and the assets of the fund as of 12/31/99, and
not the assets of the combined fund. However, if the table reflected both the
new fees and the combined assets, the fund's expenses after 5/1/00 would be
estimated as: Management fees 1.25%, Other expenses 0.29%; and Total annual
fund operating expenses 1.54%.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $159 $493 $850 $1,856
</TABLE>
TD-4 Templeton Developing Markets Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Templeton Asset Management Ltd. (TAML), 7 Temasek Blvd., #38-03 Suntec Tower
One, Singapore, 038987, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Dr. J. Mark Mobius. Dr. Mobius has been a manager of the fund since its inception in 1994,
MANAGING DIRECTOR, TAML and has been with the Franklin Templeton Group since 1987.
Tom Wu Mr. Wu has been a manager of the fund since its inception in 1994, and
DIRECTOR, TAML has been with the Franklin Templeton Group since 1987.
H. Allan Lam Mr. Lam has been a manager of the fund since its inception in 1994, and
PORTFOLIO MANAGER, TAML has been with the Franklin Templeton Group since 1987.
Eddie Chow Mr. Chow has been a manager of the fund since 1996, and has been with
PORTFOLIO MANAGER, TAML the Franklin Templeton Group since 1994.
Dennis Lim Mr. Lim has been a manager of the fund since 1996, and has been with
DIRECTOR, TAML the Franklin Templeton Group since 1990.
Tek-Khoan Ong Mr. Ong has been a manager of the fund since 1996, and has been with
PORTFOLIO MANAGER, TAML the Franklin Templeton Group since 1993.
</TABLE>
The fund pays TAML a fee for managing the fund's assets. The fee is equal to an
annual rate of 1.25%.
TD-5 Templeton Developing Markets Securities Fund - Class 1
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP (PWC), independent auditors, for the fiscal year
ended December 31, 1999, and by other auditors for the fiscal years before
1999. PWC's report for 1999, along with the financial statements, are included
in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- -------------------------------------------------------------------------------------------------------------
1999 2,3 1998 1997 1996 1
-------------------------------------------------
<S> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 5.13 6.63 9.43 10.00
-----------------------------------------------
Net investment income .05 .07 .09 .05
Net realized and unrealized gains (losses) 2.67 (1.42) (2.82) (.62)
-----------------------------------------------
Total from investment operations 2.72 (1.35) (2.73) (.57)
-----------------------------------------------
Distributions from net investment income (.08) (.09) (.04) --
Distributions from net realized gains -- (.06) (.03) --
-----------------------------------------------
Total distributions (.08) (.15) (.07) --
-----------------------------------------------
Net asset value, end of year 7.77 5.13 6.63 9.43
===============================================
Total return (%)+ 53.84 (20.94) (29.22) (5.70)
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 297,605 180,684 163,459 72,245
Ratios to average net assets: (%)
Expenses 1.50 1.66 1.58 1.70*
Expenses excluding waiver and payments by affiliate 1.50 1.66 1.58 1.78*
Net investment income .82 1.67 1.63 1.52*
Portfolio turnover rate (%) 60.27 23.22 23.82 9.95
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
*Annualized
1. For the period March 4, 1996 (commencement of operations) to December 31,
1996.
2. Based on average weighted shares outstanding.
3. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the Templeton Developing Markets Fund, a series of
Templeton Variable Products Series Fund (TVP) with a similar fund of the
Franklin Variable Insurance Products Trust (VIP), effective May 1, 2000. The
table above only reflects fund statistics of the TVP fund, which was the
surviving fund of the merger, and not of the VIP fund. The fund statistics are
for the year ended December 31, 1999.
TD-6 Templeton Developing Markets Securities Fund - Class 1
<PAGE>
Templeton Global Income Securities Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is high current income, consistent with
preservation of capital. Capital appreciation is a secondary consideration.
- --------------------------------------------------------------------------------
The fund invests primarily in bonds of governments located around the world.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in the debt securities of governments and their
political subdivisions and agencies, supranational organizations, and companies
located anywhere in the world, including emerging markets. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Common debt securities are secured
and unsecured bonds, bonds convertible into common stock, notes, and short-term
debt investments.
The fund focuses on "investment grade" debt securities. These are issues rated
in the top four rating categories (AAA to BBB) by independent rating agencies
such as Standard & Poor's Ratings Group (S&P/registered trademark/) or Moody's
Investors Services, Inc. (Moody's) or, if unrated, determined by the fund's
manager to be comparable. The fund may also invest up to 35% of its net assets
in high yield, lower rated debt securities ("junk bonds") that are rated at
least B, including debt from emerging markets' governments or companies, or if
unrated, determined by the fund's manager to be comparable. The fund will not
purchase defaulted securities. If, however, a security is downgraded in rating
or goes into default, the fund will not automatically sell the security.
Many debt securities of non-U.S. issuers, and especially emerging market
issuers, are rated below investment grade or are unrated so that their
selection depends on the manager's internal analysis. The average maturity of
debt securities in the fund's portfolio is medium-term (about 5 to 15 years)
but will fluctuate depending on the manager's outlook on the country and future
interest rate changes.
PORTFOLIO SELECTION The manager allocates the fund's assets among issuers,
geographic regions, and currencies based upon its assessment of relative
interest rates among currencies, the manager's outlook for changes in interest
rates, and credit risks. In considering these factors, a country's changing
market, economic, and political conditions, such as inflation rate, growth
prospects, global trade patterns, and government policies will be evaluated.
The manager intends to manage the fund's exposure to various currencies, and
may from time to time seek to hedge (protect) against currency risk by using
forward currency exchange contracts (Hedging Instruments).
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
TGI-1 Templeton Global Income Securities Fund - Class 1
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Changes in interest rates in markets around the world affect the prices of the
fund's debt securities. If rates rise, the value of the fund's debt securities
will fall and so too will the fund's share price. This means you could lose
money.
- --------------------------------------------------------------------------------
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes. Increases in interest
rates may also have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or have more difficulty meeting interest payments. A sub-category of
interest rate risk is reinvestment risk, which is the risk that interest rates
will be lower when the fund seeks to reinvest interest payments, or the proceeds
from a matured debt security, resulting in less income received by the fund.
FOREIGN SECURITIES Securities of governments and companies located outside the
U.S. involve risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, thus, impact fund performance.
Lower-rated securities Junk bonds generally have more risk than higher-rated
securities, and can be considered speculative. Companies issuing high yield
debt securities are not as strong financially, and are more likely to encounter
financial difficulties and to be more vulnerable to changes in the economy,
such as a recession or a sustained period of rising interest rates. If an
issuer stops paying interest and/or principal, payments may never resume. The
fund may lose its entire investment on bonds that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are
TGI-2 Templeton Global Income Securities Fund - Class 1
<PAGE>
especially sensitive to developments affecting the company's business and to
rating changes, and typically rise and fall in response to factors that affect
the company's stock prices. In addition, the entire high yield securities
market can experience sudden and sharp price swings due to changes in economic
conditions, market activity, large sustained sales, a high-profile default, or
other factors. High yield securities generally are less liquid than
higher-quality bonds, and infrequent trades can make accurate pricing more
difficult. At times, it may be difficult to sell these securities promptly at
an acceptable price.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments, which may involve a small investment relative to the
risk assumed. Their successful use will depend on the manager's ability to
predict market movements, and their use may have the opposite effect of that
intended. Risks include potential loss to the fund due to the imposition of
controls by a government on the exchange of foreign currencies, delivery
failure, default by the other party, or inability to close out a position
because the trading market becomes illiquid.
DIVERSIFICATION The fund is non-diversified as defined by federal securities
laws. As such, it may invest a greater portion of its assets in one issuer and
have a smaller number of issuers than a diversified fund. Therefore, the fund
may be more sensitive to economic, business, political or other changes
affecting similar issuers or securities. The fund intends, however, to meet tax
diversification requirements.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep interest
rate risk, country allocations, and bond maturities at desired levels, may
cause the fund's portfolio turnover rate to be high. High turnover generally
increases the fund's transaction costs.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TGI-3 Templeton Global Income Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ------------------------------------------------------------
<S> <C> <C> <C>
Templeton Global Income
Securities Fund Class 1 1 -5.79% 5.39% 5.88%
JP Morgan Global
Government Bond Index 2 -5.08% 6.69% 7.81%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged JP Morgan Global Government
Bond Index tracks the performance of government bond markets in 13 countries.
Indices include reinvested dividends and/or interest. One cannot invest directly
in an index, nor is an index representative of the fund's investments.
TGI-4 Templeton Global Income Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON GLOBAL INCOME SECURITIES FUND1 - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES 1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 2 0.60%
Other expenses 0.05%
----
Total annual fund operating expenses 0.65%
====
</TABLE>
1. On 2/8/00, a merger and reorganization was approved that combined the fund
with a similar fund of Templeton Variable Series Products Series Fund,
effective 5/1/00. The table shows total expenses based on the assets of the
fund as of 12/31/99, and not the assets of the combined fund. However, if the
table reflected combined assets, the fund's expenses after 5/1/00 would be
estimated as: Management fees 0.60%, Other expenses 0.04%, and Total annual
operating expenses 0.64%.
2. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $66 $208 $362 $810
</TABLE>
TGI-5 Templeton Global Income Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, through
its Templeton Global Bond Managers division (Global Bond Managers), is the
fund's sub-advisor. A team from Global Bond Managers provides Advisers with
investment management advice and assistance.
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal
year ended December 31, 1999, the fund paid .60% of its average daily net
assets to the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- ----------------------------------------------------------------------------------------------------------------
1999 1,2 1998 1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 12.87 12.97 13.61 13.46 12.19
-------------------------------------------------------------
Net investment income .68 1.07 1.05 1.02 .29
Net realized and unrealized gains (losses) (1.42) (.19) (.73) .17 1.47
-------------------------------------------------------------
Total from investment operations (.74) .88 .32 1.19 1.76
-------------------------------------------------------------
Distributions from net investment income (1.06) (.98) (.96) (1.04) (.49)
-------------------------------------------------------------
Net asset value, end of year 11.07 12.87 12.97 13.61 13.46
=============================================================
Total return (%)+ (5.79) 7.08 2.55 9.56 14.68
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 90,537 150,941 185,016 221,722 243,194
Ratios to average net assets: (%)
Expenses .65 .63 .62 .61 .64
Net investment income 5.65 6.86 7.03 7.30 7.59
Portfolio turnover rate (%) 80.76 84.17 181.61 140.96 152.89
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
2. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the fund with a similar fund of the Templeton Variable
Products Series Fund (TVP), effective May 1, 2000. The table above only
reflects fund statistics of the fund, which was the surviving fund of the
merger, and not of the TVP fund. The fund statistics are for the year ended
December 31, 1999.
TGI-6 Templeton Global Income Securities Fund - Class 1
<PAGE>
Templeton Growth Securities Fund
(previously Templeton Global Growth Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in the equity securities of companies located anywhere
in the world, including those in the U.S. and emerging markets. While there are
no
- --------------------------------------------------------------------------------
The fund invests primarily in U.S. and non-U.S. common stocks.
- --------------------------------------------------------------------------------
set percentage targets, the fund generally invests in large- to medium-cap
companies with market capitalization values (share price multiplied by the
number of common stock shares outstanding) greater than $2 billion, but may
invest a significant portion in small-cap companies. An equity security
represents a proportionate share of the ownership of a company; its value is
based on the success of the company's business, any income paid to stockholders,
the value of its assets, and general market conditions. Common and preferred
stocks, and securities convertible into common stock are examples of equity
securities.
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager will
focus on the market price of a company's securities relative to its evaluation
of the company's potential long-term earnings, asset value and cash flow. A
company's historical value measures, including price/earnings ratio, profit
margins and liquidation value, will also be considered, but are not limiting
factors. As a "bottom-up" investor focusing primarily on individual securities,
the fund may from time to time have significant investments in particular
countries. The manager typically does not use derivatives to hedge (protect)
its stock investments against currency risk, believing the costs generally
outweigh the benefits. Rather, the manager intends to manage the fund's
exposure to various geographic regions and their currencies based on its
assessment of changing currency rates, and market and political conditions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions and
currencies around the world, the value of your investment in the fund will go
up and down. This means you could lose money over short or even extended
periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or in favor investing in
faster-growing companies, value stocks may not increase in value as anticipated
by the manager and may even decline further.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in
TG-1 Templeton Growth Securities Fund - Class 1
<PAGE>
foreign currency exchange rates will increase or decrease the fund's returns
from its foreign portfolio holdings. Devaluations of currency by a country's
government can significantly decrease the value of securities denominated in
that currency. The economic impact of the euro, a relatively new currency
adopted by certain European countries to replace their national currencies, is
unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions and
increases in interest rates, their growth prospects are less certain and their
securities are less liquid. These companies may suffer significant losses, and
can be considered speculative.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TG-2 Templeton Growth Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 5 Years 03/15/94
- -----------------------------------------------------------------
<S> <C> <C> <C>
Templeton Growth
Securities Fund - Class 1 1 21.04% 15.40% 13.76%
MSCI AC World Free Index 2 26.82% 19.19% 16.79%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International (MSCI) All Country World Free Index measures the performance of
securities located in 48 countries, including emerging markets in Latin America,
Asia and Eastern Europe. Indices include reinvested dividends and/or interest.
One cannot invest directly in an index, nor is an index representative of the
fund's investments.
TG-3 Templeton Growth Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON GROWTH SECURITIES FUND1 -
CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES 1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 2 0.83%
Other expenses 0.05%
----
Total annual fund operating expenses 0.88%
====
</TABLE>
1. On 2/8/00, a merger and reorganization was approved that combined the fund
with a similar fund of Templeton Variable Products Series Fund effective
5/1/00. The table shows total expenses based on the fund's assets as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management fees 0.80%; Other expenses 0.05%; and Total annual fund
operating expenses 0.85%.
2. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $90 $281 $488 $1,084
</TABLE>
TG-4 Templeton Growth Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Templeton Global Advisors Limited (TGAL), Lyford Cay, Nassau, N.P., Bahamas, is
the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Mark G. Holowesko, CFA Mr. Holowesko has been a manager of the fund since November 1999,
PRESIDENT, TGAL and has been with the Franklin Templeton Group since 1985.
Richard Sean Farrington, CFA Mr. Farrington has been a manager of the fund since 1995, and has been
SENIOR VICE PRESIDENT, TGAL with the Franklin Templeton Group since 1990.
Jeffrey A. Everett, CFA Mr. Everett has been a manager of the fund since its inception in 1994,
EXECUTIVE VICE PRESIDENT, TGAL and has been with the Franklin Templeton Group since 1990.
</TABLE>
The fund pays TGAL a fee for managing its assets and providing certain
administrative facilities and services to the fund. For the fiscal year ended
December 31, 1999, the fund paid 0.83% of its average daily net assets to the
manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year Ended December 31,
- ---------------------------------------------------------------------------------------------------------------
1999 1,2 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 14.77 15.34 13.80 11.75 10.48
--------------------------------------------------------------
Net investment income .28 .35 .33 .25 .16
Net realized and unrealized gains 2.66 .98 1.53 2.22 1.17
--------------------------------------------------------------
Total from investment operations 2.94 1.33 1.86 2.47 1.33
--------------------------------------------------------------
Distributions from net investment income (.36) (.41) (.24) (.21) (.06)
Distributions from net realized gains (1.72) (1.49) (.08) (.21) --
--------------------------------------------------------------
Total distributions (2.08) (1.90) (.32) (.42) (.06)
--------------------------------------------------------------
Net asset value, end of year 15.63 14.77 15.34 13.80 11.75
==============================================================
Total return (%)+ 21.04 8.98 13.50 21.28 12.72
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 708,310 747,080 758,445 579,877 338,775
Ratios to average net assets: (%)
Expenses .88 .88 .88 .93 .97
Net investment income 1.87 2.27 2.49 2.20 2.46
Portfolio turnover rate (%) 46.54 32.30 24.81 12.32 30.92
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
2. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the fund with a similar fund of the Templeton Variable
Products Series Fund (TVP), effective May 1, 2000. The table above only
reflects fund statistics of the fund, which was the surviving fund of the
merger, and not of the TVP fund. The fund statistics are for the year ended
December 31, 1999.
TG-5 Templeton Growth Securities Fund - Class 1
<PAGE>
Templeton International Securities Fund
(previously Templeton International Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies located outside the
U.S., including those in emerging markets. While there are no set percentage
targets, the fund generally invests in large- to medium-cap companies with
market capitalization values (share price multiplied by the number of common
stock shares outstanding) greater than $2 billion. An equity security
represents a proportionate share of the ownership of a company; its value is
based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions. Common
and preferred stocks, and securities convertible into common stock are examples
of equity securities.
- --------------------------------------------------------------------------------
The fund invests primarily in non-U.S. common stocks.
- --------------------------------------------------------------------------------
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager will
focus on the market price of a company's securities relative to its evaluation
of the company's potential long-term earnings, asset value and cash flow. A
company's historical value measures, including price/earnings ratio, profit
margins and liquidation value, will also be considered, but are not limiting
factors. As a "bottom-up" investor focusing primarily on individual securities,
the fund may from time to time have significant investments in one or more
countries. The manager typically does not use derivatives to hedge (protect) its
stock investments against currency risk, believing the costs generally outweigh
the benefits. Rather, the manager intends to manage the fund's exposure to
various geographic regions and their currencies based on its assessment of
changing currency rates, and market and political conditions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of
TI-1 Templeton International Securities Fund - Class 1
<PAGE>
securities denominated in that currency. The economic impact of the euro, a
relatively new currency adopted by certain European countries to replace their
national currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TI-2 Templeton International Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 5 Years 05/01/92
- -----------------------------------------------------------------
<S> <C> <C> <C>
Templeton International
Securities Fund - Class 1 1 23.61% 17.21% 15.36%
MSCI EAFE Index 2 27.30% 13.15% 13.55%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains. A
merger and reorganization was approved that combined the fund with a similar
fund of Templeton Variable Products Series Fund (TVP). The performance shown
reflects the performance of the TVP fund.
2. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International Europe, Australia, Far East (MSCI EAFE) Index tracks the
performance of approximately 1000 securities in 20 countries. The average
company, the securities of which are a component of that index, has a market
capitalization of over $3 billion. One cannot invest directly in an index, nor
is an index representative of the fund's portfolio.
TI-3 Templeton International Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON INTERNATIONAL SECURITIES FUND1 - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES 1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 0.69%
Other expenses 0.19%
----
Total annual fund operating expenses 0.88%
====
</TABLE>
1. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton International Equity Fund. The shareholders of that
fund approved new management fees, which apply to the combined fund effective
5/1/00. The table shows restated total expenses based on the new fund fees and
the assets of the fund as of 12/31/99, and not the assets of the combined fund.
However, if the table reflected both the new fees and the combined assets, the
fund's expenses after 5/1/00 would be estimated as: Management fees 0.65%;
Other expenses 0.20%; and Total annual fund operating expenses 0.85%.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $90 $281 $488 $1,084
</TABLE>
TI-4 Templeton International Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Templeton Investment Counsel, Inc., (TICI), Broward Financial Centre, Suite
2100, Fort Lauderdale, Florida 33394, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
Peter A. Nori, CFA Mr. Nori has been a manager of the fund since November 1999, and has
SENIOR VICE PRESIDENT, TICI been with the Franklin Templeton Group since 1987.
Mark R. Beveridge CFA Mr. Beveridge has been a manager of the fund since 1994, and has been
SENIOR VICE PRESIDENT, TICI with the Franklin Templeton Group since 1994.
</TABLE>
The fund pays TICI a fee for managing the fund's assets. The fee is equal to an
annual rate of:
/bullet/ 0.75% of the value of the fund's net assets up to and including $200
million;
/bullet/ 0.675% of the value of the fund's net assets over $200 million up to
and including $1.3 billion; and
/bullet/ 0.60% of the value of the fund's net assets over $1.3 billion.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP (PWC), independent auditors, for the fiscal year
ended December 31, 1999, and by other auditors for the fiscal years before
1999. PWC's report for 1999, along with the financial statements, are included
in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- -----------------------------------------------------------------------------------------------------------------
1999 1,2 1998 1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 20.69 20.18 18.40 15.13 13.22
----------------------------------------------------------------
Net investment income .33 .60 .49 .43 .23
Net realized and unrealized gains 3.78 1.29 2.01 3.15 1.83
----------------------------------------------------------------
Total from investment operations 4.11 1.89 2.50 3.58 2.06
----------------------------------------------------------------
Distributions from net investment income (.57) (.49) (.51) (.24) (.10)
Distributions from net realized gains (1.98) (.89) (.21) (.07) (.05)
----------------------------------------------------------------
Total distributions (2.55) (1.38) (.72) (.31) (.15)
----------------------------------------------------------------
Net asset value, end of year 22.25 20.69 20.18 18.40 15.13
================================================================
Total return (%)+ 23.61 9.33 13.95 24.04 15.78
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 1,056,798 980,470 938,410 682,984 353,141
Ratios to average net assets: (%)
Expenses .85 .86 .81 .65 .71
Net investment income 1.69 2.81 2.70 3.23 2.36
Portfolio turnover rate (%) 30.04 29.56 16.63 9.46 5.19
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
2. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the Templeton International Fund, a series of Templeton
Variable Products Series Fund (TVP) with a similar fund of the Franklin
Variable Insurance Products Trust (VIP), effective May 1, 2000. The table above
only reflects fund statistics of the TVP fund, which was the surviving fund of
the merger, and not of the VIP fund. The fund statistics are for the year ended
December 31, 1999.
TI-5 Templeton International Securities Fund - Class 1
<PAGE>
Templeton International Smaller Companies Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital appreciation.
- --------------------------------------------------------------------------------
The fund invests primarily in the common stocks of smaller companies outside the
U.S.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in the equity securities of smaller companies located
outside the U.S., including those in emerging markets. Smaller companies
generally are those with market capitalization values (share price multiplied by
the number of common stock shares outstanding) of less than $2 billion, at the
time of purchase. An equity security represents a proportionate share of the
ownership of a company; its value is based on the success of the company's
business, any income paid to stockholders, the value of its assets, and general
market conditions. Common and preferred stocks, and securities convertible into
common stock are examples of equity securities.
In addition to the fund's main investments, the fund may also invest in equity
securities of larger capitalization companies located outside the U.S.
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to
its evaluation of the company's potential long-term earnings, asset value and
cash flow. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered, but are
not limiting factors. As a "bottom-up" investor focusing primarily on
individual securities, the fund may from time to time have significant
investments in one or more countries, sectors or industries. The manager
typically does not use derivatives to hedge (protect) its stock investments
against currency risk, believing the costs generally outweigh the benefits.
Rather, the manager intends to manage the fund's exposure to various geographic
regions and their currencies based on its assessment of changing market and
political conditions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency
investments. Such investments may be medium-term (less than 5 years for this
fund) or short-term, including cash or cash equivalents. Under these
circumstances, the fund may temporarily be unable to pursue its investment
goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
SMALLER COMPANIES While smaller companies may offer opportunities for capital
growth, they also have significant risk. Historically, smaller company
securities have been more volatile in price and have fluctuated independently
from larger company securities, especially over the shorter-term. Smaller or
relatively new companies can be particularly sensitive to changing economic
conditions, including increases
TIS-1 Templeton International Smaller Companies Fund - Class 1
<PAGE>
in interest rates because of their reliance on credit, and their growth
prospects are less certain.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative. Technology and biotechnology industry stocks, in particular, can be
subject to abrupt or erratic price movements.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE Rate changes can be sudden and unpredictable. Increases in
interest rates may have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or may have more difficulty meeting interest payments. Similarly,
emerging market economies may be especially sensitive to interest rate changes.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TIS-2 Templeton International Smaller Companies Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 05/01/96
- -----------------------------------------------------------------
<S> <C> <C>
Templeton International Smaller
Companies Fund - Class 1 1 23.90% 5.20%
Salomon Global Ex-U.S.
<$1 Billion Index 2 30.28% 2.06%
Salomon Global Ex-U.S. <$1 Billion
and <$1.5 Billion Custom Index 2 32.40% 2.50%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's/registered trademark/ Micropal. The Salomon Global
Ex-U.S. Less Than $1 Billion Index includes companies from developed and
emerging markets, excluding the U.S., with a market capitalization below U.S. $1
billion. The Salomon Global Ex-U.S. Less Than $1 Billion and Less Than $1.5
Billion Custom Index is created by combining, Salomon Global Ex-U.S. <$1 Billion
Index from Inception of the fund to 4/30/99 and Salomon Global Ex-U.S. <$1.5
Billion Index from 5/1/99 - 12/31/99. Indices include reinvested dividends
and/or interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ----------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------
<S> <C>
Management fees 0.85%
Other expenses 0.26%
----
Total annual fund operating expenses 1.11%
====
</TABLE>
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $113 $353 $612 $1,352
</TABLE>
TIS-3 Templeton International Smaller Companies Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite 2100,
Fort Lauderdale, Florida 33394, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Simon Rudolph Mr. Rudolph has been a manager of the fund since 1997. Before joining
SENIOR VICE PRESIDENT, TICI the Franklin Templeton Group in 1997, he was an executive director
with Morgan Stanley.
Peter A. Nori, CFA Mr. Nori has been a manager of the fund since 1997, and has been with
SENIOR VICE PRESIDENT, TICI the Franklin Templeton Group since 1987.
</TABLE>
The fund pays TICI a fee for managing the fund's assets. For the fiscal year
ended December 31, 1999, the fund paid 0.85% of its average daily net assets to
the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
- -------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 2
-------------------------------------------------
<S> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 9.20 11.02 11.25 10.00
-------------------------------------------------
Net investment income .26 .25 .23 .10
Net realized and unrealized gains (losses) 1.93 (1.52) (.39) 1.15
-------------------------------------------------
Total from investment operations 2.19 (1.27) (.16) 1.25
-------------------------------------------------
Distributions from net investment income (.32) (.25) (.07) --
Distributions from net realized gains -- (.30) -- --
-------------------------------------------------
Total distributions (.32) (.55) (.07) --
-------------------------------------------------
Net asset value, end of year 11.07 9.20 11.02 11.25
=================================================
Total return (%)+ 23.90 (12.27) (1.50) 12.50
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 23,541 24,999 32,201 16,255
Ratios to average net assets: (%)
Expenses 1.11 1.10 1.06 1.16*
Net investment income 2.52 2.26 2.74 2.51*
Portfolio turnover rate (%) 15.80 18.45 21.38 --
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
*Annualized
1. Based on average shares outstanding.
2. For the period May 1, 1996 (effective date) to December 31, 1996.
TIS-4 Templeton International Smaller Companies Fund - Class 1
<PAGE>
Templeton Pacific Growth Securities Fund
(previously Templeton Pacific Growth Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital growth.
- --------------------------------------------------------------------------------
The fund invests primarily in the common stocks of Pacific Rim companies.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities that trade in Pacific Rim markets,
some of which may be considered emerging markets, and are issued by companies
that have their principal activities in the Pacific Rim. Pacific Rim countries
include Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New
Zealand, Pakistan, Philippines, Singapore, South Korea, and Thailand. The fund
may from time to time have substantial investments in one or more countries. An
equity security represents a proportionate share of the ownership of a company;
its value is based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions. Common and
preferred stocks, and securities convertible into common stock are examples of
equity securities.
In addition to the fund's main investments, the fund may invest in securities
of issuers domiciled outside the Pacific Rim, and linked by tradition, economic
markets, geography or political events to countries in the Pacific Rim.
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the manager focuses on
the market price of a company's securities relative to its evaluation of the
company's potential long-term (typically 5 years) earnings, asset value, and
cash flow. The manager will also study a company's balance sheet to assess its
risk profile. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered, but are
not limiting factors. The manager typically does not hedge (protect) its stock
investments against currency risk, believing the costs generally outweigh the
benefits. Rather, the manager intends to manage the fund's exposure to
countries and their currencies based on its assessment of changing currency
rates, and market and political conditions, even though it is limited to
certain geographic regions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
TP-1 Templeton Pacific Growth Securities Fund - Class 1
<PAGE>
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with Pacific Rim market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund. Emerging markets in
particular can experience significant price volatility in any given year, and
even daily. The fund should be thought of as a long-term investment for the
aggressive portion of a well-diversified portfolio.
Region There is a high correlation among some of the markets and currency
exchange rates in Pacific Rim countries. Thus, the fund is subject to much
greater risks of adverse events, including currency devaluations, and political
or economic disruptions, and may experience greater volatility than a fund that
is more broadly diversified geographically.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
internal and external conflicts, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, punitive taxes, and
certain custody and settlement risks. In addition, political or economic
conditions may disrupt previously established securities markets, causing
liquid securities to become illiquid, particularly in emerging market
countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising
shareholder rights, pursuing legal remedies and obtaining judgments with
respect to non-U.S. investments in non-U.S. courts than with respect to U.S.
companies in U.S. courts.
INTEREST RATE Rate changes can be sudden and unpredictable. Increases in
interest rates may have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or may have more difficulty meeting interest payments. Similarly,
emerging market economies may be especially sensitive to interest rate changes.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TP-2 Templeton Pacific Growth Securities Fund - Class 1
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is
one indicator of the risks of investing in the fund. The bar chart shows
changes in the fund's returns from year to year over the past ten calendar
years or since the fund's inception. The table shows how the fund's average
annual total returns compare to those of a broad-based securities market index.
Of course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 5 Years 01/27/92
- -----------------------------------------------------------------
<S> <C> <C> <C>
Templeton Pacific Growth
Securities Fund - Class 1 1 37.02% -1.77% 2.53%
MSCI Pacific Index 2 57.96% 2.70% 5.13%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
2. Source: Standard & Poor's Micropal. The unmanaged MSCI Pacific Index tracks
approximately 450 companies in Australia, Hong Kong, Japan, New Zealand, and
Singapore. This is a total return index in U.S. dollars, with gross dividends
reinvested. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
TP-3 Templeton Pacific Growth Securities Fund - Class 1
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON PACIFIC GROWTH SECURITIES FUND - CLASS 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 1
- ---------------------------------------------------
<S> <C>
Management fees 1 1.00%
Other expenses 0.08%
----
Total annual fund operating expenses 1.08%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 1 $110 $343 $595 $1,317
</TABLE>
TP-4 Templeton Pacific Growth Securities Fund - Class 1
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, is the
fund's sub-advisor. TICI provides Advisers with investment management advice
and assistance.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<S> <C>
William T. Howard, Jr., CFA Mr. Howard has been a manager of the fund since 1993, and has been
SENIOR VICE PRESIDENT, TICI with the Franklin Templeton Group since 1993.
Mark R. Beveridge, CFA Mr. Beveridge has been a manager of the fund since 1994, and has been
SENIOR VICE PRESIDENT, TICI with the Franklin Templeton Group since 1985.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal
year ended December 31, 1999, the fund paid 1.00% of its average daily net
assets to the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
the fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 1 Year ended December 31,
-------------------------------------------------------------
1999 1 1998 1997 1996 1995
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 7.51 9.28 14.76 13.91 13.24
-------------------------------------------------------------
Net investment income .08 .21 .29 .21 .33
Net realized and unrealized gains (losses) 2.70 (1.52) (5.49) 1.34 .71
-------------------------------------------------------------
Total from investment operations 2.78 (1.31) (5.20) 1.55 1.04
-------------------------------------------------------------
Distributions from net investment income (.10) (.35) (.28) (.44) (.26)
Distributions from net realized gains -- (.11) -- (.26) (.11)
-------------------------------------------------------------
Total distributions (.10) (.46) (.28) (.70) (.37)
-------------------------------------------------------------
Net asset value, end of year 10.19 7.51 9.28 14.76 13.91
=============================================================
Total return (%)+ 37.02 (13.13) (35.95) 11.10 7.97
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 96,738 98,769 165,404 356,759 331,936
Ratios to average net assets: (%)
Expenses 1.08 1.10 1.03 .99 1.01
Net investment income .93 2.60 1.97 1.51 2.08
Portfolio turnover rate (%) 12.45 12.55 11.87 12.85 36.06
</TABLE>
+Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
TP-5 Templeton Pacific Growth Securities Fund - Class 1
<PAGE>
Additional Information, All Funds
DISTRIBUTIONS AND TAXES
- -----------------------
[GRAPHIC OMITTED]
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Except for the Money Fund, each
fund typically pays dividends from net investment income and net capital gains,
if any, at least annually. Dividends or distributions by the funds will reduce
the per share net asset value (NAV) by the per share amount paid.
The Money Fund declares a dividend each day the fund's NAV is calculated, equal
to all of its daily net income, payable as of the close of business the
preceding day. The amount of dividend may fluctuate from day to day and may be
omitted on some days, depending on changes in the factors that comprise the
fund's net income.
Dividends paid by a fund will be automatically reinvested in additional shares
of that fund or, if requested, paid in cash to the insurance company
shareholder.
TAX CONSIDERATIONS The tax consequences for contract owners will depend on the
provisions of the variable annuity or variable life insurance contract through
which they are invested in the funds. For more information, please consult the
accompanying contract prospectus.
1 Additional Information, All Funds
<PAGE>
Fund Account Information
BUYING SHARES
- -------------
[GRAPHIC OMITTED]
Shares of each fund are sold at net asset value (NAV) to insurance company
separate accounts to serve as investment options for variable annuity or
variable life insurance contracts, and for qualified pension and retirement
plans. The funds' Board monitors this to be sure there are no material
conflicts of interest between the two different types of contract owners, given
their differences, including tax treatment. If there were, the Board would take
corrective action.
Contract owners' payments will be allocated by the insurance company separate
account to purchase shares of the fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares are
processed at the NAV next calculated after we receive the request in proper
form. The funds do not issue share certificates.
- --------------------------------------------------------------------------------
SELLING SHARES
- --------------
[GRAPHIC OMITTED]
Each insurance company shareholder sells shares of the applicable fund to make
benefit or surrender payments or to execute exchanges (transfers) between
investment options under the terms of its contracts. Requests to sell shares
are processed at the NAV next calculated after we receive the request in proper
form.
- --------------------------------------------------------------------------------
EXCHANGING SHARES
- -----------------
[GRAPHIC OMITTED]
Contract owners may exchange shares of any one class or fund for shares of
other classes or funds through a transfer between investment options available
under a variable insurance contract, subject to the terms and any specific
limitations on the exchange (or "transfer") privilege described in the contract
prospectus.
Frequent exchanges can interfere with fund management or operations and drive
up fund costs. To protect shareholders, there are limits on the number and
amount of fund exchanges that may be made (please see "Market Timers" below).
- --------------------------------------------------------------------------------
FUND ACCOUNT POLICIES
- ---------------------
[GRAPHIC OMITTED]
CALCULATING SHARE PRICE The funds calculate their NAV per share each business
day at the close of trading on the New York Stock Exchange (normally 1:00 p.m.
Pacific time). Each class' NAV is calculated by dividing its net assets by the
number of its shares outstanding.
The funds' assets are generally valued at their market value, except that the
Money Fund's assets are generally valued at their amortized cost. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of the shares
may change on days that the insurance company shareholders cannot buy or sell
shares.
Requests to buy and sell shares are processed on any day the funds are open for
business at the NAV next calculated after we receive the request in proper
form.
STATEMENTS AND REPORTS Contract owners will receive confirmations and account
statements that show account transactions. Insurance company contract owners
will receive the funds' financial reports every six months from their insurance
company.
If there is a dealer or other investment representative of record on the
account, he or she will also receive
2 Franklin Templeton Variable Insurance Products Trust
<PAGE>
confirmations, account statements and other information about the contract
owner's account directly from the contract's administrator.
MARKET TIMERS The funds may restrict or refuse investments by market timers. As
of July 1, 2000, the following funds will not allow investments by market
timers: Franklin Aggressive Growth Securities Fund, Franklin Global Health Care
Securities Fund, Franklin High Income Fund, Franklin Rising Dividends
Securities Fund, Franklin Technology Securities Fund, Franklin Value Securities
Fund, Mutual Discovery Securities Fund, Mutual Shares Securities Fund,
Templeton Asset Strategy Fund, Templeton Developing Markets Securities Fund and
Templeton Pacific Growth Securities Fund.
You will be considered a market timer if you have (i) requested an exchange
out of the fund within two weeks of an earlier exchange request, or (ii)
exchanged shares out of the fund more than twice in a calendar quarter, or
(iii) exchanged shares equal to at least $5 million, or more than 1% of the
fund's net assets, or (iv) otherwise seem to follow a timing pattern. Accounts
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
/bullet/ Each fund may refuse any order to buy shares.
/bullet/ At any time, the funds may establish or change investment minimums.
/bullet/ The funds may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
/bullet/ You may only buy shares of the funds eligible for sale in your state
or jurisdiction.
/bullet/ In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities
laws.
/bullet/ To permit investors to obtain the current price, insurance companies
are responsible for transmitting all orders to the fund promptly.
SHARE CLASSES Each fund generally has two classes of shares, class 1 and class
2. Each class is identical except that class 2 has a distribution plan or "rule
12b-1" plan which is described in prospectuses offering class 2.
- --------------------------------------------------------------------------------
QUESTIONS
- ---------
[GRAPHIC OMITTED]
More detailed information about the Trust and the funds' account policies can
be found in the funds' Statement of Additional Information. If you have any
questions about the funds, you can write to us at 777 Mariners Island Blvd.,
P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at
1-800/342-3863. For your protection and to help ensure we provide you with
quality service, all calls may be monitored or recorded.
3 Franklin Templeton Variable Insurance Products Trust
<PAGE>
For More Information
The funds of Franklin Templeton Variable Insurance Products Trust (the Trust),
formerly Franklin Valuemark Funds, are generally only available as investment
options in variable annuity or variable life insurance contracts. Please
consult the accompanying contract prospectus for information about the terms of
an investment in a contract.
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS
Includes a discussion of recent market conditions and investment strategies,
financial statements, detailed performance information, fund holdings, and the
auditor's report (Annual Report only).
STATEMENT OF ADDITIONAL INFORMATION
Contains more information about the funds, their investments, policies, and
risks. It is incorporated by reference (is legally a part of this prospectus).
You may obtain these free reports by contacting your investment representative
or by calling us at the number below.
Franklin/registered trademark/Templeton/registered trademark/
1-800/774-5001
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: [email protected].
Investment Company Act file #811-5583Lit. Code # FTVIP1 P00 5/00
<PAGE>
Prospectus
Franklin Templeton
Variable Insurance
Products Trust
Class 2 Shares
May 1, 2000
[GRAPHIC OMITTED]
As with all fund prospectuses, the SEC has not approved or disapproved
these securities or passed upon the adequacy of this prospectus. Any
representation to the contrary is a criminal offense.
<PAGE>
Contents
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
<TABLE>
<CAPTION>
<S> <C> <C>
Information about each fund i Overview
you should know before
investing Individual Fund Descriptions
FA-1 Franklin Aggressive Growth
Securities Fund
FGC-1 Franklin Global Communications
Securities Fund
FGH-1 Franklin Global Health Care
Securities Fund
FGI-1 Franklin Growth and Income
Securities Fund
FH-1 Franklin High Income Fund
FI-1 Franklin Income Securities Fund
FL-1 Franklin Large Cap Growth
Securities Fund
FM-1 Franklin Money Market Fund
FN-1 Franklin Natural Resources
Securities Fund
FRE-1 Franklin Real Estate Fund
FRD-1 Franklin Rising Dividends
Securities Fund
FS-1 Franklin Small Cap Fund
FSP-1 Franklin S&P 500 Index Fund
FSI-1 Franklin Strategic Income
Securities Fund
FT-1 Franklin Technology Securities Fund
FUS-1 Franklin U.S. Government Fund
FV-1 Franklin Value Securities Fund
FZ-1 Franklin Zero Coupon Funds --
2000, 2005, 2010
MD-1 Mutual Discovery Securities Fund
MS-1 Mutual Shares Securities Fund
TA-1 Templeton Asset Strategy Fund
TD-1 Templeton Developing Markets
Securities Fund
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
TGI-1 Templeton Global Income
Securities Fund
TG-1 Templeton Growth Securities Fund
TI-1 Templeton International
Securities Fund
TIS-1 Templeton International
Smaller Companies Fund
TP-1 Templeton Pacific Growth
Securities Fund
Additional Information, All Funds
1 Distributions and Taxes
</TABLE>
FUND ACCOUNT INFORMATION
<TABLE>
<CAPTION>
<S> <C> <C>
Information about fund 2 Buying Shares
account transactions 2 Selling Shares
and services 2 Exchanging Shares
2 Fund Account Policies
3 Questions
</TABLE>
FOR MORE INFORMATION
<TABLE>
<CAPTION>
<S> <C>
Where to learn more about Back Cover
each fund
</TABLE>
<PAGE>
Franklin Templeton
Variable Insurance Products Trust
OVERVIEW
- --------
[GRAPHIC OMITTED]
Franklin Templeton Variable Insurance Products Trust (the Trust), formerly
Franklin Valuemark Funds, currently consists of twenty-nine (29) separate
funds, offering a wide variety of investment choices. Each fund generally has
two classes of shares, class 1 and class 2. The funds are generally only
available as investment options in variable annuity or variable life insurance
contracts. The accompanying contract prospectus indicates which funds and
classes are available to you.
INVESTMENT CONSIDERATIONS
/bullet/ Each fund has its own investment strategy and risk profile. Generally,
the higher the expected rate of return, the greater the risk of loss.
/bullet/ No single fund can be a complete investment program; consider
diversifying your fund choices.
/bullet/ You should evaluate each fund in relation to your personal financial
situation, investment goals, and comfort with risk. Your investment
representative can help you determine which funds are right for you.
RISKS
/bullet/ There can be no assurance that any fund will achieve its investment
goal.
/bullet/ Because you could lose money by investing in a fund, take the time to
read each fund description and consider all risks before investing.
/bullet/ All securities markets, interest rates, and currency valuations move
up and down, sometimes dramatically, and mixed with the good years can
be some bad years. Since no one can predict exactly how financial
markets will perform, you may want to exercise patience and focus not
on short-term market movements, but on your long-term investment
goals.
/bullet/ Fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any other
agency of the U.S. Government. Fund shares involve investment risks,
including the possible loss of principal.
More detailed information about each fund,
its investment policies, and its particular
risks can be found in the Trust's Statement of
Additional Information (SAI).
MANAGEMENT
The funds' investment managers and their affiliates manage over $229 billion in
assets. In 1992, Franklin joined forces with Templeton, a pioneer in
international investing. The Mutual Advisers organization became part of the
Franklin Templeton organization four years later. Today, Franklin Templeton
Investments is one of the largest mutual fund organizations in the United
States, and offers money management expertise spanning a variety of investment
objectives.
i
<PAGE>
Franklin Aggressive Growth Securities Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies demonstrating
accelerating growth, increasing profitability, or above-average growth or growth
potential as compared with the overall economy. An equity security represents a
proportionate share of the ownership of a company; its value is based on the
success of the company's business, any income paid to stockholders, the value of
its assets, and general market conditions. Common and preferred stocks, and
securities convertible into common stock are examples of equity securities.
- --------------------------------------------------------------------------------
The fund invests primarily in the common stocks of aggressive growth companies.
- --------------------------------------------------------------------------------
The fund invests in small, medium, and large capitalization companies with
strong growth potential. Although the fund seeks investments across a large
number of sectors, it expects to have substantial positions in the technology
sector (including computers and telecommunications), and significant positions
in other sectors including, for example, health care (including biotechnology),
consumer products, and consumer services (including media, broadcasting, and
entertainment). Typically, however, the fund will be invested in a variety of
industries and a wide variety of companies within sectors.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager focuses on sectors that have exceptional
growth potential and fast growing, innovative companies within these sectors.
The manager relies on a team of analysts to provide in-depth industry
expertise, and uses both qualitative and quantitative analysis to evaluate
companies for sound financial records, and strength and quality of management,
among other factors.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including
cash or cash equivalents. Under these circumstances, the fund may temporarily
be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the
shorter term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company
fails to meet those projections. Growth stocks may also be more expensive
relative to their earnings or assets compared to value or other stocks. Because
the fund's manager uses an aggressive growth strategy, an investment in the
fund involves greater risk and more volatility than an investment in a growth
fund investing entirely in proven growth stocks.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions,
including increases
FA-1 Franklin Aggressive Growth Securities Fund - Class 2
<PAGE>
in interest rates because of their reliance on credit, and their growth
prospects are less certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the fund,
or only in very limited quantities. Thus, when the fund's size is smaller, any
gains from IPOs will have an exaggerated impact on the fund's reported
performance than when the fund is larger.
SECTOR FOCUS By focusing on particular sectors from time to time, the fund
carries greater risk of adverse developments in a sector than a fund that
always invests in a wide variety of sectors.
Technology companies Technology and biotechnology industry stocks can be
subject to abrupt or erratic price movements. They have historically been
volatile in price, especially over the short term, due to the rapid pace of
product change and development affecting such companies. Prices often change
collectively without regard to the merits of individual companies.
Health care companies The activities of health care companies may be partially
funded or subsidized by federal or state governments. If government funding and
subsidies are reduced or discontinued, the profitability of these companies
could be adversely affected. Health care companies may also be affected by
government policies on health care reimbursements, regulatory approval for new
drugs and medical instruments, and similar matters. They are also subject to
legislative risk, i.e., the risk of a reform of the health care system through
legislation.
Telecommunications, media, and broadcasting companies These companies operate
under international, federal, and state regulations, and therefore, may be
adversely affected by changes in such regulations. The telecommunications,
media, and broadcasting sectors have been undergoing deregulation leading to
increased competition, which may adversely affect the companies in these
sectors.
Consumer products, services, and entertainment companies These companies have
historically been sensitive to the economy in general, through changes in
consumer spending patterns. These companies may be adversely affected by changes
in consumer opinion or demand for a given product or service.
PORTFOLIO TURNOVER The manager's aggressive growth strategy may cause the fund's
portfolio turnover rate to be higher than that of other funds. High turnover
generally increases the fund's transaction costs.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FA-2 Franklin Aggressive Growth Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
Because the fund is new, it has no performance history.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN AGGRESSIVE GROWTH SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- -----------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)1,2
<TABLE>
<CAPTION>
Class 2
- -----------------------------------------------------------
<S> <C>
Management fees 0.50%
Distribution and service (12b-1) fees 3 0.25%
Other expenses 0.22%
----
Total annual fund operating expenses 0.97%
====
</TABLE>
1. The management fees are based on the fund's maximum contractual amount. Other
expenses are estimated.
2. The manager and administrator have agreed in advance to waive or limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund so that total annual fund operating expenses do not exceed
1.25% of average net assets, including class 2's 12b-1 plan fee, for the current
fiscal year. After December 31, 2001, the manager and administrator may end this
arrangement at any time.
3. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
- ---------------------------------
<S> <C> <C>
Class 2 $99 $309
</TABLE>
FA-3 Franklin Aggressive Growth Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Michael McCarthy Mr. McCarthy has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1999 and has been with the Franklin Templeton Group since 1992.
J. P. Scandalios Mr. Scandalios has been a manager of the fund since its inception in
SENIOR SECURITIES ANALYST, ADVISERS 1999. Before joining the Franklin Templeton Group in 1996, he was with
Chase Manhattan Bank.
Conrad Herrmann, CFA Mr. Herrmann has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, ADVISERS 1999 and has been with the Franklin Templeton Group since 1989.
</TABLE>
The fund pays the Advisers a fee for managing the fund's assets. The fee is
equal to an annual rate of:
/bullet/ 0.500% of the value of net assets up to $500 million;
/bullet/ 0.400% of the value of net assets over $500 million up to and including
$1 billion;
/bullet/ 0.350% of the value of net assets over $1 billion up to and including
$1.5 billion;
/bullet/ 0.300% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
/bullet/ 0.275% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
/bullet/ 0.250% of the value of net assets over $11.5 billion up to and
including $16.5 billion;
/bullet/ 0.240% of the value of net assets over $16.5 billion up to and
including $19 billion;
/bullet/ 0.230% of the value of net assets over $19 billion up to and including
$21.5 billion; and
/bullet/ 0.220% of the value of net assets over $21.5 billion.
The manager is contractually obligated to limit management fees so that Total
annual fund operating expenses do not exceed 1.25% of the fund's class 2 net
assets in 2000.
FA-4 Franklin Aggressive Growth Securities Fund - Class 2
<PAGE>
Franklin Global Communications Securities Fund
(previously Franklin Global Utilities Securities Fund)
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's investment goals are capital appreciation and current income.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of U.S. and non-U.S. communications
companies.
These are companies that are primarily engaged in the development, manufacture
or sale of communications services and communications equipment. These may
include, for example, companies that provide:
- --------------------------------------------------------------------------------
The fund concentrates in common stocks of U.S. and non-U.S. companies engaged in
the public utilities industry, predominantly communications companies.
- --------------------------------------------------------------------------------
/bullet/ cellular and other wireless communications, paging, and local and wide
area network and data services or equipment;
/bullet/ local and long distance telephone services or equipment;
/bullet/ satellite, microwave, cable and other pay television services or
equipment; and
/bullet/ Internet-related services or equipment, including Internet service, web
hosting and web content, Internet portals, data warehouse and other
related service.
The fund may buy communications companies anywhere in the world, including
emerging markets, but generally invests a greater percentage of its assets in
U.S. companies than in companies in any other single country. An equity security
represents a proportionate share of the ownership of a company; its value is
based on the success of the company's business, any income paid to stockholders,
the value of its assets, and general market conditions. Common and preferred
stocks, and securities convertible into common stock are examples of equity
securities.
The fund also may invest a significant portion of its assets in small-cap
companies, which have market capitalization values (share price multiplied by
the number of common stock shares outstanding) of less than $1.5 billion.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined "blend" of growth and value strategies. Relying on a team
of analysts to provide in-depth industry expertise, the manager looks for
companies that will position the fund to benefit from potential future
technological advances and increasing worldwide demand in the communications
industries of the public utilities sector. As a "bottom-up" investor focusing
primarily on individual securities, the fund's manager will focus on the market
price of a company's securities relative to its evaluation of the company's
potential long-term earnings, asset value and cash flow. A company's historical
value measures, including price/earnings ratio, profit margins, and liquidation
value, will also be considered, but are not limiting factors.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goals.
FGC-1 Franklin Global Communications Securities Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
UTILITIES INDUSTRY, PREDOMINANTLY COMMUNICATONS COMPANIES By concentrating in
the utilities industry sector, and by investing predominantly in communications
companies, the fund carries much greater risk of adverse developments in that
sector, and among those companies, than a fund that invests more broadly. The
securities of communications companies may experience more price volatility than
securities of companies in some other industries. Communications companies are
subject to a variety of risk factors including: significant competitive
pressures, such as new market entrants, aggressive pricing and competition for
market share; and the risks that new services, equipment or technologies will
not be accepted by consumers and businesses or will become rapidly obsolete.
These factors can affect the profitability of communications companies and, as a
result, the value of their securities. In addition, many wireless
telecommunication and Internet-related companies are in the emerging stage of
development and are particularly vulnerable to the risks of rapidly changing
technologies, as well as the potential of both accidental and deliberate
disruption or failure of services or equipment. Prices of these companies'
securities historically have been more volatile than other securities,
especially over the short term.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions,
currencies, and interest rate movements around the world, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
- --------------------------------------------------------------------------------
Utility companies in the U.S. and in non-U.S. countries have generally been
subject to substantial government regulation. Major changes in government
policies, ranging from increased regulation or expropriation to deregulation,
privatization or increased competition, may dramatically increase or reduce
opportunities for these companies. For example, while certain companies may
develop more profitable opportunities, others may be forced to defend their core
businesses and may be less profitable.
In addition, electric utility companies have historically been subject to price
regulation; risks associated with high interest costs on borrowings or reduced
ability to borrow; restrictions on operations and increased costs due to
environmental and safety regulations; regulators disallowing these higher costs
in rate authorizations; difficulties in obtaining fuel for electric generation
at reasonable prices; risks associated with the operation of nuclear power
plants; and the effects of energy conservation and other factors affecting the
level of demand for services.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
BLEND STYLE STOCK INVESTING A "blend" strategy results in investments in both
growth and value stocks, or in stocks with characteristics of both. Growth stock
prices reflect projections of future earnings or revenues, and can, therefore,
fall dramatically if the company fails to meet those projections. Value stock
prices are considered "cheap" relative to the company's perceived value and are
often out of favor with other investors. However, if other investors fail to
recognize the company's value (and do not become buyers, or become sellers), or
favor investing in faster-growing companies, value stocks may not increase in
value as anticipated by the manager and may even decline further. By combining
both styles, the manager seeks to diversify the risks and lower the volatility,
but there is no assurance this strategy will have that result.
INTEREST RATE Rate changes can be sudden and unpredictable. Increases in
interest rates may have an effect on the types of companies in which the fund
invests because they may find it more difficult to obtain credit to expand, or
may have more difficulty meeting interest payments. Utility company stocks often
pay relatively high dividends, so they are particularly sensitive to interest
rate movements. Therefore, like bonds, their stock prices may rise as interest
rates fall or fall as interest rates rise.
FGC-2 Franklin Global Communications Securities Fund - Class 2
<PAGE>
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to U.S. companies in U.S.
courts.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions and
increases in interest rates, their growth prospects are less certain, and their
securities are less liquid. These companies may suffer significant losses, and
can be considered speculative. Technology industry stocks, in particular, can
be subject to abrupt or erratic price movements.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the fund,
or only in very limited quantities. Thus, when the fund's size is smaller, any
gains from IPOs will have an exaggerated impact on the fund's reported
performance than when the fund is larger.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FGC-3 Franklin Global Communications Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ----------------------------------------------------------------
<S> <C> <C> <C>
Franklin Global
Communications Securities
Fund - Class 2 1 39.00% 22.47% 14.02%
S&P 500 Index 2 21.04% 28.56% 18.21%
FT/S&P Actuaries World
Utilities Index 2 32.26% 24.70% 14.23%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The Financial Times/S&P Actuaries World Utilities Index includes
electric utilities, waterworks supply, natural gas and telephone companies.
Indices include reinvested dividends and/or interest. One cannot invest directly
in an index, nor is an index representative of the fund's investments.
FGC-4 Franklin Global Communications Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN GLOBAL COMMUNICATIONS
SECURITIES FUND1 - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 2 0.48%
Distribution and service (12b-1) fees 3 0.25%
Other expenses 0.03%
----
Total annual fund operating expenses 0.76%
====
</TABLE>
1. Before November 15, 1999, the Franklin Global Utilities Securities Fund.
2. The fund administration fee is paid indirectly through the management fee.
3. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- ------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $78 $243 $422 $942
</TABLE>
FGC-5 Franklin Global Communications Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Alex W. Peters Mr. Peters has been a manager of the fund since 1999, and has been
PORTFOLIO MANAGER, ADVISERS with the Franklin Templeton Group since 1992.
Alan Muschott Mr. Muschott has been a manager of the fund since March 2000, and has
PORTFOLIO MANAGER, ADVISERS been with the Franklin Templeton Group since 1998.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid 0.48% of its average daily net assets to
the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 21.02
-----
Net investment income .26
Net realized and unrealized gains 6.37
-----
Total from investment operations 6.63
-----
Distributions from net investment income (.84)
Distributions from net realized gains (2.03)
-----
Total distributions (2.87)
-----
Net asset value, end of year 24.78
=====
Total return (%)+ 35.17
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 491
Ratios to average net assets: (%)
Expenses .77*
Net investment income 1.24*
Portfolio turnover rate (%) 87.53
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FGC-6 Franklin Global Communications Securities Fund - Class 2
<PAGE>
Franklin Global Health Care Securities Fund
(previously Global Health Care Securities Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
70% of its total assets in equity securities of companies in the health care
industry. These are companies whose principal assets or activities are in
research, development, production or distribution of products and services in
industries such as pharmaceutical; biotechnology; health care facilities,
information systems and personal products; medical supplies, technology and
services; and managed care companies. An equity security represents a
proportionate share of the ownership of a company; its value is based on the
success of the company's business, any income paid to stockholders, the value of
its assets, and general market conditions. Common and preferred stocks, and
securities convertible into common stock are examples of equity securities.
- --------------------------------------------------------------------------------
The fund concentrates in common stocks of U.S. and non-U.S. companies in the
health care industry
- --------------------------------------------------------------------------------
The fund may buy health care companies anywhere in the world, but generally
invests predominantly in U.S. companies. The fund also may invest a substantial
portion of its assets in small-cap companies which have market capitalization
values (share price multiplied by the number of common stock shares outstanding)
of less than $1.5 billion. From time to time, the fund also may have a
substantial portion of its assets in one or more industries of the health care
sector, such as pharmaceuticals.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined "blend" of growth and value strategies. As a "bottom-up"
investor focusing primarily on individual securities, the manager chooses
companies that fill particular health care niches and that it believes are
positioned for rapid growth in revenues, earnings or assets, and/or are selling
at reasonable prices using a company's historical value measures. The manager
relies on a team of analysts to provide in-depth industry expertise, and uses
both qualitative and quantitative analysis, to look for companies that will
position the fund to benefit from potential future technological advances and
increasing worldwide demand in the health care sector. In addition, the manager
evaluates companies on factors such as strength and quality of management,
strategic positioning in their industry and globally competitive advantages.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
HEALTH CARE COMPANIES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Government actions may affect
health care companies in many ways. For example, foreign, U.S. federal, or state
governments could discontinue subsidies of certain research or other activities
of some companies, which may have an adverse effect on these companies. Stocks
held by the fund, and especially health care providers and pharmaceuticals, may
also be affected by government policies on health care reimbursements (such as
Medicare and Medicaid), regulatory approval for new drugs and medical
instruments, or legislative reform of a health care system. Health care
companies are also subject to the risks of product liability lawsuits and the
risk that their products and services may rapidly become obsolete.
FGH-1 Franklin Global Health Care Securities Fund - Class 2
<PAGE>
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions
around the world, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
BLEND STYLE STOCK INVESTING A "blend" strategy results in investments in both
growth and value stocks, or in stocks with characteristics of both. Growth stock
prices reflect projections of future earnings or revenues, and can, therefore,
fall dramatically if the company fails to meet those projections. Value stock
prices are considered "cheap" relative to the company's perceived value and are
often out of favor with other investors. However, if other investors fail to
recognize the company's value (and do not become buyers, or become sellers), or
favor investing in faster-growing companies, value stocks may not increase in
value as anticipated by the manager and may even decline further. By combining
both styles, the manager seeks to diversify the risks and lower the volatility,
but there is no assurance this strategy will have that result.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions,
including increases in interest rates because of their reliance on credit, and
their growth prospects are less certain.
For example, smaller companies may lack depth of management, or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative. Technology and biotechnology industry stocks, in particular, can be
subject to abrupt or erratic price movements.
FOREIGN SECURITIES Securities of companies located outside the U.S. may involve
risks that can increase losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country and Company General securities market and interest rate movements in any
country where the fund has investments are likely to affect the value of the
securities the fund owns that trade in that country. The political, economic,
and social structures of some countries the fund invests in may be less stable
and more volatile than those in the U.S. The risks of investing in these
countries include the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes and certain custody and settlement
risks. Non-U.S. companies may not be subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies,
or may become illiquid. Non-U.S. currency exchanges, stock exchanges, trading
systems, brokers, and companies generally have less government supervision and
regulation than in the U.S. Emerging market countries have additional,
heightened risks including a greater likelihood of currency devaluations, less
liquidity, and greater volatility.
DIVERSIFICATION The fund is non-diversified as defined by the federal securities
laws. As such, it may invest a greater portion of its assets in one issuer and
have a smaller number of issuers than a diversified fund. Therefore, the fund
may be more sensitive to economic, business, political or other changes
affecting similar issuers or securities. The fund intends, however, to meet tax
diversification requirements.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FGH-2 Franklin Global Health Care Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 05/01/98
- ----------------------------------------------------------
<S> <C> <C>
Franklin Global Health Care
Securities Fund - Class 2 1 -8.38% -1.13%
S&P 500 Index 2 21.04% 26.79%
S&P Healthcare Composite Index 2 -8.24% 6.21%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. S&P Health Care Composite Index is a capitalization-weighted index
of all of the stocks in the S&P 500 index involved in the health care related
products or services. Indices include reinvested dividends and/or interest. One
cannot invest directly in an index, nor is an index representative of the fund's
investments.
FGH-3 Franklin Global Health Care Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN GLOBAL HEALTH CARE SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.60%
Distribution and service (12b-1) fees 1 0.25%
Other expenses 0.22%
----
Total annual fund operating expenses 1.07%
====
</TABLE>
1. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $109 $340 $590 $1,306
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Evan McCulloch, CFA Mr. McCulloch has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1998, and has been with the Franklin Templeton Group since 1992.
Kurt von Emster, CFA Mr. Von Emster has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1998, and has been with the Franklin Templeton Group since 1989.
Rupert H. Johnson, Jr. Mr. Johnson has been a manager of the fund since its inception in 1998,
PRESIDENT, ADVISERS and has been with the Franklin Templeton Group since 1965.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. For the fiscal year
ended December 31, 1999, the fund paid 0.60% of its average daily net assets to
the manager for its services.
FGH-4 Franklin Global Health Care Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 10.77
------
Net investment loss (.03)
Net realized and unrealized losses (.93)
-------
Total from investment operations (.96)
-------
Distributions from net investment income (.02)
-------
Net asset value, end of year 9.79
=======
Total return (%) + (8.89)
Ratios/supplemental data
Net assets, end of year ($1,000) 83
Ratios to average net assets: (%)
Expenses 1.07*
Net investment loss (.30)*
Portfolio turnover rate (%) 188.22
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FGH-5 Franklin Global Health Care Securities Fund - Class 2
<PAGE>
Franklin Growth and Income Securities Fund
(previously Franklin Growth and Income Fund)
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is to provide current income.
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks with current dividend yields above
market average.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in a broadly diversified portfolio of equity securities
that the fund's manager considers to be financially strong, but undervalued by
the market. To help identify such companies, the manager uses a current relative
yield analysis that focuses on a company's dividend yield (calculated by
dividing a stock's annual per share dividends by its per share market price).
Following this strategy, the fund will invest predominantly in common stocks
that have dividend yields at least equal to the yield of the Standard & Poor's
500 Index ("S&P/registered trademark/ 500"). The fund seeks current income
through receipt of dividends from its investments. An equity security represents
a proportionate share of the ownership of a company; its value is based on the
success of the company's business, any income paid to stockholders, the value of
its assets, and general market conditions. Common and preferred stocks, and
securities convertible into common stock are examples of equity securities.
The fund may invest up to 30% of its total assets in foreign securities,
including those in emerging markets, but currently intends to limit such
investments to 20%.
In addition to the fund's main investments, the fund may invest in any of the
following: common stocks with current dividend yields at or below the
S&P/registered trademark/ 500 average, convertible securities, debt securities,
and real estate investment trusts (REITs). The fund does not intend to invest
more than 15% of its assets in REITs.
A debt security obligates the issuer to the bondholders, both to repay a loan
of money at a future date and generally to pay interest. Common debt securities
are secured and unsecured bonds, bonds convertible into common stock, zero
coupon bonds, notes, and short-term debt investments. A convertible security is
generally a debt security or preferred stock that may be converted into common
stock. By investing in convertible equity and debt securities, the fund seeks
the opportunity to participate in the capital appreciation of underlying
stocks, while at the same time relying on the fixed income aspect of the
convertible securities to provide current income and reduced price volatility,
which can limit the risk of loss in a down equity market. REITs are usually
publicly traded companies that manage a portfolio of real estate to earn
profits and tend to pay high yields since they must distribute most of their
earnings.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined value-oriented strategy. As a "bottom-up" investor
focusing primarily on individual securities, the manager focuses on the market
price of a company's securities relative to its evaluation of the company's
potential long-term earnings, asset value and cash flow, with a special emphasis
on current dividend yield. The manager believes that high relative dividend
yield is frequently a good indicator of value.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goals.
FGI-1 Franklin Growth and Income Securities Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions, the
value of your investment in the fund will go up and down. This means you could
lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country and Company General securities market and interest rate movements in any
country where the fund has investments are likely to affect the value of the
securities the fund owns that trade in that country. The political, economic,
and social structures of some countries the fund invests in may be less stable
and more volatile than those in the U.S. The risks of investing in these
countries include the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies,
or may become illiquid. Non-U.S. currency exchanges, stock exchanges, trading
systems, brokers, and companies generally have less government supervision and
regulation than in the U.S. Emerging market countries have additional,
heightened risks including a greater likelihood of currency devaluations, less
liquidity, and greater volatility.
REITS A REIT's performance depends on the types and locations of the properties
it owns and on how well it manages those properties. The value of a REIT may
also be affected by factors that affect the underlying properties, the real
estate industry, or local or general economic conditions.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FGI-2 Franklin Growth and Income Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -----------------------------------------------------------------
<S> <C> <C> <C>
Franklin Growth and Income
Securities Fund - Class 2 1 .84% 16.18% 11.42%
S&P 500 Index 2 21.04% 28.56% 18.21%
Russell 3000 Value Index 2 6.65% 22.15% 15.31%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The unmanaged Russell 3000 Value Index measures the performance of
those 3000 companies with lower price-to-book ratios and lower forecasted growth
values. Indices include reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's investments.
FGI-3 Franklin Growth and Income Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN GROWTH AND INCOME SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 1 0.47%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.02%
----
Total annual fund operating expenses 0.74%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $76 $237 $411 $918
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Frank Felicelli, CFA Mr. Felicelli has been a manager of the fund since 1995, and has been
SENIOR VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1986.
Derek Taner, CFA Mr. Taner has been a manager of the fund since March 2000, and has
PORTFOLIO MANAGER, ADVISERS been with the Franklin Templeton Group since 1991.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets, and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid 0.47% of its average daily net assets to
the manager for its services.
FGI-4 Franklin Growth and Income Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 20.71
-----
Net investment income .47
Net realized and unrealized losses (.46)
-----
Total from investment operations .01
-----
Distributions from net investment income (.79)
Distributions from net realized gains (2.20)
-----
Total distributions (2.99)
-----
Net asset value, end of year 17.73
=====
Total return (%)+ (.86)
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 789
Ratios to average net assets: (%)
Expenses .75*
Net investment income 2.55*
Portfolio turnover rate (%) 39.80
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FGI-5 Franklin Growth and Income Securities Fund - Class 2
<PAGE>
Franklin High Income Fund
(previously High Income Fund)
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is to earn a high level of current
income. Its secondary goal is capital appreciation.
- --------------------------------------------------------------------------------
The fund invests primarily in high yield, lower rated bonds.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in debt securities offering high yield and expected
total return. A debt security obligates the issuer to the bondholders, both to
repay a loan of money at a future date and generally to pay interest. Common
debt securities are secured and unsecured bonds, bonds convertible into common
stock, zero coupon bonds, notes, and short-term debt investments.
The fund may invest up to 100% of its assets in high yield, lower quality debt
securities ("junk bonds"). These securities are either rated below investment
grade (below the top four rating categories) by independent rating agencies such
as Standard & Poor's Ratings Group (S&P/registered trademark/) and Moody's
Investors Service, Inc. (Moody's), or are unrated securities the manager
determines are comparable. The fund generally invests in securities rated at
least Caa by Moody's or CCC by S&P or unrated securities the fund's manager
determines are comparable. The fund will not purchase defaulted securities. If,
however, a security is downgraded in rating or goes into default, the fund will
not automatically sell the security. Generally, lower rated securities pay
higher yields than more highly rated securities to compensate investors for the
higher risk.
The fund may invest up to 20% of its total assets in foreign securities,
including up to 10% in emerging markets, and will typically focus on dollar-
denominated corporate debt. Many debt securities of non-U.S. issuers, and
especially emerging market issuers, are rated below investment grade or are
unrated so that their selection depends on the manager's internal analysis.
While the fund also may invest in dividend-paying common or preferred stocks, it
more typically holds equity as a result of receiving those securities in a
corporate restructuring. An equity security represents a proportionate share of
the ownership of a company; its value is based on the success of the company's
business, any income paid to stockholders, the value of its assets, and general
market conditions. Common and preferred stocks, and securities convertible into
common stock are examples of equity securities.
PORTFOLIO SELECTION Yield and expected return are the primary criteria used by
the manager in selecting securities. The manager searches for securities it
believes offer opportunities for income today and growth tomorrow. It performs
independent analysis of the corporate debt securities being considered for the
fund's portfolio, rather than relying principally on the ratings assigned by
rating agencies. In its analysis, the manager considers a variety of factors,
including:
/bullet/ a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings
prospects;
/bullet/ the experience and strength of the company's management;
/bullet/ the company's sensitivity to changes in interest rates and business
conditions;
/bullet/ the company's debt maturity schedules and borrowing requirements; and
/bullet/ the company's changing financial condition and market recognition of
the change.
Because the manager focuses on individual securities rather than sector
allocation, from time to time the fund may have a significant portion of its
assets in one or more industries, including for example, telecommunications.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goals.
FH-1 Franklin High Income Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price.
- --------------------------------------------------------------------------------
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes. Increases in interest
rates may also have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or have more difficulty meeting interest payments. A sub-category of
interest rate risk is reinvestment risk, which is the risk that interest rates
will be lower when the fund seeks to reinvest interest payments, or the proceeds
from a matured debt security, resulting in less income received by the fund.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, thus, impact fund performance.
Lower-rated securities Securities rated below investment grade, sometimes called
"junk bonds," generally have more risk than higher-rated securities. Companies
issuing high yield debt securities are not as strong financially as those with
higher credit ratings. These companies are more likely to encounter financial
difficulties and are more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates, that could prevent
them from making interest and principal payments. If an issuer stops paying
interest and/or principal, payments may never resume. The fund may lose its
entire investment on bonds that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to changes in the ratings assigned by ratings agencies.
Prices are often closely linked with the company's stock prices and typically
rise and fall in response to factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, stock market activity, large sustained
sales by major investors, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds. Many of
these securities do not trade frequently, and when they do trade their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates, will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country and Company General securities market and interest rate movements in any
country where the fund has investments are likely to affect the value of the
securities the fund owns that trade in that country. The political, economic,
and social structures of some countries the fund invests in may be less stable
and more volatile than those in the U.S. The risks of investing in these
countries include the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes and certain custody and settlement
risks. Non-U.S. companies may not be subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies,
or may become illiquid. Non-U.S. currency exchanges, stock exchanges, trading
systems, brokers, and companies generally have less government supervision and
regulation than in the U.S. Emerging market
FH-2 Franklin High Income Fund - Class 2
<PAGE>
countries have additional, heightened risks including a greater likelihood of
currency devaluations, less liquidity, and greater volatility.
TELECOMMUNICATIONS The securities of communications companies may experience
more price volatility than securities of companies in other industries. For
example, communications companies are subject to significant competitive
pressures, such as new market entrants, aggressive pricing and competition for
market share, and the potential for falling profit margins. Wireless
telecommunication and Internet-related companies are in the emerging stage of
development and are particularly vulnerable to the risks of rapidly changing
technologies, as well as the potential of both accidental and deliberate
disruption or failure of services or equipment.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FH-3 Franklin High Income Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ---------------------------------------------------------------
<S> <C> <C> <C>
Franklin High Income Fund -
Class 2 1 -0.37% 8.88% 9.11%
CS First Boston Global High
Yield Index 2 3.28% 9.08% 11.06%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The unmanaged CS First Boston Global High
Yield Index is a trader-priced portfolio constructed to mirror the high yield
debt market. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
FH-4 Franklin High Income Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN HIGH INCOME FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 1 0.51%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.03%
----
Total annual fund operating expenses 0.79%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $81 $252 $439 $978
</TABLE>
FH-5 Franklin High Income Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Jeff Holbrook, CFA Mr. Holbrook has been a manager of the fund since 1997, and has been
VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1992.
Chris Molumphy, CFA Mr. Molumphy has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, ADVISERS 1989, and has been with the Franklin Templeton Group since 1988.
R. Martin Wiskemann Mr. Wiskemann has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1989. Mr. Wiskemann has more than 30 years' experience in the
securities industry.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid 0.51% of its average daily net assets to
the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 13.36
-----
Net investment income 1.11
Net realized and unrealized losses (1.18)
-----
Total from investment operations (.07)
-----
Distributions from net investment income (3.02)
Distributions from net realized gains (.44)
-----
Total distributions (3.46)
-----
Net asset value, end of year 9.83
=====
Total return (%)+ (.96)
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 448
Ratios to average net assets: (%)
Expenses .80*
Net investment income 9.51*
Portfolio turnover rate (%) 22.17
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FH-6 Franklin High Income Fund - Class 2
<PAGE>
Franklin Income Securities Fund
(previously Income Securities Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is to maximize income while maintaining
prospects for capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest in both
debt and equity securities. The fund seeks income by investing in corporate,
foreign, and U.S. Treasury bonds. In its search for income-producing growth
opportunities, the fund invests in common stocks with attractive dividend yields
of companies from a variety of industries such as utilities, oil, gas, real
estate, and consumer goods. From time to time, the fund may invest a substantial
portion of its assets in certain sectors, including utilities.
- --------------------------------------------------------------------------------
The fund invests in high yield, lower-rated bonds, and stocks.
- --------------------------------------------------------------------------------
A debt security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Common debt securities are
secured and unsecured bonds, bonds convertible into common stock, notes, and
short-term debt investments. An equity security represents a proportionate share
of the ownership of a company; its value is based on the success of the
company's business, any income paid to stockholders, the value of its assets,
and general market conditions. Common and preferred stocks, and securities
convertible into common stock are examples of equity securities.
The fund may invest up to 100% of its total assets in debt securities that are
below investment grade ("junk bonds"), including up to 5% in defaulted debt,
but the fund does not currently expect to invest more than 50% of its assets in
these securities. Investment grade debt securities are rated in the top four
rating categories by independent rating agencies such as Standard & Poor's
Ratings Group (S&P/registered trademark/) and Moody's Investors Service, Inc.
(Moody's). The fund generally invests in securities rated at least Caa by
Moody's or CCC by S&P or, if unrated, determined by the fund's manager to be
comparable. Generally, lower rated securities pay higher yields than more
highly rated securities to compensate investors for the higher risk.
The fund may invest up to 25% of its assets in foreign securities, including
those in emerging markets. It ordinarily buys foreign securities that are traded
in the U.S or American Depositary Receipts, which are certificates issued by a
bank or trust company that give their holders the right to receive securities
issued by a foreign or domestic company. Many debt securities of non-U.S.
issuers, and especially emerging market issuers, are rated below investment
grade or are unrated so that their selection depends on the manager's internal
analysis.
PORTFOLIO SELECTION The manager searches for undervalued or out-of-favor
securities it believes offer opportunities for income today and growth tomorrow.
It performs independent analysis of the debt securities being considered for the
fund's portfolio, rather than relying principally on the ratings assigned by
rating agencies. In analyzing both debt and equity securities, the manager
considers a variety of factors, including:
/bullet/ a security's relative value based on such factors as anticipated cash
flow, interest or dividend coverage, asset coverage, and earnings
prospects;
/bullet/ the experience and strength of the company's management;
/bullet/ the company's sensitivity to changes in interest rates and business
conditions;
/bullet/ the company's debt maturity schedules and borrowing requirements; and
/bullet/ the company's changing financial condition and market recognition of
the change.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goal.
FI-1 Franklin Income Securities Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes. Increases in interest
rates may have an effect on the types of companies in which the fund normally
invests because they may find it difficult to obtain credit to expand, or may
have more difficulty meeting interest payments.
- --------------------------------------------------------------------------------
Because the bonds and stocks the fund holds fluctuate in price with interest
rate changes and market conditions, the value of your investment in the fund
will go up and down. This means you could lose money.
- --------------------------------------------------------------------------------
Similarly, emerging market economies may be especially sensitive to interest
rate changes. A sub-category of interest rate risk is reinvestment risk, which
is the risk that interest rates will be lower when the funds seek to reinvest
interest payments, or the proceeds from a matured debt security, resulting in
less income received by the fund.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, thus, impact fund performance.
Lower-rated securities Securities rated below investment grade, sometimes called
"junk bonds," generally have more risk than higher-rated securities. Companies
issuing high yield debt securities are not as strong financially as those with
higher credit ratings. These companies are more likely to encounter financial
difficulties and are more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates, that could prevent
them from making interest and principal payments. If an issuer stops paying
interest and/or principal, payments may never resume. The fund may lose its
entire investment on bonds that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to changes in the ratings assigned by ratings agencies.
Prices are often closely linked with the company's stock prices and typically
rise and fall in response to factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, stock market activity, large sustained
sales by major investors, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds. Many of
these securities do not trade frequently, and when they do trade their prices
may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Utility company stocks pay
relatively high dividends, so they are particularly sensitive to interest rate
movements: like bonds, when interest rates rise, their stock prices tend to
fall.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
CONVERTIBLE SECURITIES The value of convertible securities may rise and fall
with the market value of the underlying stock or, like a debt security, vary
with changes in interest rates and the credit quality of the issuer. Because its
value can be influenced by many different factors, a convertible security is not
as sensitive to interest rate changes as
FI-2 Franklin Income Securities Fund - Class 2
<PAGE>
a similar non-convertible debt security, and generally has less potential for
gain or loss than the underlying stock.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country and Company General securities market and interest rate movements in any
country where the fund has investments are likely to affect the value of the
securities the fund owns that trade in that country. The political, economic,
and social structures of some countries the fund invests in may be less stable
and more volatile than those in the U.S. The risks of investing in these
countries include the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies,
or may become illiquid. Non-U.S. currency exchanges, stock exchanges, trading
systems, brokers, and companies generally have less government supervision and
regulation than in the U.S. Emerging market countries have additional,
heightened risks including a greater likelihood of currency devaluations, less
liquidity, and greater volatility.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FI-3 Franklin Income Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -------------------------------------------------------------
<S> <C> <C> <C>
Franklin Income Securities
Fund - Class 2 1 -2.07% 9.68% 9.97%
S&P 500 Index 2 21.04% 28.56% 18.21%
Lehman Brothers
Government/Corporate
Bond Index 2 -2.15% 7.61% 7.65%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The Lehman Brothers Government/Corporate Bond Index is an unmanaged
index of fixed-rate U.S. Government and foreign and domestic corporate bonds
that are rated investment grade or higher and have maturities of one year or
more and at least $50 million outstanding. Indices include reinvested dividends
and/or interest. One cannot invest directly in an index, nor is an index
representative of the fund's portfolio.
FI-4 Franklin Income Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN INCOME SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 1 0.48%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.02%
----
Total annual fund operating expenses 0.75%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $77 $240 $417 $930
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Charles B. Johnson Mr. Johnson has been a manager of the fund since its inception in 1989,
CHAIRMAN OF THE BOARD, ADVISERS and has been with the Franklin Templeton Group since 1957.
Frederick G. Fromm Mr. Fromm has been a manager of the fund since 1998, and has been
VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1992.
Christopher Molumphy Mr. Molumphy has been a manager of the fund since February 2000, and
SENIOR VICE PRESIDENT, ADVISERS has been with the Franklin Templeton Group since 1988.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid 0.48% of its average daily net assets to
the manager for its services.
FI-5 Franklin Income Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 17.07
-----
Net investment income 1.10
Net realized and unrealized losses (1.53)
-----
Total from investment operations (.43)
Distributions from net investment income (1.46)
Distributions from net realized gains (.53)
-----
Total distributions (1.99)
-----
Net asset value, end of year 14.65
=====
Total return (%)+ (2.93)
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 1,302
Ratios to average net assets: (%)
Expenses .75*
Net investment income 7.36*
Portfolio turnover rate (%) 11.89
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FI-6 Franklin Income Securities Fund - Class 2
<PAGE>
Franklin Large Cap Growth Securities Fund
(previously Franklin Capital Growth Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of U.S. large-cap growth companies.
Large-cap companies are those with market capitalization values (share price
multiplied by the number of common stock shares outstanding) of $8.5 billion or
more, at the time of purchase. Growth companies in which the fund may invest
include those that are expected to have revenue growth in excess of the economy
as a whole either through above-average industry expansion or market share
gains. These companies generally dominate, or are gaining market share in, their
industry and have a reputation for quality management, and superior products and
services.
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks of large-cap growth companies.
- --------------------------------------------------------------------------------
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for growth in revenues, earnings or assets. In choosing investments,
the manager will focus on companies that have exhibited above average growth,
strong financial records, and large market capitalization. In addition, the
manager also considers management expertise, industry leadership, growth in
market share and sustainable competitive advantage. Although the manager will
search for investments across a large number of industries, it expects to have
significant positions in the technology sector (including computer hardware and
software, telecommunications, and electronics).
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions, the
value of your investment in the fund will go up and down. This means you could
lose money over short or even extended periods.
- --------------------------------------------------------------------------------
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets. Large-capitalization stocks tend
to go through cycles of doing better -- or-worse -- than the stock market in
general. In the past, these periods have lasted for several years.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company fails
to meet those projections. Growth stocks also may be more expensive relative to
their earnings or assets compared to value or other stocks.
TECHNOLOGY COMPANIES Technology industry stocks can be subject to abrupt or
erratic price movements. They have historically been volatile in price,
especially over the short term, due to the rapid pace of product change and
development affecting such companies. Prices often change collectively without
regard to the merits of individual companies.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FL-1 Franklin Large Cap Growth Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 05/01/96
- -----------------------------------------------------
<S> <C> <C>
Franklin Large Cap Growth
Securities Fund - Class 2 1 31.21% 22.73%
S&P 500 Index 2 21.04% 26.79%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
FL-2 Franklin Large Cap Growth Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN LARGE CAP GROWTH SECURITIES FUND1 - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 2 0.75%
Distribution and service (12b-1) fees 3 0.25%
Other expenses 0.02%
----
Total annual fund operating expenses 1.02%
====
</TABLE>
1. On 2/8/00, a merger and reorganization was approved that combined the fund
with a similar fund of Templeton Variable Products Series Fund, effective
5/1/00. The table shows total expenses based on the fund's assets as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management fees 0.75%, Distribution and service fees 0.25%, Other expenses
0.02%, and Total annual fund operating expenses 1.02%.
2. The fund administration fee is paid indirectly through the management fee.
3. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $104 $325 $563 $1,177
</TABLE>
FL-3 Franklin Large Cap Growth Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Kent Shepherd, CFA Mr. Shepherd has been a manager of the fund since April 1999, and has
VICE PRESIDENT, ADVISERS been with the Franklin Templeton Group since 1991.
Jason R. Nunn Mr. Nunn has been a manager of the fund since September 1999. Before
PORTFOLIO MANAGER, ADVISERS joining the Franklin Templeton Group in 1998 he worked in corporate
finance with Alex, Brown & Sons.
Conrad B. Herrmann, CFA Mr. Herrmann has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, ADVISERS 1996, and has been with the Franklin Templeton Group since 1989.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid 0.75% of its average daily net assets to
the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1,2
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 16.47
-----
Net investment income .04
Net realized and unrealized gains 4.58
-----
Total from investment operations 4.62
-----
Distributions from net investment income (.08)
-----
Net asset value, end of year 21.01
=====
Total return (%)+ 28.11
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 542
Ratios to average net assets: (%)
Expenses 1.02*
Net investment income .22*
Portfolio turnover rate (%) 41.78
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding. 2On February 8, 2000, a merger and reorganization
was approved that will combine the assets of the fund with a similar fund of the
Templeton Variable Products Series Fund (TVP), effective May 1, 2000. The table
above only reflects fund statistics of the fund, which was the surviving fund of
the merger, and not of the TVP fund. The fund statistics are for the year ended
December 31, 1999.
FL-4 Franklin Large Cap Growth Securities Fund - Class 2
<PAGE>
Franklin Money Market Fund
(previously Money Market Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's goal is high current income, consistent with liquidity and
capital preservation. The fund also seeks to maintain a stable share price of
$1.00.
MAIN INVESTMENTS The fund invests exclusively in U.S. dollar denominated money
market debt instruments, including those issued by:
/bullet/ U.S. and foreign banks;
/bullet/ U.S. or foreign corporations; and
/bullet/ the U.S. Government, its agencies or authorities.
A debt instrument obligates the issuer both to repay a loan of money at a future
date and generally to pay interest. Money market securities are high-quality,
short-term (maturing in 13 months or less) debt instruments that may have fixed,
floating or variable interest rates. Common money market securities are U.S.
Treasury bills, U.S. Government agency securities, bank certificates of deposit,
repurchase agreements, short-term corporate obligations, bankers acceptances
(credit instruments guaranteed by a bank), and commercial paper. Commercial
paper may be either unsecured promissory notes issued by larger corporations or
financial firms or asset backed (that is, backed by a pool of assets
representing the obligations of a number of different parties). At any time, the
fund may have a significant portion of its investments in one or more of these
money market instruments.
- --------------------------------------------------------------------------------
The fund invests exclusively in money market securities.
- --------------------------------------------------------------------------------
Under the SEC's money fund rules, the fund maintains a dollar-weighted average
portfolio maturity of 90 days or less and only buys securities:
/bullet/ with remaining maturities of 397 days or less, and
/bullet/ that the manager determines present minimal credit risks, and
/bullet/ that are rated in the top two short-term rating categories by
independent rating agencies or, if unrated, determined by the manager
to be comparable.
No more than 25% of the fund's total assets may be invested in money market
securities issued by foreign banks or foreign branches of U.S. banks. The fund
may acquire securities on a when-issued or delayed delivery basis, lend
portfolio securities, and invest up to 10% of its assets in illiquid
investments.
PORTFOLIO SELECTION In selecting investments, the manager uses a conservative
investment approach, focusing on the highest quality and the most liquid of
eligible money market securities. The manager then assesses the relative value
of each security meeting its stringent credit criteria in order to find the best
combination of assets that it believes will maximize the fund's yield relative
to its investment environment expectations. The manager also monitors short-term
interest rates, economic conditions, and Federal Reserve monetary policy to
determine the portfolio maturity it believes will provide a high overall return
to the fund.
FM-1 Franklin Money Market Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
An investment in the fund is not insured or guaranteed by the Federal Deposit
Insurance Corporation or any other government agency. Although the fund tries to
keep a $1 share price, it is possible to lose money by investing in the fund.
- --------------------------------------------------------------------------------
INTEREST RATE Changes in interest rates can be sudden and unpredictable. Rate
changes occur in response to general economic conditions and also as a result of
actions by the Federal Reserve Board ( the "Fed"). A reduction in short-term
interest rates will normally result in reduced interest income to the fund and
thus a reduction in dividends payable to shareholders. An increase in short-term
interest rates will normally have the effect of increasing dividends to
shareholders.
CREDIT The fund's investments in securities which are not backed by the full
faith and credit of the U.S. Government depend on the ability of the issuer to
meet interest or principal payments. Changes in an issuer's financial strength
may affect the debt security's value and, thus, impact the value of fund shares.
Even securities supported by credit enhancements have the credit risk of the
entity providing credit support.
FOREIGN SECURITIES The fund's investments in foreign money market securities are
always dollar denominated. Nonetheless, securities or credit support, issued by
a foreign entity are subject to possible adverse foreign economic, political or
legal developments that may affect the ability of that entity to meet its
obligations. In addition, non-U.S. companies are not subject to the same
disclosure, accounting, auditing and financial reporting standards and practices
as U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS Securities purchased on a when-
issued or delayed delivery basis are subject to market fluctuations and their
value at delivery may be higher or lower than the purchase price.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FM-2 Franklin Money Market Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. Of course, past performance cannot predict or guarantee
future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -------------------------------------------------------
<S> <C> <C> <C>
Franklin Money Market
Fund - Class 21 4.47% 5.17% 4.83%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
FM-3 Franklin Money Market Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN MONEY MARKET FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 1 0.52%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.01%
----
Total annual fund operating expenses 0.78%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $80 $249 $433 $966
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid 0.52% of its average daily net assets to
the manager for its services.
FM-4 Franklin Money Market Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 1.00
----
Net investment income .04
Distributions from net investment income (.04)
----
Net asset value, end of year 1.00
====
Total return (%)+ 4.39
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 8,602
Ratios to average net assets: (%)+
Expenses .79*
Net investment income 4.51*
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FM-5 Franklin Money Market Fund - Class 2
<PAGE>
Franklin Natural Resources Securities Fund
(previously Natural Resources Securities Fund)
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is to provide current income.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies principally engaged in
the natural resources sector. These are companies that own, produce, refine,
process or market natural resources. They may also provide support services for
natural resources companies, for example, develop technologies or provide
services, supplies or equipment related to natural resources. The natural
resources sector includes industries such as energy services and technology;
integrated oil; oil and gas exploration and production; chemicals; forest and
paper products; steel, iron ore, and aluminum production; gold and precious
metals; building materials; and environmental services. The manager expects to
invest primarily in the energy industries (gas, exploration and production, oil
services, and pipeline and distribution).
The fund generally invests in mid-cap companies with market capitalization
values (share price multiplied by the number of common stock shares outstanding)
greater than $1.5 billion, but may invest substantially in small-cap companies.
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities.
- --------------------------------------------------------------------------------
The fund concentrates in common stocks of U.S. and non-U.S. companies in the
natural resources sector.
- --------------------------------------------------------------------------------
The fund may buy natural resource companies anywhere in the world, including
emerging markets, but generally invests a greater percentage of its assets in
U.S. companies than any other single country. In addition, the fund will be
exposed to emerging markets through developed market companies, which often own
or depend on natural resource assets in emerging markets countries.
In addition to its main investments, and depending upon market conditions, the
fund may invest significantly in equity securities outside the natural resources
sector. The fund may invest in companies involved in the development and/or
production of alternative energy sources.
The fund also may seek to generate additional income by investing up to 5% of
its total assets in covered call and put options.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
using a combined "bottom-up" and "top-down" strategy. As a "bottom-up" investor
focusing primarily on individual securities, the manager looks for companies it
believes are positioned for growth in revenues, earnings or assets, and are
selling at reasonable prices relative to other companies in the industry. The
manager relies on a team of analysts to provide in-depth industry expertise and
uses both qualitative and quantitative analysis to choose companies it believes
are highly profitable with skilled management, and that have strong growth
profiles and solid financials, as well as companies with sustainable competitive
advantages either through strategic asset bases or technological expertise.
These are all factors the manager believes point to strong long-term growth
potential.
This "bottom-up" approach is combined with a "top-down" analysis of
macroeconomic trends, market sectors, and industries to take advantage of
varying sector reactions to economic events. For example, the manager evaluates
business cycles, yield curves, countries' changing market, economic and
political conditions, the relative interest rates among currencies, and values
between and within markets.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goals.
FN-1 Franklin Natural Resources Securities Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
NATURAL RESOURCES By concentrating in a single industry sector, the fund carries
much greater risk of adverse developments in that sector than a fund that
invests in a wide variety of industries. The securities of companies in the
natural resources sector may experience more price volatility than securities of
companies in other industries. For example, commodity prices and the supply or
demand for commodities change dramatically for reasons beyond a company's
control. In addition, supply and demand factors may dictate the prices at which
a company acquires raw materials or sells its products or services. These
factors can affect the profitability of companies in the natural resources
sector and, as a result, the value of their securities.
In addition, the fund may from time to time invest significantly in a particular
industry or group of industries within the natural resources sector; such a
strategy may expose the fund to greater investment risk than a more diversified
strategy within the sector.
Energy companies Companies that are involved in oil or gas exploration,
production, refining, marketing or distribution, or any combination of the
above are greatly affected by the prices and supplies of raw materials such as
oil or gas. The earnings and dividends of energy companies can fluctuate
significantly as a result of international economic, political, and regulatory
developments.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions
around the world, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
BLEND STYLE STOCK INVESTING A "blend" strategy results in investments in both
growth and value stocks, or in stocks with characteristics of both. Growth stock
prices reflect projections of future earnings or revenues, and can, therefore,
fall dramatically if the company fails to meet those projections. Value stock
prices are considered "cheap" relative to the company's perceived value and are
often out of favor with other investors. However, if other investors fail to
recognize the company's value (and do not become buyers, or become sellers), or
favor investing in faster-growing companies, value stocks may not increase in
value as anticipated by the manager and may even decline further. By combining
both styles, the manager seeks to diversify the risks and lower the volatility,
but there is no assurance this strategy will have that result.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and
FN-2 Franklin Natural Resources Securities Fund - Class 2
<PAGE>
a greater likelihood of currency devaluations. Non-U.S. securities markets,
particularly emerging markets, may have substantially lower trading volumes than
U.S. markets, resulting in less liquidity and more volatility than in the U.S.
Short-term volatility in these markets can be disconcerting and declines in
excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to foreign
investments in foreign courts than with respect to U.S. companies in U.S.
courts.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions,
including increases in interest rates because of their reliance on credit, and
their growth prospects are less certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative.
INTEREST RATE Rate changes can be sudden and unpredictable. Increases in
interest rates may have an effect on the types of companies in which the fund
invests because they may find it more difficult to obtain credit to expand, or
may have more difficulty meeting interest payments.
DERIVATIVE SECURITIES, INCLUDING COVERED CALLS AND PUTS The performance of
derivative investments, depends, at least in part, on the performance of an
underlying asset such as stock prices. Derivative securities used by this fund
may involve a small investment relative to the risk assumed. Their successful
use will depend on the manager's ability to predict market movements, and their
use may have the opposite effect of that intended, if for example, the fund has
a stock called away at an unfavorable price, or is required to purchase stocks
put to it at an unfavorable price, in relation to the current market.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FN-3 Franklin Natural Resources Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ----------------------------------------------------------------
<S> <C> <C> <C>
Franklin Natural Resources
Securities Fund - Class 2 1 32.01% -3.21% 0.36%
S&P 500 Index 2 21.04% 28.56% 18.21%
FT/S&P Actuaries World:
Energy 50%, Basic
Industries 50%
Composite Index 2 24.91% 11.20% 7.55%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The Financial Times /S&P Actuaries Wold: Energy 50%, Basic
Industries 50% Composite Index is a composite of companies of which 50% are in
the energy section and 50% are in the basic industries sector. Indices include
reinvested dividends and/or interest. One cannot invest directly in an index,
nor is an index representative of the fund's investments.
FN-4 Franklin Natural Resources Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN NATURAL RESOURCES SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 1 0.62%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.04%
----
Total annual fund operating expenses 0.91%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $93 $290 $504 $1,120
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Michael R. Ward Mr. Ward has been a manager of the fund since 1999, and has been with
PORTFOLIO MANAGER, ADVISERS the Franklin Templeton Group since 1992.
Steve Land Mr. Land has been a manager of the fund since 1999, and has been with
PORTFOLIO MANAGER, ADVISERS the Franklin Templeton Group since 1997.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid 0.62% of its average daily net assets to
the manager for its services.
FN-5 Franklin Natural Resources Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 8.70
-----
Net investment income .02
Net realized and unrealized gains 2.35
-----
Total from investment operations 2.37
-----
Distributions from net investment income (.16)
-----
Net asset value, end of year 10.91
=====
Total return (%)+ 27.30
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 68
Ratios to average net assets: (%)
Expenses .92*
Net investment income .23*
Portfolio turnover rate (%) 51.19
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FN-6 Franklin Natural Resources Securities Fund - Class 2
<PAGE>
Franklin Real Estate Fund
(previously Real Estate Securities Fund)
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is to earn current income.
- --------------------------------------------------------------------------------
The fund concentrates in securities of companies in the real estate industry,
primarily equity REITs.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in securities of companies operating in the real estate
industry, including:
/bullet/ companies qualifying under federal tax law as real estate investment
trusts (REITs),
/bullet/ real estate operating companies,
/bullet/ real estate services companies, and
/bullet/ homebuilding and developing companies that derive at least half of
their assets or revenues from the ownership, construction, management
or other services, or sale of residential, commercial or industrial
real estate.
REITs are real estate investment trust companies, usually publicly traded, that
manage a portfolio of income-producing real estate properties such as
apartments, hotels, office buildings, or shopping centers. Equity REITs take
ownership positions in real estate and their shareholders receive income from
the rents received, and receive capital gains on the properties sold at a
profit. The fund generally invests in medium-cap (less than $5 billion) to
small-cap (less than $1.5 billion) REITs, because that is reflective of the
industry itself. Market capitalization is defined as share price multiplied by
the number of common stock shares outstanding.
In addition to the fund's main investments, the fund may invest in equity
securities of issuers engaged in businesses whose products and services are
closely related to the real estate industry, and issuers whose principal
business is unrelated to the real estate industry but which have very
significant real estate holdings believed to be undervalued relative to the
company's securities. An equity security represents a proportionate share of the
ownership of a company; its value is based on the success of the company's
business, any income paid to stockholders, the value of its assets, and general
market conditions.
The manager seeks to manage the risks of industry concentration by diversifying
into different types of real estate investments, although such risks cannot be
eliminated. Historically, there has been a relatively low correlation between
the real estate market and the broader equity market. While there is no
certainty that this trend will continue in the future, investments in real
estate securities may be a useful way to diversify one's overall portfolio.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a disciplined strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager will focus on the market price of a company's
security relative to its evaluation of the company's potential long-term
earnings, asset value, and cash flow. Using both qualitative and quantitative
analysis and on-site visits, the manager evaluates security characteristics, the
strength and quality of management, and underlying properties. In addition, the
manager may consider other factors, such as the supply and demand outlook for
various property types and regional markets.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goals.
FRE-1 Franklin Real Estate Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the securities the fund holds fluctuate in price with real estate market
conditions, the value of your investment in the fund will go up and down. This
means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
REAL ESTATE SECURITIES By concentrating in a single industry sector, the fund
carries much greater risk of adverse developments in that sector than a fund
that invests in a wide variety of industries. Real estate values rise and fall
in response to a variety of factors, including local, regional and national
economic conditions, interest rates and tax considerations, the strength of
specific industries renting properties, and other factors affecting the supply
and demand for properties. When economic growth is slow, demand for property
decreases and prices may decline. Property values may decrease because of
overbuilding, increases in property taxes and operating expenses, changes in
zoning laws, environmental regulations or hazards, uninsured casualty or
condemnation losses, or a general decline in neighborhood values.
REITS Equity REITs can be affected by any changes in the value of the properties
owned. A REIT's performance depends on the types and locations of the properties
it owns and on how well it manages those properties or loan financings. A
decline in rental income could occur because of extended vacancies, increased
competition from other properties, tenants' failure to pay rent or poor
management.
A REIT's performance also depends on the company's ability to finance property
purchases and renovations and manage its cash flows. Because REITs are typically
invested in a limited number of projects or in a particular market segment, they
are more susceptible to adverse developments affecting a single project or
market segment than more broadly diversified investments. Loss of status as a
qualified REIT or changes in the treatment of REITs under the federal tax law,
could adversely affect the value of a particular REIT or the market for REITs as
a whole.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
INTEREST RATE Rate changes can be sudden and unpredictable. Rising interest
rates, which drive up mortgage and financing costs, can restrain construction
and buying and selling activity in the real estate market and make other
investments more attractive.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have signficant
risk. Historically, smaller company securities have been more volatile in price
and have fluctuated independently from larger company securities, especially
over the shorter-term. Smaller or relatively new companies can be particularly
sensitive to changing economic conditions and increases in interest rates, their
growth prospects are less certain, and their securities are less liquid. These
companies may suffer significant losses and can be considered speculative. Small
cap REITs can be subject to greater risks than mid- or large-cap issuers due to
greater regional concentration and less diversification in terms of the regions,
clients and types of properties available for investment.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FRE-2 Franklin Real Estate Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C>
FRANKLIN REAL ESTATE
FUND - Class 2 1 -6.36% 7.97% 9.00%
S&P 500 Index 2 21.04% 28.56% 18.21%
Wilshire Real Estate
Securities Index 2 -3.20% 8.30% 4.11%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The Wilshire Real Estate Securities Index is a market-cap weighted
index of publicly traded real estate securities. Indices include reinvested
dividends and/or interest. One cannot invest directly in an index, nor is an
index representative of the fund's investments.
FRE-3 Franklin Real Estate Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN REAL ESTATE FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 1 0.56%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.02%
----
Total annual fund operating expenses 0.83%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $85 $265 $460 $1,025
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Douglas Barton, CFA Mr. Barton has been a manager of the fund since 1998, and has been
VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1988.
Samuel R. Kerner Mr. Kerner has been a manager of the fund since April 2000, and has
PORTFOLIO MANAGER, ADVISERS been with the Franklin Templeton Group since 1996.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid 0.56% of its average daily net assets to
the manager for its services.
FRE-4 Franklin Real Estate Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 20.21
-----
Net investment income 1.29
Net realized and unrealized losses (2.50)
-----
Total from investment operations (1.21)
-----
Distributions from net investment income (1.73)
Distributions from net realized gains (2.39)
-----
Total distributions (4.12)
-----
Net asset value, end of year 14.88
=====
Total return (%)+ (7.66)
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 2,449
Ratios to average net assets: (%)
Expenses .83*
Net investment income 8.84*
Portfolio turnover rate (%) 10.27
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FRE-5 Franklin Real Estate Fund - Class 2
<PAGE>
Franklin Rising Dividends Securities Fund
(previously Rising Dividends Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in the securities of companies that have:
/bullet/ consistently increased dividends in at least 8 out of the last 10
years and have not decreased dividends during that time;
/bullet/ increased dividends substantially (at least 100%) over the past ten
years;
/bullet/ reinvested earnings, paying out less than 65% of current earnings in
dividends (except for utility companies);
/bullet/ strong balance sheets, with (1) long-term debt that is no more than
50% of total capitalization or (2) senior debt that has been rated
investment grade by at least one of the major bond rating agencies
(except for utility companies); and
/bullet/ attractive prices, either (1) in the lower half of the stock's
price/earnings ratio range for the past 10 years or (2) less than the
average current market price/earnings ratio of the stocks comprising
the Standard & Poor's/registered trademark/ 500 Stock Index (this
criterion applies only at the time of purchase).
- --------------------------------------------------------------------------------
The fund will invest primarily in the common stocks of financially sound
companies that have paid consistently rising dividends.
- --------------------------------------------------------------------------------
The fund typically invests the rest of its assets in equity securities of
companies that pay dividends but do not necessarily meet all of these criteria.
Following these policies, the fund may invest primarily in equity securities
issued by mid- and small-cap U.S. companies, which generally have market
capitalization values (share price multiplied by the number of common stock
shares outstanding) less than $8 billion for mid-cap, and $1.5 billion for small
cap. An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities.
PORTFOLIO SELECTION The manager is a research driven, fundamental investment
adviser, pursuing a disciplined value-oriented strategy. As a "bottom-up"
adviser focusing primarily on individual securities, the manager will focus on
the market price of a company's securities relative to its evaluation of the
company's long-term earnings, and in particular a strong dividend record, asset
value, and cash flow potential. The manager seeks bargains among companies with
steadily rising dividends and strong balance sheets--out of favor companies that
might include companies that have stumbled recently, dropping sharply in price,
that offer, in the manager's opinion, excellent long-term potential.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goal.
FRD-1 Franklin Rising Dividends Securities Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions, the
value of your investment in the fund will go up and down. This means you could
lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or if they become sellers), or favor investing in
faster-growing companies, value stocks may not increase in value as anticipated
by the manager, and may even decline further.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller companies can be
particularly sensitive to changing economic conditions, including increases in
interest rates because of their reliance on credit, and their growth prospects
are less certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products and services may not find an established market or may become obsolete.
Smaller companies' securities may be less liquid which may adversely affect
their price. Investments in these companies may be considered speculative.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FRD-2 Franklin Rising Dividends Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 5 Years 01/27/92
- -----------------------------------------------------------------
<S> <C> <C> <C>
Franklin Rising Dividends
Securities Fund -
Class 2 1 -10.00% 15.58% 9.79%
Russell Mid-Cap Value
Index 2,3 -0.11% 18.01% 15.26%
Wilshire Target Mid-Cap
Growth Index 2 15.90% 17.02% 13.90%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal The Russell Mid-Cap Value Index is an
unmanaged group of securities companies with lower price-to-book ratios and
lower forecasted group values. The Wilshire Target MidCap Company Growth Index
is an unmanaged group of securities of companies selected based on growth
characteristics from among the middle capitalization universe of the Wilshire
5000. Indices include reinvested dividends and/or interest. One cannot invest
directly in an index, nor is an index representative of the fund's investments.
3. The Wilshire Index is being replaced with the Russell Index as the fund's
benchmark. The manager believes the new index is more closely aligned with the
universe of rising dividends qualifiers, and more closely matches the fund's
investments.
FRD-3 Franklin Rising Dividends Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN RISING DIVIDENDS SECURITIES FUND
- - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 1 0.73%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.02%
----
Total annual fund operating expenses 1.00%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $102 $318 $552 $1,225
</TABLE>
FRD-4 Franklin Rising Dividends Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisory Services, LLC (Advisory Services), One Parker Plaza, Ninth
Floor, Fort Lee, New Jersey, 07024, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Donald G. Taylor Mr. Taylor has been a manager of the fund since 1996. Before joining the
SENIOR VICE PRESIDENT, Franklin Templeton Group in 1996, he was a Portfolio Manager for
ADVISORY SERVICES Fidelity Management & Research Co.
William J. Lippman Mr. Lippman has been a manager of the fund since its inception in 1992.
PRESIDENT, ADVISORY SERVICES He has more than 30 years' experience in the securities industry and
joined the Franklin Templeton Group in 1988.
Bruce C. Baughman Mr. Baughman has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, 1992, and has been with the Franklin Templeton Group since 1988.
ADVISORY SERVICES
Margaret McGee Ms. McGee has been a manager of the fund since its inception in 1992,
VICE PRESIDENT, ADVISORY SERVICES and has been with the Franklin Templeton Group since 1988.
</TABLE>
The fund pays Advisory Services a fee for managing the fund's assets and
providing certain administrative facilities and services for the fund. For the
fiscal year ended December 31, 1999, the fund paid 0.73% of its average daily
net assets to the manager for its services.
FRD-5 Franklin Rising Dividends Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 18.28
------
Net investment income .17
Net realized and unrealized losses (1.74)
------
Total from investment operations (1.57)
------
Distributions from net investment income (.29)
Distributions from net realized gains (2.86)
------
Total distributions (3.15)
------
Net asset value, end of year 13.56
======
Total return (%)+ (10.84)
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 549
Ratios to average net assets: (%)
Expenses 1.01*
Net investment income 1.15*
Portfolio turnover rate (%) 5.32
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FRD-6 Franklin Rising Dividends Securities Fund - Class 2
<PAGE>
Franklin Small Cap Fund
(previously Small Cap Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in the equity securities of U.S. small capitalization
(small cap) companies. For this fund, small cap companies are those companies
with market cap values not exceeding (i) $1.5 billion; or (ii) the highest
market cap value in the Russell 2000 Index; whichever is greater, at the time of
purchase. That index consists of 2,000 small companies that have publicly traded
securities. Market capitalization is defined as share price multiplied by the
number of common stock shares outstanding. The manager may continue to hold an
investment for further capital growth opportunities even if the company is no
longer small cap. In selecting companies, the fund may invest substantially in
technology sectors such as electronics, computer software and hardware,
telecommunications, Internet-related services, and health-care technology.
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks of small cap U.S. companies.
- --------------------------------------------------------------------------------
In addition to its main investments, the fund may invest in equity securities
of larger companies. When suitable opportunities are available, the fund may
also invest in initial public offerings of securities, and may invest a very
small portion of its assets in private or illiquid securities, such as late
stage venture capital financings. An equity security represents a proportionate
share of the ownership of a company; its value is based on the success of the
company's business, any income paid to stockholders, the value of its assets,
and general market conditions. Common and preferred stocks, and securities
convertible into common stock are examples of equity securities.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings or assets. The manager relies
on a team of analysts to provide in-depth industry expertise and uses both
qualitative and quantitative analysis to evaluate companies for distinct and
sustainable competitive advantages. Advantages, such as a particular marketing
or product niche, proven technology, and industry leadership are all factors the
manager believes point to strong long-term growth potential. The manager
diversifies the fund's assets across many industries, but from time to time may
invest substantially in certain sectors.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goal.
FS-1 Franklin Small Cap Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions, the
value of your investment in the fund will go up and down. This means you could
lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company fails
to meet those projections. Growth stocks may also be more expensive relative to
their earnings or assets compared to value or other stocks. Because the fund's
manager uses an aggressive growth strategy, an investment in the fund involves
greater risk and more volatility than an investment in a growth fund investing
entirely in proven growth stocks.
SMALLER COMPANIES While smaller companies may offer opportunities for capital
growth, they also have significant risk. Historically, smaller company
securities have been more volatile in price and have fluctuated independently
from larger company securities, especially over the shorter-term. Smaller or
relatively new companies can be particularly sensitive to changing economic
conditions, including increases in interest rates because of their reliance on
credit, and their growth prospects are less certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the fund,
or only in very limited quantities. Thus, when the fund's size is smaller, any
gains from IPOs will have an exaggerated impact on the fund's reported
performance than when the fund is larger.
TECHNOLOGY COMPANIES Technology and biotechnology industry stocks can be subject
to abrupt or erratic price movements. They have historically been volatile in
price, especially over the short term, due to the rapid pace of product change
and development affecting such companies. Prices often change collectively
without regard to the merits of individual companies.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FS-2 Franklin Small Cap Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 11/01/95
- ----------------------------------------------------------------------------
<S> <C> <C>
Franklin Small Cap Fund - Class 2 1 96.36%* 30.32%
S&P 500 Index 2 21.04% 27.11%
Russell 2000/registered trademark/ Growth Index 2 43.09% 17.29%
Russell 2500/registered trademark/ Growth Index 2,3 24.14% 17.49%
</TABLE>
* Recently many individual stocks and sectors such as technology have
significantly exceeded historical norms; investors should generally not expect
such outsized gains to continue.
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks. The Russell 2000/registered
trademark/ Growth Index measures the performance of those Russell
2000/registered trademark/ companies with higher price-to-book ratios and higher
forecasted growth values. The Russell 2000/registered trademark/ Index consists
of the 2,000 smallest securities in the Russell 3000/registered trademark/
index; representing approximately 11% of the Russell 3000/registered trademark/
total market capitalization. The Russell 2500/registered trademark/ Index is an
unmanaged index of 2,500 companies with small market capitalizations. Indices
include reinvested dividends and/or interest. One cannot invest directly in an
index, nor is an index representative of the fund's investments.
3. The Russell 2500/registered trademark/ Index is being replaced with the
Russell 2000/registered trademark/ Growth Index, which more closely mirrors the
fund's growth style of investing.
FS-3 Franklin Small Cap Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN SMALL CAP FUND - CLASS 2 1
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.55%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.27%
----
Total annual fund operating expenses 1.07%
====
</TABLE>
1. On 2/8/00, a merger and reorganization was approved that combined the assets
of the fund with a similar fund of the Templeton Variable Products Series Fund,
effective 5/1/00. On 2/8/00, fund shareholders approved new management fees,
which apply to the combined fund effective 5/1/00. The table shows restated
total expenses based on the new fees and assets of the fund as of 12/31/99, and
not the assets of the combined fund. However, if the table reflected both the
new fees and the combined assets, the fund's expenses after 5/1/00 would be
estimated as: Management fees 0.55%, Distribution and service fees 0.25%, Other
expenses 0.27%, and Total annual fund operating expenses 1.07%.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $109 $340 $590 $1,306
</TABLE>
FS-4 Franklin Small Cap Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Edward B. Jamieson Mr. Jamieson has been a manager of the fund since its inception in 1995,
EXECUTIVE VICE PRESIDENT, ADVISERS and has been with the Franklin Templeton Group since 1987.
Michael McCarthy Mr. McCarthy has been a manager of the fund since its inception in
VICE PRESIDENT, ADVISERS 1995. He joined the Franklin Templeton Group in 1992.
Aidan O'Connell Mr. O'Connell has been a manager of the fund since September 1998.
PORTFOLIO MANAGER, ADVISERS Before joining Franklin Templeton in May 1998, Mr. O'Connell was a
research analyst and a corporate financial analyst at Hambrecht & Quist.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. The fee is equal to
an annual rate of:
/bullet/ 0.550% of the value of net assets up to $500 million;
/bullet/ 0.450% of the value of net assets over $500 million up to and including
$1 billion;
/bullet/ 0.400% of the value of net assets over $1 billion up to and including
$1.5 billion;
/bullet/ 0.350% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
/bullet/ 0.325% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
/bullet/ 0.300% of the value of net assets over $11.5 billion up to and
including $16.5 billion;
/bullet/ 0.290% of the value of net assets over $16.5 billion up to and
including $19 billion;
/bullet/ 0.280% of the value of net assets over $19 billion up to and including
$21.5 billion; and
/bullet/ 0.270% of the value of net assets over $21.5 billion.
FS-5 Franklin Small Cap Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1,2
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 14.25
-----
Net investment loss (.04)
Net realized and unrealized gains 12.68
-----
Total from investment operations 12.64
-----
Distributions from net investment income (.08)
Distributions from net realized gains (.01)
-----
Total distributions (.09)
-----
Net asset value, end of year 26.80
=====
Total return (%)+ 89.05
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 6,156
Ratios to average net assets: (%)
Expenses 1.02*
Net investment income (.18)*
Portfolio turnover rate (%) 39.49
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding. 2On February 8, 2000, a merger and reorganization
was approved that will combine the assets of the fund with a similar fund of the
Templeton Variable Products Series Fund (TVP), effective May 1, 2000. The table
above only reflects fund statistics of the fund, which was the surviving fund of
the merger, and not of the TVP fund. The fund statistics are for the year ended
December 31, 1999.
FS-6 Franklin Small Cap Fund - Class 2
<PAGE>
Franklin S&P 500 Index Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is to match the performance of the Standard &
Poor's 500 Composite Stock Price Index (S&P 500 Index) before the deduction of
fund expenses.
MAIN INVESTMENTS Under normal market conditions, the fund uses investment
"indexing" strategies designed to track the performance of the S&P 500 Index.
The S&P 500 Index is a widely recognized, unmanaged stock market index, which is
dominated by the securities of large U.S. companies. This index includes the
securities of 500 companies from leading industrial sectors which represent a
substantial portion of the market value of all common stocks publicly traded in
the U.S. The S&P 500 Index weights stocks according to their market
capitalization (share price multiplied by the number of common stock shares
outstanding). Standard & Poor's Corporation determines the composition of the
S&P 500 Index and may change the composition from time to time.
- --------------------------------------------------------------------------------
This index fund invests to match the performance of the S&P 500 Composite Stock
Price Index.
- --------------------------------------------------------------------------------
The fund may invest in the common stocks in the S&P 500 Index in approximately
the same proportions used in the S&P 500 Index. For example, if one company's
securities made up 5% of the S&P 500 Index, the fund may invest 5% of its total
assets in that company. This is called the "replication" method. Over time, the
fund will seek to invest at least 80% of its total assets in the common stocks
of companies included in the S&P 500 Index. The fund may also invest in a sample
of stocks found in the S&P 500 Index, selected on the basis of
computer-generated statistical data to resemble the full index in terms of
industry weighting, market capitalization, and other characteristics such as
beta, price-to-book ratios, price-to-earnings ratios and dividend yield. This is
called the "optimization" method. Using this method, the fund may not hold all
of the companies that are represented in the S&P 500 Index. An equity security,
or stock, represents a proportionate share of the ownership of a company; its
value is based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions.
When the manager determines that it would be cost-effective or otherwise
beneficial for the fund to do so, the fund may invest in derivative securities,
such as stock index futures and stock index options, as a method of gaining
market exposure in addition to, or instead of, investing directly in securities
in the S&P 500 Index. As part of a derivative strategy, the fund may invest a
small portion in short-term debt securities which may include U.S. government
securities, certificates of deposit, high-grade commercial paper, repurchase
agreements, other money market securities, and money market funds.
Derivative securities are used as an efficient, low-cost method of gaining
immediate exposure to a particular securities market without investing directly
in the underlying securities. The fund may also invest in derivative securities
to keep cash on hand to meet shareholder redemptions or other needs while
maintaining exposure to the stock market. The fund will not use derivative
securities for speculative purposes or as leveraged investments that magnify the
gains or losses of an investment.
PORTFOLIO SELECTION The manager uses various "indexing" strategies designed to
track the performance of the S&P 500 Index and does not seek to outperform the
market as a whole by researching and selecting individual securities. The
manager determines the mix of investments that it believes will, in a
cost-effective manner, achieve the fund's investment goal and manages cash flows
into and out of the fund.
TEMPORARY INVESTMENTS When the manager seeks to maintain liquidity, it may
invest all or substantially all of the fund's assets in short-term investments,
including cash or cash equivalents. Under these circumstances, the fund may
temporarily be unable to pursue its investment goal.
FSP-1 Franklin S&P 500 Index Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the value of the fund's share price, its
distributions or income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions, the
value of your investment in the fund will go up and down. This means you could
lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the
shorter term. These price movements may result from factors affecting individual
companies, industries, or the securities market as a whole. Large-capitalization
stocks tend to go through cycles of doing better -- or worse -- than the stock
market in general. In the past, these periods have lasted for several years.
S&P INDEX STOCKS Since the S&P 500 Index is market capitalization weighted,
stocks or sectors with significant market capitalizations can have a
substantial impact on the performance of the index. For example, in recent
years the top ten stocks in the index have come to account for nearly one
quarter of its value and its performance, and technology stocks have increased
from about 13% to roughly 30% of the S&P 500 Index. Of course, historically the
sectors dominating the index have varied and the largest companies in the index
have generally not made up such a large portion of the index as they have
recently. To the extent that the fund's holdings are similar to the index, the
same stocks and sectors that impact the S&P 500 Index will also impact the
fund.
INDEX TRACKING The fund's ability to track its targeted index may be affected by
transaction costs and fund expenses, cash flows, and changes in the composition
of that index. In addition, the fund's performance may not precisely track the
performance of its targeted index if the securities the manager has selected do
not precisely track that index. If securities the fund owns underperforms those
in that index, the fund's performance will be lower than that index. Unlike an
unmanaged index, the fund pays operating expenses that may prevent the fund from
precisely tracking an index's performance. Cash inflows from investors buying
shares could create large balances of cash, while cash outflows from investors
selling shares may require ready reserves of cash. Either situation would likely
cause the fund's performance to deviate from the "fully invested" targeted
index.
DERIVATIVE SECURITIES Stock index futures and stock index options are considered
derivative investments, since their value depends on the value of the underlying
asset to be purchased or sold. The fund's investment in derivatives may involve
a small investment relative to the amount of risk assumed. To the extent the
fund enters into these transactions, their success will depend on the manager's
ability to select appropriate derivative investments . The fund could suffer
losses if its derivative securities do not correlate well with the indexes or
securities for which they are acting as a substitute or if the fund cannot close
out a position because the trading markets become illiquid.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FSP-2 Franklin S&P 500 Index Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
Because the fund is new, it has no performance history.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN S&P 500 INDEX FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)1,2
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.15%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.28%
----
Total annual fund operating expenses 0.68%
====
</TABLE>
1. The management fees and distribution and service (12b-1) fees shown are based
on the fund's maximum contractual amount. Other expenses are estimated.
2. The manager and administrator have agreed in advance to waive or limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund so that total annual fund operating expenses do not exceed
0.80% for the current fiscal year. After December 31, 2001, the manager and
administrator may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
- ------------------------------------------
<S> <C> <C>
Class 2 $69 $218
</TABLE>
FSP-3 Franklin S&P 500 Index Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers) 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, State Street Global Advisors (SSgA), Two
International Place, Boston, Massachusetts 02110, is the fund's sub-advisor.
SSgA is a division of State Street Bank and Trust Company. A team from SSgA
provides Advisers with investment management advice and assistance.
The fund's lead portfolio manager is:
<TABLE>
<CAPTION>
<S> <C>
Mark Boyadjian Mr. Boyadjian is a Chartered Financial Analyst and holds a Bachelor of
PORTFOLIO MANAGER OF ADVISERS Arts degree in Philosophy from University of California at Berkeley. Prior
to joining the Franklin Templeton Group in 1998, Mr. Boyadjian was a
portfolio manager at Scudder, Stevens & Clark.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. The fee is equal to
an annual rate of 0.15% of the fund's net assets. The manager is contractually
obligated to limit management fees and make certain payments to reduce fund
expenses as necessary so that Total annual fund operating expenses do not exceed
0.80% of the fund's class 2 net assets in 2000.
"Standard & Poor's/registered trademark/", "S&P/registered trademark/" and "S&P
500/registered trademark/" are trademarks of The McGraw-Hill Companies, Inc. and
have been licensed for use by Franklin Templeton Distributors, Inc. The fund is
not sponsored, endorsed, sold or promoted by Standard & Poor's and Standard &
Poor's makes no representation regarding the advisability of investing in the
fund. Please see the SAI for more information.
FSP-4 Franklin S&P 500 Index Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year ended December 31,
- ---------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 10.00
-----
Net investment income .04
Net realized and unrealized gains .51
-----
Total from investment operations .55
-----
Net asset value, end of year 10.55
=====
Total return (%)+ 5.50
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 88
Ratios to average net assets: (%)
Expenses .80*
Expenses, excluding waiver by affiliate 1.23*
Net investment income 2.17*
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period November 1, 1999 (commencement of operations) to December 31,
1999. Based on average shares outstanding.
FSP-5 Franklin S&P 500 Index Fund - Class 2
<PAGE>
Franklin Strategic Income Securities Fund
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is to earn a high level of current
income. Its secondary goal is long-term capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in U.S. and non-U.S. debt securities. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. There are no set percentage
limitations on the amount the fund invests in any particular types of debt
securities. Rather, the fund actively and flexibly shifts its investments among
various types of debt securities to respond to current and expected economic
conditions, including:
/bullet/ high yield corporate bonds;
/bullet/ emerging market bonds;
/bullet/ international bonds;
/bullet/ convertible securities, including preferred stocks and bonds
convertible into common stocks;
/bullet/ mortgage securities and other asset-backed securities;
/bullet/ U.S. Government bonds; and
/bullet/ preferred stock (non-convertible).
- --------------------------------------------------------------------------------
The fund invests primarily in U.S. and non-U.S. bonds, including high yield,
lower-rated bonds.
- --------------------------------------------------------------------------------
The fund may invest up to 100% of its assets in high yield, lower-quality and
defaulted debt securities ("junk bonds"). These securities are either rated
below investment grade (below the top four long-term rating categories) by
independent rating agencies such as Standard & Poor's Ratings Group
(S&P/registered trademark/) and Moody's Investors Service, Inc. (Moody's), or
are comparable unrated securities. Nevertheless, the fund generally invests in
non-investment grade debt securities rated at least Caa by Moody's or CCC by S&P
or unrated securities the fund's manager determines are of comparable quality.
Many debt securities of non-U.S. issuers, and especially emerging market
issuers, are rated below investment grade or are unrated so that their selection
depends on the manager's internal analysis. Generally, lower-rated securities
pay higher yields than more highly rated securities to compensate investors for
the higher risk.
The fund invests in many different securities issued or guaranteed by the U.S.
Government, its agencies, authorities or instrumentalities (U.S. Government
securities). In addition to U.S. Treasury notes and bonds, the fund invests in
mortgage-backed securities such as Government National Mortgage Association
("Ginnie Maes"), Federal National Mortgage Association, or Federal Home Loan
Mortgage Corporation obligations, and asset-backed securities such as Small
Business Administration obligations ("Sallie Maes"). The timely payment of
principal and interest on U.S. Treasury securities, Ginnie Maes, and Sallie
Maes, are backed by the full faith and credit of the U.S. Government. Securities
issued or guaranteed by FNMA, FHLMC, and certain other entities do not carry
this guarantee. The fund may also invest in mortgage-backed securities issued by
private entities, which are supported by the credit of the issuer.
Derivative investments, such as forward currency exchange contracts, are used to
help manage interest rate and currency risks, increase liquidity, or invest in a
particular stock or bond in a more efficient way. The manager intends to manage
the fund's exposure to various currencies, and may from time to time seek to
hedge (protect) against currency risk, largely by using forward currency
exchange contracts (Hedging Instruments).
In addition to its main investments, the fund may also invest in equity
securities, largely common stock, or may receive other equities as a result of a
corporate restructuring. An equity security represents a proportionate share of
the ownership of a company; its value is based on the success of the company's
business, any income paid to stockholders, the value of its assets, and general
market conditions.
PORTFOLIO SELECTION The manager allocates its investments among the various
types of debt available based on its assessment of changing economic, market,
industry, and issuer conditions. The manager uses a "top-down" analysis of
macroeconomic trends, market sectors, and industries to take advantage of
varying sector reactions to economic events. For example, the manager evaluates
business cycles, yield curves, countries' changing market, economic, and
political conditions, the relative interest rates among currencies, and values
between and within markets.
This "top-down" approach is combined with a "bottom-up" fundamental analysis of
individual securities, including factors such as:
FSI-1 Franklin Strategic Income Securities Fund - Class 2
<PAGE>
/bullet/ a security's relative value based on anticipated cash flow, interest
or dividend coverage, asset coverage, and earnings prospects;
/bullet/ the experience and strength of the company's management;
/bullet/ the company's sensitivity to changes in interest rates and business
conditions;
/bullet/ the company's debt maturity schedules and borrowing requirements; and
/bullet/ the company's changing financial condition and market recognition of
the change.
In selecting debt securities, the manager conducts its own analysis of the
security's intrinsic value rather than simply relying on the coupon rate or
rating.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goals.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Changes in interest rates in markets around the world affect the prices of the
fund's debt securities. If rates rise the value of the fund's debt securities
will fall and so too will the fund's share price. This means you could lose
money.
- --------------------------------------------------------------------------------
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes. Increases in interest
rates may also have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or have more difficulty meeting interest payments. Stripped securities,
such as U.S. Treasury STRIPS, are extremely sensitive to changes in interest
rates (and prepayments), and their price will fluctuate more than the prices of
other interest-paying bonds or notes. A sub-category of interest rate risk is
reinvestment risk, which is the risk that interest rates will be lower when the
fund seeks to reinvest interest payments or the proceeds from a matured debt
security, resulting in less income received by the fund. With respect to the
fund's mortgage-backed securities, if rates fall, mortgage holders will
refinance their mortgage loans at lower interest rates, which will reduce the
fund's interest and yield.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, even securities supported by credit enhancements
have the credit risk of the entity providing credit support.
Lower-rated securities Securities rated below investment grade, sometimes called
"junk bonds," generally have more risk than higher-rated securities. Companies
issuing high yield debt securities are not as strong financially as those with
higher credit ratings. These companies are more likely to encounter financial
difficulties and are more vulnerable to changes in the economy, such as a
recession or a sustained period of rising interest rates that could prevent them
from making interest and principal payments. If an issuer is not paying or stops
paying interest and/or principal, payments may never resume. The fund may lose
its entire investment on bonds that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are especially sensitive to developments affecting the
company's business and to changes in the ratings assigned by ratings agencies.
Prices are often closely linked with the company's stock prices and typically
rise and fall in response to factors that affect stock prices. In addition, the
entire high yield securities market can experience sudden and sharp price swings
due to changes in economic conditions, stock market activity, large sustained
sales by major investors, a high-profile default, or other factors. High yield
securities are also generally less liquid than higher-quality bonds. Many of
these securities do not trade frequently, and when they do trade their
FSI-2 Franklin Strategic Income Securities Fund - Class 2
<PAGE>
prices may be significantly higher or lower than expected. At times, it may be
difficult to sell these securities promptly at an acceptable price, which may
limit the fund's ability to sell securities in response to specific economic
events or to meet redemption requests.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic, and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies, and obtaining judgments with respect to
non-U.S. investments in non-U.S. courts than with respect to U.S. companies in
U.S. courts.
MORTGAGE SECURITIES AND ASSET-BACKED SECURITIES Ginnie Maes, and other mortgage-
and asset-backed securities, differ from conventional debt securities because
principal is paid back over the life of the security rather than at maturity.
The fund may receive unscheduled prepayments of principal due to voluntary
prepayments, and refinancing or foreclosure on the underlying mortgage or other
loans. During periods of declining interest rates, principal prepayments
generally increase. The fund may be forced to reinvest returned principal at
lower interest rates, and there may be less potential for capital appreciation.
In periods of rising interest rates, prepayments can decline, thus extending the
security's maturity which may in turn cause the security's price to fall. Credit
enhancements, if any, may be inadequate in the event of default.
DERIVATIVE SECURITIES, INCLUDING HEDGING INSTRUMENTS The performance of
derivative investments, which includes Hedging Instruments, depends, at least in
part, on the performance of an underlying asset such as stock prices or currency
exchange rates. Hedging Instruments used by this fund may involve a small
investment relative to the risk assumed. Their successful use will depend on the
manager's ability to predict market movements, and their use may have the
opposite effect of that intended. Risks include potential loss to the fund due
to the imposition of controls by a government on the exchange of foreign
currencies, delivery failure, default by the other party, or inability to close
out a position because the trading market becomes illiquid.
DIVERSIFICATION The fund is non-diversified as defined by the federal securities
laws. As such, it may invest a greater portion of its assets in one issuer and
have a smaller number of issuers than a diversified fund. Therefore, the fund
may be more sensitive to economic, business, political or other changes
FSI-3 Franklin Strategic Income Securities Fund - Class 2
<PAGE>
affecting similar issuers or securities. The fund intends, however, to meet tax
diversification requirements.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. Illiquid
securities may not be readily sold or may only be resold at a price
significantly lower than if they were liquid.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FSI-4 Franklin Strategic Income Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
Because the fund is new, it has no performance history.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN STRATEGIC INCOME SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)1,2
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.43%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.52%
-----
Total annual fund operating expenses 1.20%
Waiver/expense reduction (0.20)%
-----
Net annual fund operating expenses 1.00%
=====
</TABLE>
1. The management fees and distribution and service (12b-1) fees shown are based
on the fund's maximum contractual amount. Other expenses are estimated.
2. The manager and administrator had agreed in advance to waive or limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund so that total fund operating expenses do not exceed 1.00% of
the fund's average net assets for the current fiscal year. After December 31,
2001, the manager and administrator may end this arrangement at any time.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses are BEFORE WAIVER and remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
- ------------------------------------------
<S> <C> <C>
Class 2 $122 $381
</TABLE>
FSI-5 Franklin Strategic Income Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers) 777 Mariners Island Blvd., P.O. Box 7777, San
Mateo, California, 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI), 500
East Broward Blvd., Ft. Lauderdale, Florida 33394, through its Templeton Global
Bond Managers division (Global Bond Managers), is the fund's sub-advisor. A team
from Global Bond Fund Managers provides Advisers with investment management
advice and assistance.
The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Eric G. Takaha, CFA Mr. Takaha has been a manager of the fund since its inception in 1999,
VICE PRESIDENT, ADVISERS and has been with the Franklin Templeton Group since 1989.
Chris Molumphy, CFA Mr. Molumphy has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, ADVISERS 1999, and has been with the Franklin Templeton Group since 1988.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. The fee is equal to
an annual rate of:
/bullet/ 0.425% of the value of net assets up to and including $500 million;
/bullet/ 0.325% of the value of net assets over $500 million up to and including
$1 billion;
/bullet/ 0.280% of the value of net assets over $1 billion up to and including
$1.5 billion;
/bullet/ 0.235% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
/bullet/ 0.215% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
/bullet/ 0.200% of the value of net assets over $11.5 billion up to and
including $16.5 billion;
/bullet/ 0.190% of the value of net assets over $16.5 billion up to and
including $19 billion;
/bullet/ 0.180% of the value of net assets over $19 billion up to and including
$21.5 billion; and
/bullet/ 0.170% of the value of net assets over $21.5 billion.
The manager is contractually obligated to limit management fees and make certain
payments to reduce fund expenses so that Total annual fund operating expenses do
not exceed 1.00% of the fund's class 2 net assets in 2000.
FSI-6 Franklin Strategic Income Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP. Their
report, along with the financial statements, are included in the fund's Annual
Report (available upon request).
<TABLE>
<CAPTION>
Year ended December 31,
Class 1 1999 1
- ----------------------------------------------------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 10.00
-----
Net investment income .38
Net realized and unrealized gains (.12)
-----
Total from investment operations .26
Distributions from net investment income (.30)
-----
Net asset value, end of year 9.96
=====
Total return (%)+ 2.61
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 4,741
Ratios to average net assets: (%)
Expenses .75*
Expenses, excluding waiver by affiliate 1.46*
Net investment income 7.52*
Portfolio turnover rate (%) 9.96
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period July 1, 1999 (commencement of operations) to December 31,
1999. Based on average shares outstanding.
FSI-7 Franklin Strategic Income Securities Fund - Class 2
<PAGE>
Franklin Technology Securities Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies expected to benefit
from the development, advancement, and use of technology. These may include, for
example, companies in the following areas:
- --------------------------------------------------------------------------------
The fund concentrates in common stocks of technology companies.
- --------------------------------------------------------------------------------
/bullet/ Technology services, including Internet services, data processing,
technology consulting and implementation services, and electronics
distributors;
/bullet/ Computer software;
/bullet/ Computing hardware, peripherals, and electronic components;
/bullet/ Semiconductors, semiconductor fabrication equipment, and precision
instruments;
/bullet/ Telecommunications, including communications equipment and services;
/bullet/ Media and information services, including cable television,
broadcasting, satellite and media content;
/bullet/ Health-care technology and biotechnology; and
/bullet/ Aerospace and defense technologies.
The fund may invest in companies of any size, and may, from time to time, invest
a significant portion of its assets in smaller companies. The fund may invest up
to 35% of its total assets in foreign securities.
PORTFOLIO SELECTION The manager is a research driven, fundamental investor,
pursuing a growth strategy. As a "bottom-up" investor focusing primarily on
individual securities, the manager chooses companies that it believes are
positioned for rapid growth in revenues, earnings or assets. The manager relies
on a team of analysts to provide in-depth industry expertise and uses both
qualitative and quantitative analysis to evaluate companies for distinct and
sustainable competitive advantages. Such advantages as a particular marketing
niche, proven technology, strong management, and industry leadership are all
factors the manager believes point to strong growth potential.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the securities the fund holds fluctuate in price, the value of your
investment in the fund will go up and down. This means you could lose money over
short or even extended periods.
- --------------------------------------------------------------------------------
TECHNOLOGY COMPANIES By focusing on technology industries, the fund carries much
greater risks of adverse developments among such industries than a fund that
invests in a wider variety of industries. Prices often change collectively
without regard to the merits of individual companies. Technology company stocks
can be subject to abrupt or erratic price movements and have been volatile,
especially over the short term, due to the rapid pace of product change and
development affecting such companies. Technology companies are subject to
significant competitive pressures, such as new market entrants, aggressive
pricing, and competition for market share, and the potential for falling profit
margins. These companies also face the risks that new services, equipment or
technologies will not be accepted by consumers and businesses or will become
rapidly obsolete. These factors can affect the profitability of technology
companies and, as a result, the value of their securities. In addition, many
Internet-related companies are in the emerging stage of development and are
particularly vulnerable to the risks of rapidly changing technologies. Prices of
these companies' securities historically have been more volatile than other
securities, especially over the short term.
FT-1 Franklin Technology Securities Fund - Class 2
<PAGE>
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
GROWTH STYLE STOCK INVESTING Growth stock prices reflect projections of future
earnings or revenues, and can, therefore, fall dramatically if the company fails
to meet those projections. Growth stocks also may be more expensive relative to
their earnings or assets compared to value or other stocks. Because the fund's
manager uses an aggressive growth strategy, an investment in the fund involves
greater risk and more volatility than an investment in a growth fund investing
entirely in proven growth stocks.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to non-U.S.
investments in non-U.S. courts than with respect to U.S. companies in U.S.
courts.
SMALLER COMPANIES While smaller companies may offer opportunities for capital
growth, they also have significant risk. Historically, smaller company
securities have been more volatile in price and have fluctuated independently
from larger company securities, especially over the shorter-term. Smaller or
relatively new companies can be particularly sensitive to changing economic
conditions, including increases in interest rates because of their reliance on
credit, and their growth prospects are less certain.
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative.
Initial public offerings (IPOs) of securities issued by unseasoned companies
with little or no operating history are risky and their prices are highly
volatile, but they can result in very large gains in their initial trading.
Attractive IPOs are often oversubscribed and may not be available to the fund,
or only in very limited quantities. Thus, when the fund's size is smaller, any
gains from IPOs will have an exaggerated impact on the fund's reported
performance than when the fund is larger.
DIVERSIFICATION The fund is non-diversified as defined by federal securities
laws. As such, it may invest a greater portion of its assets in one issuer and
have a smaller number of issuers than a diversified fund. Therefore, the fund
may be more sensitive to economic, business, political or other changes
FT-2 Franklin Technology Securities Fund - Class 2
<PAGE>
affecting similar issuers or securities. The fund intends, however, to meet tax
diversification requirements.
LIQUIDITY The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. Illiquid
securities may not be readily sold or may only be resold at a price
significantly lower than if they were liquid.
PORTFOLIO TURNOVER Because of the fund's emphasis on technology stocks, the
fund's portfolio turnover rate may exceed 100% annually, which may involve
additional expenses to the fund, including portfolio transaction costs.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FT-3 Franklin Technology Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
Because the fund is new, it has no performance history.
- --------------------------------------------------------------------------------
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN TECHNOLOGY SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)1,2
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.55%
Distribution and service (12b-1) fees 3 0.25%
Other expenses 0.38%
----
Total annual fund operating expenses 1.18%
====
</TABLE>
1. The management fees shown are based on the fund's maximum contractual amount.
Other expenses are estimated.
2. The manager and administrator have agreed in advance to waive or limit their
respective fees and to assume as their own expense certain expenses otherwise
payable by the fund so that total annual fund operating expenses do not exceed
1.30% of average net assets, including class 2's 12b-1 plan fee, for the current
fiscal year. After December 31, 2001, the manager and administrator may end this
arrangement at any time.
3. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
- -------------------------------
<S> <C> <C>
Class 2 $120 $375
</TABLE>
FT-4 Franklin Technology Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., P.O. Box 7777,
San Mateo, California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Ian Link, CFA Mr. Link has been a manager of the fund since its inception, and has
VICE PRESIDENT, ADVISERS been with the Franklin Templeton group since 1989.
Canyon Chan, CFA Mr. Chan has been a manager of the fund since its inception, and has
VICE PRESIDENT, ADVISERS been with the Franklin Templeton group since 1991.
Conrad Herrmann, CFA Mr. Herrmann has been a manager of the fund since its inception, and
SENIOR VICE PRESIDENT, ADVISERS has been with the Franklin Templeton group since 1989.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets. The fee is equal to
an annual rate of:
/bullet/ 0.550% of the value of net assets up to and including $500 million;
/bullet/ 0.450% of the value of net assets over $500 million, up to and
including $1 billion;
/bullet/ 0.400% of the value of net assets over $1 billion, up to and including
$1.5 billion;
/bullet/ 0.350% of the value of net assets over $1.5 billion, up to and
including $6.5 billion;
/bullet/ 0.325% of the value of net assets over $6.5 billion, up to and
including $11.5 billion;
/bullet/ 0.300% of the value of net assets over $11.5 billion, up to and
including $16.5 billion;
/bullet/ 0.290% of the value of net assets over $16.5 billion, up to and
including $19 billion;
/bullet/ 0.280% of the value of net assets over $19 billion, up to and including
$21.5 billion; and
/bullet/ 0.270% of the value of net assets over $21.5 billion.
The manager is contractually obligated to limit management fees so that Total
annual fund operating expenses do not exceed 1.30% of the fund's class 2 net
assets in 2000.
FT-5 Franklin Technology Securities Fund - Class 2
<PAGE>
Franklin U.S. Government Fund
(previously U.S. Government Securities Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is income.
MAIN INVESTMENTS Under normal market conditions, the fund will invest in a
portfolio limited to U.S. Government securities, primarily fixed and variable
rate mortgage-backed securities. The fund currently invests a substantial
portion of its assets in Government National Mortgage Association obligations
("Ginnie Maes").
- --------------------------------------------------------------------------------
The fund invests primarily in mortgage-backed U.S. Government securities.
- --------------------------------------------------------------------------------
Ginnie Maes represent an ownership interest in mortgage loans made by banks and
other financial institutions to finance purchases of homes. The individual loans
are packaged or "pooled" together for sale to investors. As the underlying
mortgage loans are paid off, investors receive periodic principal and interest
payments. Ginnie Maes carry a guarantee backed by the full faith and credit of
the U.S. Government. The guarantee applies only to the timely payment of
principal and interest on the mortgages in the pool, and does not apply to the
market prices and yields of the Ginnie Maes or to the net asset value or
performance of the fund, which will vary with changes in interest rates and
other market conditions. Ginnie Mae yields (interest income as a percent of
price) have historically exceeded the current yields on other types of U.S.
Government securities with comparable maturities, although interest rate changes
and unpredictable prepayments can greatly change total return.
In addition to Ginnie Maes, the fund may invest in mortgage-backed securities
issued or guaranteed by the Federal National Mortgage Association, Federal Home
Loan Mortgage Corporation, or other U.S. Government agencies. The fund may also
invest in U.S. Government securities backed by other types of assets, including
business loans guaranteed by the U.S. Small Business Administration, and
obligations of the Tennessee Valley Authority. Finally, the fund may invest in
U.S. Treasury bonds, notes and bills, and securities issued by U.S. Government
agencies or authorities. Securities issued or guaranteed by FNMA, FHLMC, TVA and
certain other entities are not backed by the full faith and credit of the U.S.
Government, but are generally supported by the creditworthiness of the issuer.
These debt securities may be fixed-rate, adjustable-rate, a hybrid of the two,
or zero coupon securities. Zero coupon securities are debt securities that make
no periodic interest payments but instead are sold at substantial discounts from
their value at maturity. The zero coupon bonds purchased by the fund are
typically those which are issued or created by the U.S. Government or its
agencies, where the interest coupons have been "stripped off" a bond and the
rights to principal and interest payments are sold separately. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest.
PORTFOLIO SELECTION The manager generally buys, and holds, high quality
securities which pay high current interest rates. Using this straightforward,
low turnover approach, the manager seeks to produce high current income with a
high degree of credit safety and lower price volatility, from a conservatively
managed portfolio of U.S. Government securities.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goal.
FUS-1 Franklin U.S. Government Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price. This means you could lose money over short or even
extended periods.
- --------------------------------------------------------------------------------
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. Zero coupon bonds are more sensitive to
interest rate changes and their price will fluctuate more than the prices of
interest-paying bonds or notes for comparable maturities. In general, securities
with longer maturities are more sensitive to these price changes. A sub-category
of interest rate risk is reinvestment risk, which is the risk that interest
rates will be lower when the fund seeks to reinvest interest payments or the
proceeds from a matured debt security, resulting in less income received by the
fund.
GINNIE MAES Ginnie Maes, and other mortgage and asset-backed securities, differ
from conventional debt securities because principal is paid back over the life
of the security rather than at maturity. The fund may receive unscheduled
prepayments of principal due to voluntary prepayments, refinancing or
foreclosure on the underlying mortgage or other loans. During periods of
declining interest rates, the volume of principal prepayments generally
increases as borrowers refinance their mortgages at lower rates. The fund may be
forced to reinvest returned principal at lower interest rates, reducing the
fund's income. For this reason, Ginnie Maes may be less effective than other
types of securities as a means of "locking in" long-term interest rates and may
have less potential for capital appreciation during periods of falling interest
rates than other investments with similar maturities. A reduction in the
anticipated rate of principal payments, especially during periods of rising
interest rates, may increase the effective maturity of Ginnie Maes making them
more susceptible than other debt securities to a decline in market value when
interest rates rise. This could increase volatility of the fund's returns and
share price.
CREDIT The fund's investments in securities which are not backed by the full
faith and credit of the U.S. Government depend upon the ability of the issuing
agency or instrumentality to meet interest or principal payments, and may not
permit recourse against the U.S. Treasury. Accordingly, the issuers of some
securities considered to be U.S. Government securities may be unable to make
principal and interest payments when due.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FUS-2 Franklin U.S. Government Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -----------------------------------------------------------
<S> <C> <C> <C>
Franklin U.S. Government
Fund - Class 2 1 -1.10% 7.53% 7.43%
Lehman Brothers
Intermediate Government
Bond Index 2 0.49% 6.93% 7.10%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. Lehman Brothers Intermediate Government
Bond Index is an unmanaged index of fixed-rate bonds issued by the U.S.
Government and its agencies that are rated investment grade or higher and have
one to ten years remaining until maturity and at least $100 million outstanding.
Indices include reinvested dividends and/or interest. One cannot invest directly
in an index, nor is an index representative of the fund's investments.
FUS-3 Franklin U.S. Government Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN U.S. GOVERNMENT FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 1 0.49%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.02%
----
Total annual fund operating expenses 0.76%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $78 $243 $422 $942
</TABLE>
FUS-4 Franklin U.S. Government Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Jack Lemein Mr. Lemein has been a manager of the fund since its inception in 1989,
EXECUTIVE VICE PRESIDENT, ADVISERS and has more than 30 years experience in the securities industry.
Roger Bayston, CFA Mr. Bayston has been a manager of the fund since 1993, and has been
SENIOR VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1991.
T. Anthony Coffey, CFA Mr. Coffey has been a manager of the fund since 1996, and has been
VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1989.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid 0.49% of its average daily net assets to
the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year ended December 31,
- ----------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 13.89
-----
Net investment income .77
Net realized and unrealized losses (.92)
-----
Total from investment operations (.15)
-----
Distributions from net investment income (1.96)
-----
Net asset value, end of year 11.78
=====
Total return (%)+ (1.10)
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 1,877
Ratios to average net assets: (%)
Expenses .77*
Net investment income 5.95*
Portfolio turnover rate (%) 7.90
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FUS-5 Franklin U.S. Government Fund - Class 2
<PAGE>
Franklin Value Securities Fund
(previously Value Securities Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term total return.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies of various sizes that
the fund's manager believes are selling substantially below the underlying
value of their assets or their private market value (what a sophisticated
investor would pay for the entire company). Following this strategy, the fund
will invest in companies with, for example:
/bullet/ Stock prices that are low relative to current or historical earnings,
book value, cash flow, or sales--all relative to the market, a
company's industry or a company's earnings growth.
/bullet/ Recent sharp price declines ("fallen angels") but that still have
significant growth potential in the manager's opinion.
/bullet/ Valuable intangibles not reflected in the stock price such as
franchises, distribution networks or market share for particular
products or services, underused or understated assets or cash,
tax-loss carry forwards, or patents and trademarks.
- --------------------------------------------------------------------------------
The fund invests primarily in the common stocks of companies the manager
believes are undervalued.
- --------------------------------------------------------------------------------
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities. The fund may invest primarily in small-cap
companies, with market capitalization values (share price multiplied by the
number of common stock shares outstanding) of less than $1.5 billion. The fund
may also invest up to 25% of its total assets in foreign securities, including
those in emerging markets, but does not currently intend to invest more than
10%.
PORTFOLIO SELECTION The manager is a research driven, fundamental investment
adviser, pursuing a disciplined value-oriented strategy for this fund. As a
"bottom-up" adviser focusing primarily on individual securities, the manager
will focus on the market price of a company's securities relative to its
evaluation of the company's potential long-term earnings, asset value and cash
flow. The manager seeks bargains among the "under researched and unloved" - out
of favor companies that offer, in the manager's opinion, excellent long-term
potential that might include current growth companies that are being ignored by
the market, former growth companies that have stumbled recently, dropping
sharply in price but that still have significant growth potential in the
manager's opinion, or companies that are a potential turnaround or takeover
target.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in
FV-1 Franklin Value Securities Fund - Class 2
<PAGE>
such stocks if it believes the market may have overreacted to adverse
developments or failed to appreciate positive changes. However, if other
investors fail to recognize the company's value (and do not become buyers, or
become sellers), or favor investing in faster-growing companies, value stocks
may not increase in value as anticipated by the manager and may even decline
further.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions, the
value of your investment in the fund will go up and down. This means you could
lose money over short or even extended periods.
- --------------------------------------------------------------------------------
The fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may also
include companies reporting poor earnings, companies whose share prices have
declined sharply (sometimes growth companies that have recently stumbled but
have "fundamentals" the manager believes are good), turnarounds, cyclical
companies, or companies emerging from bankruptcy, all of which may have a higher
risk of being ignored or rejected, and therefore, undervalued by the market.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions,
including increases in interest rates because of their reliance on credit, and
their growth prospects are less certain.
For example, smaller companies may lack depth of management, or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative.
DIVERSIFICATION The fund is non-diversified as defined by federal securities
laws. As such, it may invest a greater portion of its assets in one issuer and
have a smaller number of issuers than a diversified fund. Therefore, the fund
may be more sensitive to economic, business, political or other changes
affecting similar issuers or securities. The fund intends, however, to meet tax
diversification requirements.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund. These include CURRENCY RISKS
(fluctuations in currency exchange rates; devaluations by governments; and the
new euro currency) and COUNTRY AND COMPANY RISKS (political, social, and
economic instability; less liquid securities or markets; restrictions on removal
of currency and other assets; punitive taxes; custody and settlement risks; less
government supervision and regulation of foreign markets and their participants;
and less stringent disclosure, financial accounting or reporting standards).
EMERGING MARKET COUNTRIES have heightened risks including a greater likelihood
of currency devaluations, less liquidity, and greater volatility.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FV-2 Franklin Value Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 05/01/98
- -----------------------------------------------------------
<S> <C> <C>
Franklin Value Securities Fund -
Class 2 1 1.39% -13.16%
Russell 2000 Value Index 2 -1.49% -9.52%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The unmanaged Russell 2000 Growth Index
measures the performance of companies with lower price-to-book ratios and higher
forecasted growth values. One cannot invest directly in an index, nor is an
index representative of the fund's portfolio.
FV-3 Franklin Value Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN VALUE SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.60%
Distribution and service (12b-1) fees 1 0.25%
Other expenses 0.21%
----
Total annual fund operating expenses 1.06%
====
</TABLE>
1. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $108 $337 $585 $1,294
</TABLE>
FV-4 Franklin Value Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisory Services, LLC (Advisory Services), One Parker Plaza, Ninth
Floor, Fort Lee, New Jersey, 07024, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
William J. Lippman Mr. Lippman has been a manager of the fund since its inception in 1998.
PRESIDENT, ADVISORY SERVICES He has more than 30 years' experience in the securities industry and
joined the Franklin Templeton Group in 1988.
Bruce C. Baughman Mr. Baughman has been a manager of the fund since its inception in
SENIOR VICE PRESIDENT, 1998, and has been with the Franklin Templeton Group since 1988.
ADVISORY SERVICES
Margaret McGee Ms. McGee has been a manager of the fund since its inception in 1998
VICE PRESIDENT, and has been with the Franklin Templeton Group since 1988.
ADVISORY SERVICES
</TABLE>
The fund pays Advisory Services a fee for managing the fund's assets. For the
fiscal year ended December 31, 1999, the fund paid 0.60% of its average daily
net assets to the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ---------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 7.97
-----
Net investment income .05
Net realized and unrealized losses (.12)
------
Total from investment operations (.07)
------
Distributions from net investment income (.02)
------
Net asset value, end of year 7.88
======
Total return (%)+ (.90)
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 1,263
Ratios to average net assets: (%)
Expenses 1.06*
Net investment income .62*
Portfolio turnover rate (%) 61.23
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
FV-5 Franklin Value Securities Fund - Class 2
<PAGE>
Franklin Zero Coupon Funds: maturing in December 2000, 2005, 2010
(previously Zero Coupon Funds, 2000, 2005, 2010)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL Each fund's investment goal is to provide as high an investment return as
is consistent with capital preservation.
- --------------------------------------------------------------------------------
Each fund seeks to return a reasonably assured targeted dollar amount,
predictable at the time of investment, on a specific date in the future by
investing primarily in zero coupon securities.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, each fund will invest at least
65% of its net assets in zero coupon debt securities, primarily U.S. Treasury
issued stripped securities and stripped securities issued by the U.S.
Government, and its agencies and authorities. The fund may also invest a lesser
amount in zero coupon securities issued by U.S. companies and stripped
eurodollar obligations, which are U.S. dollar denominated debt securities
typically issued by foreign subsidiaries of U.S. companies.
A debt security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Zero coupon securities are
debt securities that make no periodic interest payments but instead are sold at
substantial discounts from their value at maturity. The buyer receives the rate
of return by the gradual appreciation of the zero coupon bond, which is redeemed
at face value on the specified maturity date.
Stripped securities result from the separation of a bond's interest coupons from
the obligation to repay principal. An "interest only" strip is, in essence a
zero coupon bond, which has only the right to the repayment of principal.
Stripped U.S. Treasury securities are backed by the full faith and credit of the
U.S. Government. The guarantee applies only to the timely payment of principal
and does not apply to the market prices and yields of the zero coupon bonds or
to the net asset value or performance of the fund, which will vary with changes
in interest rates and other market conditions. Where the fund invests in other
than stripped U.S. Treasury securities, the zero coupon bonds will be rated at
least A by independent rating agencies such as Standard & Poor's Ratings Group
(S&P/registered trademark/) or Moody's Investors Services, Inc. (Moody's) or, if
unrated, securities determined by the Manager to be comparable.
As a fund approaches its Target Date, its investments will be made up of
increasingly larger amounts of short-term money market investments, including
cash and cash equivalents.
PORTFOLIO SELECTION In selecting investments for the funds, the manager seeks to
keep the average duration of each fund to within twelve months of each fund's
maturity Target Date. Duration is a measure of the length of an investment,
taking into account the timing and amount of any interest payments and the
principal repayment. By balancing investments with slightly longer and shorter
durations, the manager believes it can reduce its unknown "reinvestment risk."
Since each fund will not be invested entirely in zero coupon securities maturing
on the Target Date but also will invest in money market securities, there will
be some reinvestment risk and liquidation costs.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goal.
MATURITY Each fund matures on the third Friday of December of its specific
maturity year (Target Date). The Zero Coupon Fund - 2000 will mature on December
15, 2000. On each fund's Target Date, the fund will be converted into cash. At
least 30 days prior to the Target Date, contract owners will be notified and
given an opportunity to select another investment option. If an investor does
not complete an instruction form directing what should be done with the cash
proceeds, the proceeds will be automatically invested in a money market fund
available under the contract and the contract owners will be notified of such
event.
FZ-1 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
Each fund's main risks can affect its share price, its distributions or income,
and therefore, the fund's performance.
If fund shares are redeemed prior to the maturity of the fund, an investor may
receive a significantly different investment return than anticipated at the time
of purchase. Therefore, the Zero Coupon Funds may not be appropriate for
contract owners who do not plan to invest for the long-term or until maturity.
- --------------------------------------------------------------------------------
Changes in interest rates affect the prices of the fund's debt securities. If
rates rise, the value of the fund's debt securities will fall and so too will
the fund's share price. This means you could lose money.
- --------------------------------------------------------------------------------
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. Because zero coupon securities do not pay
interest, the market value of zeros can fall more dramatically than
interest-paying securities of similar maturities when interest rates rise. When
interest rates fall, however, zeros rise more rapidly in value. In general,
securities with longer maturities usually are more sensitive to price changes.
Thus, the Zero Coupon Fund 2010 may experience more volatility in its share
price than the Zero Coupon Fund 2000. A sub-category of interest rate risk is
reinvestment risk, which is the risk that interest rates will be lower when the
fund seeks to reinvest interest payments or the proceeds from a matured debt
security, resulting in less income received by the fund.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, thus, impact fund performance.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
FZ-2 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
Because class 2 shares were not offered for fiscal year 1999, the fund's class 1
performance is shown.
These bar charts and tables show the volatility of the funds' returns, which is
one indicator of the risks of investing in the funds. The bar charts show
changes in the funds' returns from year to year over the past ten calendar years
or since the funds' inception. The tables show how each fund's average annual
total returns compare to those of a broad-based securities market index. Of
course, past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the funds are
investment options. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ------------------------------------------------------------
<S> <C> <C> <C>
Franklin Zero Coupon Fund,
2000 - Class 1 1 3.07% 7.96% 8.23%
Merrill Lynch 1-Year Zero
Coupon Bond Index 2 4.34% 6.18% 6.25%
</TABLE>
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- -------------------------------------------------------------
<S> <C> <C> <C>
Franklin Zero Coupon Fund,
2005 - Class 1 1 -5.88% 9.11% 8.88%
Merrill Lynch 5-Year Zero
Coupon Bond Index 2 -3.00% 7.21% 7.79%
</TABLE>
FZ-3 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 2
<PAGE>
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ----------------------------------------------------------------
<S> <C> <C> <C>
Franklin Zero Coupon
Fund, 2010 - Class 1 1 -12.24% 10.22% 9.25%
Merrill Lynch 10-Year Zero
Coupon Bond Index 2 -10.34% 9.17% 9.08%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Because class 2 shares were not offered in fiscal year 1999, performance shown
represents class 1 shares, which are not offered in this prospectus. Although
invested in the same portfolio of securities as class 1, class 2 performance
will differ because of class 2's higher annual fees and expenses resulting from
its rule 12b-1 plan. Current 12b-1 fees are set by Board approval at an annual
rate of 0.25%.
2. Source: Standard & Poor's Micropal. The unmanaged Merrill Lynch Zero Coupon
indices include zero coupon bonds that pay no interest and are issued at a
discount from redemption price. One cannot invest directly in an index, nor is
an index representative of the fund's investments.
FZ-4 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
FRANKLIN ZERO COUPON FUNDS - CLASS 2:
MATURING IN DECEMBER 2000, 2005, 2010
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Zero Zero Zero
Coupon Coupon Coupon
Fund, Fund, Fund,
Class 2 2000 2005 2010
- --------------------------------------------------------------------------
<S> <C> <C> <C>
Maximum sales charge (load)
imposed on purchases 0.00% 0.00% 0.00%
Maximum deferred sales charge (load) 0.00% 0.00% 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Franklin Franklin Franklin
Zero Zero Zero
Coupon Coupon Coupon
Fund, Fund, Fund,
Class 2 2000 2005 2010
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Management fees 1 0.63% 0.63% 0.63%
Other expenses 1 0.02% 0.02% 0.02%
Distribution and service (12b-1) fees 2 0.25% 0.25% 0.25%
---- ---- ----
Total annual fund operating expenses 0.90% 0.90% 0.90%
==== ==== ====
</TABLE>
1. The funds' administration fees are paid indirectly through the management
fees. Management fees and other expenses are based on class 1's expenses for the
fiscal year 1999.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
These examples can help you compare the cost of investing in the funds with the
cost of investing in other mutual funds. They assume:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Each investment has a 5% return each year; and
/bullet/ Each fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years
- ---------------------------------------------------
<S> <C> <C>
Franklin Zero Coupon Fund, 2000 -
Class 21 $92 $287
Franklin Zero Coupon Fund, 2005 -
Class 2 $92 $287
Franklin Zero Coupon Fund, 2010 -
Class 2 $92 $287
</TABLE>
1. The fund will mature on December 15, 2000. See "Maturity" under "GOAL AND
STRATEGIES."
FZ-5 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Roger Bayston, CFA Mr. Bayston has been a manager of the fund since November 1999, and
SENIOR VICE PRESIDENT, ADVISERS has been with the Franklin Templeton Group since 1991.
Jack Lemein Mr. Lemein has been a manager of the fund since its inception in 1989,
EXECUTIVE VICE PRESIDENT, ADVISERS and has more than 30 years' experience in the securities industry.
T. Anthony Coffey, CFA Mr. Coffey has been a manager of the fund since 1989, and has been
VICE PRESIDENT, ADVISERS with the Franklin Templeton Group since 1989.
</TABLE>
Each fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, each fund paid .63% of its average daily net assets to
the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 1 shares for the past five years or since
each fund's inception. The table shows certain information on a single fund
share basis (per share performance). It also shows some key fund statistics,
such as total return (past performance) and expense ratios. Total return
represents the annual change in value of a share assuming reinvestment of
dividends and capital gains. This information has been audited by
PricewaterhouseCoopers LLP, independent auditors. Their report, along with the
financial statements, are included in the funds' Annual Report (available upon
request).
<TABLE>
<CAPTION>
Franklin Zero Coupon Fund, 2000 - Class 1 Year Ended December 31,
- ------------------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 14.81 15.14 15.19 15.73 13.62
----------------------------------------------------------------
Net investment income .98 1.22 1.15 .98 .75
Net realized and unrealized gains (losses) (.55) (.15) (.12) (.65) 2.03
----------------------------------------------------------------
Total from investment operations .43 1.07 1.03 .33 2.78
----------------------------------------------------------------
Distributions from net investment income (2.33) (1.21) (1.06) (.86) (.67)
Distributions from net realized gains (.34) (.19) (.02) (.01) --
----------------------------------------------------------------
Total distributions (2.67) (1.40) (1.08) (.87) (.67)
----------------------------------------------------------------
Net asset value, end of year 12.57 14.81 15.14 15.19 15.73
================================================================
Total return (%)+ 3.07 7.50 7.11 2.43 20.67
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 70,918 93,543 111,650 129,601 137,357
Ratios to average net assets: (%)
Expenses .65 .40 .40 .40 .40
Expenses excluding waiver and payments by affiliate .65 .66 .63 .62 .63
Net investment income 6.85 6.67 6.47 6.14 6.14
Portfolio turnover rate (%) 10.42 17.70 6.16 .58 1.63
</TABLE>
FZ-6 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 2
<PAGE>
<TABLE>
<CAPTION>
Franklin Zero Coupon Fund, 2005 - Class 1 Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 17.74 17.05 16.35 17.38 13.76
--------------------------------------------------------------
Net investment income .98 1.01 1.14 .96 .78
Net realized and unrealized gains (losses) (2.01) 1.03 .63 (1.13) 3.53
--------------------------------------------------------------
Total from investment operations (1.03) 2.04 1.77 (.17) 4.31
--------------------------------------------------------------
Distributions from net investment income (2.10) (1.10) (1.06) (.86) (.69)
Distributions from net realized gains (.10) (.25) (.01) -- --
--------------------------------------------------------------
Total distributions (2.20) (1.35) (1.07) (.86) (.69)
--------------------------------------------------------------
Net asset value, end of year 14.51 17.74 17.05 16.35 17.38
==============================================================
Total return (%)+ (5.88) 12.53 11.37 (.50) 31.76
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 65,895 84,487 77,296 82,603 83,222
Ratios to average net assets: (%)
Expenses .65 .40 .40 .40 .40
Expenses excluding waiver and payments by affiliate .65 .66 .65 .65 .66
Net investment income 5.93 5.82 6.16 6.15 6.19
Portfolio turnover rate (%) 15.87 3.87 4.52 2.06 1.72
</TABLE>
<TABLE>
<CAPTION>
Franklin Zero Coupon Fund, 2010 - Class 1 Year Ended December 31,
- ----------------------------------------------------------------------------------------------------------------------
1999 1 1998 1997 1996 1995
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 19.05 17.83 16.29 18.04 13.02
--------------------------------------------------------------
Net investment income .99 1.09 1.02 1.02 .76
Net realized and unrealized gains (losses) (3.24) 1.39 1.54 (1.65) 4.75
--------------------------------------------------------------
Total from investment operations (2.25) 2.48 2.56 (.63) 5.51
--------------------------------------------------------------
Distributions from net investment income (2.14) (1.11) (1.01) (.88) (.49)
Distributions from net realized gains (.51) (.15) (.01) (.24) --
--------------------------------------------------------------
Total distributions (2.65) (1.26) (1.02) (1.12) (.49)
--------------------------------------------------------------
Net asset value, end of year 14.15 19.05 17.83 16.29 18.04
==============================================================
Total return (%)+ (12.24) 14.45 16.57 (2.69) 42.79
Ratios/supplemental data
Net assets, end of year (x 1,000) 66,049 93,515 85,515 78,816 85,633
Ratios to average net assets: (%)
Expenses .65 .40 .40 .40 .40
Expenses excluding waiver and payments by affiliate .65 .66 .65 .65 .66
Net investment income 5.83 5.55 6.21 6.24 6.41
Portfolio turnover rate (%) 19.30 15.92 12.20 16.10 31.45
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower.
1. Based on average shares outstanding.
FZ-7 Franklin Zero Coupon Funds - 2000, 2005, 2010 - Class 2
<PAGE>
Mutual Discovery Securities Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies of any nation that
the manager believes are available at market prices less than their value based
on certain recognized or objective criteria (intrinsic value). Following this
value-oriented strategy, the fund primarily invests in:
/bullet/ Undervalued Stocks Stocks trading at a discount to intrinsic value.
And, to a much smaller extent, the fund invests in:
/bullet/ Restructuring Companies Securities of companies that are involved in
restructurings such as mergers, acquisitions, consolidations,
liquidations, spin-offs, or tender or exchange offers.
/bullet/ Distressed Companies Securities of companies that are, or are about to
be, involved in reorganizations, financial restructurings, or
bankruptcy.
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks of U.S. and non-U.S. companies the
manager believes are undervalued.
- --------------------------------------------------------------------------------
The fund invests primarily in mid- and large-cap companies with market
capitalization values (share price multiplied by the number of common stock
shares outstanding) greater than $1.5 billion. The fund also may invest a
significant portion of its assets in small-cap companies. An equity security
represents a proportionate share of the ownership of a company; its value is
based on the success of the company's business, any income paid to stockholders,
the value of its assets, and general market conditions. Common and preferred
stocks, and securities convertible into common stock are examples of equity
securities.
While the fund generally purchases securities for investment purposes, the
manager may seek to influence or control management, or invest in other
companies that do so, when the manager believes the fund may benefit.
The fund may invest 50% or more of its total assets in foreign equity and debt
securities, which may include sovereign debt and participations in foreign
government debt. A debt security obligates the issuer to the bondholders or
creditors, both to repay a loan of money at a future date and generally to pay
interest.
The fund generally seeks to hedge (protect) against currency risks largely using
forward foreign currency exchange contracts (Hedging Instruments), where
available, and when, in the manager's opinion, it is economical to do so.
The fund's investments in Restructuring and Distressed Companies typically
involve the purchase of lower-rated or defaulted debt securities (junk bonds),
or comparable unrated debt securities, or the purchase of the direct
indebtedness (or participations in the indebtedness) of such companies.
Indebtedness generally represents a specific commercial loan or portion of a
loan made to a company by a financial institution such as a bank or insurance
company. Loan participations represent fractional interests in a company's
indebtedness and are generally made available by banks or insurance companies.
By purchasing all or a part of a company's direct indebtedness, a fund, in
effect, steps into the shoes of the lender. If the loan is secured, the fund
will have a priority claim to the assets of the company ahead of unsecured
creditors and stockholders. The fund generally makes such investments to achieve
capital appreciation, rather than to seek income.
The fund also may purchase trade claims and other similar direct obligations or
claims against a company in bankruptcy. Trade claims are generally purchased
from creditors of the bankrupt company and typically represent money due to a
supplier of goods or service to the company.
PORTFOLIO SELECTION The manager employs a research driven, fundamental value
strategy. In choosing equity investments, the manager focuses on the market
price of a company's securities relative to the manager's own evaluation of the
company's asset value, book value, cash flow potential, long-term earnings, and
multiples of earnings of comparable securities of both public or private
companies. Similarly, debt securities, including indebtedness, participations,
and trade claims, are generally selected based on the manager's own analysis of
the security's intrinsic value rather than the coupon rate or rating of the
security or investment. The manager examines each investment separately and
there are no set criteria as to specific value parameters, asset size, earnings
or industry type.
MD-1 Mutual Discovery Securities Fund - Class 2
<PAGE>
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The prices of debt securities of Restructuring or Distressed
Companies also may be "cheap" relative to the perceived value of the company's
assets. The manager may invest in such stocks if it believes the market may have
overreacted to adverse developments or failed to appreciate positive changes.
However, if other investors fail to recognize the company's value (and do not
become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions
around the world, the value of your investment in the fund will go up and down.
This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
The fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may also
include those of companies reporting poor earnings, companies whose share prices
have declined sharply (sometimes growth companies that have recently stumbled
but have "fundamentals" the manager believes are good), turnarounds, cyclical
companies, or companies emerging from bankruptcy, all of which may have a higher
risk of being ignored or rejected, and therefore, undervalued by the market.
RESTRUCTURING COMPANIES There can be no assurance that any merger or other
restructuring, or tender or exchange offer proposed at the time the fund invests
will be completed on the terms contemplated, and will therefore, benefit the
fund.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging
MD-2 Mutual Discovery Securities Fund - Class 2
<PAGE>
markets, may have substantially lower trading volumes than U.S. markets,
resulting in less liquidity and more volatility than in the U.S. Short-term
volatility in these markets can be disconcerting and declines in excess of 50%
are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to non-U.S.
investments in non-U.S. courts than with respect to U.S. companies in U.S.
courts.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and fluctuated independently from larger company securities,
especially over the shorter-term. Smaller or relatively new companies can be
particularly sensitive to changing economic conditions and increases in interest
rates, their growth prospects are less certain and their securities are less
liquid. These companies may suffer significant losses, and can be considered
speculative.
CREDIT An issuer may be unable to make interest payments or repay principal.
Lower-rated and unrated debt securities, including Indebtedness and
Participations Junk bonds generally have more risk, fluctuate more in price, and
are less liquid than higher rated securities. Prices are especially sensitive to
developments affecting the company's business and to rating changes, and
typically rise and fall in response to factors that affect the company's stock
prices. Companies issuing such lower-rated debt securities are not as strong
financially, and are more likely to encounter financial difficulties and be more
vulnerable to changes in the economy, such as a recession or a sustained period
of rising interest rates. Purchasers of participations, such as the fund, must
rely on the financial institution issuing the participation to assert any rights
against the borrower with respect to the underlying indebtedness. In addition,
the fund takes on the risk as to the creditworthiness of the bank or other
financial intermediary issuer, as well as of the company issuing the underlying
indebtedness. The fund may lose its entire investment in defaulted bonds.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments which may involve a small investment relative to the risk
assumed. Their successful use will depend on the manager's ability to predict
market movements, and their use may have the opposite effect of that intended.
Risks include potential loss to the fund due to the imposition of controls by a
government on the exchange of foreign currencies, delivery failure, default by
the other party, or inability to close out its position because the trading
market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. Illiquid
securities may not be readily sold or may only be resold at a price
significantly lower than if they were liquid.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
MD-3 Mutual Discovery Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 11/08/96
- ----------------------------------------------------------
<S> <C> <C>
Mutual Discovery Securities Fund
Class 2 1 23.49% 12.01%
S&P 500 Index 2 21.04% 27.52%
Russell 2000 Index 2 21.26% 14.45%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. The Russell 2000 Index measures the 2000 smallest companies in the
Russell 3000 Index. Indices include reinvested dividends and/or interest. One
cannot invest directly in an index, nor is an index representative of the fund's
investments.
MD-4 Mutual Discovery Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
MUTUAL DISCOVERY SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)1
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.80%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.21%
----
Total annual fund operating expenses 1.26%
====
</TABLE>
1. The fund's class 2 distribution plan or "rule 12b-1 plan" is described in the
fund's prospectus. While the maximum amount payable under the fund's class 2
rule 12b-1 plan is 0.35% per year of the fund's average daily net assets, the
Board of Trustees of Franklin Templeton Variable Insurance Products Trust has
set the current rate at 0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $128 $400 $692 $1,523
</TABLE>
MD-5 Mutual Discovery Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078, is the fund's investment manager.
Michael F. Price is Chairman of the Board of Directors of Franklin Mutual.
MANAGEMENT TEAM The team member primarily responsible for the fund's management
is:
<TABLE>
<CAPTION>
<S> <C>
David J. Winters Mr. Winters has been a manager of the fund since 1998. Before joining
SENIOR VICE PRESIDENT, ADVISERS the Franklin Templeton Group in 1996, he was a research analyst for
AND DIRECTOR OF RESEARCH Heine Securities Corporation (Heine), the predecessor of Franklin
FRANKLIN MUTUAL Mutual.
The managers listed above are part of a larger team of investment professionals with management
responsibility for all of the funds managed by Franklin Mutual, including this fund.
The team also includes:
Peter A. Langerman Mr. Langerman has been involved with the management of the fund
PRESIDENT AND CHIEF EXECUTIVE OFFICER since its inception in 1996. Before joining the Franklin Templeton Group
FRANKLIN MUTUAL in 1996, he was a research analyst for Heine.
Robert L. Friedman Mr. Friedman has been involved with the management of the fund since
SENIOR VICE PRESIDENT its inception in 1996. Before joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for Heine.
Lawrence N. Sondike Mr. Sondike has been involved with the management of the fund since
SENIOR VICE PRESIDENT its inception in 1996. Before joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for Heine.
Jeffrey A. Altman Mr. Altman has been involved with the management of the fund since its
SENIOR VICE PRESIDENT inception in 1996. Before joining the Franklin Templeton Group in 1996,
FRANKLIN MUTUAL he was a research analyst for Heine.
Raymond Garea Mr. Garea has been involved with the management of the fund since its
SENIOR VICE PRESIDENT inception in 1996. Before joining the Franklin Templeton Group in 1996,
FRANKLIN MUTUAL he was a research analyst for Heine.
In addition, the following Franklin Mutual employees serve as Assistant Portfolio Managers:
Jeff Diamond Mr. Diamond has been involved with the management of the fund since
ASSISTANT PORTFOLIO MANAGER 1998. Before joining the Franklin Templeton Group in 1998, he was a
FRANKLIN MUTUAL vice president and co-manager of Prudential Conservative Stock Fund.
Susan Potto Ms. Potto has been involved with the management of the fund since its
VICE PRESIDENT inception in 1996. Before joining the Franklin Templeton Group in 1996,
FRANKLIN MUTUAL she was a research analyst for Heine.
</TABLE>
The fund pays Franklin Mutual a fee for managing the fund's assets. For the
fiscal year ended December 31, 1999, the fund paid 0.80% of its average daily
net assets to the manager for its services.
MD-6 Mutual Discovery Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year ended December 31,
- ----------------------------------------------------------------------
1999 1,2
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 11.65
------
Net investment income .11
Net realized and unrealized gains 2.15
------
Total from investment operations 2.26
------
Distributions from net investment income (.37)
-------
Net asset value, end of year 13.54
=======
Total return (%)+ 19.68
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 413
Ratios to average net assets: (%)
Expenses 1.27
Net investment income .94*
Portfolio turnover rate (%) 104.69
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999.
2. Based on average shares outstanding.
MD-7 Mutual Discovery Securities Fund - Class 2
<PAGE>
Mutual Shares Securities Fund
GOALS AND STRATEGIES
- --------------------
[GRAPHIC OMITTED]
GOALS The fund's principal investment goal is capital appreciation. Its
secondary goal is income.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies that the manager
believes are available at market prices less than their value based on certain
recognized or objective criteria (intrinsic value). Following this
value-oriented strategy, the fund primarily invests in:
/bullet/ Undervalued Stocks Stocks trading at a discount to intrinsic value.
And to a much smaller extent, the fund also invests in:
/bullet/ Restructuring Companies Securities of companies that are involved in
restructurings such as mergers, acquisitions, consolidations,
liquidations, spinoffs, or tender or exchange offers.
/bullet/ Distressed Companies Securities of companies that are, or about to be,
involved in reorganizations, financial restructurings, or bankruptcy.
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks of companies the manager believes
are undervalued.
- --------------------------------------------------------------------------------
The fund invests primarily in mid- and large-cap companies with market
capitalization values (share price multiplied by the number of common stock
shares outstanding) greater than $1.5 billion. The fund also may invest a
significant portion of its assets in small-cap companies, which have more risk.
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities.
While the fund generally purchases securities for investment purposes, the
manager may seek to influence or control management, or invest in other
companies that do so, when the manager believes the fund may benefit.
The fund's investments in Restructuring and Distressed Companies typically
involve the purchase of lower-rated or defaulted debt securities (junk bonds),
or comparable unrated debt securities, or the purchase of the direct
indebtedness (or participations in the indebtedness) of such companies. A debt
security obligates the issuer to the bondholders or creditors, both to repay a
loan of money at a future date and generally to pay interest. Indebtedness
generally represents a specific commercial loan or portion of a loan made to a
company by a financial institution such as a bank or insurance company. Loan
participations represent fractional interests in a company's indebtedness and
are generally made available by banks or insurance companies. By purchasing all
or a part of a company's direct indebtedness, a fund, in effect, steps into the
shoes of the lender. If the loan is secured, the fund will have a priority claim
to the assets of the company ahead of unsecured creditors and stockholders. The
fund generally makes such investments to achieve capital appreciation rather
than to seek income.
The fund may also purchase trade claims and other similar direct obligations or
claims against companies in bankruptcy. Trade claims are generally purchased
from creditors of the bankrupt company and typically represent money due to a
supplier of goods or services to the company.
The fund currently intends to invest up to approximately 20% of its total assets
in foreign equity and debt securities. The fund generally seeks to hedge
(protect) against currency risks, largely using forward foreign currency
exchange contracts, (Hedging Instruments), where available, and when, in the
manager's opinion, it is economical to do so.
PORTFOLIO SELECTION The manager employs a research driven, fundamental value
strategy. In choosing equity investments, the manager focuses on the market
price of a company's securities relative to the manager's own evaluation of the
company's asset value, including an analysis of book value, cash flow potential,
long-term earnings, and multiples of earnings of comparable securities of both
public or private companies. Similarly, debt securities, including indebtedness,
participations, and trade claims, are generally selected based on the manager's
own analysis of the security's intrinsic value rather than the coupon rate or
rating of the security or investment. The manager examines each investment
separately and there are no set criteria as to specific value parameters, asset
size, earnings or industry type.
MS-1 Mutual Shares Securities Fund - Class 2
<PAGE>
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in short-term investments, including cash
or cash equivalents. Under these circumstances, the fund may temporarily be
unable to pursue its investment goals.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions, the
value of your investment in the fund will go up and down. This means you could
lose money over short or even extended periods.
- --------------------------------------------------------------------------------
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The prices of debt securities of Restructuring or Distressed
Companies also may be "cheap" relative to the perceived value of the company's
assets. The manager may invest in such stocks if it believes the market may have
overreacted to adverse developments or failed to appreciate positive changes.
However, if other investors fail to recognize the company's value (and do not
become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may decline even further.
The fund's bargain-driven focus may result in the fund choosing securities that
are not widely followed by other investors. "Cheaply" priced securities may also
include those of companies reporting poor earnings, companies whose share prices
have declined sharply (sometimes growth companies that have recently stumbled
but have "fundamentals" the manager believes are good), turnarounds, cyclical
companies, or companies emerging from bankruptcy, all of which may have a higher
risk of being ignored or rejected, and therefore, undervalued by the market.
RESTRUCTURING COMPANIES There can be no assurance that any merger or other
restructuring, or tender or exchange offer proposed at the time the fund invests
will be completed on the terms contemplated and will therefore, benefit the
fund.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Where the fund's investments are denominated in foreign currencies,
changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country and Company General securities market and interest rate movements in any
country where the fund has investments are likely to affect the value of the
securities the fund owns that trade in that country. The political, economic,
and social structures of some countries the fund invests in may be less stable
and more volatile than those in the U.S. The risks of investing in these
countries include the imposition of exchange controls, foreign ownership
limitations, expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes and certain custody and settlement
risks. Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies,
or may become illiquid. Non-U.S. currency exchanges, stock exchanges, trading
systems, brokers, and companies generally have less government supervision and
regulation than in the U.S.
MS-2 Mutual Shares Securities Fund - Class 2
<PAGE>
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions and
increases in interest rates, their growth prospects are less certain and their
securities are less liquid. These companies may suffer significant losses, and
can be considered speculative.
CREDIT An issuer may be unable to make interest payments or repay principal.
Lower-rated and unrated debt securities, including Indebtedness and
Participations Junk bonds generally have more risk, fluctuate more in price, and
are less liquid than higher rated securities. Prices are especially sensitive to
developments affecting the company's business and to rating changes, and
typically rise and fall in response to factors that affect the company's stock
prices. Companies issuing such lower-rated debt securities are not as strong
financially, and are more likely to encounter financial difficulties and be more
vulnerable to changes in the economy, such as a recession or a sustained period
of rising interest rates. Purchasers of participations, such as the fund, must
rely on the financial institution issuing the participation to assert any rights
against the borrower with respect to the underlying indebtedness. In addition,
the fund takes on the risk as to the creditworthiness of the bank or other
financial intermediary issuer, as well as of the company issuing the underlying
indebtedness. The fund may lose its entire investment in defaulted bonds.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments. Their successful use will depend on the manager's
ability to predict market movements, and their use may have the opposite effect
of that intended. Risks include potential loss to the fund due to the imposition
of controls by a government on the exchange of foreign currencies, delivery
failure, default by the other party, or inability to close out a position
because the trading market becomes illiquid.
ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in illiquid
securities, which are securities with a limited trading market. Illiquid
securities may not be readily sold or may only be resold at a price
significantly lower than if they were liquid.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
MS-3 Mutual Shares Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 11/08/96
- ---------------------------------------------------------
<S> <C> <C>
Mutual Shares Securities Fund -
Class 2 1 13.58% 10.92%
S&P 500 Index 2 21.04% 27.52%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The S&P 500/registered trademark/ Index
is an unmanaged group of widely held common stocks covering a variety of
industries. Indices include reinvested dividends and/or interest. One cannot
invest directly in an index, nor is an index representative of the fund's
investments.
MS-4 Mutual Shares Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
MUTUAL SHARES SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.60%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.19%
----
Total annual fund operating expenses 1.04%
====
</TABLE>
1. On 2/8/00, a merger and reorganization was approved that combined the fund
with a similar fund of Templeton Variable Products Series Fund, effective
5/1/00. The table shows total expenses based on the fund's assets as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management fees 0.60%, Distribution and service fees 0.25%, Other expenses
0.19%, and Total annual fund operating expenses 1.04%.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $106 $331 $574 $1,271
</TABLE>
MS-5 Mutual Shares Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway,
Short Hills, New Jersey 07078, is the fund's investment manager.
Michael F. Price is Chairman of the Board of Directors of Franklin Mutual.
MANAGEMENT TEAM The team members primarily responsible for the fund's management
are:
<TABLE>
<CAPTION>
<S> <C>
Lawrence N. Sondike Mr. Sondike has been a manager of the fund since its inception in 1996.
SENIOR VICE PRESIDENT Before joining the Franklin Templeton Group in 1996, he was a research
FRANKLIN MUTUAL analyst for Heine Securities Corporation (Heine), the predecessor of
Franklin Mutual.
Susan Potto Ms. Potto has been an assistant portfolio manager of the fund since
VICE PRESIDENT January 2000. Before joining the Franklin Templeton Group in 1996, she
FRANKLIN MUTUAL was a research analyst for Heine.
</TABLE>
The managers listed above are part of a larger team of investment professionals
with management responsibility for all of the funds managed by Franklin Mutual,
including this fund.
The team also includes:
<TABLE>
<CAPTION>
<S> <C>
Peter A. Langerman Mr. Langerman has been involved with the management of the fund
CHIEF EXECUTIVE OFFICER AND PRESIDENT since its inception in 1996. Before joining the Franklin Templeton Group
FRANKLIN MUTUAL in 1996, he was a research analyst for Heine.
Robert L. Friedman Mr. Friedman has been involved with the management of the fund since
SENIOR VICE PRESIDENT its inception in 1996. Before joining the Franklin Templeton Group in
FRANKLIN MUTUAL 1996, he was a research analyst for Heine.
Jeffrey A. Altman Mr. Altman has been involved with the management of the fund since its
SENIOR VICE PRESIDENT inception in 1996. Before joining the Franklin Templeton Group in 1996,
FRANKLIN MUTUAL he was a research analyst for Heine.
Raymond Garea Mr. Garea has been involved with the management of the fund since its
SENIOR VICE PRESIDENT inception in 1996. Before joining the Franklin Templeton Group in 1996,
FRANKLIN MUTUAL he was a research analyst for Heine.
David J. Winters Mr. Winters has been involved with the management of the fund since
SENIOR VICE PRESIDENT 1998. Before joining the Franklin Templeton Group in 1996, he was a
AND DIRECTOR OF RESEARCH research analyst for Heine.
FRANKLIN MUTUAL
</TABLE>
In addition, the following Franklin Mutual employee serves as Assistant
Portfolio Manager:
<TABLE>
<CAPTION>
<S> <C>
Jeff Diamond Mr. Diamond has been involved with the management of the fund since
ASSISTANT PORTFOLIO MANAGER 1998. Before joining the Franklin Templeton Group in 1998, he was a
FRANKLIN MUTUAL vice president and co-manager of Prudential Conservative Stock Fund.
</TABLE>
The fund pays Franklin Mutual a fee for managing the fund's assets. For the
fiscal year ended December 31, 1999, the fund paid 0.60% of its average daily
net assets to the manager for its services.
MS-6 Mutual Shares Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year ended December 31,
- ----------------------------------------------------------------------
1999 1,2
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 12.36
-----
Net investment income .16
Net realized and unrealized gains 1.07
-----
Total from investment operations 1.23
-----
Distributions from net investment income (.34)
-----
Net asset value, end of year 13.25
=====
Total return (%)+ 9.91
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 5,716
Ratios to average net assets: (%)
Expenses 1.04*
Net investment income 1.26*
Portfolio turnover rate (%) 80.02
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding. 2On February 8, 2000, a merger and reorganization
was approved that will combine the assets of the fund with a similar fund of the
Templeton Variable Products Series Fund (TVP), effective May 1, 2000. The table
above only reflects fund statistics of the fund, which was the surviving fund of
the merger, and not of the TVP fund. The fund statistics are for the year ended
December 31, 1999.
MS-7 Mutual Shares Securities Fund - Class 2
<PAGE>
Templeton Asset Strategy Fund
(previously Templeton Asset Allocation Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is high total return.
MAIN INVESTMENTS Under normal market conditions, the fund will invest in equity
securities of companies in any country, debt securities of companies and
governments of any country, and in money market instruments. The mix of
investments will be adjusted to capitalize on total return potential produced by
changing economic conditions throughout the world. While there are no minimum or
maximum percentage targets for each asset class, historically the fund has been
invested predominantly in stocks.
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities.
- --------------------------------------------------------------------------------
The fund invests primarily in common stocks and bonds of U.S. and non-U.S.
countries.
- --------------------------------------------------------------------------------
A debt security obligates the issuer to the bondholders, both to repay a loan of
money at a future date and generally to pay interest. Common debt securities are
secured and unsecured bonds, bonds convertible into common stock, notes, and
short-term debt investments.
The fund's debt investments will be primarily "investment grade". These are
issues rated in the top four rating categories (AAA to BBB) by independent
rating agencies such as Standard & Poor's Ratings Group (S&P/registered
trademark/) or Moody's Investors Services, Inc. (Moody's) or, if unrated,
determined by the fund's manager to be comparable. The fund will not invest in
defaulted securities, but may invest in those which are rated below investment
grade. Many debt securities of non-U.S. issuers, and especially emerging market
issuers, are rated below investment grade or are unrated so that their
selection depends on the manager's internal analysis.
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to its
evaluation of the company's potential long-term earnings, asset value and cash
flow. A company's historical value measures, including price/earnings ratio,
profit margins, and liquidation value, will also be considered, but are not
limiting factors. As a "bottom-up" investor focusing primarily on individual
securities, the fund may from time to time have significant investments in one
or more countries, sectors or industries.
In choosing debt investments, the fund's manager allocates its assets among
issuers, geographic regions, and currencies based upon its assessment of
relative interest rates among currencies, the manager's outlook for changes in
interest rates, and credit risks. The manager typically does not use derivatives
to hedge (protect) its stock investments against currency risk, believing the
costs generally outweigh the benefits. Rather, the manager intends to manage the
fund's exposure to various geographic regions and their currencies based on its
assessment of changing market and political conditions. With respect to debt
securities, the manager may also from time to time make use of forward currency
exchange contracts (Hedging Instruments) for hedging purposes.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
TA-1 Templeton Asset Strategy Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks and bonds the fund holds fluctuate in price with market
conditions and currencies around the world, the value of your investment in the
fund will go up and down. This means you could lose money over short or even
extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to non-U.S.
investments in non-U.S. courts than with respect to U.S. companies in U.S.
courts.
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, thus, impact fund performance.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative
TA-2 Templeton Asset Strategy Fund - Class 2
<PAGE>
investments which may involve a small investment relative to the risk assumed.
Their successful use will depend on the manager's ability to predict market
movements, and their use may have the opposite effect of that intended.
More detailed information about the fund, its policies and risks can be found in
the SAI.
TA-3 Templeton Asset Strategy Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- ---------------------------------------------------------------
<S> <C> <C> <C>
Templeton Asset Strategy
Fund - Class 2 1 22.54% 16.92% 13.01%
MSCI World Index 2 25.34% 20.25% 11.96%
JP Morgan Global
Government Bond Index 2 -5.08% 6.69% 7.81%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains. A
merger and reorganization was approved that combined the fund with a similar
fund of Templeton Variable Products Series Fund (TVP). The performance shown
reflects the performance of the TVP fund. Because class 2 shares were not
offered until 5/1/97, the performance shown reflects a "blended" figure,
combining: (a) for periods prior to class 2's inception, historical results of
class 1 shares, and (b) for periods after 5/1/97, class 2's results reflecting
an additional 12b-1 fee expense which was 0.25% annually based on the average
daily net assets of TVP, which also affects all future performance. Current
12b-1 fee expenses have been set by the Board at 0.25% annually based on the
fund's average daily net assets.
2. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International (MSCI) All Country World Free Index measures the performance of
securities located in 48 countries, including emerging markets in Latin America,
Asia, and Eastern Europe. The unmanaged MSCI World Index tracks the performance
of approximately 1500 securities in 23 countries and is designed to measure
world stock market performance. The unmanaged JP Morgan Global Government Bond
Index tracks the performance of government bond markets in 13 countries. One
cannot invest directly in an index, nor is an index representative of the fund's
portfolio.
TA-4 Templeton Asset Strategy Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON ASSET STRATEGY FUND1 - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.60%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.18%
----
Total annual fund operating expenses 1.03%
====
</TABLE>
1. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton Global Asset Allocation Fund, effective 5/1/00. The
shareholders of that fund had approved new management fees, which apply to the
combined fund effective 5/1/00. The table shows restated total expenses based on
the new fees and the assets of the fund as of 12/31/99, and not the assets of
the combined fund. However, if the table reflected both the new fees and the
combined assets, the fund's expenses after 5/1/00 would be estimated as:
Management fees 0.60%, Distribution and service fees 0.25%, Other expenses
0.14%, and Total annual fund operating expenses 0.99%.
2. The fund administration fee is paid indirectly through the management fee.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $105 $328 $569 $1,259
</TABLE>
TA-5 Templeton Asset Strategy Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite 2100,
Fort Lauderdale, Florida 33394, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for managing the equity portion of the fund
is:
<TABLE>
<CAPTION>
<S> <C>
Gary Clemons, Mr. Clemons has managed the equity portion of the fund since 1995,
EXECUTIVE VICE PRESIDENT, TICI and has been with the Franklin Templeton Group since 1990.
Tucker Scott CFA, Mr. Scott has managed the equity portion of the fund since 1998. Before
VICE PRESIDENT, TICI joining the Franklin Templeton Group in 1996, he worked for Aeltus
Investment Management.
Peter A. Nori CFA, Mr. Nori has managed the equity portion of the fund since 1996, and has
SENIOR VICE PRESIDENT, TICI been with the Franklin Templeton Group since 1987.
</TABLE>
The fund's debt securities are managed by a team of Templeton Global Bond
Managers, a division of TICI.
The fund pays TICI a fee for managing the fund's assets. The fee is equal to an
annual rate of:
/bullet/ 0.65% of the value of the fund's net assets up to and including 200
million;
/bullet/ 0.585% of the value of the fund's net assets over $200 million up to
and including $1.3 billion; and
/bullet/ 0.52% of the value of the fund's net assets over $1.3 billion.
TA-6 Templeton Asset Strategy Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP (PWC),
independent auditors, for the fiscal year ended December 31, 1999, and by other
auditors for the fiscal years before 1999. PWC's report from 1999, along with
the financial statements, are included in the fund's Annual Report (available
upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------------------
1999 1,2 1998 1997 3
------------------------------------
<S> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 22.38 22.32 20.40
------------------------------------
Net investment income .36 .63 .16
Net realized and unrealized gains 3.80 .74 1.76
------------------------------------
Total from investment operations 4.16 1.37 1.92
------------------------------------
Distributions from net investment income (.46) (.64) --
Distributions from net realized gains (2.81) (.67) --
------------------------------------
Total distributions (3.27) (1.31) --
------------------------------------
Net asset value, end of year 23.27 22.38 22.32
====================================
Total return (%)+ 22.54 6.10 9.41
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 20,962 15,763 9,665
Ratios to average net assets: (%)
Expenses .99 1.03 1.03*
Net investment income 1.71 2.61 1.97*
Portfolio turnover rate (%) 45.34 43.18 45.27
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. Based on average shares outstanding.
2. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the Templeton Asset Allocation Fund, a series of Templeton
Variable Products Series Fund (TVP) with a similar fund of the Franklin Variable
Insurance Products Trust (VIP), effective May 1, 2000. The table above only
reflects fund statistics of the TVP fund, which was the surviving fund of the
merger, and not of the VIP fund. The fund statistics are for the year ended
December 31, 1999.
3. For the period May 1, 1997 (effective date) to December 31, 1997.
TA-7 Templeton Asset Strategy Fund - Class 2
<PAGE>
Templeton Developing Markets Securities Fund
(previously Templeton Developing Markets Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital appreciation.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in emerging market equity securities. Emerging market
equity securities generally include equity securities that trade in emerging
markets or are issued by companies that derive significant revenue from goods,
services, or sales produced, or have their principal activities or significant
assets, in emerging market countries.
Emerging market countries generally include those considered to be emerging by
the World Bank, the International Finance Corporation, the United Nations, or
the countries' authorities. These countries are typically located in the
Asia-Pacific region, Eastern Europe, Central and South America, and Africa. The
fund may from time to time have significant investments in one or more
countries. Emerging market equity securities and emerging market countries are
more fully described in the SAI.
- --------------------------------------------------------------------------------
The fund invests primarily in the common stocks of companies located in, or that
have their principal activities in, emerging market countries.
- --------------------------------------------------------------------------------
An equity security represents a proportionate share of the ownership of a
company; its value is based on the success of the company's business, any income
paid to stockholders, the value of its assets, and general market conditions.
Common and preferred stocks, and securities convertible into common stock are
examples of equity securities.
In addition to its main investments, the fund may invest significantly in
securities of issuers in developed market countries.
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager may
make onsite visits to prospective companies to assess critical factors such as
management strength and local conditions. In addition, the manager focuses on
the market price of a company's securities relative to its evaluation of the
company's potential long-term (typically 5 years) earnings, asset value, cash
flow, and balance sheet. A company's historical value measures, including
price/earnings ratio, book value, profit margins and liquidation value, will
also be considered, but are not limiting factors. The manager typically does not
use derivatives to hedge (protect) its stock investments against currency risk,
believing the costs generally outweigh the benefits. Rather, the manager intends
to manage the fund's exposure to various geographic regions and to their
currencies, through its individual company investments, and based on its
assessment of changing currency rates, and market and political conditions. The
fund may have significant investments in particular sectors, such as
telecommunications and technology.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency investments.
Such investments may be medium-term (less than 5 years for this fund) or
short-term, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over
the long term, their value tends to go up and down more dramatically over the
short term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in
TD-1 Templeton Developing Markets Securities Fund - Class 2
<PAGE>
such stocks if it believes the market may have overreacted to adverse
developments or failed to appreciate positive changes. However, if other
investors fail to recognize the company's value (and do not become buyers, or
become sellers), or favor investing in faster-growing companies, value stocks
may not increase in value as anticipated by the manager and may even decline
further.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with emerging market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase the potential for losses in the fund.
EMERGING MARKETS IN PARTICULAR CAN EXPERIENCE SIGNIFICANT PRICE VOLATILITY IN
ANY GIVEN YEAR, AND EVEN DAILY. The fund should be thought of as a long-term
investment for the aggressive portion of a well- diversified portfolio.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
internal and external conflicts, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, punitive taxes, and certain
custody and settlement risks. In addition, political or economic conditions may
disrupt previously established securities markets, causing liquid securities to
become illiquid, particularly in emerging market countries.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to non-U.S.
investments in non-U.S. courts than with respect to U.S. companies in U.S.
courts.
TELECOMMUNICATIONS AND TECHNOLOGY COMPANIES These companies' stocks can be
subject to abrupt or erratic price movements. They have historically been
volatile in price, especially over the short term, due to the rapid pace of
product change and development affecting such companies. For example, these
companies are subject to significant competitive pressures such as new market
entrants, aggressive pricing and competition for market share, and the potential
for falling profit margins. Prices often change collectively without regard to
the merits of individual companies.
INTEREST RATE Rate changes can be sudden and unpredictable. Increases in
interest rates may have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or may have more difficulty meeting interest payments. Similarly,
emerging market economies may be especially sensitive to interest rate changes.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TD-2 Templeton Developing Markets Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 03/04/96
- ---------------------------------------------------------
<S> <C> <C>
Templeton Developing Markets
Securities Fund - Class 2 1 53.27% -5.45%
MSCI Emerging Markets Free
Index 2 66.41% 2.62%
MSCI World Index 2 25.34% 20.15%
IFC Investable Composite Index 67.11% 3.60%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains. A
merger and reorganization was approved that combined the fund with a similar
fund of Templeton Variable Products Series Fund (TVP). The performance shown
reflects the performance of the TVP fund. Because class 2 shares were not
offered until 5/1/97, the performance shown reflects a "blended" figure,
combining: (a) for periods prior to class 2's inception, historical results of
class 1 shares, and (b) for periods after 5/1/97, class 2's results reflecting
an additional 12b-1 fee expense which was 0.25% annually based on the average
daily net assets of TVP, which also affects all future performance. Current
12b-1 fee expenses have been set by the Board at 0.25% annually based on the
fund's average daily net assets.
2. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International (MSCI) Emerging Markets Free Index is a market
capitalization-weighted equity index comprising 26 of the 48 countries in the
MSCI universe. The MSCI World Index comprises the developed markets of 22
countries. The International Finance Corporation's Investable Composite Index is
an emerging markets index that includes 2,000 stocks from 18 countries including
Mexico, South Korea, Brazil, Jordan and Turkey. One cannot invest directly in an
index, nor is an index representative of the fund's portfolio.
TD-3 Templeton Developing Markets Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON DEVELOPING MARKETS SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 1.25%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.31%
----
Total annual fund operating expenses 1.81%
====
</TABLE>
1. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton Developing Markets Equity Fund, effective 5/1/00.
The shareholders of that fund had approved new management fees, which apply to
the combined fund effective 5/1/00. The table shows restated total expenses
based on the new fees and the assets of the fund as of 12/31/99, and not the
assets of the combined fund. However, if the table reflected both the new fees
and the combined assets, the fund's expenses after 5/1/00 would be estimated as:
Management fees 1.25%, Distribution and service fees 0.25%, Other expenses
0.29%, and Total annual fund operating expenses 1.79%.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $184 $569 $980 $2,127
</TABLE>
TD-4 Templeton Developing Markets Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Templeton Asset Management Ltd. (TAML), 7 Temasek Blvd., #38-03 Suntec Tower
One, Singapore, 038987, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Dr. J. Mark Mobius. Dr. Mobius has been a manager of the fund since its inception in 1994,
MANAGING DIRECTOR, TAML and has been with the Franklin Templeton Group since 1987.
Tom Wu Mr. Wu has been a manager of the fund since its inception in 1994, and
DIRECTOR, TAML has been with the Franklin Templeton Group since 1987.
H. Allan Lam Mr. Lam has been a manager of the fund since its inception in 1994, and
PORTFOLIO MANAGER, TAML has been with the Franklin Templeton Group since 1987.
Eddie Chow Mr. Chow has been a manager of the fund since 1996, and has been with
PORTFOLIO MANAGER, TAML the Franklin Templeton Group since 1994.
Dennis Lim Mr. Lim has been a manager of the fund since 1996, and has been with
DIRECTOR, TAML the Franklin Templeton Group since 1990.
Tek-Khoan Ong Mr. Ong has been a manager of the fund since 1996, and has been with
PORTFOLIO MANAGER, TAML the Franklin Templeton Group since 1993.
</TABLE>
The fund pays TAML a fee for managing the fund's assets. The fee is equal to an
annual rate of 1.25%.
TD-5 Templeton Developing Markets Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP (PWC),
independent auditors, for the fiscal year ended December 31, 1999, and by other
auditors for the fiscal years before 1999. PWC's report for 1999, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 2 Year ended December 31,
- --------------------------------------------------------------------------------------
1999 2,3 1998 1997 1
--------------------------------------
<S> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 5.12 6.62 9.85
--------------------------------------
Net investment income .03 .07 .04
Net realized and unrealized gains (losses) 2.66 (1.42) (3.27)
--------------------------------------
Total from investment operations 2.69 (1.35) (3.23)
--------------------------------------
Distributions from net investment income (.07) (.09) --
Distributions from net realized gains -- (.06) --
--------------------------------------
Total distributions (.07) (.15) --
--------------------------------------
Net asset value, end of year 7.74 5.12 6.62
======================================
Total return (%)+ 53.27 (21.03) (32.79)
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 49,654 17,287 9,569
Ratios to average net assets: (%)
Expenses 1.75 1.91 1.77*
Net investment income .52 1.44 1.48*
Portfolio turnover rate (%) 60.27 23.22 23.82
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period May 1, 1997 (effective date) to December 31, 1997.
2. Based on average shares outstanding.
3. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the Templeton Developing Markets Fund, a series of
Templeton Variable Products Series Fund (TVP) with a similar fund of the
Franklin Variable Insurance Products Trust (VIP), effective May 1, 2000. The
table above only reflects fund statistics of the TVP fund, which was the
surviving fund of the merger, and not of the VIP fund. The fund statistics are
for the year ended December 31, 1999.
TD-6 Templeton Developing Markets Securities Fund - Class 2
<PAGE>
Templeton Global Income Securities Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is high current income, consistent with
preservation of capital. Capital appreciation is a secondary consideration.
- --------------------------------------------------------------------------------
The fund invests primarily in bonds of governments located around the world.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in the debt securities of governments and their
political subdivisions and agencies, supranational organizations, and companies
located anywhere in the world, including emerging markets. A debt security
obligates the issuer to the bondholders, both to repay a loan of money at a
future date and generally to pay interest. Common debt securities are secured
and unsecured bonds, bonds convertible into common stock, notes, and short-term
debt investments.
The fund focuses on "investment grade" debt securities. These are issues rated
in the top four rating categories (AAA to BBB) by independent rating agencies
such as Standard & Poor's Ratings Group (S&P/registered trademark/) or Moody's
Investors Services, Inc. (Moody's) or, if unrated, determined by the fund's
manager to be comparable. The fund may also invest up to 35% of its net assets
in high yield, lower rated debt securities ("junk bonds") that are rated at
least B, including debt from emerging markets' governments or companies, or if
unrated, determined by the fund's manager to be comparable. The fund will not
purchase defaulted securities. If, however, a security is downgraded in rating
or goes into default, the fund will not automatically sell the security.
Many debt securities of non-U.S. issuers, and especially emerging market
issuers, are rated below investment grade or are unrated so that their selection
depends on the manager's internal analysis. The average maturity of debt
securities in the fund's portfolio is medium-term (about 5 to 15 years) but will
fluctuate depending on the manager's outlook on the country and future interest
rate changes.
PORTFOLIO SELECTION The manager allocates the fund's assets among issuers,
geographic regions, and currencies based upon its assessment of relative
interest rates among currencies, the manager's outlook for changes in interest
rates, and credit risks. In considering these factors, a country's changing
market, economic, and political conditions, such as inflation rate, growth
prospects, global trade patterns, and government policies will be evaluated. The
manager intends to manage the fund's exposure to various currencies, and may
from time to time seek to hedge (protect) against currency risk by using forward
currency exchange contracts (Hedging Instruments).
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
TGI-1 Templeton Global Income Securities Fund - Class 2
<PAGE>
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Changes in interest rates in markets around the world affect the prices of the
fund's debt securities. If rates rise, the value of the fund's debt securities
will fall and so too will the fund's share price. This means you could lose
money.
- --------------------------------------------------------------------------------
INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates
rise, debt securities can lose market value. Similarly, when interest rates
fall, debt securities can gain value. In general, securities with longer
maturities are more sensitive to these price changes. Increases in interest
rates may also have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or have more difficulty meeting interest payments. A sub-category of
interest rate risk is reinvestment risk, which is the risk that interest rates
will be lower when the fund seeks to reinvest interest payments, or the proceeds
from a matured debt security, resulting in less income received by the fund.
FOREIGN SECURITIES Securities of governments and companies located outside the
U.S. involve risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to non-U.S.
investments in non-U.S. courts than with respect to U.S. companies in U.S.
courts.
CREDIT An issuer may be unable to make interest payments or repay principal.
Changes in an issuer's financial strength or in a security's credit rating may
affect a security's value and, thus, impact fund performance.
Lower-rated securities Junk bonds generally have more risk than higher-rated
securities, and can be considered speculative. Companies issuing high yield debt
securities are not as strong financially, and are more likely to encounter
financial difficulties and to be more vulnerable to changes in the economy, such
as a recession or a sustained period of rising interest rates. If an issuer
stops paying interest and/or principal, payments may never resume. The fund may
lose its entire investment on bonds that may be, or are, in default.
The prices of high yield debt securities fluctuate more than higher quality
securities. Prices are
TGI-2 Templeton Global Income Securities Fund - Class 2
<PAGE>
especially sensitive to developments affecting the company's business and to
rating changes, and typically rise and fall in response to factors that affect
the company's stock prices. In addition, the entire high yield securities market
can experience sudden and sharp price swings due to changes in economic
conditions, market activity, large sustained sales, a high-profile default, or
other factors. High yield securities generally are less liquid than
higher-quality bonds, and infrequent trades can make accurate pricing more
difficult. At times, it may be difficult to sell these securities promptly at an
acceptable price.
HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered
derivative investments, which may involve a small investment relative to the
risk assumed. Their successful use will depend on the manager's ability to
predict market movements, and their use may have the opposite effect of that
intended. Risks include potential loss to the fund due to the imposition of
controls by a government on the exchange of foreign currencies, delivery
failure, default by the other party, or inability to close out a position
because the trading market becomes illiquid.
DIVERSIFICATION The fund is non-diversified as defined by federal securities
laws. As such, it may invest a greater portion of its assets in one issuer and
have a smaller number of issuers than a diversified fund. Therefore, the fund
may be more sensitive to economic, business, political or other changes
affecting similar issuers or securities. The fund intends, however, to meet tax
diversification requirements.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep interest
rate risk, country allocations, and bond maturities at desired levels, may cause
the fund's portfolio turnover rate to be high. High turnover generally increases
the fund's transaction costs.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TGI-3 Templeton Global Income Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
1 Year 5 Years 10 Years
- --------------------------------------------------------------
<S> <C> <C> <C>
Templeton Global Income
Securities Fund - Class 2 1 -6.09% 5.32% 5.88%
JP Morgan Global
Government Bond Index 2 -5.08% 6.69% 7.81%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The unmanaged JP Morgan Global Government
Bond Index tracks the performance of government bond markets in 13 countries.
Indices include reinvested dividends and/or interest. One cannot invest directly
in an index, nor is an index representative of the fund's investments.
TGI-4 Templeton Global Income Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON GLOBAL INCOME SECURITIES FUND1 - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)1
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 2 0.60%
Distribution and service (12b-1) fees 3 0.25%
Other expenses 0.05%
----
Total annual fund operating expenses 0.90%
====
</TABLE>
1. On 2/8/00, a merger and reorganization was approved that combined the fund
with a similar fund of Templeton Variable Products Series Fund, effective
5/1/00. The table shows total expenses based on the fund's assets as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management fees 0.60%, Distribution and service fees 0.25%, Other expenses
0.04%, and Total annual fund operating expenses 0.89%.
2. The fund administration fee is paid indirectly through the management fee.
3. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $92 $287 $498 $1,108
</TABLE>
TGI-5 Templeton Global Income Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, through
its Templeton Global Bond Managers division (Global Bond Managers), is the
fund's sub-advisor. A team from Global Bond Managers provides Advisers with
investment management advice and assistance.
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid .60% of its average daily net assets to
the manager for its services.
- --------------------------------------------------------------------------------
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year ended December 31,
- ----------------------------------------------------------------------
1999 1,2
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 12.93
-----
Net investment income .60
Net realized and unrealized losses (1.44)
-----
Total from investment operations (.84)
-----
Distributions from net investment income (1.05)
-----
Net asset value, end of year 11.04
=====
Total return (%) (6.53)
Ratios/supplemental data+
Net assets, end of year ($ x 1,000) 443
Ratios to average net assets: (%)
Expenses .91*
Net investment income 5.36*
Portfolio turnover rate (%) 80.76
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
2. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the fund with a similar fund of the Templeton Variable
Products Series Fund (TVP), effective May 1, 2000. The table above only reflects
fund statistics of the fund, which was the surviving fund of the merger, and not
of the TVP fund. The fund statistics are for the year ended December 31, 1999.
TGI-6 Templeton Global Income Securities Fund - Class 2
<PAGE>
Templeton Growth Securities Fund
(previously Templeton Global Growth Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in the equity securities of companies located anywhere
in the world, including those in the U.S. and emerging markets. While there are
no set percentage targets, the fund generally invests in large- to medium-cap
companies with market capitalization values (share price multiplied by the
number of common stock shares outstanding) greater than $2 billion, but may
invest a significant portion in small-cap companies. An equity security
represents a proportionate share of the ownership of a company; its value is
based on the success of the company's business, any income paid to stockholders,
the value of its assets, and general market conditions. Common and preferred
stocks, and securities convertible into common stock are examples of equity
securities.
- --------------------------------------------------------------------------------
The fund invests primarily in U.S. and non-U.S. common stocks.
- --------------------------------------------------------------------------------
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager will
focus on the market price of a company's securities relative to its evaluation
of the company's potential long-term earnings, asset value and cash flow. A
company's historical value measures, including price/earnings ratio, profit
margins and liquidation value, will also be considered, but are not limiting
factors. As a "bottom-up" investor focusing primarily on individual securities,
the fund may from time to time have significant investments in particular
countries. The manager typically does not use derivatives to hedge (protect) its
stock investments against currency risk, believing the costs generally outweigh
the benefits. Rather, the manager intends to manage the fund's exposure to
various geographic regions and their currencies based on its assessment of
changing currency rates, and market and political conditions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions and
currencies around the world, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or in favor investing in
faster-growing companies, value stocks may not increase in value as anticipated
by the manager and may even decline further.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in
TG-1 Templeton Growth Securities Fund - Class 2
<PAGE>
foreign currency exchange rates will increase or decrease the fund's returns
from its foreign portfolio holdings. Devaluations of currency by a country's
government can significantly decrease the value of securities denominated in
that currency. The economic impact of the euro, a relatively new currency
adopted by certain European countries to replace their national currencies, is
unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to non-U.S.
investments in non-U.S. courts than with respect to U.S. companies in U.S.
courts.
SMALLER COMPANIES While smaller companies, and to some extent mid-size
companies, may offer opportunities for capital growth, they also have
significant risk. Historically, smaller company securities have been more
volatile in price and have fluctuated independently from larger company
securities, especially over the shorter-term. Smaller or relatively new
companies can be particularly sensitive to changing economic conditions and
increases in interest rates, their growth prospects are less certain and their
securities are less liquid. These companies may suffer significant losses, and
can be considered speculative.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TG-2 Templeton Growth Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 5 Years 03/15/94
- -----------------------------------------------------------------
<S> <C> <C> <C>
Templeton Growth
Securities Fund - Class 2 1 20.84% 15.36% 13.73%
MSCI AC World Free Index 2 26.82% 19.19% 16.79%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International (MSCI) All Country World Free Index measures the performance of
securities located in 48 countries, including emerging markets in Latin America,
Asia and Eastern Europe. Indices include reinvested dividends and/or interest.
One cannot invest directly in an index, nor is an index representative of the
fund's investments.
TG-3 Templeton Growth Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON GROWTH SECURITIES FUND 1 -
CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES 1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 2 0.83%
Distribution and service (12b-1) fees 3 0.25%
Other expenses 0.05%
----
Total annual fund operating expenses 1.13%
====
</TABLE>
1. On 2/8/00, a merger and reorganization was approved that combined the fund
with a similar fund of Templeton Variable Products Series Fund, effective
5/1/00. The table shows total expenses based on the fund's assets as of
12/31/99, and not the assets of the combined fund. However, if the table
reflected combined assets, the fund's expenses after 5/1/00 would be estimated
as: Management fees 0.80%, Distribution and service fees 0.25%, Other expenses
0.05%, and Total annual fund operating expenses 1.10%.
2. The fund administration fee is paid indirectly through the management fee.
3. The fund's class 2 distribution plan or "rule 12b-1 plan" is described in the
fund's prospectus. While the maximum amount payable under the fund's class 2
rule 12b-1 plan is 0.35% per year of the fund's average daily net assets, the
Board of Trustees of Franklin Templeton Variable Insurance Products Trust has
set the current rate at 0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $112 $350 $606 $1,340
</TABLE>
TG-4 Templeton Growth Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Templeton Global Advisors Limited (TGAL), Lyford Cay, Nassau, N.P., Bahamas, is
the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Mark G. Holowesko, CFA Mr. Holowesko has been a manager of the fund since November 1999,
PRESIDENT, TGAL and has been with the Franklin Templeton Group since 1985.
Richard Sean Farrington, CFA Mr. Farrington has been a manager of the fund since 1995, and has been
SENIOR VICE PRESIDENT, TGAL with the Franklin Templeton Group since 1990.
Jeffrey A. Everett, CFA Mr. Everett has been a manager of the fund since its inception in 1994,
EXECUTIVE VICE PRESIDENT, TGAL and has been with the Franklin Templeton Group since 1990.
</TABLE>
The fund pays TGAL a fee for managing its assets and providing certain
administrative facilities and services to the fund. For the fiscal year ended
December 31, 1999, the fund paid 0.83% of its average daily net assets to the
manager for its services.
TG-5 Templeton Growth Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- ----------------------------------------------------------------------
1999 1,2
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 15.34
-----
Net investment income .17
Net realized and unrealized gains 2.17
-----
Total from investment operations 2.34
-----
Distributions from net investment income (.36)
Distributions from net realized gains (1.72)
-----
Total distributions (2.08)
-----
Net asset value, end of year 15.60
=====
Total return (%)+ 16.35
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 4,483
Ratios to average net assets: (%)
Expenses 1.14*
Net investment income 1.17*
Portfolio turnover rate (%) 46.54
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
2. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the fund with a similar fund of the Templeton Variable
Products Series Fund (TVP), effective May 1, 2000. The table above only reflects
fund statistics of the fund, which was the surviving fund of the merger, and not
of the TVP fund. The fund statistics are for the year ended December 31, 1999.
TG-6 Templeton Growth Securities Fund - Class 2
<PAGE>
Templeton International Securities Fund
(previously Templeton International Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital growth.
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities of companies located outside the
U.S., including those in emerging markets. While there are no set percentage
targets, the fund generally invests in large- to medium-cap companies with
market capitalization values (share price multiplied by the number of common
stock shares outstanding) greater than $2 billion. An equity security represents
a proportionate share of the ownership of a company; its value is based on the
success of the company's business, any income paid to stockholders, the value of
its assets, and general market conditions. Common and preferred stocks, and
securities convertible into common stock are examples of equity securities.
- --------------------------------------------------------------------------------
The fund invests primarily in non-U.S. common stocks.
- --------------------------------------------------------------------------------
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the fund's manager will
focus on the market price of a company's securities relative to its evaluation
of the company's potential long-term earnings, asset value and cash flow. A
company's historical value measures, including price/earnings ratio, profit
margins and liquidation value, will also be considered, but are not limiting
factors. As a "bottom-up" investor focusing primarily on individual securities,
the fund may from time to time have significant investments in one or more
countries. The manager typically does not use derivatives to hedge (protect) its
stock investments against currency risk, believing the costs generally outweigh
the benefits. Rather, the manager intends to manage the fund's exposure to
various geographic regions and their currencies based on its assessment of
changing currency rates, and market and political conditions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of
TI-1 Templeton International Securities Fund - Class 2
<PAGE>
securities denominated in that currency. The economic impact of the euro, a
relatively new currency adopted by certain European countries to replace their
national currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to non-U.S.
investments in non-U.S. courts than with respect to U.S. companies in U.S.
courts.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TI-2 Templeton International Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 5 Years 05/01/92
- -----------------------------------------------------------------
<S> <C> <C> <C>
Templeton International
Securities Fund - Class 2 1 22.23% 17.03% 15.25%
MSCI EAFE Index 2 27.30% 13.15% 13.55%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains. A
merger and reorganization was approved that combined the fund with a similar
fund of Templeton Variable Products Series Fund (TVP). The performance shown
reflects the performance of the TVP fund. Because class 2 shares were not
offered until 5/1/97, the performance shown reflects a "blended" figure,
combining: (a) for periods prior to class 2's inception, historical results of
class 1 shares, and (b) for periods after 5/1/97, class 2's results reflecting
an additional 12b-1 fee expense which was 0.25% annually based on the average
daily net assets of TVP, which also affects all future performance. Current
12b-1 fee expenses have been set by the Board at 0.25% annually based on the
fund's average daily net assets.
2. Source: Standard & Poor's Micropal. The unmanaged Morgan Stanley Capital
International Europe, Australia, Far East (MSCI EAFE) Index tracks the
performance of approximately 1000 securities in 20 countries. The average
company, the securities of which are a component of that index, has a market
capitalization of over $3 billion. One cannot invest directly in an index, nor
is an index representative of the fund's portfolio.
TI-3 Templeton International Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON INTERNATIONAL SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES1
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.69%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.19%
----
Total annual fund operating expenses 1.13%
====
</TABLE>
1. On 2/8/00, shareholders approved a merger and reorganization that combined
the fund with the Templeton International Equity Fund, effective 5/1/00. The
shareholders of that fund had approved new management fees, which apply to the
combined fund effective 5/1/00. The table shows restated total expenses based on
the new fees and the assets of the fund as of 12/31/99, and not the assets of
the combined fund. However, if the table reflected both the new fees and the
combined assets, the fund's expenses after 5/1/00 would be estimated as:
Management fees 0.65%, Distribution and service fees 0.25%, Other expenses
0.20%, and Total annual fund operating expenses 1.10%.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $112 $350 $606 $1,340
</TABLE>
TI-4 Templeton International Securities Fund - Class 2
<PAGE>
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Templeton Investment Counsel, Inc., (TICI), Broward Financial Centre, Suite
2100, Fort Lauderdale, Florida 33394, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Peter A. Nori, CFA Mr. Nori has been a manager of the fund since November 1999, and has
SENIOR VICE PRESIDENT, TICI been with the Franklin Templeton Group since 1987.
Mark R. Beveridge CFA Mr. Beveridge has been a manager of the fund since 1994, and has been
SENIOR VICE PRESIDENT, TICI with the Franklin Templeton Group since 1994.
</TABLE>
The fund pays TICI a fee for managing the fund's assets. The fee is equal to an
annual rate of:
/bullet/ 0.75% of the value of the fund's net assets up to and including $200
million;
/bullet/ 0.675% of the value of the fund's net assets over $200 million up to
and including $1.3 billion; and
/bullet/ 0.60% of the value of the fund's net assets over $1.3 billion.
TI-5 Templeton International Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP (PWC),
independent auditors, for the fiscal year ended December 31, 1999, and by other
auditors for the fiscal years before 1999. PWC's report for 1999, along with the
financial statements, are included in the fund's Annual Report (available upon
request).
<TABLE>
<CAPTION>
Class 2 Year Ended December 31,
- -----------------------------------------------------------------------------------
1999 1,2 1998 1997 3
-------------------------------------
<S> <C> <C> <C>
Per share data ($)
Net asset value, beginning of year 20.61 20.14 18.40
-------------------------------------
Net investment income .25 .59 .07
Net realized and unrealized gains 3.78 1.25 1.67
-------------------------------------
Total from investment operations 4.03 1.84 1.74
-------------------------------------
Distributions from net investment income (.53) (.48) --
Distributions from net realized gains (1.98) (.89) --
-------------------------------------
Total distributions (2.51) (1.37) --
-------------------------------------
Net asset value, end of year 22.13 20.61 20.14
=====================================
Total return (%)+ 23.23 9.08 9.46
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 101,365 39,886 17,606
Ratios to average net assets: (%)
Expenses 1.10 1.11 1.13*
Net investment income 1.26 2.69 1.14*
Portfolio turnover rate (%) 30.04 29.56 16.63
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. Based on average shares outstanding.
2. On February 8, 2000, a merger and reorganization was approved that will
combine the assets of the Templeton International Fund, a series of Templeton
Variable Products Series Fund (TVP) with a similar fund of the Franklin Variable
Insurance Products Trust (VIP), effective May 1, 2000. The table above only
reflects fund statistics of the TVP fund, which was the surviving fund of the
merger, and not of the VIP fund. The fund statistics are for the year ended
December 31, 1999. 3For the period May 1, 1997 (effective date) to December 31,
1997.
TI-6 Templeton International Securities Fund - Class 2
<PAGE>
Templeton International Smaller Companies Fund
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital appreciation.
- --------------------------------------------------------------------------------
The fund invests primarily in the common stocks of smaller companies outside the
U.S.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in the equity securities of smaller companies located
outside the U.S., including those in emerging markets. Smaller companies
generally are those with market capitalization values (share price multiplied by
the number of common stock shares outstanding) of less than $2 billion, at the
time of purchase. An equity security represents a proportionate share of the
ownership of a company; its value is based on the success of the company's
business, any income paid to stockholders, the value of its assets, and general
market conditions. Common and preferred stocks, and securities convertible into
common stock are examples of equity securities.
In addition to the fund's main investments, the fund may also invest in equity
securities of larger capitalization companies located outside the U.S.
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing equity investments, the fund's
manager will focus on the market price of a company's securities relative to its
evaluation of the company's potential long-term earnings, asset value and cash
flow. A company's historical value measures, including price/earnings ratio,
profit margins and liquidation value, will also be considered, but are not
limiting factors. As a "bottom-up" investor focusing primarily on individual
securities, the fund may from time to time have significant investments in one
or more countries, sectors or industries. The manager typically does not use
derivatives to hedge (protect) its stock investments against currency risk,
believing the costs generally outweigh the benefits. Rather, the manager intends
to manage the fund's exposure to various geographic regions and their currencies
based on its assessment of changing market and political conditions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency investments.
Such investments may be medium-term (less than 5 years for this fund) or
short-term, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
SMALLER COMPANIES While smaller companies may offer opportunities for capital
growth, they also have significant risk. Historically, smaller company
securities have been more volatile in price and have fluctuated independently
from larger company securities, especially over the shorter-term. Smaller or
relatively new companies can be particularly sensitive to changing economic
conditions, including increases
TIS-1 Templeton International Smaller Companies Fund - Class 2
<PAGE>
in interest rates because of their reliance on credit, and their growth
prospects are less certain.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with foreign market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
For example, smaller companies may lack depth of management or may have limited
financial resources for growth or development. They may have limited product
lines or market share. Smaller companies may be in new industries, or their new
products or services may not find an established market or may become quickly
obsolete. Smaller companies' securities may be less liquid which may adversely
affect their price. Investments in these companies may be considered
speculative. Technology and biotechnology industry stocks, in particular, can be
subject to abrupt or erratic price movements.
FOREIGN SECURITIES Securities of companies located outside the U.S. involve
risks that can increase losses in the fund.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
expropriation, restrictions on removal of currency or other assets,
nationalization of assets, punitive taxes, and certain custody and settlement
risks. In addition, political or economic conditions may disrupt previously
established securities markets, causing liquid securities to become illiquid,
particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to non-U.S.
investments in non-U.S. courts than with respect to U.S. companies in U.S.
courts.
INTEREST RATE Rate changes can be sudden and unpredictable. Increases in
interest rates may have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or may have more difficulty meeting interest payments. Similarly,
emerging market economies may be especially sensitive to interest rate changes.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TIS-2 Templeton International Smaller Companies Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 05/01/96
- -------------------------------------------------------------
<S> <C> <C>
Franklin Templeton International
Smaller Companies Fund -
Class 2 1 23.90% 5.20%
The Salomon Global Ex-U.S.
<$1 Billion Index 2 30.28% 2.06%
Salomon Global Ex-U.S. <$1 Billion
and <$15 Billion Custom Index 2 32.40% 2.50%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performances.
2. Source: Standard & Poor's/registered trademark/ Micropal. The Salomon Global
Ex-U.S. Less Than $1 Billion Index includes companies from developed and
emerging markets, excluding the U.S., with a market capitalization below U.S. $1
billion. The Salomon Global Ex-U.S. Less Than $1 Billion and Less Than $1.5
Billion Custom Index is created by combining, Salomon Global Ex-U.S. <$1 Billion
Index from Inception of the fund to 4/30/99 and Salomon Global Ex-U.S. <$1.5
Billion Index from 5/1/99 - 12/31/99. Indices include reinvested dividends
and/or interest. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
TIS-3 Templeton International Smaller Companies Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 0.85%
Distribution and service (12b-1) fees 1 0.25%
Other expenses 0.26%
----
Total annual fund operating expenses 1.36%
====
</TABLE>
1. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $138 $431 $745 $1,635
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite 2100,
Fort Lauderdale, Florida 33394, is the fund's investment manager.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
Simon Rudolph Mr. Rudolph has been a manager of the fund since 1997. Before joining
SENIOR VICE PRESIDENT, TICI the Franklin Templeton Group in 1997, he was an executive director
with Morgan Stanley.
Peter A. Nori, CFA Mr. Nori has been a manager of the fund since 1997, and has been with
SENIOR VICE PRESIDENT, TICI the Franklin Templeton Group since 1987.
</TABLE>
The fund pays TICI a fee for managing the fund's assets. For the fiscal year
ended December 31, 1999, the fund paid 0.85% of its average daily net assets to
the manager for its services.
TIS-4 Templeton International Smaller Companies Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year ended December 31,
- ---------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 9.44
-----
Net investment income .13
Net realized and unrealized gains 1.82
-----
Total from investment operations 1.95
-----
Distributions from net investment income (.32)
-----
Net asset value, end of year 11.07
=====
Total return (%)+ 20.75
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 2,049
Ratios to average net assets: (%)
Expenses 1.38*
Net investment income 1.21*
Portfolio turnover rate (%) 15.80
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
TIS-5 Templeton International Smaller Companies Fund - Class 2
<PAGE>
Templeton Pacific Growth Securities Fund
(previously Templeton Pacific Growth Fund)
GOAL AND STRATEGIES
- -------------------
[GRAPHIC OMITTED]
GOAL The fund's investment goal is long-term capital growth.
- --------------------------------------------------------------------------------
The fund invests primarily in the common stocks of Pacific Rim companies.
- --------------------------------------------------------------------------------
MAIN INVESTMENTS Under normal market conditions, the fund will invest at least
65% of its total assets in equity securities that trade in Pacific Rim markets,
some of which may be considered emerging markets, and are issued by companies
that have their principal activities in the Pacific Rim. Pacific Rim countries
include Australia, China, Hong Kong, India, Indonesia, Japan, Malaysia, New
Zealand, Pakistan, Philippines, Singapore, South Korea, and Thailand. The fund
may from time to time have substantial investments in one or more countries. An
equity security represents a proportionate share of the ownership of a company;
its value is based on the success of the company's business, any income paid to
stockholders, the value of its assets, and general market conditions. Common and
preferred stocks, and securities convertible into common stock are examples of
equity securities.
In addition to the fund's main investments, the fund may invest in securities of
issuers domiciled outside the Pacific Rim, and linked by tradition, economic
markets, geography or political events to countries in the Pacific Rim.
PORTFOLIO SELECTION The manager's investment philosophy is "bottom-up,"
value-oriented, and long-term. In choosing investments, the manager focuses on
the market price of a company's securities relative to its evaluation of the
company's potential long-term (typically 5 years) earnings, asset value, and
cash flow. The manager will also study a company's balance sheet to assess its
risk profile. A company's historical value measures, including price/earnings
ratio, profit margins and liquidation value, will also be considered, but are
not limiting factors. The manager typically does not hedge (protect) its stock
investments against currency risk, believing the costs generally outweigh the
benefits. Rather, the manager intends to manage the fund's exposure to countries
and their currencies based on its assessment of changing currency rates, and
market and political conditions, even though it is limited to certain geographic
regions.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, is unable to locate suitable investment
opportunities, or seeks to maintain liquidity, it may invest all or
substantially all of the fund's assets in U.S. or non-U.S. currency short-term
investments, including cash or cash equivalents. Under these circumstances, the
fund may temporarily be unable to pursue its investment goal.
- --------------------------------------------------------------------------------
MAIN RISKS
- ----------
[GRAPHIC OMITTED]
The fund's main risks can affect the fund's share price, its distributions or
income, and therefore, the fund's performance.
STOCKS While stocks have historically outperformed other asset classes over the
long term, their value tends to go up and down more dramatically over the short
term. These price movements may result from factors affecting individual
companies, industries, or securities markets.
VALUE STYLE STOCK INVESTING Value stock prices are considered "cheap" relative
to the company's perceived value and are often out of favor with other
investors. The manager may invest in such stocks if it believes the market may
have overreacted to adverse developments or failed to appreciate positive
changes. However, if other investors fail to recognize the company's value (and
do not become buyers, or become sellers), or favor investing in faster-growing
companies, value stocks may not increase in value as anticipated by the manager
and may even decline further.
TP-1 Templeton Pacific Growth Securities Fund - Class 2
<PAGE>
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with Pacific Rim market
conditions and currencies, the value of your investment in the fund will go up
and down. This means you could lose money over short or even extended periods.
- --------------------------------------------------------------------------------
FOREIGN SECURITIES Securities of companies and governments located outside the
U.S. involve risks that can increase losses in the fund. Emerging markets in
particular can experience significant price volatility in any given year, and
even daily. The fund should be thought of as a long-term investment for the
aggressive portion of a well-diversified portfolio.
Region There is a high correlation among some of the markets and currency
exchange rates in Pacific Rim countries. Thus, the fund is subject to much
greater risks of adverse events, including currency devaluations, and political
or economic disruptions, and may experience greater volatility than a fund that
is more broadly diversified geographically.
Currency Many of the fund's investments are denominated in foreign currencies.
Changes in foreign currency exchange rates will increase or decrease the fund's
returns from its foreign portfolio holdings. Devaluations of currency by a
country's government can significantly decrease the value of securities
denominated in that currency. The economic impact of the euro, a relatively new
currency adopted by certain European countries to replace their national
currencies, is unclear.
Country General securities market and interest rate movements in any country
where the fund has investments are likely to affect the value of the securities
the fund owns that trade in that country. The political, economic and social
structures of some countries the fund invests in may be less stable and more
volatile than those in the U.S. The risks of investing in these countries
include the imposition of exchange controls, foreign ownership limitations,
internal and external conflicts, expropriation, restrictions on removal of
currency or other assets, nationalization of assets, punitive taxes, and certain
custody and settlement risks. In addition, political or economic conditions may
disrupt previously established securities markets, causing liquid securities to
become illiquid, particularly in emerging market countries.
The fund's investments in emerging markets are subject to all of the risks of
foreign investing generally, and have additional heightened risks due to a lack
of established legal, political, business, and social frameworks to support
securities markets, and a greater likelihood of currency devaluations. Non-U.S.
securities markets, particularly emerging markets, may have substantially lower
trading volumes than U.S. markets, resulting in less liquidity and more
volatility than in the U.S. Short-term volatility in these markets can be
disconcerting and declines in excess of 50% are not unusual.
Company Non-U.S. companies are not subject to the same disclosure, accounting,
auditing and financial reporting standards and practices as U.S. companies and
their securities may not be as liquid as securities of similar U.S. companies.
Non-U.S. currency exchanges, stock exchanges, trading systems, brokers, and
companies generally have less government supervision and regulation than in the
U.S. The fund may have greater difficulty voting proxies, exercising shareholder
rights, pursuing legal remedies and obtaining judgments with respect to non-U.S.
investments in non-U.S. courts than with respect to U.S. companies in U.S.
courts.
INTEREST RATE Rate changes can be sudden and unpredictable. Increases in
interest rates may have an effect on the types of companies in which the fund
normally invests because they may find it more difficult to obtain credit to
expand, or may have more difficulty meeting interest payments. Similarly,
emerging market economies may be especially sensitive to interest rate changes.
More detailed information about the fund, its policies, and risks can be found
in the SAI.
TP-2 Templeton Pacific Growth Securities Fund - Class 2
<PAGE>
PAST PERFORMANCE
- ----------------
[GRAPHIC OMITTED]
This bar chart and table show the volatility of the fund's returns, which is one
indicator of the risks of investing in the fund. The bar chart shows changes in
the fund's returns from year to year over the past ten calendar years or since
the fund's inception. The table shows how the fund's average annual total
returns compare to those of a broad-based securities market index. Of course,
past performance cannot predict or guarantee future results.
Performance reflects all fund expenses but does not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they had been included, performance would be lower.
[GRAPHIC OMITTED]
AVERAGE ANNUAL TOTAL RETURNS
For the periods ended December 31, 1999
<TABLE>
<CAPTION>
Since
Inception
1 Year 5 Years 01/27/92
- -----------------------------------------------------------------
<S> <C> <C> <C>
Templeton Pacific Growth
Securities Fund - Class 1 1 36.89% -1.79% 2.51%
MSCI Pacific Index 2 57.96% 2.70% 5.13%
</TABLE>
1. All fund performance assumes reinvestment of dividends and capital gains.
Performance shown 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 fee
expense which also affects all future performance.
2. Source: Standard & Poor's Micropal. The unmanaged MSCI Pacific Index tracks
approximately 450 companies in Australia, Hong Kong, Japan, New Zealand, and
Singapore. This is a total return index in U.S. dollars, with gross dividends
reinvested. One cannot invest directly in an index, nor is an index
representative of the fund's investments.
TP-3 Templeton Pacific Growth Securities Fund - Class 2
<PAGE>
FEES AND EXPENSES
- -----------------
[GRAPHIC OMITTED]
TEMPLETON PACIFIC GROWTH SECURITIES FUND - CLASS 2
This table describes the fees and expenses that you may pay if you buy and hold
shares of the fund. The table and the example do not include any fees or sales
charges imposed by the variable insurance contract for which the fund is an
investment option. If they were included, your costs would be higher. Investors
should consult the contract prospectus or disclosure document for more
information.
SHAREHOLDER FEES
(fees paid directly from your investment)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%
</TABLE>
ANNUAL FUND OPERATING EXPENSES
(expenses deducted from fund assets)
<TABLE>
<CAPTION>
Class 2
- ------------------------------------------------------------
<S> <C>
Management fees 1 1.00%
Distribution and service (12b-1) fees 2 0.25%
Other expenses 0.08%
----
Total annual fund operating expenses 1.33%
====
</TABLE>
1. The fund administration fee is paid indirectly through the management fee.
2. While the maximum amount payable under the fund's class 2 rule 12b-1 plan is
0.35% per year of the fund's average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust has set the current rate at
0.25% per year.
EXAMPLE
This example can help you compare the cost of investing in the fund with the
cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions
your costs would be:
<TABLE>
<CAPTION>
1 Year 3 Years 5 Years 10 Years
- --------------------------------------------------------
<S> <C> <C> <C> <C>
Class 2 $135 $421 $729 $1,601
</TABLE>
- --------------------------------------------------------------------------------
MANAGEMENT
- ----------
[GRAPHIC OMITTED]
Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo,
California 94403-7777, is the fund's investment manager.
Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI),
Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, is the
fund's sub-advisor. TICI provides Advisers with investment management advice and
assistance.
MANAGEMENT TEAM The team responsible for the fund's management is:
<TABLE>
<CAPTION>
<S> <C>
William T. Howard, Jr., CFA Mr. Howard has been a manager of the fund since 1993, and has been
SENIOR VICE PRESIDENT, TICI with the Franklin Templeton Group since 1993.
Mark R. Beveridge, CFA Mr. Beveridge has been a manager of the fund since 1994, and has been
SENIOR VICE PRESIDENT, TICI with the Franklin Templeton Group since 1985.
</TABLE>
The fund pays Advisers a fee for managing the fund's assets and providing
certain administrative facilities and services for the fund. For the fiscal year
ended December 31, 1999, the fund paid 1.00% of its average daily net assets to
the manager for its services.
TP-4 Templeton Pacific Growth Securities Fund - Class 2
<PAGE>
FINANCIAL HIGHLIGHTS
- --------------------
[GRAPHIC OMITTED]
The financial highlights table provides further details to help you understand
the financial performance of class 2 shares for the past five years or since the
fund's inception. The table shows certain information on a single fund share
basis (per share performance). It also shows some key fund statistics, such as
total return (past performance) and expense ratios. Total return represents the
annual change in value of a share assuming reinvestment of dividends and capital
gains. This information has been audited by PricewaterhouseCoopers LLP,
independent auditors. Their report, along with the financial statements, are
included in the fund's Annual Report (available upon request).
<TABLE>
<CAPTION>
Class 2 Year ended December 31,
- ---------------------------------------------------------------------
1999 1
------------------------
<S> <C>
Per share data ($)
Net asset value, beginning of year 7.63
-----
Net investment income .06
Net realized and unrealized gains 2.59
-----
Total from investment operations 2.65
-----
Distributions from net investment income (.08)
-----
Net asset value, end of year 10.20
=====
Total return (%)+ 34.74
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 112
Ratios to average net assets: (%)
Expenses 1.36*
Net investment income .68*
Portfolio turnover rate (%) 12.45
</TABLE>
+ Total return does not include deductions at the contract level for cost of
insurance charges, premium load, administrative charges, mortality and expense
risk charges or other charges that may be incurred under the variable insurance
contract for which the fund serves as an underlying investment vehicle. If they
had been included, total return would be lower. Total return is not annualized.
* Annualized
1. For the period January 6, 1999 (effective date) to December 31, 1999. Based
on average shares outstanding.
TP-5 Templeton Pacific Growth Securities Fund - Class 2
<PAGE>
Additional Information, All Funds
DISTRIBUTIONS AND TAXES
- -----------------------
[GRAPHIC OMITTED]
INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends
substantially all of its net investment income. Except for the Money Fund, each
fund typically pays dividends from net investment income and net capital gains,
if any, at least annually. Dividends or distributions by the funds will reduce
the per share net asset value (NAV) by the per share amount paid.
The Money Fund declares a dividend each day the fund's NAV is calculated, equal
to all of its daily net income, payable as of the close of business the
preceding day. The amount of dividend may fluctuate from day to day and may be
omitted on some days, depending on changes in the factors that comprise the
fund's net income.
Dividends paid by a fund will be automatically reinvested in additional shares
of that fund or, if requested, paid in cash to the insurance company
shareholder.
TAX CONSIDERATIONS The tax consequences for contract owners will depend on the
provisions of the variable annuity or variable life insurance contract through
which they are invested in the funds. For more information, please consult the
accompanying contract prospectus.
1 Additional Information, All Funds
<PAGE>
Fund Account Information
BUYING SHARES
- -------------
[GRAPHIC OMITTED]
Shares of each fund are sold at net asset value (NAV) to insurance company
separate accounts to serve as investment options for variable annuity or
variable life insurance contracts, and for qualified pension and retirement
plans. The funds' Board monitors this to be sure there are no material conflicts
of interest between the two different types of contract owners, given their
differences, including tax treatment. If there were, the Board would take
corrective action.
Contract owners' payments will be allocated by the insurance company separate
account to purchase shares of the fund chosen by the contract owner, and are
subject to any limits or conditions in the contract. Requests to buy shares are
processed at the NAV next calculated after we receive the request in proper
form. The funds do not issue share certificates.
- --------------------------------------------------------------------------------
SELLING SHARES
- --------------
[GRAPHIC OMITTED]
Each insurance company shareholder sells shares of the applicable fund to make
benefit or surrender payments or to execute exchanges (transfers) between
investment options under the terms of its contracts. Requests to sell shares are
processed at the NAV next calculated after we receive the request in proper
form.
- --------------------------------------------------------------------------------
EXCHANGING SHARES
- -----------------
[GRAPHIC OMITTED]
Contract owners may exchange shares of any one class or fund for shares of
other classes or funds through a transfer between investment options available
under a variable insurance contract, subject to the terms and any specific
limitations on the exchange (or "transfer") privilege described in the contract
prospectus.
Frequent exchanges can interfere with fund management or operations and drive up
fund costs. To protect shareholders, there are limits on the number and amount
of fund exchanges that may be made (please see "Market Timers" below).
- --------------------------------------------------------------------------------
FUND ACCOUNT POLICIES
- ---------------------
[GRAPHIC OMITTED]
CALCULATING SHARE PRICE The funds calculate their NAV per share each business
day at the close of trading on the New York Stock Exchange (normally 1:00 p.m.
Pacific time). Each class' NAV is calculated by dividing its net assets by the
number of its shares outstanding.
The funds' assets are generally valued at their market value, except that the
Money Fund's assets are generally valued at their amortized cost. If market
prices are unavailable, or if an event occurs after the close of the trading
market that materially affects the values, assets may be valued at their fair
value. If a fund holds securities listed primarily on a foreign exchange that
trades on days when the fund is not open for business, the value of the shares
may change on days that the insurance company shareholders cannot buy or sell
shares.
Requests to buy and sell shares are processed on any day the funds are open for
business at the NAV next calculated after we receive the request in proper form.
STATEMENTS AND REPORTS Contract owners will receive confirmations and account
statements that show account transactions. Insurance company contract owners
will receive the funds' financial reports every six months from their insurance
company.
If there is a dealer or other investment representative of record on the
account, he or she will also receive
2 Franklin Templeton Variable Insurance Products Trust
<PAGE>
confirmations, account statements and other information about the contract
owner's account directly from the contract's administrator.
MARKET TIMERS The funds may restrict or refuse investments by market timers. As
of July 1, 2000, the following funds will not allow investments by market
timers: Franklin Aggressive Growth Securities Fund, Franklin Global Health Care
Securities Fund, Franklin High Income Fund, Franklin Rising Dividends Securities
Fund, Franklin Technology Securities Fund, Franklin Value Securities Fund,
Mutual Discovery Securities Fund, Mutual Shares Securities Fund, Templeton Asset
Strategy Fund, Templeton Developing Markets Securities Fund and Templeton
Pacific Growth Securities Fund.
You will be considered a market timer if you have (i) requested an exchange
out of the fund within two weeks of an earlier exchange request, or (ii)
exchanged shares out of the fund more than twice in a calendar quarter, or
(iii) exchanged shares equal to at least $5 million, or more than 1% of the
fund's net assets, or (iv) otherwise seem to follow a timing pattern. Accounts
under common ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the funds maintain additional policies and
reserve certain rights, including:
/bullet/ Each fund may refuse any order to buy shares.
/bullet/ At any time, the funds may establish or change investment minimums.
/bullet/ The funds may modify or discontinue the exchange privilege on 60 days'
notice to insurance company shareholders.
/bullet/ You may only buy shares of the funds eligible for sale in your state
or jurisdiction.
/bullet/ In unusual circumstances, we may temporarily suspend redemptions, or
postpone the payment of proceeds, as allowed by federal securities
laws.
/bullet/ To permit investors to obtain the current price, insurance companies
are responsible for transmitting all orders to the fund promptly.
SHARE CLASSES Each fund generally has two classes of shares, class 1 and class
2. Each class is identical except that class 2 has a distribution plan or "rule
12b-1" plan which is described below.
Distribution and service (12b-1) fees Class 2 has a distribution plan, sometimes
known as a rule 12b-1 plan, that allows the funds to pay distribution fees to
those who sell and distribute class 2 shares and provide services to
shareholders and contract owners. Because these fees are paid out of class 2's
assets on an on-going basis, over time these fees will increase the cost of an
investment, and may cost you more than paying other types of sales charges.
While the maximum amount payable under most fund's class 2 rule 12b-1 plan is
0.35% per year of a fund's average net assets, the Board of Trustees has set the
current rate at 0.25%. (The Franklin Strategic Income Securities Fund and
Franklin S&P 500 Index Fund each have a maximum rule 12b-1 plan fee of 0.25% per
year).
- --------------------------------------------------------------------------------
QUESTIONS
- ---------
[GRAPHIC OMITTED]
More detailed information about the Trust and the funds' account policies can be
found in the funds' Statement of Additional Information. If you have any
questions about the funds, you can write to us at 777 Mariners Island Blvd.,
P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at 1-800/342-3863.
For your protection and to help ensure we provide you with quality service, all
calls may be monitored or recorded.
3 Franklin Templeton Variable Insurance Products Trust
<PAGE>
For More Information
The funds of Franklin Templeton Variable Insurance Products Trust (the Trust),
formerly Franklin Valuemark Funds, are generally only available as investment
options in variable annuity or variable life insurance contracts. Please consult
the accompanying contract prospectus for information about the terms of an
investment in a contract.
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS Includes a discussion of recent
market conditions and investment strategies, financial statements, detailed
performance information, fund holdings, and the auditor's report (Annual Report
only).
STATEMENT OF ADDITIONAL INFORMATION Contains more information about the funds,
their investments, policies, and risks. It is incorporated by reference (is
legally a part of this prospectus).
You may obtain these free reports by contacting your investment representative
or by calling us at the number below.
Franklin /registered trademark/ Templeton /registered trademark/
1-800/774-5001
You can also obtain information about the funds by visiting the SEC's Public
Reference Room in Washington, D.C. (phone 1-202/942-8090) or the EDGAR Database
on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this
information, after paying a duplicating fee, by writing to the SEC's Public
Reference Section, Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: [email protected].
Investment Company Act file #811-5479Lit. Code # FTVIP2 P00 5/00
<PAGE>
Prospectus
Franklin
S&P 500 Index Fund
Franklin Templeton Variable Insurance Products Trust
Class 3
Investment Strategy
- --------------------------------------------------------------------------------
Growth
May 1, 2000
As with all fund prospectuses, the SEC has not approved or disapproved these
securities or passed upon the adequacy of this prospectus. Any representation to
the contrary is a criminal offense.>>
Contents
The Fund
- --------------------------------------------------------------------------------
Information about
the fund you should know before investing
2 Goal and Strategies
4 Main Risks
6 Past Performance
6 Fees and Expenses
8 Management
9 Overview of the Trust
11 Distributions and Taxes
12 Financial Highlights
FUND ACCOUNT INFORMATION
- --------------------------------------------------------------------------------
<PAGE>
Information about fund account transactions and services
13 Buying Shares
13 Selling Shares
13 Exchanging Shares
14 Fund Account Policies
16 Questions
For More Information
- --------------------------------------------------------------------------------
Where to learn more about the fund
Back Cover
The Fund
GOAL AND STRATEGIES
- --------------------------------------------------------------------------------
GOAL The fund's investment goal is to match the performance of the
Standard & Poor's 500 Composite Stock Price Index (S&P 500 Index)
before the deduction of fund expenses.
MAIN INVESTMENTS Under normal market conditions, the fund uses
investment "indexing" strategies designed to track the performance
of the S&P 500 Index. The S&P 500 Index is a widely recognized,
unmanaged stock market index, which is dominated by the securities
of large U.S. companies. This index includes the securities of 500
companies from leading industrial sectors which represent a
substantial portion of the market value of all common stocks
publicly traded in the U.S. The S&P 500 Index weights stocks
according to their market capitalization (share price multiplied by
the number of common stock shares outstanding). Standard & Poor's
Corporation determines the composition of the S&P 500 Index and may
change the composition from time to time.
- --------------------------------------------------------------------------------
This index fund invests to match the performance of the S&P 500 Composite Stock
Price Index.
The fund may invest in the common stocks in the S&P 500 Index in
approximately the same proportions used in the S&P 500 Index. For
example, if one company's securities made up 5% of the S&P 500
Index, the fund may invest 5% of its total assets in that company.
This is called the "replication" method. Over time, the fund will
seek to invest at least 80% of its total assets in the common stocks
of companies included in the S&P 500 Index. The fund may also invest
in a sample of stocks found in the S&P 500 Index, selected on the
basis of computer-generated statistical data to resemble the full
index in terms of industry weighting, market capitalization, and
other characteristics such as beta, price-to-book ratios,
price-to-earnings ratios and dividend yield. This is called the
"optimization" method. Using this method, the fund may not hold all
of the companies that are represented in the S&P 500 Index. An
equity security represents a proportionate share of the ownership of
a company; its value is based on the success of the company's
business, any income paid to stockholders, the value of its assets,
and general market conditions.
<PAGE>
When the manager determines that it would be cost-effective or
otherwise beneficial for the fund to do so, the fund may invest in
derivative securities, such as stock index futures and stock index
options, as a method of gaining market exposure in addition to, or
instead of, investing directly in securities in the S&P 500 Index.
As part of a derivative strategy, the fund may invest a small
portion in short-term debt securities which may include U.S.
government securities, certificates of deposit, high-grade
commercial paper, repurchase agreements, other money market
securities, and money market funds.
Derivative securities are used as an efficient, low-cost method of
gaining immediate exposure to a particular securities market without
investing directly in the underlying securities. The fund may also
invest in derivative securities to keep cash on hand to meet
shareholder redemptions or other needs while maintaining exposure to
the stock market. The fund will not use derivative securities for
speculative purposes or as leveraged investments that magnify the
gains or losses of an investment.
Portfolio Selection The manager uses various "indexing" strategies
designed to track the performance of the S&P 500 Index and does not
seek to outperform the market as a whole by researching and
selecting individual securities. The manager determines the mix of
investments that it believes will, in a cost-effective manner,
achieve the fund's investment goal and manages cash flows into and
out of the fund.
TEMPORARY INVESTMENTS When the manager seeks to maintain liquidity,
it may invest all or substantially all of the fund's assets in
short-term investments, including cash or cash equivalents. Under
these circumstances, the fund may temporarily be unable to pursue
its investment goal.
<PAGE>
MAIN RISKS
The fund's main risks can affect the value of the fund's share
price, its distributions or income, and therefore, the fund's
performance.
STOCKS While stocks have historically outperformed other asset
classes over the long term, their value tends to go up and down more
dramatically over the shorter term. These price movements may result
from factors affecting individual companies, industries, or the
securities market as a whole. Large-capitalization stocks tend to go
through cycles of doing better -- or worse -- than the stock market
in general. In the past, these periods have lasted for several
years.
- --------------------------------------------------------------------------------
Because the stocks the fund holds fluctuate in price with market conditions, the
value of your investment in the fund will go up and down. This means you could
lose money over short or even extended periods.
S&P INDEX STOCKS Since the S&P 500 Index is market capitalization
weighted, stocks or sectors with significant market capitalizations
can have a substantial impact on the performance of the index. For
example, in recent years the top ten stocks in the index have come
to account for nearly one quarter of its value and its performance,
and technology stocks have increased from about 13% to roughly 30%
of the S&P 500 Index. Of course, historically the sectors dominating
the index have varied and the largest companies in the index have
generally not made up such a large portion of the index as they have
recently. To the extent that the fund's holdings are similar to the
index, the same stocks and sectors that impact the S&P 500 Index
will also impact the fund.
INDEX TRACKING The fund's ability to track its targeted index may be
affected by transaction costs and fund expenses, cash flows, and
changes in the composition of that index. In addition, the fund's
performance may not precisely track the performance of its targeted
index if the securities the manager has selected do not precisely
track that index. If securities the fund owns underperforms those in
that index, the fund's performance will be lower than that index.
Unlike an unmanaged index, the fund pays operating expenses that may
prevent the fund from precisely tracking an index's performance.
Cash inflows from investors buying shares could create large
balances of cash, while cash outflows from investors selling shares
may require ready reserves of cash. Either situation would likely
cause the fund's performance to deviate from the "fully invested"
targeted index.
DERIVATIVE SECURITIES Stock index futures and stock index options
are considered derivative investments, since their value depends on
the value of the underlying asset to be purchased or sold. The
fund's investment in derivatives may involve a small investment
relative to the amount of risk assumed. To the extent the fund
enters into these transactions, their success will depend on the
manager's ability to select appropriate derivative investments. The
fund could suffer losses if its derivative securities do not
correlate well with the indexes or securities for which they are
acting as a substitute or if the fund cannot close out a position
because the trading markets become illiquid.
More detailed information about the fund, its policies, and risks
can be found in the SAI.
<PAGE>
PAST PERFORMANCE
Because the fund is new, it does not have a full calendar year of
performance.
FEES AND EXPENSES
--------------------------------------------------------------------
This table describes the fees and expenses that you may pay if you
buy and hold shares of the fund. The table and the example do not
include any plan administration fees and expenses imposed on
retirement plans for which the fund's class 3 shares are an
investment option. If they were included, your costs would be
higher. Investors should consult the plan sponsor or the terms of
their retirement plan for more information.
<TABLE>
<CAPTION>
SHAREHOLDER FEES (fees paid directly from your investment)
Class 3
----------------------------------------------------------------------------------
<S> <C>
Maximum sales charge (load) imposed on purchases 0.00%
Maximum deferred sales charge (load) 0.00%1
ANNUAL FUND OPERATING EXPENSES (expenses deducted from fund assets)2,3
Class 3
----------------------------------------------------------------------------------
Management fees 0.15%
Distribution and service (12b-1) fees 0.25%
Other expenses 0.60%
----------------------------------------------------------------------------------
Total annual fund operating expenses 1.00%
Fee waiver/expense reductions (0.20%)
----------------------------------------------------------------------------------
Net expenses 0.80%
----------------------------------------------------------------------------------
</TABLE>
1. Shares acquired through an exchange from another Franklin
Templeton fund may be subject to a contingent deferred sales charge
in certain circumstances. Please see page 13.
2. The management fees and Distribution and service (12b-1) fees
shown are based on the fund's maximum contractual amount. Other
expenses are estimated.
3. The manager and administrator have agreed in advance to waive or
limit their respective fees and to assume as their own expense
certain expenses otherwise payable by the fund so that total annual
fund operating expenses do not exceed 0.80% of the class 3's average
net assets for the current fiscal year. After December 31, 2001, the
manager and administrator may end this arrangement at any time.
<PAGE>
EXAMPLE
This example can help you compare the cost of investing in the fund
with the cost of investing in other mutual funds. It assumes:
/bullet/ You invest $10,000 for the periods shown;
/bullet/ Your investment has a 5% return each year; and
/bullet/ The fund's operating expenses are BEFORE WAIVER and remain
the same.
Although your actual costs may be higher or lower, based on these
assumptions your costs would be:
1 Year 3 Years
--------------------------------------------------------------------
Class 3 $102 1 $318
1. Assumes a contingent deferred sales charge will not apply.
<PAGE>
MANAGEMENT
Franklin Advisers, Inc. (Advisers) 777 Mariners Island Blvd., P.O.
Box 7777, San Mateo, California 94403-7777, is the fund's investment
manager.
Under an agreement with Advisers, State Street Global Advisors
(SSgA), Two International Place, Boston, Massachusetts 02110, is the
fund's sub-advisor. SSgA is a division of State Street Bank and
Trust Company. A team from SSgA provides Advisers with investment
management advice and assistance.
The fund's lead portfolio manager is:
Mark Boyadjian PORTFOLIO MANAGER OF ADVISERS
Mr. Boyadjian is a Chartered Financial Analyst and holds a Bachelor
of Arts degree in Philosophy from the University of California at
Berkeley. Prior to joining the Franklin Templeton Group in 1998, Mr.
Boyadjian was a portfolio manager at Scudder, Stevens & Clark.
The fund pays Advisers a fee for managing the fund's assets. The fee
is equal to an annual rate of 0.15% of the fund's net assets. The
manager is contractually obligated to limit management fees so that
Total annual fund operating expenses do not exceed 0.80% of the
fund's Class 3 net assets in 2000.
"Standard & Poor's(R)", "S&P(R)" and "S&P 500(R)" are trademarks of
The McGraw-Hill Companies, Inc. and have been licensed for use by
Franklin Templeton Distributors, Inc. The fund is not sponsored,
endorsed, sold or promoted by Standard & Poor's and Standard &
Poor's makes no representation regarding the advisability of
investing in the fund. Please see the SAI for more information.
<PAGE>
OVERVIEW OF THE TRUST
Franklin Templeton Variable Insurance Products Trust (the Trust),
formerly Franklin Valuemark Funds, currently consists of twenty-nine
(29) separate funds, offering a wide variety of investment choices.
Each fund generally has two classes of shares, class 1 and class 2.
The funds are generally only available as investment options in
variable annuity or variable life insurance contracts, except for
Franklin S&P 500 Index Fund which offers class 3 shares as an
investment option to defined contributions plans participating in
Franklin Templeton ValuSelect(R) and certain other qualified
retirement plans that have executed a special agreement with the
fund or its agents.
INVESTMENT CONSIDERATIONS
o The fund has its own investment strategy and risk profile.
Generally, the higher the expected rate of return, the greater the
risk of loss.
o No single fund can be a complete investment program; consider
diversifying your fund choices.
o You should evaluate the fund in relation to your personal
financial situation, investment goals, and comfort with risk. Your
investment representative can help you determine if the fund is
right for you.
RISKS
o There can be no assurance that the fund will achieve its
investment goal.
o Because you could lose money by investing in the fund, take the
time to read this prospectus and consider all risks before
investing.
o All securities markets, interest rates, and currency valuations
move up and down, sometimes dramatically, and mixed with the good
years can be some bad years. Since no one can predict exactly how
financial markets will perform, you may want to exercise patience
and focus not on short-term market movements, but on your long-term
investments goals.
o Fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not federally insured by the Federal
Deposit Insurance Corporation, the Federal Reserve Board, or any
other agency of the U.S. Government. Fund shares involve investment
risks, including the possible loss of principal.
More detailed information about the fund, its investment policies,
and its particular risks can be found in the fund's Statement of
Additional Information (SAI).
MANAGEMENT
The funds' investment managers and their affiliates manage over $229
billion in assets. In 1992, Franklin joined forces with Templeton, a
pioneer in international investing. The Mutual Advisers organization
became part of the Franklin Templeton organization four years later.
Today, Franklin Templeton Investments is one of the largest mutual
fund organizations in the United States, and offers money management
expertise spanning a variety of investment objectives.
<PAGE>
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAINS DISTRIBUTIONS The fund will declare as
dividends substantially all of its net investment income. The fund
typically pays dividends from net investment income and net capital
gains, if any, following the close of the calendar year. Dividends
or distributions by the fund will reduce the per share net asset
value (NAV) by the per share amount paid.
TAX CONSIDERATIONS Fund distributions received by your qualified
retirement plan, such as a Section 401(k) plan or profit sharing
plan, are generally tax-deferred. This means that you are not
required to report fund distributions on your income tax return when
paid, but rather, when your plan makes payments to you. Investors
should consult their retirement plan documents for more information.
<PAGE>
FINANCIAL HIGHLIGHTS
The financial highlights table provides further details to help you
understand the financial performance of class 3 shares for the past
five years or since the fund's inception. The table shows certain
information on a single fund share basis (per share performance). It
also shows some key fund statistics, such as total return (past
performance) and expense ratios. Total return represents the annual
change in value of a share assuming reinvestment of dividends and
capital gains. This information has been audited by
PricewaterhouseCoopers LLP. Their report, along with the financial
statements, are included in the fund's Annual Report (available upon
request).
Class 3Year ended December 31,
--------------------------------------------------------------------
1999 1
--------------------------------------------------------------------
Per share data ($)
Net asset value, beginning of year 10.00
--------------------------------------------------------------------
Net investment income .03
Net realized and unrealized gains .52
--------------------------------------------------------------------
Total from investment operations .55
Net asset value, end of year 10.55
--------------------------------------------------------------------
Total return (%)+ 5.50
Ratios/supplemental data
Net assets, end of year ($ x 1,000) 2,349
Ratios to average net assets: (%)
Expenses .80*
Expenses, excluding waiver by affiliate 4.16*
Net investment income 1.78
*Annualized
+Total return does not include deductions of plan administration
fees and expenses that may be incurred under the retirement plan for
which the fund serves as an investment option. If they had been
included, total return would be lower. Total return is not
annualized.
1. For the period November 1, 1999 (commencement of operations) to
December 31, 1999. Based on average shares outstanding.
<PAGE>
Fund Account Information
BUYING SHARES
--------------------------------------------------------------------
Class 3 shares of the fund are sold at NAV to defined contribution
plans participating in Franklin Templeton ValuSelect(R) and certain
other qualified retirement plans that have executed a special
agreement with the fund or its agents to serve as an investment
option for plan participants. Class 1 and class 2 shares of the fund
are sold at NAV to insurance company separate accounts to serve as
investment options for variable annuity or variable life insurance
contracts. The fund's Board monitors the different share classes to
be sure there are no material conflicts of interest between the two
different types of contract owners and/or plan participants. If
there were, the Board would take corrective action.
Requests to buy shares are processed at the NAV next calculated
after we receive the request in proper form. The fund does not issue
share certificates.
Investors should consult their retirement plan documents for more
information about selecting the fund as an investment option.
SELLING SHARES
--------------------------------------------------------------------
Requests to sell shares are processed at the NAV next calculated
after we receive the request in proper form. A Contingent Deferred
Sales Charge (CDSC) may apply to shares of the fund acquired through
an exchange of shares from another Franklin Templeton fund if the
retirement plan is transferred out of the Franklin Templeton funds
or terminated within 365 days of the retirement plan account's
initial purchase in the Franklin Templeton funds. The CDSC is 1% of
the current value of the shares being sold or the NAV at the time of
the purchase of the shares you exchanged for the fund's shares,
whichever is less. There is no CDSC on shares you acquire by
reinvesting your dividends or capital gains distributions.
EXCHANGING SHARES
--------------------------------------------------------------------
You may exchange shares of the fund for shares of other Franklin
Templeton funds offered as an investment option in your defined
contribution plan, subject to the terms, and any specific
limitations on the exchange (or "transfer") privilege, described in
your plan and in the prospectus of that fund.
Frequent exchanges can interfere with fund management or operations
and drive up fund costs. To protect shareholders, there are limits
on the number and amount of exchanges that may be made (please see
"Market Timers," below).
FUND ACCOUNT POLICIES
--------------------------------------------------------------------
CALCULATING SHARE PRICE The fund calculates its NAV per share each
business day at the close of trading on the New York Stock Exchange
(normally 1:00 p.m. Pacific time). Each class's NAV is calculated by
dividing its net assets by the number of its shares outstanding.
<PAGE>
The fund's assets are generally valued at their market value. If
market prices are unavailable, or if an event occurs after the close
of the trading market that materially affects the values, assets may
be valued at their fair value.
Requests to buy and sell shares are processed on any day the fund is
open for business at the NAV next calculated after we receive the
request in proper form.
REPORTS Investors will receive confirmations and account statements
that show account activity. Investors will also receive the fund's
financial reports every six months.
If there is a dealer or other investment representative of record on
the account, he or she may also receive confirmations, account
statements and other information about the account directly from the
fund.
MARKET TIMERS The fund may restrict or refuse investments by market
timers. You will be considered a market timer if you have (i)
requested an exchange out of the fund within two weeks of an earlier
exchange request, or (ii) exchanged shares out of the fund more than
twice in a calendar quarter, or (iii) exchanged shares equal to at
least $5 million, or more than 1% of the fund's net assets, or (iv)
otherwise seem to follow a timing pattern. Accounts under common
ownership or control are combined for these limits.
ADDITIONAL POLICIES Please note that the fund maintains additional
policies and reserve certain rights, including:
o The fund may refuse any order to buy shares.
o At any time, the fund may establish or change investment minimums.
o The fund may modify or discontinue the exchange privilege on 60
days' notice.
o Investors may only buy shares if the fund is eligible for sale in
their state or jurisdiction.
o In unusual circumstances, we may temporarily suspend redemptions,
or postpone the payment of proceeds, as allowed by federal
securities laws.
o For redemptions over a certain amount, the fund reserves the right
to make payments in securities or other assets of the fund, in the
case of an emergency.
SHARE CLASSES The fund has three classes of shares, class 1, class 2
and class 3, which differ only with respect to certain
class-specific expenses. Class 2 and class 3 each have a
distribution plan or "rule 12b-1 Plan" which is described in the
prospectuses offering class 2 and class 3 shares. In addition, class
3 bears its own registration expenses under state and federal
securities laws and transfer agency (shareholder account
maintenance) expenses.
DISTRIBUTION AND SERVICE (12B-1) FEES Class 3 has a distribution
plan, sometimes known as a rule 12b-1 plan, that allows the fund to
pay distribution fees of up to 0.25% per year to those who sell and
distribute class 3 shares and provide services to shareholders and
plan participants. Because these fees are paid out of class 3's
assets on an on-going basis, over time these fees will increase the
cost of an investment, and may cost more than paying other types of
sales charges. A portion of the fees payable to Franklin Templeton
Distributors, Inc. (Distributors) or others under the rule 12b-1
plan may be retained by Distributors for its distribution expenses.
<PAGE>
QUESTIONS
More detailed information about the Trust and the fund's account
policies can be found in the fund's Statement of Additional
Information (SAI). If you have any questions about the fund, you can
write to us at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo,
CA, 94403-7777 or call 1-800/774-5001. For your protection and to
help ensure we provide you with quality service, all calls may be
monitored or recorded.
<PAGE>
Franklin Templeton FUNDS
Literature Request ~ Call 1-800/DIAL BEN(R) (1-800/342-5236) today
for a free descriptive brochure and prospectus on any of the funds
listed below. The prospectus contains more complete information,
including fees, sales charges and expenses, and should be read
carefully before investing or sending money.
Global Growth
Franklin Global Health Care Fund
Mutual Discovery Fund
Templeton Developing
Markets Trust
Templeton Foreign Fund
Templeton Foreign Smaller Companies Fund
Templeton Global
Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund
Templeton International Fund
Templeton Latin America Fund
Templeton Pacific Growth Fund
Templeton World Fund
Global Growth
and Income
Franklin Global Communications Fund
Mutual European Fund
Templeton Global Bond Fund
Global Income
Franklin Global Government
Income Fund
Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Growth
Franklin Aggressive Growth
Fund
Franklin Biotechnology
Discovery Fund1
Franklin Blue Chip Fund
Franklin California Growth Fund
Franklin DynaTech Fund
Franklin Equity Fund
Franklin Gold Fund2
Franklin Growth Fund
Franklin Large Cap Growth
Fund
Franklin Small Cap Growth Fund
Growth and Income
Franklin Asset Allocation Fund
Franklin Balance Sheet Investment Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Income Fund
Franklin MicroCap Value Fund
Franklin Natural Resources Fund
Franklin Real Estate Securities Fund
Franklin Rising Dividends Fund
Franklin Utilities Fund
Franklin Value Fund
Mutual Beacon Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Fund Allocator Series
Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
<PAGE>
Income
Franklin Adjustable U.S. Government Securities Fund
Franklin's AGE High Income Fund
Franklin Bond Fund
Franklin Floating Rate Trust
Franklin Short-Intermediate U.S. Government Securities Fund
Franklin Strategic Income Fund
Franklin U.S. Government Securities Fund
Franklin Federal Money Fund3
Franklin Money Fund3
Tax-Free Income
Federal Intermediate-Term Tax-Free Income Fund
Federal Tax-Free Income Fund
High Yield Tax-Free Income Fund
Insured Tax-Free Income Fund
Puerto Rico Tax-Free Income Fund
Tax-Exempt Money Fund3
State-Specific Tax-Free Income
Alabama
Arizona4
California4
Colorado
Connecticut
Florida4
Georgia
Kentucky
Louisiana
Maryland
Massachusetts5
Michigan5
Minnesota5
Missouri
New Jersey
New York4
North Carolina
Ohio5
Oregon
Pennsylvania
Tennessee6
Texas
Virginia
<PAGE>
Variable Annuities 7
Franklin(R)Valuemark(R)
Franklin Templeton Valuemark Income Plus (an immediate
annuity)
<PAGE>
1. As of February 18, 2000, the fund is closed to new investors with the
exception of retirement plans.
2. Effective April 10, 2000, the fund will be renamed Franklin Gold and Precious
Metals Fund.
3. An investment in the fund is neither insured nor guaranteed by the U.S.
government or by any other entity or institution.
4. Two or more fund options available: long-term portfolio; portfolio of insured
securities; high yield portfolio (CA); intermediate-term and money market
portfolios (CA and NY).
5. Portfolio of insured municipal securities.
6. The fund may invest up to 100% of its assets in bonds that pay interest
subject to the federal alternative minimum tax.
7. Franklin Valuemark and Franklin Templeton Valuemark Income Plus are issued by
Allianz Life Insurance Company of North America or by its wholly owned
subsidiary, Preferred Life Insurance Company of New York, and distributed by
USAllianz Investor Services, LLC. Franklin Templeton Variable Insurance Products
Trust, formerly Franklin Valuemark Funds, is managed by Franklin Advisers, Inc.
and its Templeton and Franklin affiliates.
03/00
For More Information
You can learn more about the fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and investment
strategies, financial statements, detailed performance information,
portfolio holdings, and the auditor's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI) Contains more information
about the fund, its investments, poli- cies and risks. It is
incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI,
please contact your investment representative or call us at the
number below.
Franklin(R)Templeton(R)
1-800/774-5001
You can also obtain information about the fund by visiting the SEC's
Public Reference Room in Washington, D.C. (phone 1-202/942-8090) or
the EDGAR Database on the SEC's Internet site at http://www.sec.gov.
You can obtain copies of this information, after paying a
duplicating fee, by writing to the SEC's Public Reference Section,
Washington, D.C. 20549-0102 or by electronic request at the
following E-mail address: [email protected].
Investment Company Act file 811-5479ZF050 P 05/00
<PAGE>
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
PREVIOUSLY, FRANKLIN(R) VALUEMARK(R) FUNDS
STATEMENT OF ADDITIONAL INFORMATION
- --------------------------------------------------------------------------------
MAY 1, 2000
777 Mariners Island Blvd., P.O. Box 7777, San Mateo CA 94403-7777
1-800/342-3863
[GRAPHIC OMITTED]
The following series or funds (funds) of Franklin Templeton Variable Insurance
Products Trust (Trust), previously Franklin Valuemark Funds, generally offer
class 1 and class 2 shares, which are available only to insurance companies for
use as investment options in variable annuity or variable life insurance
contracts. S&P 500 Index Fund also offers a class 3, which is available only to
defined contribution plans participating in Franklin ValuSelect(R) and certain
other qualified retirement plans.
Aggressive Growth Fund
Global Communications Fund
PREVIOUSLY FRANKLIN GLOBAL UTILITIES SECURITIES FUND
Franklin Global Health Care Securities Fund
PREVIOUSLY GLOBAL HEALTH CARE SECURITIES FUND
Franklin Growth and Income Securities Fund
PREVIOUSLY FRANKLIN GROWTH AND INCOME FUND
Franklin High Income Fund
PREVIOUSLY HIGH INCOME FUND
Franklin Income Securities Fund
PREVIOUSLY INCOME SECURITIES FUND
Franklin Large Cap Growth Securities Fund
PREVIOUSLY FRANKLIN CAPITAL GROWTH FUND
Franklin Money Market Fund
PREVIOUSLY MONEY MARKET FUND
Franklin Natural Resources Securities Fund
PREVIOUSLY NATURAL RESOURCES SECURITIES FUND
Franklin Real Estate Fund
PREVIOUSLY REAL ESTATE SECURITIES FUND
Franklin Rising Dividends Securities Fund
PREVIOUSLY RISING DIVIDENDS SECURITIES FUND
Franklin Small Cap Fund
PREVIOUSLY SMALL CAP FUND
Franklin S&P 500 Index Fund
Franklin Strategic Income Securities Fund
Franklin Technology Securities Fund
Franklin U.S. Government Fund
PREVIOUSLY U.S. GOVERNMENT SECURITIES FUND
Franklin Value Securities Fund
PREVIOUSLY VALUE SECURITIES FUND
Franklin Zero Coupon Funds, 2000, 2005, and 2010
PREVIOUSLY ZERO COUPON FUNDS, 2000, 2005 AND 2010
1
<PAGE>
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Asset Strategy Fund
PREVIOUSLY TEMPLETON ASSET ALLOCATION FUND
Templeton Developing Markets Securities Fund
PREVIOUSLY TEMPLETON DEVELOPING MARKETS FUND
Templeton Global Income Securities Fund
Templeton Growth Securities Fund
PREVIOUSLY TEMPLETON GLOBAL GROWTH FUND
Templeton International Securities Fund
PREVIOUSLY TEMPLETON INTERNATIONAL FUND
Templeton International Smaller Companies Fund
Templeton Pacific Growth Securities Fund
PREVIOUSLY TEMPLETON PACIFIC GROWTH FUND.
This Statement of Additional Information (SAI) is not a prospectus. It contains
information in addition to the information in the funds' prospectuses. The
funds' prospectuses, dated May 1, 2000, which we may amend from time to time,
contains the basic information you should know before investing in the funds.
You should read this SAI together with the funds' prospectuses.
Effective May 1, 2000, the funds of Templeton Variable Products series Fund
(TVP) merged with similar corresponding funds of Franklin Templeton Variable
Insurance Products Trust (VIP). The audited financial statements and auditor's
report in the TVP and VIP funds' Annual Reports to Shareholders, for the fiscal
year ended December 31, 1999, are incorporated by reference (are legally a part
of this SAI).
To obtain a free additional copy of a prospectus for class 1 or class 2, or an
annual report, please call Franklin Templeton at 1-800/342-3863, or your
insurance company. To obtain additional copies of the prospectus for class 3 of
S&P 500 Index Fund please call us at 1-800/774-5001.
CONTENTS
Goals and Strategies
Securities and Investment Techniques
Common to More Than One Fund
Risks of Securities and Investment Techniques
Non-Fundamental Policies Affecting Multiple Funds
Officers and Trustees
Management and Other Services
Portfolio Transactions
Distributions and Taxes
Organization, Voting Rights and Principal Holders
Pricing Shares
The Underwriter
Performance
Miscellaneous Information
Description of Bond Ratings
2
<PAGE>
- --------------------------------------------------------------------------------
MUTUAL FUNDS, ANNUITIES, AND OTHER INVESTMENT PRODUCTS:
- --------------------------------------------------------------------------------
/bullet/ ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE
FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
- --------------------------------------------------------------------------------
/bullet/ ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK;
- --------------------------------------------------------------------------------
/bullet/ ARE SUBJECT TO INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF
PRINCIPAL.
- --------------------------------------------------------------------------------
3
<PAGE>
GOALS AND STRATEGIES
- --------------------------------------------------------------------------------
FRANKLIN AGGRESSIVE GROWTH SECURITIES FUND
(AGGRESSIVE GROWTH FUND)
The fund's investment goal is capital appreciation. This goal is fundamental,
which means it may not be changed without shareholder approval.
Under normal market conditions, the fund will invest primarily in equity
securities of companies demonstrating accelerating growth, increasing
profitability, or above-average growth or growth potential as compared with the
overall economy.
CONVERTIBLE SECURITIES Although the fund may invest in convertible securities
without limit, it currently intends to limit these investments to no more than
5% of its net assets. The fund intends to invest in liquid convertible
securities but there can be no assurance that it will always be able to do so.
Convertible SECURITIES have risk characteristics of both equity and debt
securities.
FOREIGN SECURITIES Although the fund may invest in foreign securities, including
depositary receipts, it intends to limit such investments to 10% of its total
assets.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ write covered put and call options, and purchase put and call options,
on securities or financial indices. The fund will only buy options if
the premiums paid for such options total 5% or less of its net assets;
/bullet/ purchase and sell futures contracts or related options with respect to
securities, indices, and currencies. The fund will not enter into a
futures contract if the amounts paid for its open contracts, including
required initial deposits, would exceed 5% of its net assets;
/bullet/ invest in illiquid securities up to 15% of its net assets;
/bullet/ lend its portfolio securities up to 33 1/3% of the value of its total
assets;
/bullet/ borrow up to 33 1/3% of the value of its assets; and
/bullet/ enter into repurchase and reverse repurchase agreements.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN GLOBAL COMMUNICATIONS SECURITIES FUND
(GLOBAL COMMUNICATIONS FUND)
BEFORE NOVEMBER 15, 1999, THE FUND'S NAME WAS "FRANKLIN GLOBAL UTILITIES
SECURITIES FUND," AND BEFORE MAY 1, 1998, THE FUND'S NAME WAS "UTILITY EQUITY
FUND." The fund's investment goals are capital appreciation and current income.
These goals are fundamental, which means they may not be changed without
shareholder approval.
4
<PAGE>
Under normal market conditions, the fund will invest primarily in equity
securities of companies engaged in providing communication services and
communication equipment. The fund currently expects to invest in common stocks
that the manager expects to pay dividends. The fund may invest significantly in
small-cap companies, those with market capitalization values (share price
multiplied by the number of common stock shares outstanding) of less than $1.5
billion, but will typically invest in large- and mid-cap companies.
GAS AND WATER COMPANIES The utility companies in which the fund may invest
include gas transmission and distribution companies and companies in the water
supply industry. Like electric utility companies, gas transmission and
distribution companies continue to undergo significant changes. Many companies
have diversified into oil and gas exploration and development. This makes
returns more sensitive to energy prices. The water supply industry is highly
fragmented due to local ownership. Water supply company securities are often
thinly traded and their markets are less liquid than other utility securities.
FOREIGN SECURITIES The fund may invest in stocks and debt securities of
companies of any nation, developed or emerging. The fund will normally invest at
least 65% of its assets in issuers located in at least three different
countries, and generally expects to invest a higher percentage of its assets in
U.S. securities than issuers located in any other single country. As a
non-fundamental policy, the fund will limit its investments in securities of
Russian issuers to 5% of assets.
CONCENTRATION The fund concentrates its investments (invests more than 25% of
its total assets) in the global public utilities sector and, in particular,
within that sector invests primarily in communications companies. Investing in a
fund that concentrates its investments in specialized market sector involves
increased risks.
OTHER INVESTMENT POLICIES The fund may invest up to 5% of its assets in debt
securities, including convertible bonds issued by public utility issuers. These
debt securities may be rated Ba or lower by Moody's or BB or lower by S&P(R) or
unrated securities that the manager determines are of comparable quality. The
fund currently intends to invest no more than 5% of its assets in preferred
stocks or convertible preferred stocks issued by public utility issuers. Subject
to these limits, the fund may invest up to 5% of its assets in enhanced
convertible securities.
The fund may also:
/bullet/ write covered call options;
/bullet/ lend its portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes; and
/bullet/ enter into repurchase transactions.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
5
<PAGE>
FRANKLIN GLOBAL HEALTH CARE SECURITIES FUND
(GLOBAL HEALTH CARE FUND)
The fund's investment goal is capital appreciation. This goal is fundamental,
which means it may not be changed without shareholder approval.
Under normal market conditions, the fund will invest primarily in equity
securities of companies in the health care sector. Health care companies are
those that, based on their most recently reported fiscal year, (i) derived at
least 50% of their earnings or revenues from health care activities, or (ii)
have devoted at least 50% of their assets to health care activities. Health care
activities include research, development, production or distribution of products
and services in industries such as pharmaceutical, biotechnology, health care
facilities, medical supplies, medical technology, medical services, managed care
companies, health care related information systems, and personal health care
products.
Often major developments in health care come from foreign companies. Therefore,
in the opinion of the manager, a portfolio of global health care company
securities may provide greater potential for investment participation in present
and future opportunities than may be present in domestic health care related
industries. The manager also believes that U.S. health care companies may be
subject to increasing regulation and government control. By investing in
foreign, as well as U.S. health care companies, the manager believes that the
fund will be able to lessen the impact of U.S. Government regulation on its
portfolio. By investing in multiple countries, the risk of a single government's
actions on the portfolio may also be reduced.
FOREIGN SECURITIES The fund will mix its investments globally by investing at
least 70% of its assets in securities of issuers located in at least three
different countries, one of which may be the U.S. The fund may invest in both
developed and emerging markets, but does not currently intend to invest more
than 10% of its assets in securities of emerging markets, which may involve
greater risks. The fund will not invest more than 40% of its net assets in any
one country, other than the U.S. From time to time, the fund may invest a
significant portion of its assets in securities of U.S. issuers, the prices of
which may fluctuate independently from comparable foreign securities. As a
global fund, it may invest in securities issued in any currency, including
multinational currency units such as the Euro or European Currency Unit, and may
hold currency. The fund may also buy depositary receipts. As a non-fundamental
policy, the fund will limit its investments in securities of Russian issuers to
5% of its assets.
CONVERTIBLE SECURITIES The fund may invest up to 10% of its assets in
convertible securities, which have risk characteristics of both equity and debt
securities.
CONCENTRATION The fund concentrates its investments (invests more than 25% of
its total assets) in the global health care sector. Investing in a fund that
concentrates its investments in a specialized market sector involves increased
risks.
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DEBT SECURITIES Depending upon current market conditions, the fund may invest up
to 30% of its assets in debt securities issued by U.S. and non-U.S. corporations
and governments. To the extent the fund invests in debt securities, changes in
interest rates in any country where the fund has investments will affect the
value of the fund and its share price. The fund will invest in debt securities
rated B or above by Moody's or S&P(R), or in unrated securities of similar
quality and, in any event, does not currently expect investments in such lower
rated debt securities to exceed 5% of the fund's assets. Securities rated below
BBB are considered to be below investment grade.
OTHER INVESTMENT POLICIES The fund may engage in short sale transactions, in
which the fund sells a security it does not own to a purchaser at a specified
price. The fund's equity securities holdings may include rights and warrants.
The fund may also:
/bullet/ write covered put and call options on securities or financial indices;
/bullet/ purchase put and call options on securities or financial indices;
/bullet/ purchase and sell futures contracts or related options with respect to
securities, indices and currencies;
/bullet/ invest in restricted or illiquid securities;
/bullet/ lend portfolio securities up to 33 1/3% of its assets;
/bullet/ borrow up to 33 1/3% of the value of its assets from banks;
/bullet/ enter into repurchase or reverse repurchase agreements; and
/bullet/ enter into foreign currency exchange contracts.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN GROWTH AND INCOME SECURITIES FUND
(GROWTH AND INCOME FUND)
The fund's principal investment goal is capital appreciation. Its secondary goal
is current income. These goals are fundamental, which means they may not be
changed without shareholder approval.
Under normal market conditions, the fund will maintain a broadly diversified
portfolio of U.S. common stocks that may be traded on a securities exchange or
over-the-counter; i.e., directly from the dealer.
The selection criteria for the fund's primary investments are discussed in the
prospectus.
The fund seeks current income through the receipt of dividends or interest from
its investments, and the payment of dividends may therefore be a consideration
in purchasing debt or equity securities.
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<PAGE>
AMERICAN DEPOSITARY RECEIPTS (ADRS) are typically issued by a U.S. bank or trust
company and evidence ownership of underlying securities issued by a foreign
corporation. Generally, depositary receipts in registered form are designed for
use in the U.S. securities markets and depositary receipts in bearer form are
designed for use in securities markets outside the U.S. Depositary receipts
involve the same risks as direct investments in foreign securities and are, for
purposes of the fund's investment policies, considered to be investments in the
underlying securities.
REITS The fund currently intends to invest no more than 15% of its assets in
equity REITs.
OTHER INVESTMENT POLICIES In pursuing its secondary goal of current income, the
fund may also invest up to 35% in any combination of common stocks with current
dividend yields at or below the average dividend yield of the Standard & Poor's
500 Index; convertible securities, including bonds, preferred stocks, and
enhanced convertible securities; debt securities; and REITs. The fund will not
invest more than 5% of its assets in debt securities, including convertible debt
securities, rated below investment grade and, in any event, will not invest in
debt securities that, at the time of purchase, are rated lower than B by Moody's
or unrated debt securities that the manager determines to be of comparable
quality.
The fund may also:
/bullet/ write covered call and put options;
/bullet/ purchase call and put options on securities and indices of securities,
including "forward conversion" transactions;
/bullet/ lend its portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes; and
/bullet/ enter into repurchase transactions.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN HIGH INCOME FUND
(HIGH INCOME FUND)
The fund's principal investment goal is to earn a high level of current income.
Its secondary goal is capital appreciation. These goals are fundamental, which
means they may not be changed without shareholder approval.
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<PAGE>
Under normal market conditions, the fund will invest primarily in debt
securities. The fund may invest in debt securities in any rating category,
including high yield, lower-rated debt securities ("junk bonds"), or in unrated
debt securities. But, the fund does not intend to invest more than 5%, at the
time of purchase, in securities in the lowest rating categories, i.e., rated
below Caa by Moody's or CCC by S&P(R) or unrated securities that the manager
determines are of comparable quality. The fund will not purchase defaulted
securities, but may continue to hold securities that go into default. The fund
may also buy lower-rated zero-coupon, deferred interest and pay-in-kind
securities. The fund may occasionally participate on creditors' committees for
issuers of defaulted debt. If it does, the fund is generally restricted from
selling those securities to anyone other than another member of the creditors'
committee, which restricts the liquidity of the holding.
Ratings assigned by the rating agencies are based largely on the issuer's
historical financial condition and the rating agencies' investment analysis at
the time of the rating. Credit quality in the high yield debt market, however,
can change suddenly and unexpectedly, and credit ratings may not reflect the
issuer's current financial condition. For these reasons, the manager does not
rely principally on the ratings assigned by rating agencies, but performs its
own independent investment analysis of securities being considered for the
fund's portfolio.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ acquire loan participations;
/bullet/ purchase debt securities on a "when-issued" basis;
/bullet/ write covered call options;
/bullet/ lend its portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes; and
/bullet/ enter into repurchase agreements and forward currency exchange
contracts, participate in interest rate swaps, invest in restricted
securities, and invest in trade claims.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN INCOME SECURITIES FUND
(INCOME SECURITIES FUND)
The fund's investment goal is to maximize income while maintaining prospects for
capital appreciation. This goal is fundamental, which means it may not be
changed without shareholder approval.
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<PAGE>
Under normal market conditions, the fund will invest in debt and equity
securities. The assets of the fund may be held in cash or invested in securities
traded on any national securities exchange, in money market instruments, or in
securities issued by a corporation, association or similar legal entity having
gross assets valued at not less than $1 million as shown by its most recently
published annual report. These investments may include zero coupon, deferred
interest or pay-in-kind bonds, or preferred stocks. Because the manager has the
discretion to choose the percentage of assets that can be invested in a
particular type of security as market conditions change, the fund's portfolio
may be entirely invested in debt securities or, conversely, in common stocks.
OTHER INVESTMENT POLICIES While the fund may invest up to 5% of its assets in
defaulted debt securities, which are considered speculative, it does not
currently intend to invest in those securities. The fund currently does not
intend to invest more than 5% of its assets in loan participations and other
related direct or indirect bank securities. The fund may invest up to 5% of its
assets in trade claims. Both loan participations and trade claims carry a high
degree of risk. In addition, the fund does not intend to invest more than 5% of
its assets in enhanced convertible securities.
The fund may also:
/bullet/ lend its portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes;
/bullet/ enter into repurchase transactions;
/bullet/ purchase securities on a "when-issued" or "delayed-delivery" basis; and
/bullet/ write covered call options on securities.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN LARGE CAP GROWTH SECURITIES FUND
(LARGE CAP FUND)
BEFORE DECEMBER 15, 1999, THE FUND'S NAME WAS THE FRANKLIN CAPITAL GROWTH FUND.
The fund's investment goal is capital appreciation. Current income is only a
secondary consideration in selecting portfolio securities. This goal is
fundamental, which means it may not be changed without shareholder approval.
Under normal market conditions, the fund will invest primarily in equity
securities of U.S. large-cap growth companies (those with market capitalizations
of $8.5 billion or more). Some of these securities may yield little or no
current income. The fund's assets may be invested in shares of common stock
traded on any national securities exchange or over-the-counter, and in
convertible securities including convertible preferred stocks.
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<PAGE>
HEALTH CARE COMPANIES The fund may, at times, have significant investments in
securities of health care companies. Because the activities of health care
companies may be heavily dependent on federal and state government funding, the
profitability of these companies could be adversely affected if that funding is
reduced or discontinued. Stocks of these companies may also be affected by
government policies on health care reimbursements, regulatory approval for new
drugs and medical instruments, or legislative reform of the health care system.
Health care companies are also subject to the risks of product liability
lawsuits and the risk that their products and services may become obsolete.
FINANCIAL SERVICES COMPANIES The fund may also invest in financial services
companies. Financial services companies are subject to extensive government
regulation of the amount and types of loans and other financial commitments they
can make, and of the interest rates and fees they can charge. These limitations
can have a significant impact on a financial services company's profitability
because its profitability is affected by its ability to make financial
commitments such as loans. In addition, changing regulations, continuing
consolidations, and development of new products and structures are all likely to
have a significant impact on the financial services industry.
DEBT SECURITIES INCLUDING LOWER RATED SECURITIES To the extent the fund invests
in debt securities and convertible debt securities, it does not intend to invest
more than 5% in those rated Ba or lower by Moody's or BB or lower by S&P(R) or
unrated securities that the manager determines are of comparable quality.
FOREIGN SECURITIES The fund may invest up to 10% of its assets in foreign
securities, including depositary receipts and emerging market securities.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ write covered call options;
/bullet/ purchase put options on securities;
/bullet/ lend its portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes;
/bullet/ enter into repurchase transactions; and
/bullet/ invest in restricted or illiquid securities.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN MONEY MARKET FUND
(MONEY FUND)
The fund's investment goal is high current income, consistent with liquidity and
capital preservation. This goal is fundamental, which means it may not be
changed without shareholder approval.The fund also seeks to maintain a stable
share price of $1.00.
The fund invests primarily in high-quality, short-term money market securities
of domestic and foreign issuers, including:
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<PAGE>
/bullet/ U.S. Government securities with fixed, floating or variable interest
rates;
/bullet/ repurchase agreements;
/bullet/ obligations, with fixed, floating or variable interest rates, issued or
guaranteed by U.S. banks with assets of at least one billion dollars,
including certificates of deposit, bank notes, loan participation
interests, commercial paper, unsecured promissory notes, time deposits,
and bankers' acceptances;
/bullet/ obligations of foreign branches of foreign banks, U.S. branches of
foreign banks ("Yankee Dollar Investments"), and foreign branches of
U.S. banks ("Eurodollar Investments"), all of which include
certificates of deposit, bank notes, loan participation interests,
commercial paper, unsecured promissory notes, time deposits, and
bankers' acceptances, where the parent bank has more than five billion
dollars in total assets at the time of purchase;
/bullet/ commercial paper, including asset backed commercial paper;
/bullet/ other short-term securities, with fixed, floating or variable interest
rates, issued or guaranteed by U.S. corporations, or securities issued
by foreign entities;
/bullet/ taxable municipal securities, up to 10% of the fund's assets; and
/bullet/ unrated notes, paper, securities or other instruments that the manager
determines to be of comparable high quality. Under the SEC's money fund
rules, the fund maintains a dollar-weighted average portfolio maturity
of 90 days or less and only buys securities: o with remaining
maturities of 397 days or less;
/bullet/ that the fund's manager determines present minimal credit risks; and o
that are rated in the top two short-term rating categories by
independent rating agencies or, if unrated, determined by the fund's
Board of Trustees to be comparable.
If the disposition of a portfolio security results in a dollar-weighted average
portfolio maturity in excess of 90 days, the fund will invest its available so
that it reduces its dollar-weighted average portfolio maturity to 90 days or
less as soon as is reasonably practicable. Although the fund may invest up to 5%
of assets in securities rated in the second highest category (or unrated
securities the manager determines are comparable), it generally invests in
securities rated in the highest category.
ASSET-BACKED SECURITIES The fund may, at times, hold a significant portion of
its assets in asset-backed securities, typically commercial paper backed by
loans or accounts receivable of an entity or number of different entities, such
as banks or credit card companies. BANK OBLIGATIONS The fund may invest in
obligations of U.S. branches of foreign banks, which are considered domestic
banks. The fund will only make these investments if the branches have a federal
or state charter to do business in the U.S. and are subject to U.S. regulatory
authorities. The fund may invest up to 25% of its assets in obligations of
foreign branches of U.S. or foreign banks. The fund may also invest in time
deposits, which are non-negotiable deposits maintained in a banking institution
for a specified period of time at a stated interest rate. The fund may invest up
to 10% of its assets in time deposits with maturities in excess of seven
calendar days.
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<PAGE>
DIVERSIFICATION The fund may not invest more than 5% of its total assets in
securities of a single issuer, other than U.S. Government securities, although
it may invest more than 5% of its total assets in securities of a single issuer
that are rated in the highest rating category for a period of up to three
business days after purchase. The fund also may not invest more than (a) the
greater of 1% of its total assets or $1 million in securities issued by a single
issuer that are rated in the second highest rating category; and (b) 5% of its
total assets in securities rated in the second highest rating category. OTHER
INVESTMENT POLICIES The fund may also:
/bullet/ buy U.S. Government securities on a when-issued or delayed delivery
basis;
/bullet/ lend portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes; and
/bullet/ enter into repurchase agreements.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN NATURAL RESOURCES SECURITIES FUND
(NATURAL RESOURCES FUND)
PRIOR TO MAY 1, 1997, THE NATURAL RESOURCES FUND WAS KNOWN AS THE PRECIOUS
METALS FUND AND HAD DIFFERENT INVESTMENT GOALS AND POLICIES. The fund's
principal investment goal is capital appreciation. Its secondary goal is to
provide current income. These goals are fundamental, which means they may not be
changed without shareholder approval.
Under normal market conditions, the fund will invest primarily in equity
securities of companies principally in the natural resources sector. These are
companies that own, produce, refine, process or market natural resources, or
provide support services for natural resources companies (e.g., develop
technologies or provide services, supplies or equipment related to activities
related to natural resources). The natural resources sector includes, but is not
limited to, the following industries: energy services and technology; integrated
oil; oil and gas exploration and production; gold and precious metals; steel and
iron ore production; aluminum production; forest, farming, and paper products;
chemicals; building materials; and environmental services.
While the fund generally expects to invest primarily in equity securities, the
manager may vary the mixture of common stocks, preferred stocks and debt
securities depending on how each category may contribute to attaining the fund's
investment goal.
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<PAGE>
The fund may invest up to 35% of its assets in equity or debt securities of
foreign or domestic issuers outside the natural resources sector. Some of these
issuers may be in industries related to the natural resources sector and,
therefore, may be subject to similar risks. The fund may have significant
investments in alternative energy sources, which include batteries, switching
technology and utilities, and may also invest in REITs. The value of companies
involved in alternative energy sources may be affected by conditions impacting
natural resources companies. For example, when oil prices are high, alternative
energy sources may be in greater demand, but when oil prices fall, demand for
alternative energy sources may fall, and companies in that industry may be
adversely affected.
CONCENTRATION The fund concentrates its investments (invests more than 25% of
its total assets) in the natural resources sector described above. Investing in
a fund that concentrates its investments in a specialized market sector involves
increased risk. In addition, at the manager's discretion, the fund may from time
to time have significant investments in any industry or group of industries
within the natural resources sector. This strategy may expose the fund to
greater investment risk than a more diversified strategy within the sector.
NATURAL RESOURCES RISKS Commodities produced by or used by certain of the
natural resources industries are subject to limited pricing flexibility as a
result of similar supply and demand factors. Other commodities have broad price
fluctuations reflecting the volatility of certain raw materials' prices and the
instability of supplies of other resources. These factors can affect the overall
profitability of an individual company operating within the natural resources
sector. While the manager may strive to diversify among the industries within
the natural resources sector to reduce this volatility, the value of an
individual company's securities may prove more volatile than the broader market.
In addition, many of these companies operate in, or are dependent upon resources
from, areas of the world where they are subject to unstable political
environments, currency fluctuations and inflationary pressures.
FOREIGN SECURITIES While the fund will normally invest a greater percentage of
its assets in U.S. securities than in securities of issuers in any other single
country, the fund may invest 50% or more of its assets in foreign securities,
including emerging markets.
SMALLER COMPANIES The fund may invest without limitation in small capitalization
companies, which have market capitalizations of $1.5 billion or less. These may
include investments in small mining or oil and gas exploration concerns that the
manager believes may have significant potential for appreciation but are subject
to the risk that their exploration efforts will not be successful.
NEW COMPANIES The fund will not invest more than 10% of its assets in securities
of companies with less than three years of continuous operation.
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<PAGE>
COVERED PUT AND CALL OPTIONS The fund may seek to generate additional income by
writing covered put and call options. When the fund writes a covered put option,
it earns a premium for providing another person with the right to sell specific
securities to the fund at a stated price. Writing covered put options may also
allow the fund to acquire desirable securities at a favorable price; however,
the fund may also be required to purchase securities at a stated price that is
below the current market price for the securities. When the fund writes a
covered call option, it earns a premium for providing another party with the
right to buy specific securities held by the fund at a stated price; however,
the fund may have to sell a security which it might otherwise want to hold, at a
price that is lower than the then current market price. No more than 15% of the
fund's assets will be subject to covered call options.
REITS The fund may invest up to 10% of its total assets in real estate
investment trusts (REITs), which may be in or outside the natural resources
sector. REITs are usually publicly traded companies that manage a portfolio of
income producing real estate properties.
A REIT's performance depends on the types and locations of the properties it
owns and on how well it manages those properties. The value of a REIT may also
be affected by factors that affect the underlying properties, the real estate
industry, or local or general economic conditions. Changes in the market value
of the fund's investments in REITs will affect its performance.
DEBT SECURITIES The fund may invest in debt securities issued by domestic or
foreign corporations or governments. Debt securities obligate the issuer to
repay a loan of money at a future date and generally to pay interest. Common
debt securities are secured and unsecured bonds, bonds convertible into common
stock, notes and short-term investments.
The fund may invest, without percentage limitation, in debt securities rated as
"investment grade" by Moody's or S&P(R) or, in unrated debt securities that the
manager determines are of similar quality. The fund may also invest up to 15% of
its assets in debt securities rated BB or lower by S&P(R) or Ba or lower by
Moody's, so long as they are not rated lower than B by Moody's or S&P(R) or, if
unrated, that the manager determines to be of comparable quality. The manager
does not currently expect investments in lower rated debt securities to exceed
5% of the fund's assets.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ invest up to 5% in commodities (including gold bullion or gold coins)
or futures on commodities related to the natural resources sector;
/bullet/ purchase securities on a "when-issued" or "delayed delivery" basis;
/bullet/ lend its portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes;
/bullet/ enter into repurchase transactions; and
/bullet/ invest in restricted or illiquid securities.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
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FRANKLIN REAL ESTATE FUND
(REAL ESTATE FUND)
The fund's principal goal is capital appreciation. Its secondary goal is to earn
current income. These goals are fundamental, which means they may not be changed
without shareholder approval.
Under normal market conditions, the fund will invest in real estate securities,
primarily equity real estate investment trusts (REITs). As used by the fund,
"real estate securities" will include equity, debt and convertible securities of
companies having the following characteristics and limitations:
/bullet/ Companies qualifying as a REIT for federal income tax purposes. In
order to qualify as a REIT, i) a company must derive at least 75% of
its gross income from real estate sources (rents, mortgage interest,
gains form the sale of real estate assets), and at least 95% from real
estate sources, plus dividends, interest and gains from the sale of
securities; ii) 75% of a company's assets must be made up of real
property, mortgage loans, cash and certain securities; and iii) a
company must make distributions to shareholders aggregating annually at
least 95% of its REIT taxable income; or
/bullet/ Companies that have at least 50% of their assets or revenues
attributable to the ownership, construction, management or other
services, or sale of residential, commercial or industrial real estate.
These companies would include real estate operating companies, real
estate services and homebuilders.
/bullet/
The fund will generally invest in real estate securities listed on a securities
exchange or traded over-the-counter. The fund may also invest in mortgage REITs,
which specialize in lending money to developers, and hybrid REITs, which have a
mix of equity and debt instruments. Mortgage REITs pass interest income on to
shareholders. Mortgage REITs can be affected by the quality of any credit
extended. Hybrid REITs can be affected by both the quality of any credit
extended and, like equity REITs, by changes in the value of their holdings.
While the fund invests predominately in equity securities, the fund may also
invest in debt and convertible securities. Debt securities represent the
obligation of the issuer to repay a loan of money to it and generally to pay
interest to the holder. Convertible securities have characteristics of both debt
securities (which is frequently the form in which they are first issued) and
equity securities (which is what they can be converted into). As an operating
policy, the fund will not invest more than 10% of its net assets in debt
securities, including convertible debt securities, rated Ba or lower by Moody's
or unrated securities that the manager determines are of comparable quality.
Generally, however, the fund will not acquire any securities rated lower than B
by Moody's or unrated securities that the manager determines are of comparable
quality.
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<PAGE>
In addition to its investments in real estate securities, the fund may also
invest a portion of its assets in debt and equity securities of issuers whose
products and services are closely related to the real estate industry and that
are publicly traded on an exchange or in the over-the-counter market. These
issuers may include, for example, manufacturers and distributors of building
supplies, and financial institutions that issue or service mortgages, such as
savings and loan associations or mortgage bankers. Also, the fund may invest in
companies whose principal business is unrelated to the real estate industry but
who have at least 50% of their assets in real estate holdings.
CONCENTRATION The fund concentrates its investments (invests more than 25% of
its total assets) in the real estate sector as described above. Investing in a
fund that concentrates its investments in a specialized market sector or
industry involves increased risk. The manager believes that, to the extent that
the fund's assets are diversified into different types of real estate
investments, that may help mitigate although not eliminate the risks of industry
concentration. Moreover, the real estate market historically had only a modest
correlation with the broader equity market.
FOREIGN SECURITIES The fund may invest up to 10% in foreign securities,
including emerging markets.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ write covered call options;
/bullet/ lend its portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value of its assets for any purpose other than
direct investments in securities, and up to 33 1/3% of the value of its
total assets from banks for temporary or emergency purposes;
/bullet/ engage in repurchase transactions; and
/bullet/ invest in enhanced convertible securities.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN RISING DIVIDENDS SECURITIES FUND
(RISING DIVIDENDS FUND)
The fund's investment goal is long-term capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.
Preservation of capital, while not a goal, is also an important consideration.
Under normal market conditions, the fund will, as a fundamental policy, invest
at least 65% of its net assets in financially sound companies that have paid
consistently rising dividends. The fund believes that the securities of such
companies, because of their dividend record, have a strong potential to increase
in value.
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<PAGE>
The balance of the fund's portfolio will typically be invested in
dividend-payment equity securities that meet some, but not all, of the criteria
set forth in the fund's prospectus. The manager also considers other factors,
such as return on shareholder's equity, rate of earnings growth and anticipated
price/earnings ratios, in selecting investments for the fund.
FOREIGN SECURITIES The fund may invest up to 10% of its net assets in foreign
securities, including those in emerging markets.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ lend its portfolio securities up to 33 1/3% of its assets;
/bullet/ borrow up to 33 1/3% of the value of its total assets;
/bullet/ enter into repurchase transactions; and
/bullet/ write covered call options.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN SMALL CAP FUND
(SMALL CAP FUND)
The fund's investment objective is long-term capital growth. This goal is
fundamental, which means it may not be changed without shareholder approval.
Under normal market conditions, the fund will invest primarily in equity
securities of small capitalization ("small cap") growth companies. Although the
fund purchases securities of small cap companies, it may, at times, have a
significant percentage of its assets in mid- and large-cap companies. This is,
in part, because the fund will not dispose of securities of companies whose
successes lead them into the mid- and large-cap range. This may also be a result
of the fund's purchases of securities of larger companies, which the fund may
make in addition to its main investments in smaller companies.
The securities of small-cap companies are traded on U.S. and foreign stock
exchanges and in the over-the-counter market.
Equity securities of small-cap companies may consist of common stock, preferred
stock, warrants for the purchase of common stock, and convertible securities.
The fund currently does not intend to invest more than 10% of its assets in
convertible securities.
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The fund may purchase securities in private placements, particularly late stage
private placements. Late stage private placements are sales of securities made
in non-public, unregistered transactions shortly before a company expects to go
public. The fund may do this in order to invest in securities of companies whose
initial public offerings are expected to be "hot" issues. If the fund were to
wait for the initial public offerings for some of these companies, its small cap
restriction might preclude it from buying these securities. This is because, by
the time the companies go public, the price at which the offering is finally
sold may put some companies into the mid-cap range or the amount that might be
allocated to the fund would be much less than it desires to buy. There is no
public market for shares sold in these private placements and it is possible
that an initial public offering will never be completed. Moreover, even after an
initial public offering, there may be a limited trading market for the
securities or the fund may be subject to contractual limitations on its ability
to sell the shares.
FOREIGN SECURITIES Although the fund may invest up to 25% of its assets in
foreign securities, including those of emerging markets issuers and depositary
receipts, it does not intend to invest more than 10% in foreign securities,
generally, nor more than 5% in emerging markets securities, specifically.
OTHER INVESTMENTS Although the fund's assets will be invested primarily in
equity securities of small-cap companies, the fund may invest up to 35% of its
assets in other securities, including equity securities of larger companies,
which may cause its performance to vary from that of the small capitalization
equity markets. The fund may invest in equity securities of larger companies
that the fund's manager believes have strong growth potential, or in equity
securities of relatively well-known, larger companies in mature industries that
the manager believes have the potential for appreciation.
DEBT SECURITIES The fund may also invest in debt securities that the manager
believes have the potential for capital appreciation as a result of improvement
in the creditworthiness of the issuer. The receipt of income is incidental to
the fund's goal of capital growth. The fund may invest in debt securities rated
B or above by Moody's or S&P(R), or in unrated securities the manager determines
are of comparable quality. Currently, however, the fund does not intend to
invest more than 5% of its assets in debt securities (including convertible debt
securities) rated lower than BBB by S&P(R) or Baa by Moody's or, if unrated,
that the manager determines to be of comparable quality.
REITS The fund currently does not intend to invest more than 10% of its assets
in real estate investment trusts (REITs), including small company REITs.
LOANS OF PORTFOLIO SECURITIES The fund intends to take full advantage of its
authority to lend its portfolio securities up to 30% of its assets in order to
generate additional income. As with other extensions of credit, there are risks
of delay in recovery or even loss of rights in collateral in the event of
default or insolvency of the borrower.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ write covered put and call options on securities or financial indices;
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/bullet/ purchase put and call options on securities or financial indices;
/bullet/ purchase and sell futures contracts or related options with respect to
securities, indices and currencies;
/bullet/ invest in restricted or illiquid securities;
/bullet/ borrow up to 33 1/3% of the value of its total assets; and
/bullet/ enter into repurchase or reverse repurchase agreements.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN S&P 500 INDEX FUND
(S&P 500 INDEX FUND)
The fund's investment goal is to match the performance of the Standard & Poor's
500 Composite Stock Price Index (S&P 500 Index) before the deduction of fund
expenses. This goal is fundamental, which means that it may not be changed
without shareholder approval.
DEBT SECURITIES represent a loan of money by the purchaser of the securities to
the issuer. A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. Common debt securities include bonds, notes
and commercial paper, which differ in the length of the issuer's payment
schedule with commercial paper having the shortest. The fund presently intends
to limit these investments to high quality, short-term debt securities.
BANK OBLIGATIONS, or instruments secured by bank obligations, include fixed,
floating or variable rate CDs, letters of credit, time deposits, bank notes and
bankers' acceptances. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Bankers' acceptances are negotiable drafts or bills
of exchange normally drawn by an importer or exporter to pay for specific
merchandise and which are "accepted" by a bank, meaning, in effect, that the
bank unconditionally agrees to pay the face value of the instrument upon
maturity. Such obligations include dollar-denominated certificates of deposit
and bankers' acceptances of banks having total assets in excess of $1 billion,
certificates of deposit of federally insured savings and loan associations
having total assets in excess of $1 billion, or cash and time deposits with
banks. Time deposits are non-negotiable deposits that are held in a banking
institution for a specified time at a stated interest rate.
COMMERCIAL PAPER typically refers to short-term obligations of banks,
corporations and other borrowers with maturities of up to 270 days. Investments
in commercial paper are generally limited to obligations rated Prime-1 or
Prime-2 by Moody's or A-1 or A-2 by S&P(R) or if unrated, issued by companies
having an outstanding debt issue currently rated Aaa or Aa by Moody's or AAA or
AA by S&P(R).
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U.S. GOVERNMENT SECURITIES The fund may invest in U.S. Government securities
including: (1) U.S. Treasury obligations with varying interest rates, maturities
and dates of issuance, such as U.S. Treasury bills (maturities of one year or
less), U.S. Treasury notes (original maturities of one to ten years) and U.S.
Treasury bonds (generally original maturities of greater than ten years); and
(2) obligations issued or guaranteed by U.S. Government agencies and
instrumentalities such as the Government National Mortgage Association, the
Export-Import Bank and the Farmers Home Administration. The fund's investments
may include obligations that are supported by the full faith and credit of the
U.S. Government. In the case of U.S. Government securities that are not backed
by the full faith and credit of the U.S. Government (e.g., obligations of the
Federal National Mortgage Association (FNMA) or a Federal Home Loan Bank), the
fund must look principally to the agency issuing or guaranteeing the obligation
for ultimate repayment and may not be able to assert a claim against the U.S.
Government itself in the event the agency or instrumentality does not meet its
commitments.
OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES The fund may buy and sell
financial futures contracts and options on these contracts and options on
securities and securities indices. The fund may only sell covered options. The
fund may not commit more than 5% of its total assets to initial margin deposits
on futures and related options contracts and premiums paid for related options.
Financial futures contracts and options on these contracts and options on
securities and securities indices are generally considered "derivative
securities." The fund will not use derivative securities for speculative
purposes or as leveraged investments that magnify the gains or losses of an
investment.
OTHER INVESTMENT POLICIES The fund also may:
/bullet/ invest in illiquid securities;
/bullet/ lend its portfolio securities up to 33 1/3% of the value of the its
total assets; and
/bullet/ borrow up to 33 1/3% of the value of its total assets.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN STRATEGIC INCOME SECURITIES FUND
(STRATEGIC INCOME FUND)
The fund's principal goal is to earn a high level of current income. Its
secondary goal is long-term capital appreciation. These goals are fundamental,
which means they may not be changed without shareholder approval.
Under normal market conditions, the fund will invest primarily in a combination
of U.S. and non-U.S. debt securities, government securities, mortgage
securities, asset-backed securities, convertible securities, and preferred
stock. The fund may invest up to 35% of its total assets in common stocks.
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MORTGAGE SECURITIES The fund may invest in mortgage securities issued or
guaranteed by Government National Mortgage Association (GNMA), the Federal
National Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Corporation (FHLMC), and stripped mortgage-backed securities, any of which may
be privately issued.
DEBT SECURITIES The fund may invest in debt securities in any rating category,
including high yield, lower-rated debt securities ("junk bonds"), or in unrated
debt securities. Ratings assigned by the rating agencies are based largely on
the issuer's historical financial condition and the rating agencies' investment
analysis at the time of the rating. The fund may also buy defaulted debt
securities if, in the opinion of the manager, it appears the issuer may resume
interest payments or other advantageous developments appear likely in the near
future.
DERIVATIVE INVESTMENTS The fund may invest limited amounts in various derivative
investments, which carry high risk. Such derivatives could include: stripped
mortgage-backed securities (including interest-only or principal-only
securities); CMOs; options on securities, on securities indices, on futures
contracts, and financial futures contracts; interest rate swap agreements; and
mortgage dollar rolls. The fund may only buy options on securities and
securities indices if the total premium paid for such options is 5% or less of
total assets. The fund may not commit more than 5% of its total assets to
initial margin deposits on futures contracts.
CURRENCY HEDGING The fund may also use the following currency hedging
techniques: investments in foreign currency futures contracts, options on
foreign currencies or currency futures, forward foreign currency exchange
contracts ("forward contracts"), and currency swaps.
PORTFOLIO TURNOVER The manager's rebalancing of the portfolio when seeking to
keep interest rate risk, market and country allocations, and bond maturities at
desired levels may cause the fund's portfolio turnover rate to be high. High
turnover generally increases the fund's transaction costs. Moreover, in shifting
assets strategically from one sector to another, there is no guarantee that the
manager will consistently select the sectors that are the most advantageous.
INDEBTEDNESS AND PARTICIPATIONS The fund may invest in secured or unsecured
corporate indebtedness, including loan participations and trade claims. When a
corporation receives a loan from a financial institution such as a bank or
insurance company, the financial institution may subsequently sell all or a part
of the loan to investors such as the fund. A fractional interest in a company's
indebtedness is called a "participation." If the loan is secured, the fund will
generally have a priority claim to the assets of the company ahead of unsecured
creditors and stockholders. Purchasers of participations must rely on the
financial institution that made the loan to assert any rights against the
borrower with respect to the underlying indebtedness. Trade claims are generally
purchased from creditors of companies in financial difficulty and typically
represent money due to a supplier of goods or services to those companies.
INVERSE FLOATERS The fund may invest up to 5% of its total assets in inverse
floaters, which are instruments with floating or variable interest rates that
move in the opposite direction, usually at an accelerated speed, to short-term
interest rates or interest rate indices.
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<PAGE>
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ invest up to 15% of its net assets in illiquid securities;
/bullet/ lend its portfolio securities up to 33 1/3% of the value of its total
assets;
/bullet/ borrow up to 33 1/3% of the value of its total assets; and
/bullet/ enter into repurchase or reverse repurchase agreements.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN TECHNOLOGY SECURITIES FUND
(TECHNOLOGY FUND)
THIS FUND IS NEW AS OF MAY 1, 2000.
The fund's investment goal is capital appreciation. Under normal market
conditions, the fund will invest at least 65% of its total assets in equity
securities of companies expected to benefit from the development, advancement,
and use of technology. This goal is fundamental, which means it may not be
changed without shareholder approval.
The fund may invest in companies of any size and may, from time to time, invest
a significant portion in small-cap companies. Small cap companies generally have
market capitalizations of up to $1.5 billion, at the time of purchase. Mid-cap
companies generally have market capitalizations of $1 to $8 billion at the time
of the fund's investment. Market capitalization is the total market value of a
company's outstanding stock.
The fund may invest up to 5% of its assets in private placements, particularly
late stage private placements. Late stage private placements are sales of
securities made in non-public, unregistered transactions shortly before a
company expects to go public. The fund may do this in order to participate in
companies whose initial public offerings are expected to be "hot" issues. There
is no public market for shares sold in these private placements and it is
possible that an initial public offering will never be completed. Moreover, even
after an initial public offering, there may be a limited trading market for the
securities or the fund may be subject to contractual limitations on its ability
to sell the shares.
FOREIGN SECURITIES The fund may invest up to 35% of its total assets in foreign
securities, including depositary receipts and emerging markets. The fund will
limit its investments in emerging markets to less than 5% of its total assets.
The fund may buy foreign securities traded in the U.S. or directly in foreign
markets. The fund may buy American, European, and Global Depositary Receipts.
Depositary receipts are certificates typically
23
<PAGE>
issued by a bank or trust company that give their holders the right to receive
securities (a) of a foreign issuer deposited in a U.S. bank or trust company
(American Depositary Receipts, ADRs); or (b) of a foreign or U.S. issuer
deposited in a foreign bank or trust company (Global Depositary Receipts, GDRs
or European Depositary Receipts, EDRs).
CONVERTIBLE SECURITIES The fund may invest in convertible securities up to 20%
of its assets, principally in preferred stocks. A convertible security is
generally a debt obligation or preferred stock that may be converted within a
specified period of time into a certain amount of common stock of the same or a
different issuer. Convertible securities have risk characteristics of both
equity and debt securities.
DEBT SECURITIES The fund will invest less than 5% of its net assets debt
securities. Debt securities obligate the issuer to repay a loan of money to it
and generally pay interest to the holder. Common debt securities include bonds,
notes, and commercial paper.
The fund may buy rated and unrated debt securities. Independent rating agenices
rate debt securities based upon their assessment of the financial soundness of
the issuer. Generally, a lower rating indicates higher risk.
CONCENTRATION The fund concentrates its investments (invests more than 25% of
its net assets) in equity securities of companies in the technology sector,
including companies expected to benefit from the development, advancement, and
use of technology. The fund may have significant investments in any industry or
group of industries within the technology sector. Investing in a fund that
concentrates its investments in a specialized market sector involves increased
risks.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ engage in repurchase agreements;
/bullet/ lend its portfolio securities up to 33 1/3% of the value of its total
assets;
/bullet/ borrow up to 33 1/3% of the value of its total assets;
/bullet/ invest its assets in securities issued by companies engaged in
securities related businesses;
/bullet/ buy equity securities on a "when-issued" or "delayed delivery" basis;
/bullet/ buy equity securities under a standby commitment agreement;
/bullet/ buy and sell options on securities and securities indices (provided the
premiums paid for such options total 5% or less of the fund's net
assets);
/bullet/ buy and sell futures contracts for securities and currencies;
/bullet/ buy and sell securities index futures and options on securities index
futures; and
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<PAGE>
/bullet/ buy or write covered put and call options on securities listed on a
national securities exchange and in the over-the-counter (OTC) market
and on securities indices.
There can be no assurance that the securities underlying a standby commitment
agreement will be issued. If issued, the value of the security may be more or
less than its purchase price. Since the issuance of the security is at the
option of the issuer, the fund may bear the risk of a decline in value of the
security and may not benefit if the security appreciates in value during the
commitment period.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN U.S. GOVERNMENT FUND
(GOVERNMENT FUND)
The fund's investment goal is income. This goal is fundamental, which means it
may not be changed without shareholder approval.
Under normal market conditions, the fund will invest in a portfolio limited to
U.S. Government securities. The fund primarily invests in fixed and variable
rate mortgage-back securities such as Government National Mortgage Association
obligations (Ginnie Maes), but may also invest in U.S. Treasury bonds, notes and
bills, and other securities issued by U.S. Government agencies.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION (GNMA) OBLIGATIONS (GINNIE MAES) Ginnie
Maes differ from other bonds in that principal is paid back over the life of the
loan and may be paid back on an unscheduled basis rather than returned in a lump
sum at maturity. GNMA's guarantee of payment of principal and interest on Ginnie
Maes is backed by the full faith and credit of the U.S. Government. GNMA may
borrow U.S. Treasury funds to the extent needed to make payments under its
guarantee. Payments to holders of Ginnie Maes consist of the monthly
distributions of interest and principal less GNMA's and issuers' fees. The fund
will reinvest the return of principal in securities that may have different
interest rates than the Ginnie Mae on which the principal was returned.
Unscheduled principal payments are passed through to the Ginnie Mae holders,
such as the fund, when mortgages in the pool underlying a Ginnie Mae are prepaid
by borrowers (because a home is sold and the mortgage is paid off, or the
mortgage is refinanced) or as a result of foreclosure. Accordingly, a Ginnie
Mae's life is likely to be substantially shorter than the stated maturity of the
mortgages in the underlying pool. Because of such variation in prepayment rates,
it is not possible to accurately predict the life of a particular Ginnie Mae.
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OTHER MORTGAGE SECURITIES The fund may also invest in fixed-rate mortgage-backed
securities, adjustable-rate mortgage-backed securities (ARMS), or a hybrid of
the two. In addition to ARMS, the fund may also invest in adjustable rate U.S.
Government securities, which may include securities backed by other types of
assets, including business loans guaranteed by the U.S. Small Business
Administration and obligations of the Tennessee Valley Authority. Some
government agency obligations or guarantees are supported by the full faith and
credit of the U.S. Government, while others are supported principally by the
issuing agency and may not permit recourse against the U.S. Treasury if the
issuing agency does not meet its commitments.
The ARMS in which the fund invests are issued primarily by GNMA, the Federal
National Mortgage Association (FNMA), and the Federal Home Loan Mortgage
Corporation (FHLMC), and are actively traded in the secondary market. ARMS
issued by GNMA are collateralized by underlying mortgages that are fully
guaranteed by the Federal Housing Administration or the Veterans Administration.
ARMS issued by the FNMA or the FHLMC are collateralized by conventional
residential mortgages conforming to standard underwriting size and maturity
constraints.
ARMS allow the fund to participate in increases in interest rates through
periodic adjustments in the coupon rates of the underlying mortgages, resulting
in both higher current yields and lower price fluctuations. The fund will not,
however, benefit from increases in interest rates to the extent that interest
rates rise to the point where the current coupon of adjustable rate mortgages in
the fund exceeds the maximum annual or lifetime reset limits (or "cap rates").
Fluctuations in interest rates above these levels could cause such ARMS to
behave more like long-term, fixed-rate bonds. Similarly, the fund will generally
not benefit by an increase in value of the underlying security when mortgage
interest rates decline to the same extent as a fixed interest rate obligation or
one that cannot be called or prepaid. See "Securities and Investment Techniques,
Adjustable Rate Mortgage Securities" for additional details.
OTHER INVESTMENT POLICIES The fund may invest in certain other types of
pass-through debt securities, issued or guaranteed by U.S. Government agencies
or instrumentalities. The fund may also:
/bullet/ purchase securities on a "to be announced" and "delayed delivery"
basis;
/bullet/ enter into covered mortgage "dollar rolls;"
/bullet/ lend portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes; and
/bullet/ engage in repurchase agreements.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN VALUE SECURITIES FUND
(VALUE FUND)
The fund's investment goal is long-term total return. This goal is fundamental,
which means it may not be changed without shareholder approval.
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Under normal market conditions, the fund will invest primarily in the common
stocks of companies that the manager believes are selling substantially below
the underlying value of their assets or their private market value. The fund may
also invest in preferred stocks, securities convertible into common stocks,
warrants, secured and unsecured debt securities, and notes. The fund may, from
time to time, hold up to 100% of its total assets in money market instruments
while awaiting suitable investment opportunities meeting its value standards.
The fund may purchase securities based on company stock buy-backs and company
insiders' purchases and sales.
CONTROL The fund purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, if the
manager perceives that the fund may benefit, the manager may, but is not
obligated to, seek to influence or control management.
COMPANIES EMERGING FROM BANKRUPTCY The fund may buy securities of companies
emerging from bankruptcy, which have special risks. Companies emerging from
bankruptcy may have difficulty retaining customers and suppliers who prefer
transacting with solvent organizations. If new management is installed in a
company emerging from bankruptcy, the management may be considered untested; if
the existing management is retained, the management may be considered
incompetent. Further, even when a company has emerged from bankruptcy with a
lower level of debt, it may still retain a relatively weak balance sheet. During
economic downturns, these companies may not have sufficient cash flow to pay
their debt securities and may also have difficulty finding additional financing.
In addition, reduced liquidity in the secondary market may make it difficult for
the fund to sell these securities or to value them based on actual trades.
FOREIGN SECURITIES The fund may invest up to 25% of its total assets in foreign
securities, including depositary receipts, but currently intends to limit its
investments in foreign securities generally to less than 10% and in emerging
markets securities to less than 5%.
CONVERTIBLE SECURITIES The fund may invest in convertible securities, enhanced
convertible securities and synthetic convertibles. The fund applies the same
rating criteria and investment policies to convertible debt securities as its
investments in debt securities. Convertible preferred stocks are equity
securities that generally carry a higher degree of market risk than debt
securities, and often may be regarded as speculative in nature. The fund's
investments in enhanced convertible securities may provide higher dividend
income but may carry additional risks, including reduced liquidity.
LOWER-RATED SECURITIES The fund may invest up to 25% of its assets in debt
securities rated below BBB by S&P(R) or Baa by Moody's, or in unrated debt
securities that the manager determines to be comparable. Such securities,
sometimes called "junk bonds," are regarded as predominantly speculative with
respect to the issuer's capacity to pay interest and repay principal in
accordance with the terms of the obligation. Therefore, these securities involve
special risks. Debt securities rated D by S&P(R) are in default and may be
considered speculative.
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<PAGE>
OTHER INVESTMENT POLICIES The fund may also sell short securities it does not
own, up to 5% of its assets. The fund may also sell securities "short against
the box" without limit.
The fund may also:
/bullet/ lend its portfolio securities up to 33 1/3% of its assets;
/bullet/ borrow up to 33 1/3% of the value of its total assets from banks;
/bullet/ invest in zero coupon securities, pay-in-kind bonds, structured notes,
mortgage-backed and asset-backed securities;
/bullet/ purchase loan participations and trade claims, both of which carry a
high degree of risk;
/bullet/ purchase and sell exchange-listed and over-the-counter put and call
options on securities and financial indices;
/bullet/ purchase and sell futures contracts or related options with respect to
securities and indices; and
/bullet/ invest in restricted or illiquid securities.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
FRANKLIN ZERO COUPON FUNDS, 2000, 2005, AND 2010
(ZERO COUPON FUNDS):
MATURING IN DECEMBER OF 2000, 2005, 2010
Each fund's investment goal is to provide as high an investment return as is
consistent with the capital preservation. This goal is fundamental, which means
it may not be changed without shareholder approval.
Under normal market conditions, each fund will invest primarily in bonds, which
were issued without the promise to pay interest before maturity, and in
"stripped securities," a term used collectively for Stripped Treasury
Securities, Stripped Government Securities, Stripped Corporate Securities and
Stripped Eurodollar Obligations, all of which are described below.
Zero coupon bonds may be issued by the U.S. Treasury, other U.S. Government
agencies, foreign government issuers, and domestic and foreign corporations.
STRIPPED SECURITIES The stripped securities in which each fund invests refer to
securities that were originally issued with both principal and periodic interest
components, or coupons, and that have been separated or "stripped" generally by
a securities dealer so that there is a principal-only component and an
interest-only component. The principal-only strip functions the same way as does
an original issue zero coupon bond in that no interest is paid during the life
of the bond but, at maturity, the stated value of principal is returned to the
holder.
The fund may purchase zero coupon bonds or stripped securities including:
/bullet/ Securities issued by the U.S. Treasury, including treasury bills and
other debt securities ("Stripped Treasury Securities"). The funds do
not anticipate that these securities will exceed 55% of a fund's
assets.
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/bullet/ Securities issued by the U.S. Government and its agencies and
instrumentalities ("Stripped Government Securities").
/bullet/
/bullet/ Debt securities denominated in U.S. dollars that are issued by foreign
issuers, often subsidiaries of domestic corporations ("Stripped
Eurodollar Obligations").
/bullet/
/bullet/ To a lesser extent, zero coupon securities issued by domestic
corporations, which consist of corporate debt securities without
interest coupons, and, if available, interest coupons that have been
stripped from corporate debt securities, and receipts and certificates
for such stripped debt securities and stripped coupons (collectively,
"Stripped Corporate Securities").
/bullet/
Zero coupon bonds and stripped securities, like other debt securities, are
subject to certain risks, including credit and market risks. To the extent the
funds invest in securities other than U.S. Treasury securities, these
investments will be rated at least A by nationally recognized statistical rating
agencies or unrated securities that the manager determines are of comparable
quality. Debt securities rated A are regarded as having an adequate capacity to
pay principal and interest but are vulnerable to adverse economic conditions and
have some speculative characteristics. The funds will also attempt to minimize
the impact of individual credit risks by diversifying their portfolio
investments. The availability of stripped securities, other than Stripped
Treasury Securities, may be limited at times. During such periods, because the
funds must meet annuity tax diversification rules, they may invest in other
types of fixed-income securities.
Because each fund will be primarily invested in zero coupon securities,
investors who hold shares to maturity will experience a return consisting
primarily of the amortization of discount on the underlying securities in the
fund. However, the net asset value of a fund's shares increases or decreases
with changes in the market value of that fund's investments.
FOREIGN SECURITIES Although each fund reserves the right to invest up to 10% of
its assets in foreign securities, each fund typically invests less than that and
only in dollar denominated foreign securities.
STRUCTURED NOTES Although each fund reserves the right to invest up to 10%, each
fund currently does not intend to invest more than 5% of its assets in certain
structured notes that are comparable to zero coupon bonds in terms of credit
quality, interest rate volatility, and yield.
MATURITY The Zero Coupon Fund - 2000 will mature on December 15, 2000. The
estimated expense of terminating and liquidating a fund will be accrued ratably
over its Target Year. These expenses, which are charged to income like all
expenses, are not expected to exceed significantly the ordinary annual expenses
incurred by the fund and, therefore, should have no significant additional
effect on the maturity value of the fund.
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TAX CONSIDERATIONS Under federal income tax law, a portion of the difference
between the purchase price of the zero coupon securities and their face value
("original issue discount") is considered to be income to the Zero Coupon Funds
each year, even though the funds will not receive cash payments representing the
discount from these securities. This original issue discount will comprise a
part of the net taxable investment income of the funds that must be
"distributed" to the insurance company, as shareholder, each year whether or not
the distributions are paid in cash. To the extent the distributions are paid in
cash, the fund may have to generate the required cash from interest earned on
non-zero coupon securities or possibly from the disposition of zero coupon
securities.
OTHER INVESTMENT POLICIES Each fund may invest up to, but under normal
circumstances will have less than, 20% of its assets in money market instruments
for purposes of providing income for expenses, redemption payments, and cash
dividends. Each fund may also:
/bullet/ lend portfolio securities up to 30% of its assets;
/bullet/
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes; and
/bullet/
/bullet/ enter into repurchase agreements.
/bullet/
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
MUTUAL DISCOVERY SECURITIES FUND
(MUTUAL DISCOVERY FUND)
The fund's investment goal is capital appreciation. This goal is fundamental,
which means it may not be changed without shareholder approval.
Under normal market conditions, the fund invests primarily in domestic and
foreign equity securities that the manager believes to be undervalued, as well
as debt securities of any quality. Debt securities may include securities or
indebtedness issued by corporations or governments in any form. Debt includes
notes, bonds, or debentures, as well as distressed mortgage obligations and
other debt secured by real property. The fund does not have established
percentage limits for its investment in equity securities, debt securities or
money market instruments.
The fund may invest in securities that are traded on U.S. or foreign exchanges,
the NASDAQ national market or in the over-the-counter market. It may invest in
any industry sector, although it will not concentrate in any one industry. From
time to time, the fund may hold significant cash positions, consistent with its
policy on temporary investments, until suitable investment opportunities are
available.
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RESTRUCTURING OR DISTRESSED COMPANIES The fund also seeks to invest in
securities of companies involved in mergers, consolidations, liquidations and
spin-offs or as to which there exist tender or exchange offers. The fund may
participate in such transactions. The fund also seeks to invest in companies
that are, or are about to be, involved in reorganizations or bankruptcy, if the
manager believes the investment may result in capital appreciation. The fund
does not presently anticipate investing more than 50% of its assets in such
investments, but is not restricted to that amount.
INDEBTEDNESS The fund may also invest in other forms of secured or unsecured
indebtedness or participations ("indebtedness"). These include without
limitation loan participations and trade claims of debtor companies involved in
reorganizations or financial restructurings. Some of the indebtedness may have
very long maturities or is illiquid.
CONTROL The fund purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, the
manager may, but is not obligated to, seek to influence or control management if
it perceives that the fund may benefit. The fund may also invest in other
entities that purchase securities for the purpose of influencing or controlling
management. These entities may invest in a potential takeover or leveraged
buyout or invest in other entities engaged in such practices.
FOREIGN SECURITIES The fund presently does not intend to invest more than 5% of
its assets in securities of emerging market countries including Eastern European
countries and Russia. Foreign investments may include both voting and non-voting
securities, sovereign debt and participation in foreign government deals.
CURRENCY HEDGING To the extent that hedging is available, the fund may use the
following currency hedging techniques: foreign currency futures contracts,
options on foreign currencies or currency futures, forward foreign currency
exchange contracts and currency swaps.
LOWER-RATED SECURITIES The fund may invest in debt securities in any rating
category including lower-rated debt securities or in comparable unrated debt
securities ("junk bonds"). In general, the fund will invest in these instruments
for the same reasons as equity securities, i.e., the manager believes that the
securities may be acquired at prices less than their intrinsic values.
Consequently, the manager's own analysis of a debt instrument exercises a
greater influence over the investment decision than the stated coupon rate or
credit rating. The fund expects to invest in debt securities issued by
reorganizing or restructuring companies, or companies that recently emerged
from, or are facing the prospect of a financial restructuring. It is under these
circumstances, which usually involve unrated or low rated securities that are
often in, or are about to, default, that the manager seeks to identify
securities which are sometimes available at prices which it believes are less
than their intrinsic values. The fund may invest without limit in defaulted debt
securities, subject to the fund's restriction on investments in illiquid
securities. Defaulted debt securities may be considered speculative. The
purchase of debt of a troubled company always involves a risk that the
investment may be lost. However, the debt securities of reorganizing or
restructuring companies typically rank senior to the equity securities of such
companies.
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<PAGE>
CLOSED-END INVESTMENT COMPANIES While the fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities. The fund
may not however, purchase more than 3% of the voting securities of another
investment company. In addition, the fund will not invest more than 5% of its
assets in the securities of any single investment company and will not invest
more than 10% of its assets in investment company securities. Investors should
recognize that they indirectly bear a proportionate share of the expenses of
these investment companies, including operating costs, and investment advisory
and administrative fees.
SHORT SALES The fund may also sell short securities it does not own up to 5% of
its assets. The fund may also sell securities "short against the box" without
limit.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ lend its portfolio securities up to 33 1/3% of its assets;
/bullet/
/bullet/ borrow up to 33 1/3% of the value of its total assets from banks;
/bullet/ enter into repurchase transactions;
/bullet/ purchase securities on a "when-issued" or "delayed delivery" basis;
/bullet/ invest in restricted or illiquid securities;
/bullet/ purchase and sell exchange-listed and over-the-counter put and call
options on securities, equity and fixed-income indices and other
financial instruments; and
/bullet/ purchase and sell financial futures contracts and related options.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
MUTUAL SHARES SECURITIES FUND
(MUTUAL SHARES FUND)
The fund's principal goal is capital appreciation. Its secondary goal is income.
These goals are fundamental, which means they may not be changed without
shareholder approval.
Under normal market conditions, the fund invests primarily in domestic equity
securities that the manager believes are undervalued, as well as debt securities
of any quality. Debt includes notes, bonds, or debentures, as well as distressed
mortgage obligations and other debt secured by real property. The fund does not
have established percentage limits for its investment in equity securities, debt
securities or money market instruments.
The fund may invest in securities that are traded on U.S. or foreign exchanges,
the NASDAQ national market or in the over-the-counter market. It may invest in
any industry sector, although it will not concentrate in any one industry. From
time to time, the fund may hold significant cash positions, consistent with its
policy on temporary investments, until suitable investment opportunities are
available.
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<PAGE>
RESTRUCTURING OR DISTRESSED COMPANIES The fund also seeks to invest in
securities of companies involved in mergers, consolidations, liquidations and
spin-offs or as to which there exist tender or exchange offers. The fund also
seeks to invest in companies that are, or are about to be, involved in
reorganizations or bankruptcy, if the manager believes the investment may result
in capital appreciation. The fund does not presently anticipate investing more
than 50% of its assets in such investments, but is not restricted to that
amount.
INDEBTEDNESS The fund may also invest in other forms of secured or unsecured
indebtedness or participations ("indebtedness"). These include without
limitation loan participations and trade claims of debtor companies involved in
reorganization or financial restructuring. Some of the indebtedness may have
very long maturities or may be illiquid.
CONTROL The fund purchases securities for investment purposes and not for the
purpose of influencing or controlling management of the issuer. However, the
manager may, but is not obligated to, seek to influence or control management
when it perceives that the fund may benefit. The fund may also invest in other
entities that purchase securities for the purpose of influencing or controlling
management. These entities may invest in a potential takeover or leveraged
buyout or invest in other entities engaged in such practices.
LOWER-RATED SECURITIES The fund may invest in debt securities in any rating
category including lower rated debt securities or in comparable unrated debt
securities ("junk bonds"). In general, the fund will invest in these instruments
for the same reasons as equity securities, i.e., the manager believes that the
securities are available at prices less than their intrinsic values.
Consequently, the manager's own analysis of a debt instrument exercises a
greater influence over the investment decision than the stated coupon rate or
credit rating. The fund expects to invest in debt securities issued by
reorganizing or restructuring companies, or companies that recently emerged
from, or are facing the prospect of a financial restructuring. It is under these
circumstances, which usually involve unrated or lower rated securities that are
often in, or are about to, default, that the manager seeks to identify
securities which are sometimes available at prices which it believes are less
than their intrinsic values. The fund may invest without limit in defaulted debt
securities, subject to the fund's restriction on investments in illiquid
securities. Defaulted debt securities may be considered speculative. The
purchase of debt of a troubled company always involves a risk that the
investment may be lost. However, the debt securities of reorganizing or
restructuring companies typically rank senior to the equity securities of such
companies.
FOREIGN SECURITIES Although the fund reserves the right to purchase securities
in any foreign country without percentage limitation, the fund's current
investment strategy is to invest primarily in domestic securities, with
approximately 15-20% of its assets in foreign securities, including depositary
receipts. The fund presently does not intend to invest more than 5% of its
assets in securities of emerging markets, including Eastern European countries
and Russia. Foreign investments may include both voting and non-voting
securities, sovereign debt and participation in foreign government deals.
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<PAGE>
CURRENCY HEDGING The fund may use the following currency hedging techniques:
investments in foreign currency futures contracts, options on foreign currencies
or currency futures, forward foreign currency exchange contracts and currency
swaps.
CLOSED-END INVESTMENT COMPANIES While the fund may not purchase securities of
registered open-end investment companies or affiliated investment companies, it
may invest from time to time in other investment company securities. The fund
may not purchase more than 3% of the voting securities of another investment
company. In addition, the fund will not invest more than 5% of its assets in the
securities of any single investment company and will not invest more than 10% of
its assets in investment company securities. Investors should recognize that
they indirectly bear a proportionate share of the expenses of these investment
companies, including operating costs, and investment advisory and administrative
fees.
SHORT SALES The fund may also sell short securities it does not own up to 5% of
its assets. The fund may also sell securities "short against the box" without
limit.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ lend its portfolio securities up to 33 1/3% of its assets;
/bullet/ borrow up to 33 1/3% of the value of its assets from banks;
/bullet/ enter into repurchase transactions;
/bullet/ purchase securities on a "when-issued" or "delayed delivery" basis;
/bullet/ invest in restricted or illiquid securities: purchase and sell
exchange-listed and over-the- counter put and call options on
securities, equity and fixed-income indices and other financial
instruments; and
/bullet/ purchase and sell financial futures contracts and related options.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
TEMPLETON ASSET STRATEGY FUND
(ASSET STRATEGY FUND)
The fund's investment goal is high total return. This goal is fundamental, which
means it may not be changed without shareholder approval.
Under normal market conditions, the fund will invest in equity securities of
companies in any nation, debt securities of companies and governments of any
nation, and money market instruments. The fund's manager may, from time to time,
use various methods of selecting securities for the fund's portfolio, and may
employ and rely on independent or affiliated sources of information and ideas in
connection with the management of the fund's portfolio. As a non-fundamental
policy, the fund will limit its investments in securities of Russian issuers to
5% of its assets.
The average maturity of debt security's in the fund's portfolio is medium-term
(about 5 to 15 years), but will fluctuate depending on the manager's outlook on
the issuer's country and future interest rate changes.
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<PAGE>
LOWER-RATED SECURITIES Consistent with the overall 15% limit on lower-rated debt
securities, the fund preserves its flexibility to invest up to 10% of its total
assets in defaulted debt securities, but current does not intend to invest in
them.
OTHER INVESTMENT POLICIES The fund may also:
/bullet/ invest in collateralized mortgage obligations;
/bullet/ invest up to 15% of its net assets in illiquid securities;
/bullet/ purchase securities on a "when-issued" basis;
/bullet/ enter into repurchase transactions;
/bullet/ lend its portfolio securities up to 33 1/3% of its assets;
/bullet/ borrow up to 33 1/3% of the value of its assets;
/bullet/ invest in forward foreign currency exchange contracts and options on
foreign currencies; and
/bullet/ purchase and sell financial futures contracts, stock index futures
contracts, and foreign currency futures contracts for hedging purpose
only and not for speculation. It may engage in these transactions only
if the total contract value of the futures contract does not exceed 20%
of the fund's total assets.
As non-fundamental investment policies, which may be changed by the Board
without shareholder approval, the fund will not invest:
(i) more than 15% of its total assets in securities of foreign
issuers that are not listed on a recognized U.S. or foreign
securities exchange; or
(ii)
(ii) invest more than 15% of its total assets in:
(a) securities with a limited trading market;
(b) securities subject to legal or contractual restrictions as to resale;
and
(c) repurchase agreements not terminable within seven days.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
TEMPLETON DEVELOPING MARKETS SECURITIES FUND
(DEVELOPING MARKETS FUND)
The fund's investment goal is long-term capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.
Under normal market conditions, the fund will invest primarily in emerging
market equity securities that are issued by emerging market companies. For this
fund, emerging market countries include: (i) countries that are generally
considered low or middle income countries by the International Bank for
Reconstruction and Development (commonly known as the World Bank) and the
International Finance Corporation; or (ii) countries that are classified by
United Nations or otherwise regarded by their authorities as emerging, or (iii)
countries with a market capitalization of less than 3% of the Morgan Stanley
Capital World Index.
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<PAGE>
Emerging market companies are (i) companies whose principal securities trading
markets are in emerging market countries, or (ii) companies that derive a
significant share of their total revenue from either goods or services produced
or sales made in emerging market countries, or (iii) companies that have a
significant portion of their assets in emerging market countries, or (iv)
companies that are linked to currencies of emerging market countries, or (v)
companies that are organized under the laws of, or with principal offices in,
emerging market countries. The manager will determine eligibility based on
publicly available information and inquiries to the companies.
The fund's manager may, from time to time, use various methods of selecting
securities for the fund's portfolio, and also may employ and rely on independent
or affiliated sources of information and ideas in connection with the management
of the fund's portfolio. The manager will determine the eligibility of
investments based on publicly available information and inquiries made to
companies.
The fund will at all times, except during defensive periods, maintain
investments in at least three emerging markets countries. Consistent with its
policy of investing primarily in emerging market equity securities, the fund may
purchase securities in any foreign country, developed or emerging. As a
non-fundamental policy, however, the fund will limit its investments in
securities of Russian issuers to 5% of assets. From time to time, the fund may
hold significant cash positions until suitable investment opportunities are
available, consistent with its policy on temporary investments.
The fund seeks to benefit from economic and other developments in emerging
markets. The investment goal of the fund reflects the belief that investment
opportunities may result from an evolving, long-term international trend
favoring more market-oriented economies. This trend may be facilitated by local
or international political, economic or financial developments that could
benefit the capital markets of such countries. Countries in the process of
developing more market-oriented economies may experience relatively high rates
of economic growth, but there are many factors that may slow development and
growth. Other countries, although having relatively mature emerging markets, may
also be in a position to benefit from local or international developments
encouraging greater market orientation and diminishing governmental intervention
in economic affairs.
SMALLER COMPANIES The fund may invest significantly in smaller companies, which
have market capitalization of $1.5 billion or less. Market capitalization is the
total market value of a company's outstanding stock.
DEBT SECURITIES Depending upon current market conditions, the fund may invest up
to 35% of its assets in fixed-income debt securities for capital appreciation.
These securities include bonds, notes, debentures, commercial paper,
certificates of deposit, time deposits and bankers' acceptances. Certain debt
securities can provide the potential for capital appreciation based on factors
such as changes in interest rates, economic and market conditions, improvement
in an issuer's ability to repay principal and pay interest, and ratings
upgrades. Additionally, convertible bonds offer the potential for capital
appreciation through the conversion feature, which enables the holder of the
bond to benefit from increases in the market price of the securities into which
they are convertible.
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<PAGE>
To the extent the fund invests in debt securities, it will invest in those rated
at least C by Moody's or S&P(R) or, if unrated, that the manager determines to
be of comparable quality. As a fundamental policy, the fund will not invest more
than 10% of its assets in defaulted debt securities, which may be considered
speculative. The fund does not, however, currently intend to invest in defaulted
debt. As an operating policy (which may be changed without shareholder
approval), the fund will not invest more than 5% of its assets in lower-rated
debt securities which include debt securities rated BBB or lower by S&P(R) or
Baa or lower by Moody's (the lowest category of "investment grade" rating),
unrated securities that the manager determines are of equivalent investment
quality, and defaulted debt securities.
CLOSED END INVESTMENT COMPANIES The fund may invest up to 10% of its total
assets in securities of closed-end investment companies to facilitate foreign
investment. Investors should recognize that they indirectly bear a proportionate
share of the expenses of these investment companies, including operating costs,
and investment advisory and administrative fees.
OTHER INVESTMENT POLICIES The fund may:
/bullet/ lend its portfolio securities up to 33 1/3% of its assets;
/bullet/ borrow up to 33 1/3% of the value of its assets;
/bullet/ purchase convertible securities and warrants;
/bullet/ invest up to 15% of its net assets in illiquid securities;
/bullet/ enter into forward foreign currency contracts; and
/bullet/ enter into futures contracts, and related options, with respect to
securities, securities indices and foreign currencies. The value of the
underlying securities of written futures contracts will not exceed at
any time, 25% of the total assets of the fund. Presently, the fund
cannot use these strategies to a significant extent in the markets in
which the fund will principally invest.
When deemed appropriate by the manager, the fund may invest cash balances in
repurchase agreements and other money market investments to maintain liquidity
in an amount to meet expenses or for day-to-day operating purposes.
As non-fundamental investment policies, which may be changed by the Board
without shareholder approval, the fund will not:
(i) invest more than 15% of its total assets in securities of
foreign issuers that are not listed on a recognized U.S. or
foreign securities exchange; or
(ii) investment more than 15% of its total assets in:
(a) securities with a limited trading market;
(b) securities subject to legal or contractual
restrictions as to resale; and
(c) repurchase agreements not terminable within seven days.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
TEMPLETON GLOBAL INCOME SECURITIES FUND
(GLOBAL INCOME FUND)
The fund's investment goal is high current income consistent with preservation
of capital. This goal is fundamental, which means it may
37
<PAGE>
not be changed without shareholder approval. Capital appreciation is a secondary
consideration.
Under normal market conditions, the fund will invest primarily in the debt
securities of governments and their political subdivisions and agencies,
supranational organizations, and companies located anywhere in the world,
including emerging markets. A supranational organization is an entity designated
or supported by the national government of one or more countries to promote
economic reconstruction or development. The fund selects investments to provide
a high current yield and currency stability, or a combination of yield, capital
appreciation, and currency appreciation. As a global fund, the fund may invest
in securities issued in any currency and may hold foreign currency.
The fund may invest in debt or equity securities of any type of issuer,
including domestic and foreign corporations, domestic and foreign banks (with
assets in excess of one billion dollars), other business organizations, and
domestic and foreign governments and their political subdivisions, including the
U.S. Government, its agencies, and authorities or instrumentalities, and
supranational organizations. The fund is further authorized to invest in
"semi-governmental securities," which are debt securities issued by entities
owned by either a national, state, or equivalent government or of a government
jurisdiction that are not backed by its full faith and credit and general taxing
powers. The fund considers securities issued by central banks that are
guaranteed by their national governments to be government securities.
The debt securities in which the fund invests may have equity features, such as
conversion or exchange rights or warrants for the acquisition of stock of the
same or a different issuer; participation based on revenues, sales or profits;
or the purchase of common stock in a unit transaction (where an issuer's debt
securities and common stock are offered as a unit).
FOREIGN SECURITIES Under normal market conditions, the fund will have at least
25% of its assets invested in debt securities issued or guaranteed by foreign
governments. Under normal circumstances, at least 65% of the fund's assets will
be invested in issuers located in at least three countries, one of which may be
the U.S.
The fund normally invests its assets principally within Australia, Canada,
Japan, New Zealand, the U.S., and Western Europe, and in securities denominated
in the currencies of these countries or in multinational currency units, such as
the Euro or European Currency Unit (ECU). The fund may also invest a significant
portion of its assets in securities and currency in emerging market countries.
The manager intends to manage the fund's exposure to various currencies, and may
from time to time use forward currency exchange contracts or options on
currencies for hedging purposes.
MATURITY The fund may invest in debt securities with varying maturities. Under
current market conditions, it is expected that the average life span of all of
the fund's investments (the dollar-weighted average maturity of the fund's
investments) will not exceed 15 years. Generally, the portfolio's average
maturity will be shorter when the manager expects interests rates worldwide or
in a particular country to rise and longer when the manager expects interest
rates to fall.
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<PAGE>
OTHER INVESTMENT POLICIES In order to hedge currency risk, the fund may use
forward and futures contracts and interest rate swaps. The fund may also:
/bullet/ acquire loan participations;
/bullet/ lend its portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes;
/bullet/ enter into repurchase, reverse repurchase, and "when-issued"
transactions;
/bullet/ invest in preferred stock;
/bullet/ invest in structured notes;
/bullet/ purchase and sell call and put options on U.S. or foreign securities;
and
/bullet/ enter into futures contracts for the purchase or sale of U.S. Treasury
or foreign securities or based upon financial indices.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
TEMPLETON GROWTH SECURITIES FUND
(GROWTH SECURITIES FUND)
The fund's investment goal is long-term capital growth. This goal is
fundamental, which means it may not be changed without shareholder approval. Any
income the fund earns will be incidental.
Under normal market conditions, the fund will invest primarily in equity
securities of companies of any nation, including the U.S. and emerging markets.
The fund considers emerging market countries to include those generally
considered low or middle income countries by the International Bank for
Reconstruction and Development (commonly known as the World Bank) and the
International Finance Corporation. As a non-fundamental policy, the fund will
limit its investments in securities of Russian issuers to 5% of assets.
Although the fund generally invests in common stock, it may also invest in
preferred stocks, certain rated and unrated debt securities, such as convertible
bonds and bonds selling at a discount, and depositary receipts.
DEBT SECURITIES Debt securities obligate the issuer to repay a loan of money at
a future date and generally to pay interest. They include bonds, notes,
debentures, commercial paper, certificates of deposit, time deposits and
bankers' acceptances. The fund may invest in bonds as a defensive measure while
looking for attractive equity investments. The fund may also invest in debt
securities for capital appreciation. Debt securities can provide the potential
for capital appreciation based on various factors such as changes in interest
rates, economic and market conditions, improvement in an issuer's ability to
repay principal and pay interest, and ratings upgrades. Additionally,
convertible bonds offer the potential for capital appreciation through the
conversion feature, which enables the holder of the bond to benefit from
increases in the market price of the securities into which they are convertible.
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<PAGE>
The fund may invest in debt securities that are rated as low as C by Moody's or
S&P(R) (the lowest rating category) or, if unrated, that the manager determines
to be of comparable quality, but intends to invest in those that are highly
rated. However, as a policy established by the Board, the fund will not invest
more than 5% of its assets in debt securities rated BBB or lower by S&P(R) or
Baa or lower by Moody's. Consistent with the goal of the fund, the Board may
consider a change if economic conditions change such that a higher level of
investment in high risk, lower quality debt securities would be appropriate. As
a fundamental policy, the fund may not invest more than 10% of its assets in
defaulted debt securities, which may be considered speculative. The fund,
however, does not currently intend to invest in any defaulted debt securities.
DEPOSITARY RECEIPTS are certificates issued by a bank or trust company that give
their holders the right to receive securities issued by a foreign or domestic
company. Investments in depositary receipts involves some or all of the risks
associated with investments in foreign securities generally.
OTHER INVESTMENT POLICIES The fund may purchase and sell stock index futures
contracts up to in the aggregate 20% of its assets. It may not at any time
commit more than 5% of its assets to initial margin deposits on futures
contracts. In addition, in order to increase its return or to hedge all or a
portion of its portfolio investments, the fund may purchase and sell put and
call options on securities indices.
The fund may also:
/bullet/ invest up to 5% of its assets in securities issued by any one company
or foreign government (exclusive of U.S. Government securities);
/bullet/ invest up to 5% of its assets in warrants (exclusive of warrants
acquired in units or attached to securities);
/bullet/ invest up to 10% of its assets in securities with a limited trading
market, i.e., "illiquid securities";
/bullet/ enter into repurchase agreements;
/bullet/ lend its portfolio securities up to 30% of its assets;
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes; and
/bullet/ invest in restricted securities.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
TEMPLETON INTERNATIONAL SECURITIES FUND
(INTERNATIONAL SECURITIES FUND)
The fund's investment goal is long-term capital growth. This goal is
fundamental, which means it may not be changed without shareholder approval.
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<PAGE>
Under normal market conditions, the fund will invest primarily in equity
securities of companies located outside the U.S., including emerging markets.
The fund will invest at least 65% of its total assets in securities of issuers
in at least three countries outside the U.S. The fund will invest predominantly
in large-cap and mid-cap companies. Large-cap companies are those with market
capitalizations of $5 billion or more; mid-cap companies are those with market
capitalization of $2 billion to $5 billion. It may also invest to a lesser
extent in smaller companies.
As a non-fundamental policy, the fund will limit its investments in securities
of Russian issuers to 5% of its assets. The fund's manager may, from time to
time, use various methods of selecting securities for the fund's portfolio, and
also may employ and rely on independent or affiliated sources of information and
ideas in connection with the management of the fund's portfolio.
DEBT SECURITIES The fund may invest in medium and lower quality debt securities
that are rated between BBB and as low as D by S&P(R), and between Baa and as low
as C by Moody's or unrated securities the manager determines are of comparable
quality. As a fundamental policy (which may not be changed without shareholder
approval), the fund will not invest more than 10% of its assets in defaulted
debt securities, which may be considered speculative. As an operating policy
(which may not be changed without shareholder approval), however, the fund will
not invest more than 5% of its assets in lower-rated securities, debt securities
rated BBB or lower by S&P(R), Ba or lower by Moody's, or lower unrated
securities that the manager determines are an equivalent investment quality.
OTHER INVESTMENT POLICIES The fund also may:
/bullet/ enter into transactions in options on securities, securities indices
and foreign currencies;
/bullet/ invest up to 15% of its net assets in illiquid securities or in
restricted securities such as private placements;
/bullet/ enter into firm commitment agreements;
/bullet/ purchase securities on a "when-issued" basis;
/bullet/ purchase and sell financial futures contracts, stock index futures
contracts, and foreign currency futures contracts for hedging purposes
only and not for speculation. It may engage in these transactions only
if the total contract value of the futures do not exceed 20% of the
fund's total assets;
/bullet/ lend its portfolio securities up to 33 1/3% of its assets; and
/bullet/ borrow up to 33 1/3% of the value of its total assets.
As non-fundamental investment policies, which may be changed by the Board
without shareholder approval, the fund will not:
(i) invest more than 15% of its total assets in securities of
foreign issuers that are not listed on a recognized U.S. or foreign
securities exchange; or
(ii) invest more than 15% of its total assets in:
(a) securities with a limited trading market;
(b) securities subject to legal or contractual restrictions
as to resale; and
(c) repurchase agreements not terminable within seven days.
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Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
TEMPLETON INTERNATIONAL SMALLER COMPANIES FUND
(INTERNATIONAL SMALLER COMPANIES FUND)
The fund's investment goal is long-term capital appreciation. This goal is
fundamental, which means it may not be changed without shareholder approval.
Under normal market conditions, the fund will invest primarily in equity
securities of smaller companies located outside the U.S., including emerging
markets. Smaller companies are generally those that have market capitalizations
of less than $2 billion. The manager believes that international small cap
companies may provide attractive investment opportunities because these
securities comprise a majority of the world's equity securities. These companies
also are frequently overlooked by investors or undervalued in relation to their
perceived earning power. In addition, such securities may provide investors with
the opportunity to increase the diversification of their overall investment
portfolios because the market performance of these securities may differ from
U.S. small-cap stocks and large-cap stocks of any nation. As an operating
policy, the fund will not invest more than 10% of its assets in securities of
companies with less than three years of continuous operation.
As a non-fundamental policy, the fund will limit its investments in securities
of Russian issuers to 5% of assets.
The fund may invest up to 35% of its assets in:
/bullet/ equity securities of larger issuers outside the U.S.;
/bullet/ equity securities of larger or smaller issuers within the U.S.,
although the fund does not expect these investments to exceed 5% of
assets; or
/bullet/ debt securities issued by companies or governments in any nation. These
investments may cause the fund's performance to vary from those of
international smaller equity markets.
DEBT SECURITIES Debt securities obligate the issuer to repay a loan of money to
it and generally to pay interest. Common debt securities are bonds, including
bonds convertible into common stock or unsecured bonds, notes and short-term
investments. The fund may invest in debt securities that are rated at least C by
Moody's or S&P(R) or, if unrated, that the manager determines to be of
comparable quality. As a current policy, however, the fund will not invest more
than 5% of its assets in debt securities rated lower than BBB by S&P(R) or Baa
by Moody's. The fund may invest up to 10% of its assets in defaulted debt
securities, which may be considered speculative.
CURRENCY HEDGING The fund may, but with respect to equity securities currently
does not intend to, employ the following currency hedging techniques: foreign
currency futures contracts, forward foreign currency exchange contracts
("forward contracts"), and options on foreign currencies. Further, the fund will
not enter into forward contracts if, as a result, the fund would have more than
20% of its assets committed to such contracts.
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OTHER INVESTMENT POLICIES The fund may invest no more than 5% of its assets in
securities of any one issuer, at the time of purchase. This restriction does not
include U.S. Government securities.
For hedging purposes only, the fund may enter into transactions in options on
securities, securities indices, and foreign currencies; and futures contracts
and related options. The value of the underlying securities on which futures
contracts will be written at any one time will not exceed 25% of the assets of
the fund.
The fund may also:
/bullet/ enter into repurchase agreements;
/bullet/ invest in illiquid securities;
/bullet/ lend its portfolio securities up to 30% of its assets; and
/bullet/ borrow up to 33 1/3% of the value of its total assets from banks.
/bullet/
While the fund may invest in warrants, as a non-fundamental investment policy,
the fund may not invest more than 5% of its assets in warrants, whether or not
listed on the New York or American Stock Exchanges, including no more than 2% of
its total assets in warrants that are not listed on those exchanges. Warrants
acquired by the fund in units or attached to securities are not included in this
restriction.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
TEMPLETON PACIFIC GROWTH SECURITIES FUND
(PACIFIC GROWTH FUND)
The fund's investment goal is to provide long-term growth of capital. This goal
is fundamental, which means it may not be changed without shareholder approval.
Under normal market conditions, the fund will invest primarily in equity
securities that trade on markets in the Pacific Rim, some of which may be
considered emerging markets, and that are issued by companies that have their
principal activities in the Pacific Rim. The fund considers companies to have
their principal activities in the Pacific Rim if they (i) are domiciled in the
Pacific Rim or (ii) derive at least 50% of either their revenues or pre-tax
income from activities in the Pacific Rim. Normally, the fund will invest at
least 65% of its assets in securities traded in at least three foreign
countries, including the countries listed in the fund's prospectus. Although the
fund will not invest more than 25% of its assets in any one industry or the
government of any one country, the fund may invest more than 25% of its assets
in the securities of issuers in any given country. The fund may from time to
time hold significant cash positions until suitable investment opportunities are
available, consistent with its policy on temporary investments.
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There is a high correlation among most of the markets in the Pacific Rim. Thus,
changes in one Pacific Rim country, even a country in which the fund is not
invested, may adversely affect security values in other Pacific Rim countries
and thus the fund's holdings. Currency volatility is greater in certain segments
of the Pacific Rim than in Europe. Because of the high correlation among the
Pacific Rim markets, devaluation or strengthening of currency has a ripple
effect in the Pacific Rim. Market uncertainty, including the failure to open
trading markets or stopping of expatriation of currency, and political
instability is also generally great in the Pacific Rim countries.
OTHER INVESTMENTS The fund may invest up to 35% of its assets in the securities
of issuers domiciled outside of the Pacific Rim or in investment grade debt
securities.
DEBT SECURITIES obligate the issuer to repay a loan of money and generally to
pay interest. The fund may seek capital appreciation by investing in debt
securities that increase in value through changes in relative foreign currency
exchange rates, changes in relative interest rates or improvement in the
creditworthiness of the issuer. These debt obligations may consist of U.S. and
foreign government securities and corporate debt obligations, including Yankee
bonds, Eurobonds, and Depositary Receipts.
OTHER INVESTMENT POLICIES The fund may:
/bullet/ invest up to 10% of its net assets in illiquid securities;
/bullet/ invest no more than 10% of its net assets in warrants, including those
not listed on an exchange;
/bullet/ write covered call and put options on securities;
/bullet/ purchase call and put options on securities;
/bullet/ buy puts and write calls in "forward conversion" transactions;
/bullet/ engage in "spread" and "straddle" transactions;
/bullet/ purchase and write call and put options on stock indices;
/bullet/ enter into contracts for the purchase or sale for future delivery of
U.S. Treasury or foreign securities or futures contracts based upon
financial indices;
/bullet/ purchase and sell interest rate futures contracts and related options;
/bullet/ purchase and sell stock index futures contracts and related options;
/bullet/ purchase convertible securities;
/bullet/ lend its portfolio securities up to 33 1/3% of its assets;
/bullet/ borrow up to 5% of the value of its total assets for any purpose other
than direct investments in securities, and up to 33 1/3% of the value
of its total assets from banks for temporary or emergency purposes; and
/bullet/ engage in repurchase agreements.
Please see, "Securities and Investment Techniques Common to More than One Fund,"
and "Risks of Securities and Investment Techniques" below, for more information.
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SECURITIES AND INVESTMENT TECHNIQUES COMMON TO MORE THAN ONE FUND
- --------------------------------------------------------------------------------
THIS SECTION DESCRIBES CERTAIN TYPES OF SECURITIES AND INVESTMENT TECHNIQUES
THAT A FUND MAY USE IF THE DISCUSSION IN A FUND'S INDIVIDUAL SECTION IN THIS SAI
INDICATES THAT IT IS AUTHORIZED TO DO SO. NOT ALL INVESTMENTS, STRATEGIES AND
TECHNIQUES ARE AVAILABLE TO ALL FUNDS. YOU SHOULD REFER TO THE INFORMATION IN
THE PROSPECTUS OR SAI TO DETERMINE IF AN INVESTMENT, STRATEGY OR TECHNIQUE MAY
BE USED BY A PARTICULAR FUND. IF THERE APPEARS TO BE AN INCONSISTENCY BETWEEN
THIS SECTION AND THE INDIVIDUAL FUND SECTION WITH RESPECT TO INVESTMENTS,
STRATEGIES OR TECHNIQUES, THE INDIVIDUAL FUND SECTION CONTROLS AND SHOULD BE
RELIED UPON.
All policies and percentage limitations are considered at the time of purchase
of an investment and refer to a fund's total assets, unless another purpose is
indicated. A fund will not necessarily use the strategies described to the full
extent permitted, or at all, depending upon the manager's assessment of current
market and economic conditions. Further, not all instruments or strategies will
be used at all times.
In the event of a corporate restructuring or bankruptcy reorganization of a
company whose securities are owned by a fund, the fund may receive securities
different from those originally purchased. For example, a fund might receive
common stock that is not dividend paying, bonds with a lower coupon or more
junior status, convertible securities or even conceivably real estate. The fund
is not obligated to sell such investments immediately if the manager believes,
based on its own analysis, that the longer term outlook is favorable and there
is the potential for a higher total return by holding such investments.
Each fund is also subject to investment restrictions that are described under
the heading "Fundamental Investment Restrictions" in this SAI. The investment
goal of each fund and its listed investment restrictions are "fundamental
policies" of each fund, which means that they may not be changed without a
majority vote of shareholders of the fund. With the exception of a fund's
investment goal and those restrictions specifically identified as fundamental,
all investment policies and practices described in the prospectus and in this
SAI are not fundamental, which means that the Board of Trustees may change them
without shareholder approval.
BORROWING Most funds may borrow in excess of 5% of their total assets only from
banks for temporary or emergency purposes and up to 5% for any purpose other
than direct investments in securities. Certain funds may borrow from banks up to
33 1/3% of their total net assets. In addition, certain funds may enter into
borrowing arrangements with non-banks under specified conditions. None of the
funds will purchase additional securities while its borrowing exceeds its stated
percentage limitations on borrowing. Under federal securities laws, a fund may
borrow from banks and is required to maintain continuous asset coverage of 300%
with respect to such borrowings and to sell (within three days) sufficient
portfolio holdings to restore such coverage if it should decline to less than
300% due to market fluctuations or otherwise, even if disadvantageous from an
investment standpoint.
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Leveraging by means of borrowing may make any change in the fund's net asset
value even greater and thus result in increased volatility of returns. The
fund's assets that are used as collateral to secure the borrowing may decrease
in value while the borrowing is outstanding, which may force the fund to use its
other assets to increase the collateral. In addition, the money borrowed will be
subject to interest and other costs (which may include commitment fees and/or
the cost of maintaining minimum average balances). The cost of borrowing may
exceed the income received from the securities purchased with borrowed funds.
In addition to borrowing for leverage purposes, the funds also may borrow money
to meet redemptions in order to avoid forced, unplanned sales of portfolio
securities. This allows the funds greater flexibility to buy and sell portfolio
securities for investment or tax considerations, rather than cash flow
considerations. As a matter of non-fundamental policy, the funds do not consider
the purchase and/or sale of a mortgage dollar roll to be a borrowing. See
"Fundamental Investment Restrictions" for more information about the funds'
policies with respect to borrowing.
CONCENTRATION Unless otherwise disclosed in the individual fund sections above,
the funds will not invest more than 25% of their "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. Pursuant to the 1940 Act, these policies may not be changed
without shareholder approval.
CONVERTIBLE SECURITIES A convertible security is generally a debt obligation or
preferred stock that may be converted within a specified period of time into a
certain amount of common stock of the same or a different issuer. A convertible
security provides a fixed-income stream and the opportunity, through its
conversion feature, to participate in the capital appreciation resulting from a
market price advance in its underlying common stock.
As with a straight fixed-income security, a convertible security tends to
increase in market value when interest rates decline and decrease in value when
interest rates rise. Like a common stock, the value of a convertible security
also tends to increase as the market value of the underlying stock rises, and it
tends to decrease as the market value of the underlying stock declines. Because
both interest rate and market movements can influence its value, a convertible
security is not as sensitive to interest rates as a similar fixed-income
security, nor as sensitive to changes in share price as its underlying stock.
A convertible security is usually issued either by an operating company or by an
investment bank. When issued by an operating company, a convertible security
tends to be senior to common stock, but subordinate to other types of
fixed-income securities issued by that company. When that convertible security
is "converted," the operating company often issues new stock to the holder of
the convertible security. If, however, the parity price (the price at which the
common stock underlying the convertible security may be obtained) of the
convertible security is less than the call price (the price of the bond,
including any premium related to the conversion feature), the operating company
may pay out cash instead of common stock. When a convertible security is issued
by an investment bank, the security is
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an obligation of and is convertible through the issuing investment bank.
In addition, the issuer of a convertible security may be important in
determining the security's true value. This is because the holder of a
convertible security will have recourse only to the issuer. A convertible
security may be subject to redemption by the issuer, but only after a specified
date and under circumstances established at the time the security is issued.
While the fund uses the same criteria to rate a convertible debt security that
it uses to rate a more conventional debt security, a convertible preferred stock
is treated like a preferred stock for the fund's financial reporting, credit
rating, and investment limitation purposes. A preferred stock is subordinated to
all debt obligations of the issuer in the event of insolvency, and an issuer's
failure to make a dividend payment is generally not an event of default
entitling the preferred shareholder to take action. A preferred stock generally
has no maturity date so that its market value is dependent on the issuer's
business prospects for an indefinite period of time. In addition, distributions
from preferred stock are dividends, rather than interest payments, and are
usually treated as such for corporate tax purposes.
ENHANCED CONVERTIBLE SECURITIES. In addition to "plain vanilla" convertibles, a
number of different structures have been created to fit the characteristics of
specific investors and issuers. Examples of these enhanced characteristics for
investors include yield enhancement, increased equity exposure or enhanced
downside protection. From an issuer's perspective, enhanced structures are
designed to meet balance sheet criteria, interest/dividend payment deductibility
and reduced equity dilution. The following are descriptions of common structures
of enhanced convertible securities.
Mandatorily convertible securities (e.g., ACES, DECS, PRIDES, SAILS-each issuer
has a different acronym for their version of these securities) are considered
the most equity like of convertible securities. At maturity these securities are
mandatorily convertible into common stock offering investors some form of yield
enhancement in return for some of the upside potential in the form of a
conversion premium. Typical characteristics of mandatories include: issued as
preferred stock, convertible at premium, pay fixed quarterly dividend (typically
500 to 600 basis points higher than common stock dividend), and are non-callable
for the life of the security (usually three to five years). An important feature
of mandatories is that the number of shares received at maturity is determined
by the difference between the price of the common stock at maturity and the
price of the common stock at issuance.
Enhanced convertible preferred securities (e.g., QUIPS, TOPrS, and TECONS) are,
from an investor's viewpoint, essentially convertible preferred securities, i.e.
they are issued as preferred stock convertible into common stock at a premium
and pay quarterly
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dividends. Through this structure the company establishes a wholly owned special
purpose vehicle whose sole purpose is to issue convertible preferred stock. The
proceeds of the convertible preferred stock offering pass through to the
company. The company then issues a convertible subordinated debenture to the
special purpose vehicle. This convertible subordinated debenture has identical
terms to the convertible preferred issued to investors. Benefits to the issuer
include increased equity credit from rating agencies and the deduction of coupon
payments for tax purposes.
Exchangeable securities are often used by a company divesting a holding in
another company. The primary difference between exchangeables and standard
convertible structures is that the issuing company is a different company to
that of the underlying shares.
Yield enhanced stock (YES, also known as PERCS) mandatorily converts into common
stock at maturity and offers investors a higher current dividend than the
underlying common stock. The difference between these structures and other
mandatories is that the participation in stock price appreciation is capped.
Zero-coupon and deep-discount convertible bonds (OID and LYONs) include the
following characteristics: no or low coupon payments, imbedded put options
allowing the investor to put them on select dates prior to maturity, call
protection (usually three to five years), and lower than normal conversion
premiums at issuance. A benefit to the issuer is that while no cash interest is
actually paid, the accrued interest may be deducted for tax purposes. Because of
their put options, these bonds tend to be less sensitive to changes in interest
rates than either long maturity bonds or preferred stocks. The put options also
provide enhanced downside protection while retaining the equity participation
characteristics of traditional convertible bonds.
An investment in an enhanced convertible security or any other security may
involve additional risks. The fund may have difficulty disposing of such
securities because there may be a thin trading market for a particular security
at any given time. Reduced liquidity may have an adverse impact on market price
and the fund's ability to dispose of particular securities, when necessary, to
meet the fund's liquidity needs or in response to a specific economic event,
such as the deterioration in the credit worthiness of an issuer. Reduced
liquidity in the secondary market for certain securities may also make it more
difficult for the fund to obtain market quotations based on actual trades for
purposes of valuing the fund's portfolio. The fund, however, intends to acquire
liquid convertible securities, though there can be no assurances that this will
be achieved.
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SYNTHETIC CONVERTIBLE SECURITIES. A synthetic convertible is created by
combining distinct securities that together possess fixed income payments and
the right to acquire the underlying equity security. This combination is
achieved by investing in nonconvertible fixed-income securities and in warrants
or stock or stock index call options that grant the holder the right to purchase
a specified quantity of securities within a specified period of time at a
specified price or to receive cash in the case of stock index options. Synthetic
convertible securities are generally not considered to be "equity securities"
for purposes of each fund's investment policy regarding those securities.
Synthetic convertible securities differ from a true convertible security in the
following respects:
/bullet/ The value of a synthetic convertible is the sum of the values of its
fixed-income and convertibility components, which means that the values
of a synthetic convertible and a true convertible security will respond
differently to market fluctuations.
/bullet/ Typically, the two components of a synthetic convertible represent one
issuer, but a fund may combine components representing distinct
issuers, or to combine a fixed income security with a call option on a
stock index, when the manager determines that such a combination would
better promote a fund's investment objectives.
/bullet/ The component parts of a synthetic convertible security may be
purchased simultaneously or separately.
/bullet/ The holder of a synthetic convertible faces the risk that the price of
the stock, or the level of the market index underlying the
convertibility component will decline.
DEBT SECURITIES represent a loan of money by the purchaser of the securities to
the issuer. A debt security typically has a fixed payment schedule that
obligates the issuer to pay interest to the lender and to return the lender's
money over a certain time period. A company typically meets its payment
obligations associated with its outstanding debt securities before it declares
and pays any dividend to holders of its equity securities. Bond, notes and
commercial paper are types of debt securities. Each of these differs in the
length of the issuer's payment schedule, with commercial paper having the
shortest payment schedule.
The market value of debt securities generally varies in response to changes in
interest rates and the financial condition of each issuer. During periods of
declining interest rates, the value of debt securities generally increases.
Conversely, during periods of rising interest rates, the value of such
securities generally declines. These changes in market value will be reflected
in the fund's net asset value.
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RATINGS. Various investment services publish ratings of some of the debt
securities in which the funds may invest. Higher yields are ordinarily available
from securities in the lower rating categories, such as securities rated Ba or
lower by Moody's or BB or lower by S&P(R) or from unrated securities deemed by a
fund's manager to be of comparable quality. These ratings represent the opinions
of the rating services with respect to the issuer's ability to pay interest and
repay principal. They do not purport to reflect other risk, such as the risk of
fluctuations in market value and are not absolute standards of quality. However,
lower rated securities typically are riskier than investment grade securities.
Bonds that are rated C by Moody's are the lowest rated class of bonds and can be
regarded as having extremely poor prospects of ever attaining any real
investment standing. Bonds rated C by S&P(R) are securities on which no interest
is being paid. The appendix has a more complete discussion of the ratings.
Regardless of rating levels, all debt securities considered for purchase
(whether rated or unrated) will be carefully analyzed by the manager to assess
whether, at the time of purchase, the planned investment offers potential
returns that are reasonable in light of the risks involved. The manager, in its
evaluation of the overall investment merits of a security, will consider the
fact that the rating on an issue held in a fund's portfolio is changed by the
rating service or that the security goes into default but, in general, will not
automatically sell the security.
BANK OBLIGATIONS, or instruments secured by bank obligations, include fixed,
floating or variable rate CDs, letters of credit, time deposits, bank notes and
bankers' acceptances. Certificates of deposit are negotiable certificates issued
against funds deposited in a commercial bank for a definite period of time and
earning a specified return. Time deposits are non-negotiable deposits that are
held in a banking institution for a specified time at a stated interest rate.
Bankers' acceptances are negotiable drafts or bills of exchange normally drawn
by an importer or exporter to pay for specific merchandise. When a bank
"accepts" a bankers' acceptance, the bank, in effect, unconditionally agrees to
pay the face value of the instrument upon maturity. The funds that are permitted
to invest in bank obligations may invest in dollar-denominated certificates of
deposit and bankers' acceptances of foreign and domestic banks having total
assets in excess of $1 billion, certificates of deposit of federally insured
savings and loan associations having total assets in excess of $1 billion, or
cash and time deposits with banks in the currency of any major nation.
Certain funds may invest in obligations of U.S. banks, foreign branches of U.S.
banks, foreign branches of foreign banks, and U.S. branches of foreign banks
that have a federal or state charter to do business in the U.S. and are subject
to U.S. regulatory authorities.
COMMERCIAL PAPER typically refers to short-term obligations of banks,
corporations and other borrowers with maturities of up to 270 days. A fund may
invest in domestic or foreign commercial paper. Investments in commercial paper
are generally limited to obligations rated Prime-1 or Prime-2 by Moody's or A-1
or A-2 by S&P(R) or if unrated, issued by companies having an outstanding debt
issue currently rated Aaa or Aa by Moody's or AAA or AA by S&P(R). Certain funds
may also invest in lower rated commercial paper to the extent permitted by their
policies on lower rated debt securities generally. The Appendix contains a more
complete description of commercial paper ratings.
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DEFERRED INTEREST AND PAY-IN-KIND BONDS are bonds issued at a discount that
defer the payment of interest until a later date or pay interest through the
issuance of additional bonds, known as pay-in-kind bonds. A fund will accrue
income on deferred interest bonds for tax and accounting purposes. Similarly, a
fund will be deemed to receive interest over the life of such bonds and be
treated as if interest were paid on a current basis for federal income tax
purposes, although no cash interest payments are received by the fund until the
cash payment date or until the bonds mature. This accrued income from both
deferred interest and pay-in-kind bonds must be "distributed" to the insurance
company shareholders each year, whether or not such distributions are paid in
cash. To the extent such distributions are paid in cash, a fund may be required
to dispose of portfolio securities that it otherwise would have continued to
hold or to use other sources such as sales of fund shares. See "Risks,
Lower-rated securities" for more information about these bonds.
MORTGAGE-BACKED SECURITIES
ADJUSTABLE RATE MORTGAGE SECURITIES (ARMS), like traditional mortgage
securities, are interests in pools of mortgage loans. The interest rates on the
mortgages underlying ARMS are reset periodically. The adjustable interest rate
feature of the mortgages underlying the mortgage securities in which the funds
invest generally will act as a buffer to reduce sharp changes in a fund's net
asset value in response to normal interest rate fluctuations. As the interest
rates are reset, the yields of the securities will gradually align themselves to
reflect changes in market rates so that their market value will remain
relatively stable compared to fixed-rate securities. As a result, a fund's net
asset value should fluctuate less significantly than if the fund invested in
more traditional long-term, fixed-rate securities. During periods of extreme
fluctuation in interest rates, however, a fund's net asset value will fluctuate.
Because the interest rates on the mortgages underlying ARMS are reset
periodically, a fund may participate in increases in interest rates, resulting
in both higher current yields and lower price fluctuations. This differs from
fixed-rate mortgages, which generally decline in value during periods of rising
interest rates. A fund, however, will not benefit from increases in interest
rates to the extent that interest rates exceed the maximum allowable annual or
lifetime reset limits (or "cap rates") for a particular mortgage security. Since
most mortgage securities held by the funds will generally have annual reset
limits or caps of 100 to 200 basis points, short-term fluctuations in interest
rates above these levels could cause these mortgage securities to "cap out" and
behave more like long-term, fixed-rate debt securities. If prepayments of
principal are made on the underlying mortgages during periods of rising interest
rates, a fund generally will be able to reinvest these amounts in securities
with a higher current rate of return.
During periods of rising interest rates, changes in the interest rates on
mortgages underlying ARMS lag behind changes in the market rate. This may result
in a lower net asset value until the interest rate resets to market rates. Thus,
you could suffer some principal loss if you sell your shares of a fund before
the interest rates on the underlying mortgages in the underlying portfolio reset
to market rates. Also, a fund's net asset value could vary to the extent that
current yields on mortgage-backed securities are different from market yields
during interim periods between coupon reset dates. A portion of the ARMS in
which the funds may invest may not reset for up to five years.
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During periods of declining interest rates, the interest rates may reset
downward, resulting in lower yields to a fund. As a result, the value of ARMS is
unlikely to rise during periods of declining interest rates to the same extent
as the value of fixed-rate securities. As with other mortgage-backed securities,
declining interest rates may result in accelerated prepayments of mortgages, and
a fund may have to reinvest the proceeds from the prepayments at the lower
prevailing interest rates.
For certain types of ARMS, the rate of amortization of principal, as well as
interest payments, change in accordance with movements in a pre-specified,
published interest rate index. The amount of interest due to an ARMS holder is
calculated by adding a specified additional amount, the "margin," to the index,
subject to limitations or "caps" on the maximum and minimum interest that is
charged to the mortgagor during the life of the mortgage or to maximum and
minimum changes to that interest rate during a given period.
Mortgage loan pools offering pass-through investments in addition to those
described above may be created in the future. The mortgages underlying these
securities may be alternative mortgage instruments, that is, mortgage
instruments whose principal or interest payments may vary or whose terms to
maturity may differ from customary long-term, fixed-rate mortgages. As new types
of mortgage securities are developed and offered to investors, a fund may invest
in them if they are consistent with the fund's goal, policies, and quality
standards.
ADJUSTABLE RATE SECURITIES (ARS) are debt securities with interest rates that
are adjusted periodically pursuant to a pre-set formula and interval. Movements
in the relevant index on which adjustments are based, as well as the applicable
spread relating to the ARS, will affect the interest paid on ARS and, therefore,
the current income earned by a fund by investing in ARS. (See "Resets.")
The interest rates on ARS are readjusted periodically to an amount above the
chosen interest rate index. These readjustments occur at intervals ranging from
one to sixty months. The degree of volatility in the market value of the
securities held by a fund and of the net asset value of the fund's shares will
be a function primarily of the length of the adjustment period and the degree of
volatility in the applicable indices. It will also be a function of the maximum
increase or decrease of the interest rate adjustment on any one adjustment date,
in any one year, and over the life of the securities. These maximum increases
and decreases are typically referred to as "caps" and "floors," respectively. A
fund does not seek to maintain an overall average cap or floor, although the
manager will consider caps or floors in selecting ARS for a fund.
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While the funds investing in ARS do not attempt to maintain a stable net asset
value per share, during periods when short-term interest rates move within the
caps and floors of the securities held by a fund, the fluctuation in market
value of the ARS held by the fund is expected to be relatively limited, since
the interest rates on the ARS generally adjust to market rates within a short
period of time. In periods of substantial short-term volatility in interest
rates, the value of a fund's holdings may fluctuate more substantially because
the caps and floors of its ARS may not permit the interest rates to adjust to
the full extent of the movements in the market rates during any one adjustment
period. In the event of dramatic increases in interest rates, the lifetime caps
on the ARS may prevent the securities from adjusting to prevailing rates over
the term of the loan. In this case, the market value of the ARS may be
substantially reduced, with a corresponding decline in a fund's net asset value.
COLLATERALIZED MORTGAGE OBLIGATIONS (CMOS), REAL ESTATE MORTGAGE INVESTMENT
CONDUITS (REMICS), AND MULTI-CLASS PASS-THROUGHS are debt obligations that are
collateralized by mortgage loans or mortgage pass-through securities. These
obligations may be issued and guaranteed by U.S. Government agencies or
instrumentalities or issued by certain financial institutions and other mortgage
lenders. CMOs and REMICs are debt instruments issued by special purpose entities
and are secured by pools of mortgages backed by residential and various types of
commercial properties. Multi-class pass-through securities are equity interests
in a trust composed of mortgage loans or other mortgage-backed securities.
CMOs are debt instruments that are collateralized by pools of mortgage loans
created by commercial banks, savings and loan institutions, private mortgage
insurance companies, mortgage bankers, and other issuers in the U.S. Principal
and interest on the underlying collateral are paid to the issuer of the CMOs to
make required payments on these securities. In effect, CMOs "pass-through" the
monthly payments made by individual borrowers on their mortgage loans. Timely
payment of interest and principal (but not market value) of these pools is
supported by various forms of insurance or guarantees issued by U.S. Government
agencies, private issuers, and mortgage poolers; however, the obligations
themselves are not guaranteed.
A CMO is a mortgage-backed security that separates mortgage pools into short-,
medium-, and long-term components. Each component pays a fixed rate of interest
to security holders at regular intervals. These components enable an investor,
such as a fund, to predict more accurately the pace at which principal is
returned.
CMOs and REMICS purchased by a fund may be:
(1) collateralized by pools of mortgages in which each mortgage is
guaranteed as to payment of principal and interest by an agency or
instrumentality of the U.S. Government; or (2) collateralized by pools of
mortgages in which payment of principal and interest are guaranteed by the
issuer, an entity specifically created for this purpose, and the guarantee
is collateralized by U.S. Government securities.
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If the collateral securing the obligation is insufficient to make payment on the
obligation, a holder could sustain a loss. In addition, a fund may buy CMOs
without insurance or guarantees if, in the opinion of the manager, the sponsor
is creditworthy. The ratings of the CMOs will be consistent with the ratings
criteria of the fund. Prepayments of the mortgages included in the mortgage pool
may influence the yield of the CMO. Prepayments usually increase when interest
rates are decreasing, thereby decreasing the life of the pool. Reinvestment of
prepayments may be at a lower rate than that on the original CMO. As a result,
the value of CMOs decrease like other debt obligations when interest rates rise,
but when interest rates decline, they may not increase as much as other debt
obligations due to the prepayment feature.
RESETS. The interest rates paid on ARMS, ARS, and CMOs generally are readjusted
at intervals of one year or less to an increment over some predetermined
interest rate index, although some securities in which the funds may invest may
have intervals as long as five years. There are three main categories of
indices: those based on LIBOR, those based on U.S. Treasury securities, and
those derived from a calculated measure such as a cost of funds index or a
moving average of mortgage rates. Commonly used indices include:
/bullet/ the one-, three-, and five-year constant-maturity Treasury rates;
/bullet/ the three-month Treasury bill rate;
/bullet/ the 180-day Treasury bill rate;
/bullet/ rates on longer-term Treasury securities;
/bullet/ the 11th District Federal Home Loan Bank Cost of Funds;
/bullet/ the National Median Cost of Funds;
/bullet/ the one-, three-, six-month, or one-year LIBOR;
/bullet/ the prime rate of a specific bank; or
/bullet/ commercial paper rates.
/bullet/
Some indices, such as the one-year constant-maturity Treasury rate, closely
mirror changes in market interest rate levels. Others, such as the 11th District
Federal Home Loan Bank Cost of Funds, tend to lag behind changes in market
interest rate levels and tend to be somewhat less volatile.
CAPS AND FLOORS. The underlying mortgages that collateralize ARMS and CMOs will
frequently have caps and floors that limit the maximum amount by which the loan
rate to the borrower may change up or down (a) per reset or adjustment interval
and (b) over the life of the loan. Some residential mortgage loans restrict
periodic adjustments by limiting changes in the borrower's monthly principal and
interest payments rather than limiting interest rate changes. These payment caps
may result in negative amortization (an increase in the principal due). In
periods of rising interest rates, certain coupons may be temporarily "capped
out" resulting in declines in the prices of those securities and, therefore, a
negative affect on share price. Conversely, in periods of declining interval
rates certain coupons may be temporarily "floored out," resulting in an increase
in the price of those securities and, therefore, a positive effect on a fund's
share price.
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STRIPPED MORTGAGE SECURITIES are derivative multi-class mortgage securities. The
stripped mortgage securities in which a fund may invest will only be issued or
guaranteed by the U.S. Government, its agencies or instrumentalities, or issued
by private originators of, or investors in, mortgage loans, including saving and
loan associations, mortgagers, banks, commercial banks, investment banks, and
special purpose subsidiaries of any of these. Stripped mortgage securities have
greater market volatility than other types of mortgage securities in which a
fund invests.
Stripped mortgage securities are usually structured with two classes, each
receiving different proportions of the interest and principal distributions on a
pool of mortgage assets. A common type of stripped mortgage security has one
class that receives some of the interest and most of the principal from the
mortgage assets, while the other class receives most of the interest and the
remainder of the principal. In the most extreme case, one class receives all of
the interest (the interest-only or "IO" class), while the other class receives
the entire principal (the principal-only or "PO" class). The yield to maturity
on an IO class is extremely sensitive not only to changes in prevailing interest
rates but also to the rate of principal payments (including prepayments) on the
underlying mortgage assets. A rapid rate of principal payments may have a
material adverse effect on the yield to maturity of any IO class held by a fund.
If the underlying mortgage assets experience greater than anticipated
prepayments of principal, the fund may fail to recoup its initial investment
fully, even if the securities are rated in the highest rating categories, AAA or
Aaa, by S&P(R) or Moody's, respectively.
Stripped mortgage securities are purchased and sold by institutional investors,
such as a fund, through several investment banking firms acting as brokers or
dealers. These securities were only recently developed, and traditional trading
markets have not yet been established for all stripped mortgage securities.
Accordingly, some of these securities may be illiquid. The staff of the SEC has
indicated that only government-issued IO or PO securities that are backed by
fixed-rate mortgages may be deemed to be liquid, if procedures with respect to
determining liquidity are established by a fund's board. The Board may, in the
future, adopt procedures that would permit a fund to acquire, hold, and treat as
liquid government-issued IO and PO securities. At the present time, however, all
such securities will continue to be treated as illiquid and will, together with
any other illiquid investments, not exceed 10% of a fund's net assets. This
position may be changed in the future, without notice to shareholders, in
response to the SEC staff's continued reassessment of this matter, as well as to
changing market conditions.
INVERSE FLOATERS are instruments with floating or variable interest rates that
move in the opposite direction, usually at an accelerated speed, to short-term
interest rates or interest rate indices.
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ASSET-BACKED SECURITIES, including adjustable-rate asset-backed securities that
have interest rates that reset at periodic intervals, are similar to
mortgage-backed securities except that the underlying assets may include
receivables on home equity and credit card loans, and automobile, mobile home,
and recreational vehicle loans and leases. The issuer intends to repay using the
assets backing the securities (once collected). Therefore, repayment depends
largely on the cash-flows generated by the assets backing the securities.
Sometimes, the credit support for these securities is limited to the underlying
assets. In other cases, it may be provided by a third party through a letter of
credit or insurance guarantee.
Asset-backed commercial paper is often backed by a pool of assets representing
the obligations of a number of different parties. To lessen the effect of
failures by obligators on these underlying assets to make payment, the
securities may contain elements of credit support. The credit support falls into
two categories: liquidity protection and protection against ultimate default on
the underlying assets. Liquidity protection refers to the provision of advances,
generally by the entity administering the pool of assets, to ensure that
scheduled payments on the underlying pool are made in a timely fashion.
Protection against ultimate default ensures payment on at least a portion of the
assets in the pool. This protection may be provided through guarantees,
insurance policies or letters of credit obtained from third parties, through
various means of structuring the transaction or through a combination of these
approaches. The degree of credit support provided on each issue is based
generally on historical information respecting the level of credit risk
associated with the payments. Delinquency or loss that exceeds the anticipated
amount could adversely impact the return on an investment in an asset-backed
security.
Asset-backed securities are issued in either a pass-through structure (similar
to a mortgage pass-through structure) or a pay-through structure (similar to a
CMO structure). There may be other types of asset-backed securities that are
developed in the future in which a fund may invest. In general, collateral
supporting asset-backed securities has shorter maturities than mortgage loans
and historically has been less likely to experience substantial prepayment.
MUNICIPAL SECURITIES are issued by state and local governments, their agencies
and authorities, as well as by the District of Columbia and U.S. territories and
possessions, to borrow money for various public or private projects. The issuer
pays a fixed, floating or variable rate of interest, and must repay the amount
borrowed (the "principal") at maturity. Municipal securities generally pay
interest free from federal income tax.
STRIPPED SECURITIES are the separate income and principal components of a debt
security. Once the securities have been stripped, the principal portion may be
referred to as a zero coupon security or as a "principal-only strip." Stripped
securities do not make periodic payments of interest prior to maturity and the
stripping of the interest coupons causes them to be offered at a discount from
their face amount. This results in the security being subject to greater
fluctuations in response to changing interest rates than interest-paying
securities of similar maturities. Stripped securities include: U.S. Treasury
STRIPS, Stripped Government Securities, Stripped Obligations of the Financing
Corporation (FICO STRIPS), Stripped Corporate Securities, and Stripped
Eurodollar Obligations.
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U.S. TREASURY STRIPS ("SEPARATE TRADING OF REGISTERED INTEREST AND PRINCIPAL OF
SECURITIES") are considered U.S. Treasury securities for purposes of a fund's
investment policies. Their risks are similar to those of other U.S. Government
securities, although they may be more volatile. The U.S. Treasury has
facilitated transfers of ownership of zero coupon securities by accounting
separately for the beneficial ownership of particular interest coupon and
principal payments on Treasury securities through the Federal Reserve book-entry
record-keeping system.
STRIPPED GOVERNMENT SECURITIES are issued by the U.S. Government and its
agencies and instrumentalities, by a variety of tax-exempt issuers (such as
state and local governments and their agencies and instrumentalities), and by
"mixed-ownership government corporations."
FICO STRIPS represent interests in securities issued by the Financing
Corporation (FICO). FICO is the financing vehicle for the recapitalization of
the Federal Savings and Loan Insurance Corporation (FSLIC). FICO STRIPS are not
backed by the full faith and credit of the U.S. Government but are generally
treated as U.S. Government agency securities.
STRIPPED CORPORATE SECURITIES are zero coupon securities issued by domestic
corporations. They consist of corporate debt obligations without interest
coupons, interest coupons that have been stripped from corporate debt
obligations, and receipts and certificates for stripped debt obligations and
stripped coupons.
STRIPPED EURODOLLAR OBLIGATIONS are stripped debt obligations denominated in
U.S. dollars that are issued by foreign issuers, often subsidiaries of domestic
corporations.
STRUCTURED NOTES are derivative instruments that entitle a holder to receive
some portion of the principal or interest payments that would be due on a
traditional debt obligation. A zero coupon bond, which is the right to receive
only the principal portion of a debt security, is a simple form of structured
note. A structured note's performance or value may be linked to a change in
return, interest rate, or value of the change in an identified or "linked"
equity security, currency, interest rate, index or other financial indicator.
The holder's right to receive principal or interest payments on a structured
note may also vary in timing or amount, depending upon changes in certain rates
of interest or other external events. If permitted by a fund's policies, the
Templeton managers may occasionally invest under 5% of a fund's net assets in
structured notes that are linked to a benchmark, on a non-leveraged, one-to-one
basis.
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U.S. GOVERNMENT SECURITIES U.S. Government securities include: (1) U.S. Treasury
obligations with varying interest rates, maturities and dates of issuance, such
as U.S. Treasury bills (maturities of one year or less), U.S. Treasury notes
(original maturities of one to ten years) and U.S. Treasury bonds (generally
original maturities of greater than ten years); and (2) obligations issued or
guaranteed by U.S. Government agencies and instrumentalities such as the
Government National Mortgage Association, the Export-Import Bank and the Farmers
Home Administration. Some of the funds' investments will include obligations
that are supported by the full faith and credit of the U.S. Government. In the
case of U.S. Government securities that are not backed by the full faith and
credit of the U.S. Government (e.g., obligations of the Federal National
Mortgage Association (FNMA) or a Federal Home Loan Bank), the fund must look
principally to the agency issuing or guaranteeing the obligation for ultimate
repayment and may not be able to assert a claim against the U.S. itself in the
event the agency or instrumentality does not meet its commitments.
GOVERNMENT NATIONAL MORTGAGE ASSOCIATION OBLIGATIONS (GINNIE MAES). The
Government National Mortgage Association's guarantee of payment of principal and
interest on Ginnie Maes is backed by the full faith and credit of the U.S.
Government. The Government National Mortgage Association may borrow U.S.
Treasury funds to the extent needed to make payments under its guarantee.
SMALL BUSINESS ADMINISTRATION (SBA) securities are pools of loans to small
businesses that are guaranteed as to principal and interest by the SBA, and
supported by the full faith and credit of the U.S. Government. SBA loans
generally have variable interest rates that are set at a premium above the prime
rate, and generally have no interest rate caps or floors. The terms on SBA loans
currently range from 7 to 25 years from the time they are issued.
ZERO COUPON BONDS are debt obligations that are issued at a significant discount
from the value set forth on the face of the bond. The original discount
approximates the total amount of interest the bonds will accumulate and
compounds over the period until maturity or the first interest accumulation date
at a rate of interest reflecting the market rate of the security at the time of
issuance. Although a zero coupon bond pays no interest to its holder during its
life, a fund will be deemed to have received income on such investments for tax
and accounting purposes. That income is distributable to shareholders even
though no cash is received at the time of accrual, which may require the
liquidation of other portfolio securities to satisfy the fund's distribution
obligations. Zero coupon bonds may include stripped securities as noted above.
DERIVATIVE SECURITIES are those securities whose values are dependent upon the
performance of one or more securities or indices such as:
/bullet/ adjustable rate mortgage securities;
/bullet/ adjustable rate securities;
/bullet/ collateralized mortgage obligations;
/bullet/ convertible securities with enhanced yield features such as PERCS,
ACES, DECS, and PEPS;
/bullet/ forward contracts;
/bullet/ futures contracts;
/bullet/ inverse floaters;
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/bullet/ mortgage pass-throughs, including multiclass pass-throughs, stripped
mortgage securities, and other asset-backed securities;
/bullet/ options;
/bullet/ re-securitized government project loans;
/bullet/ spreads and straddles;
/bullet/ swaps;
/bullet/ synthetic convertible securities; and
/bullet/ uncovered mortgage dollar rolls. Derivatives may be used for "hedging,"
which means that they help manage risks relating to interest rates,
currency fluctuations and other market factors. They may also be used
to increase liquidity or to invest in a particular stock or bond in a
more efficient or less expensive way. CURRENCY RATE SWAPS A currency
rate swap is the transfer between two counterparties of their
respective rights to receive payments in specified currencies.
CURRENCY TECHNIQUES AND HEDGING Forward currency exchange contracts ("forward
contracts") and currency futures contracts and options on these futures
contracts, although the fund has no present intention of using any of these
techniques except forward contracts. The funds typically engage in these
practices to protect against declines in the value of a fund's portfolio
securities and the income on these securities. A fund will normally conduct its
foreign currency exchange transactions either on a spot (i.e., cash) basis at
the spot rate prevailing in the foreign currency exchange market, or through
entering into forward contracts to purchase or sell foreign currencies.
FORWARD CURRENCY EXCHANGE CONTRACTS. Forward currency exchange contracts to try
to minimize the risk to the fund from adverse changes in the relationship
between currencies or to enhance income. A forward contract involves an
obligation to buy or sell a specific currency at a future date, which may be any
fixed number of days from the date of the contract agreed upon by the parties,
at a price set at the time of the contract. These contracts are traded in the
interbank market conducted directly between currency traders (usually large
commercial banks).
A fund may either accept or make delivery of the currency specified at the
maturity of a forward contract or, prior to maturity, enter into a closing
transaction involving the purchase or sale of an offsetting contract. Closing
transactions with respect to forward contracts are usually effected with the
currency trader who is a party to the original forward contract.
A fund may construct an investment position by combining a debt security
denominated in one currency with a forward contract calling for the exchange of
that currency for another currency. The investment position is not itself a
security but is a combined position (i.e., a debt security coupled with a
forward contract) that is intended to be similar in overall performance to a
debt security denominated in the currency purchased.
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A fund may enter into a forward contract, for example, when it enters into a
contract for the purchase or sale of a security denominated in a foreign
currency in order to "lock in" the U.S. dollar price of that security by buying
the amount of foreign currency needed to settle the transaction. Thus, for
example, when a fund believes that a foreign currency may suffer a substantial
decline against the U.S. dollar, it may enter into a forward contract to sell an
amount of that foreign currency approximating the value of some or all of the
fund's portfolio securities denominated in such foreign currency. Similarly,
when a fund believes that the U.S. dollar may suffer a substantial decline
against a foreign currency, it may enter into a forward contract to buy that
foreign currency for a fixed dollar amount. A fund may also purchase and sell
forward contracts for non-hedging purposes when the manager anticipates that the
foreign currency will appreciate or depreciate in value but securities
denominated in that currency do not present attractive investment opportunities
and are held in a fund.
A fund sets aside or segregates sufficient cash, cash equivalents, or readily
marketable debt securities held by its custodian bank as deposits for
commitments created by open forward contracts. The fund will cover any
commitments under these contracts to sell currency by owning or acquiring the
underlying currency (or an absolute right to acquire such currency). The
segregated account will be marked-to-market daily. The ability of a fund to
enter into forward contracts is limited only to the extent forward contracts
would, in the opinion of the manager, impede portfolio management or the ability
of the fund to honor redemption requests.
Forward contracts may limit potential gain from a positive change in the
relationship between the U.S. dollar and foreign currencies or between foreign
currencies. Unanticipated changes in currency exchange rates also may result in
poorer overall performance for the fund than if it had not entered into such
contracts.
The funds generally will not enter into a forward contract with a term of
greater than one year.
CURRENCY FUTURES CONTRACTS are traded on regulated commodity exchanges,
including non-U.S. exchanges. A currency futures contract is a standardized
contract for the future delivery of a specified amount of currency at a future
date at a price set at the time of the contract. A fund may use currency futures
contracts to hedge against anticipated future changes in exchange rates which
otherwise might adversely affect the value of the fund's portfolio securities or
adversely affect the prices of securities that a fund intends to purchase at a
later date.
A fund may either accept or make delivery of the currency specified at the
maturity of a currency futures contract or, prior to maturity, enter into a
closing transaction involving the purchase or sale of an offsetting contract.
Closing transactions with respect to currency futures contracts are effected on
the exchange on which the contract was entered into (or on a linked exchange).
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OPTIONS ON FOREIGN CURRENCIES. A fund may buy and write put and call options on
foreign currencies (traded on U.S. and foreign exchanges or over-the-counter)
for hedging purposes to protect against declines in the U.S. dollar value of
foreign portfolio securities and against increases in the U.S. dollar cost of
foreign securities or other assets to be acquired. As in the case of other kinds
of options, however, the writing of an option on foreign currency will
constitute only a partial hedge, up to the amount of the premium received. A
fund could be required to buy or sell foreign currencies at disadvantageous
exchange rates, thereby incurring losses. The purchase of an option on foreign
currency may constitute an effective hedge against fluctuations in exchange
rates although, in the event of rate movements adverse to a fund's position, the
fund may lose the entire amount of the premium plus related transaction costs.
INTEREST RATE SWAPS An interest rate swap is an agreement between two parties to
exchange sets of cash flows over a period in the future. Most corporate and
government bonds pay fixed coupons, and are exposed to the risk of rising
interest rates. Swapping fixed payments for floating payments, an interest rate
swap is a vehicle to hedge interest rate risk.
An example of an interest rate swap is an exchange between one obligation that
has an interest rate fixed to maturity with another that has an interest rate
that changes with changes in a designated benchmark, such as the London
Interbank Offered Rate (LIBOR), prime, or commercial paper, or other benchmarks.
The obligations to make repayment of principal on the underlying securities are
not transferred. Similarly, the right to receive such payments is not
transferred. These transactions generally require the participation of an
intermediary, frequently a bank. The entity holding the fixed rate obligation
will transfer the obligation to the intermediary, and the entity will then be
obligated to pay to the intermediary a floating rate of interest, generally
including a fractional percentage as a commission for the intermediary. The
intermediary also makes arrangements with a second entity that has a
floating-rate obligation that substantially mirrors the obligation desired by
the first entity. In return for assuming a fixed obligation, the second entity
will pay the intermediary all sums that the intermediary pays on behalf of the
first entity, plus an arrangement fee and other agreed upon fees.
The funds intend to participate in interest rate swaps involving obligations
held in a fund's portfolio on which it is receiving payments of principal and
interest. A fund might do this, for example, in order to gain or reduce its
exposure to fixed interest rate payments under certain market conditions. To the
extent, a fund does not own the underlying obligation, however, the fund will
maintain, in a segregated account with its custodian bank, cash or marketable
securities with an aggregate value equal to the amount of the fund's outstanding
swap obligation.
Interest rate swaps permit the party seeking a floating rate obligation the
opportunity to acquire the obligation at a lower rate than is directly available
in the credit market, while permitting the party desiring a fixed rate
obligation the opportunity to acquire a fixed rate obligation, also frequently
at a price lower than is available in the capital markets. The success of the
transaction depends in large part on the availability of fixed rate obligations
at a low enough coupon rate to cover the cost involved.
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OPTIONS, FUTURES AND OPTIONS ON FINANCIAL FUTURES A stock option is a contract
that provides the holder the right to buy or sell shares of the stock at a fixed
price, within a specified period of time. An option on a stock index is a
contract that allows the buyer of the option the right to receive from the
seller cash, in an amount equal to the difference between the index's closing
price and the option's exercise price. A futures contract is an obligation to
buy or sell a specified security or currency at a set price on a specified
future date. A stock index futures contract is an agreement to take or make
delivery of an amount of cash based on the difference between the value of the
index at the beginning and end of the contract period. Options, futures, and
options on futures are considered "derivative securities."
Unless otherwise noted in a fund's policies, the value of the underlying
securities on which options may be written at any one time will not exceed 15%
of the fund's assets. Nor will a fund purchase put or call options if the
aggregate premium paid for such options would exceed 5% of its assets at the
time of purchase. Unless otherwise noted in a fund's policies, none of the funds
permitted to purchase contracts will purchase or sell futures contracts or
options on futures contracts if, immediately thereafter, the aggregate amount of
initial margin deposits on all the futures positions of the fund and the
premiums paid on options on futures contracts would exceed 5% of the market
value of the fund's total assets.
OPTIONS - GENERAL. A fund may write (sell) covered put and call options and buy
put and call options on securities listed on a national securities exchange and
in the over-the-counter (OTC) market. Additionally, a fund may "close out"
options it has entered into.
A call option gives the option holder the right to buy the underlying security
from the option writer at the option exercise price at any time prior to the
expiration of the option. A put option gives the option holder the right to sell
the underlying security to the option writer at the option exercise price at any
time prior to the expiration of the option. The OTC market is the
dealer-to-dealer market in securities, in this case, option securities in which
the fund may buy or sell.
WRITING COVERED CALL AND PUT OPTIONS ON SECURITIES. A fund may write options to
generate additional income and to hedge its portfolio against market or exchange
rate movements. The writer of covered calls gives up the potential for capital
appreciation above the exercise price of the option should the underlying stock
rise in value. If the value of the underlying stock rises above the exercise
price of the call option, the security may be "called away" and a fund required
to sell shares of the stock at the exercise price. A fund will realize a gain or
loss from the sale of the underlying security depending on whether the exercise
price is greater or less than the purchase price of the stock. Any gain will be
increased by the amount of the premium received from the sale of the call; any
loss will be decreased by the amount of the premium received. If a covered call
option expires unexercised, a fund will realize a gain in the amount of the
premium received. If, however, the stock price decreases, the hedging benefit of
the covered call option is limited to the amount of the premium received.
A call option written by a fund is "covered" if:
(a) the fund owns the underlying security that is subject to the call; or
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(b) the fund has an absolute and immediate right to acquire that security
without additional cash consideration (or for additional cash consideration
held in a segregated account by its custodian bank) upon conversion or
exchange of other securities held in its portfolio.
A call option is also covered if a fund holds a call on the same security and in
the same principal amount as the call written where the exercise price of the
call held:
(a) is equal to or less than the exercise price of the call written; or
(b) is greater than the exercise price of the call written if the
difference in exercise prices is maintained by a fund in cash and marketable
securities. Options may be written in connection with "buy-and-write"
transactions; that is, a fund may purchase a security and then write a call
option against that security. The exercise price of the call will depend upon
the expected price movement of the underlying security. The exercise price of a
call option may be below ("in-the-money"), equal to ("at-the-money"), or above
("out-of-the-money") the current value of the underlying security at the time
the option is written.
When a fund writes a covered call option, the underlying securities that are
subject to the call will be held in a segregated account (or escrow) with the
fund's custodian. It will be unable to sell the underlying securities that are
subject to the call until it either effects a closing transaction with respect
to the call, or otherwise satisfies the conditions for release of the underlying
securities from escrow, as may be imposed by the broker through which the call
is effected. In addition, if the broker fails to timely issue instructions to
the Fund's custodian to permit the release of the underlying security when the
escrow is no longer required, the Fund may be unable to sell the securities when
it desires to do so.
The writer of covered puts retains the risk of loss should the underlying
security decline in value. If the value of the underlying stock declines below
the exercise price of the put option, the security may be "put to" a fund and
the fund required to buy the stock at the exercise price. A fund will incur an
unrealized loss to the extent that the current market value of the underlying
security is less than the exercise price of the put option. However, the loss
will be offset at least in part by the premium received from the sale of the
put. If a put option written by a fund expires unexercised, the fund will
realize a gain in the amount of the premium received.
A put option written by the fund is "covered" if the fund maintains cash and
marketable securities with a value equal to the exercise price in a segregated
account with its custodian bank. A put option is also covered if the fund holds
a put on the same security and in the same principal amount as the put written
where the exercise price of the put held is equal to or greater than the
exercise price of the put written.
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The writer of an option may have no control over when the underlying securities
must be sold, in the case of a call option, or purchased, in the case of a put
option, since the writer may be assigned an exercise notice at any time prior to
the termination of the obligation. Whether or not an option expires unexercised,
the writer retains the amount of the premium. This amount may, in the case of a
covered call option, be offset by a decline in the market value of the
underlying security during the option period. If a call option is exercised, the
writer experiences a profit or loss from the sale of the underlying security. If
a put option is exercised, the writer must fulfill the obligation to buy the
underlying security at the exercise price, which will usually exceed the market
value of the underlying security at that time.
If the writer of an option wants to terminate its obligation, the writer may
effect a "closing purchase transaction" by buying an option of the same series
as the option previously written. The effect of the purchase is that the
clearing corporation will cancel the writer's position. However, a writer may
not effect a closing purchase transaction after being notified of the exercise
of an option. Likewise, the holder of an option may liquidate its position by
effecting a "closing sale transaction" by selling an option of the same series
as the option previously purchased. There is no guarantee that either a closing
purchase or a closing sale transaction may be made at the time desired by a
fund.
Effecting a closing transaction in the case of a written call option allows the
fund to write another call option in the underlying security with a different
exercise price, expiration date or both. In the case of a written put option, a
closing transaction allows the fund to write another covered put option.
Effecting a closing transaction also allows the cash or proceeds from the sale
of any securities subject to the option to be used for other fund investments.
If the fund wants to sell a particular security from its portfolio on which it
has written a call option, it will effect a closing transaction prior to or at
the same time as the sale of the security.
A fund will realize a profit from a closing transaction if the price of the
transaction is less than the premium received from writing the option or is more
than the premium paid to buy the option. Likewise, fund will realize a loss from
a closing transaction if the price of the transaction is more than the premium
received from writing the option. Increases in the market price of a call option
will generally reflect increases in the market price of the underlying security.
As a result, any loss resulting from the repurchase of a call option is likely
to be offset in whole or in part by appreciation of the underlying security
owned by the fund.
BUYING CALL AND PUT OPTIONS ON SECURITIES. The premium paid by the buyer of an
option will reflect, among other things, the relationship of the exercise price
to the market price and the volatility of the underlying security, the remaining
term of the option, supply and demand and interest rates.
A fund may buy call options on securities that it intends to buy in order to
limit the risk of a substantial increase in the market price of the security
before the purchase is effected. A fund may also buy call options on securities
held in its portfolio and on which it has written call options.
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As the holder of a put option, a fund has the right to sell the underlying
security at the exercise price at any time during the option period. A fund may
enter into closing sale transactions with respect to put options, exercise them
or permit them to expire.
A fund may buy a put option on an underlying security or currency owned by the
fund ("a protective put") as a hedging technique in order to protect against an
anticipated decline in the market value of the security. Such hedge protection
is provided only during the life of the put option when a fund, as the holder of
the put option, is able to sell the underlying security at the put exercise
price, regardless of any decline in the underlying security's market price or
currency's exchange value. For example, a put option may be purchased in order
to protect unrealized appreciation of a security when the manager deems it
desirable to continue to hold the security or currency because of tax
considerations. The premium paid for the put option and any transaction costs
would reduce any short-term capital gain that may be available for distribution
when the security is eventually sold.
A fund may also buy put options at a time when it does not own the underlying
security. By buying put options on a security it does not own, the fund seeks to
benefit from a decline in the market price of the underlying security. If the
put option is not sold when it has remaining value, and if the market price of
the underlying security remains equal to or greater than the exercise price
during the life of the put option, the fund will lose its entire investment in
the put option. In order for the purchase of a put option to be profitable, the
market price of the underlying security must decline sufficiently below the
exercise price to cover the premium and transaction costs, unless the put option
is sold in a closing sale transaction.
OVER-THE-COUNTER (OTC) OPTIONS. Like exchange traded options, OTC options give
the holder the right to buy, in the case of OTC call options, or sell, in the
case of OTC put options, an underlying security from or to the writer at a
stated exercise price. OTC options, however, differ from exchange traded options
in certain material respects.
OTC options are arranged directly with dealers and not with a clearing
corporation. Thus, there is a risk of non-performance by the dealer. Because
there is no exchange, pricing is typically done based on information from market
makers. OTC options are available for a greater variety of securities and in a
wider range of expiration dates and exercise prices, however, than exchange
traded options and the writer of an OTC option is paid the premium in advance by
the dealer.
There can be no assurance that a continuous liquid secondary market will exist
for any particular OTC option at any specific time. A fund may be able to
realize the value of an OTC option it has purchased only by exercising it or
entering into a closing sale transaction with the dealer that issued it. A fund
may suffer a loss if it is not able to exercise or sell its position on a timely
basis. When a fund writes an OTC option, it generally can close out that option
prior to its expiration only by entering into a closing purchase transaction
with the dealer with which the fund originally wrote the option. If a fund as a
covered call option writer is unable to effect a closing purchase transaction in
a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise.
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The funds understand the current position of the staff of the SEC to be that
purchased OTC options are illiquid securities and that the assets used to cover
the sale of an OTC option are considered illiquid. The funds and the manager
disagree with this position. Nevertheless, pending a change in the staff's
position, the funds will treat OTC options and "cover" assets as subject to a
fund's limitation on illiquid securities.
OPTIONS ON STOCK INDICES. A fund may also buy and sell both call and put options
on stock indices in order to hedge against the risk of market or industry-wide
stock price fluctuations or to increase income to the fund. Call and put options
on stock indices are similar to options on securities except that, rather than
the right to buy or sell stock at a specified price, options on a stock index
give the holder the right to receive, upon exercise of the option, an amount of
cash if the closing level of the underlying stock index is greater (or less, in
the case of puts) than the exercise price of the option. This amount of cash is
equal to the difference between the closing price of the index and the exercise
price of the option expressed in dollars multiplied by a specified number. Thus,
unlike stock options, all settlements are in cash, and gain or loss depends on
the price movements in the stock market generally (or in a particular industry
or segment of the market) rather than price movements in individual stock.
When a fund writes an option on a stock index, the fund may cover the option by
owning securities whose price changes, in the opinion of the manager, are
expected to be similar to those of the index, or in such other manner as may be
in accordance with the rules of the exchange on which the option is traded and
applicable laws and regulations. The funds may also cover by establishing a
segregated account containing cash or marketable securities with its custodian
bank in an amount at least equal to the market value of the underlying stock
index. The fund will maintain the account while the option is open or it will
otherwise cover the transaction.
FORWARD CONVERSIONS. In a forward conversion, a fund buys securities and writes
call options and buys put options on such securities. By purchasing puts, a fund
protects the underlying security from depreciation in value. By selling calls on
the same security, a fund receives premiums which may offset part or all of the
cost of purchasing the puts while foregoing the opportunity for appreciation in
the value of the underlying security. A fund will not exercise a put it has
purchased while a call option on the same security is outstanding.
Although it is generally intended that the exercise price of put and call
options would be identical, situations might occur in which some option
positions are acquired with different exercise prices. Therefore, a fund's
return may depend in part on movements in the price of the underlying security.
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SPREAD AND STRADDLE OPTIONS TRANSACTIONS. In "spread" transactions, a fund buys
and writes a put or buys and writes a call on the same underlying security with
the options having different exercise prices and/or expiration dates. In
"straddles," a fund purchases or writes combinations of put and call options on
the same security. When a fund engages in spread and straddle transactions, it
seeks to profit from differences in the option premiums paid and received and in
the market prices of the related options positions when they are closed out or
sold. Because these transactions require a fund to buy and/or write more than
one option simultaneously, the fund's ability to enter into such transactions
and to liquidate its positions when necessary or deemed advisable may be more
limited than if the fund was to buy or sell a single option. Similarly, costs
incurred by a fund in connection with these transactions will in many cases be
greater than if the fund was to buy or sell a single option.
FUTURES CONTRACTS - GENERAL. Although futures contracts by their terms call for
the actual delivery or acquisition of securities, or the cash value of the
index, in most cases the contractual obligation is fulfilled before the date of
the contract without having to make or take delivery of the securities or cash.
A contractual obligation is offset by buying (or selling, as the case may be) on
a commodities exchange an identical financial futures contract calling for
delivery in the same month. This transaction, which is effected through a member
of an exchange, cancels the obligation to make or take delivery of the
securities or cash. Since all transactions in the futures market are made,
offset or fulfilled through a clearinghouse associated with the exchange on
which the contracts are traded, the fund will incur brokerage fees when it buys
or sells financial futures contracts.
FINANCIAL FUTURES. Financial futures contracts are commodity contracts that
obligate the purchase or seller to take or make delivery of a specified quantity
of a financial instrument, such as a security, or the cash value of a securities
index during a specified future period at a specified price.
A "sale" of a futures contract means the acquisition of a contractual obligation
to deliver the securities called for by the contract at a specified price on a
specified date. A "purchase" of a futures contract means the acquisition of a
contractual obligation to acquire the securities called for by the contract at a
specified price on a specified date. The purpose of the acquisition or sale of a
futures contract is to attempt to protect the fund from fluctuations in price of
portfolio securities without actually buying or selling the underlying security.
Futures contracts have been designed by exchanges that have been designated
"contracts markets" by the Commodity Futures Trading Commission (CFTC) and must
be executed through a futures commission merchant, or brokerage firm, that is a
member of the relevant contract market. The exchanges guarantee performance of
the contracts as between the clearing members of the exchange.
A fund may enter into futures contracts on foreign currencies, interest rates,
or on debt securities that are backed by the full faith and credit of the U.S.
Government, such as long-term U.S. Treasury bonds, Treasury notes, Government
National Mortgage Association modified pass-through mortgage-backed securities,
and three-month U.S. Treasury bills. A fund may also enter into futures
contracts on corporate securities and non-U.S. Government debt securities, but
such futures contracts are not currently available.
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At the same time a futures contract is purchased or sold, the fund must allocate
cash or securities as a deposit payment ("initial deposit"). Daily thereafter,
the futures contract is valued and the payment of "variation margin" may be
required since each day the fund would provide or receive cash that reflects any
decline or increase in the contract's value. In addition, the fund must maintain
with its custodian bank, to the extent required by the rules of the Securities
and Exchange Commission (SEC), assets in a segregated account to cover its
obligations with respect to such contract, which will consist of cash, cash
equivalents or high quality debt securities from its portfolio in an amount
equal to the market value of such futures contract or related option.
At the time of delivery of securities on the settlement date of a contract,
adjustments are made to recognize differences in value arising from the delivery
of securities with a different interest rate from that specified in the
contract. In some (but not many) cases, securities called for by a futures
contract may not have been issued when the contract was written.
Although financial futures contracts by their terms call for the actual delivery
or acquisition of securities, or the cash value of the index, in most cases the
contractual obligation is fulfilled before the date of the contract without
having to make or take delivery of the securities or cash. The obligation to
make or take delivery is ended by buying (or selling, as the case may be) on an
exchange an identical financial futures contract calling for delivery in the
same month. All transactions in the futures market are made, offset or fulfilled
through a clearinghouse associated with the exchange on which the contracts are
traded. The fund will incur brokerage fees when it buys or sells financial
futures.
A fund will not engage in transactions in futures contracts for speculation.
Futures contracts will be used as a hedge against changes resulting from market
conditions in the values of its securities or securities that it intends to buy
or to attempt to protect a fund from fluctuations in price of portfolio
securities without actually buying or selling the underlying security. When a
fund buys futures contracts or related call options, marketable instruments
equal to the difference between the fluctuating market value of such futures
contract and the aggregate value of the initial and variation margin payments
made by the fund will be deposited in a segregated account with the custodian
bank to collateralize such long positions.
OPTIONS ON FUTURES CONTRACTS. A fund may purchase and write options on futures
contracts for hedging purposes only. The purchase of a call option on a futures
contract is similar in some respects to the purchase of a call option on an
individual security or currency. Depending on the price of the option compared
to either the price of the futures contract upon which it is based or the price
of the underlying securities or currency, the option may be less risky than
direct ownership of the futures contract or the underlying securities or
currency. As with the purchase of futures contracts, when a fund is not fully
invested, it may purchase a call option on a futures contract to hedge against a
market advance due to declining interest rates or appreciation in the value of a
foreign currency against the U.S. dollar.
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If a fund writes a call option on a futures contract and the futures price at
expiration of the option is below the exercise price, the fund will retain the
full amount of the option premium, which may provide a partial hedge against any
decline that may have occurred in the value of the fund's holdings. If the
futures price at expiration of the option is higher than the exercise price, the
fund will retain the full amount of the option premium, which may provide a
partial hedge against any increase in the price of securities that the fund
intends to purchase. If a put or call option a fund has written is exercised,
the fund will incur a loss that will be reduced by the amount of the premium it
received. Depending on the degree of correlation between changes in the value of
its portfolio securities and changes in the value of its futures positions, a
fund's losses from existing options on futures may be affected by changes in the
value of its portfolio securities.
BOND INDEX FUTURES AND OPTIONS ON SUCH FUTURES A fund may buy and sell futures
contracts based on an index of debt securities and options on such futures
contracts to the extent they currently exist and, in the future, may be
developed. The fund also reserves the right to conduct futures and options
transactions based on an index that may be developed in the future to correlate
with price movements in certain categories of debt securities. A fund's
investment strategy in employing futures contracts based on an index of debt
securities may be similar to that used by it in other financial futures
transactions. A fund may also buy and write put and call options on such index
futures and enter into closing transactions with respect to such options.
STOCK INDEX FUTURES AND OPTIONS ON THESE FUTURES A fund may buy and sell stock
index futures contracts and options on stock index futures contracts that trade
on domestic exchanges and, to the extent such contracts have been approved by
the CFTC for sale to customers in the U.S., on foreign exchanges. In general,
these funds may invest in index futures for hedging purposes. Open futures
contracts are valued on a daily basis and a fund may be obligated to provide or
receive cash reflecting any decline or increase in the contracts value.
STOCK INDEX FUTURES. A stock index futures contract obligates the seller to
deliver (and the buyer to take) an amount of cash equal to a specific dollar
amount times the difference between the value of a specific stock index at the
close of the last trading day of the contract and the price at which the
agreement is made. No physical delivery of the underlying stocks in the index is
made.
A fund may sell stock index futures contracts in anticipation of or during a
market decline to attempt to offset a possible decrease in market value of its
equity securities. When a fund is not fully invested in stocks and anticipates a
significant market advance, it may buy stock index futures in order to gain
rapid market exposure that may in part or entirely offset increases in the cost
of common stocks that it intends to buy.
OPTIONS ON STOCK INDEX FUTURES. To hedge against risks of market price
fluctuations, a fund may buy and sell call and put options on stock index
futures. The need to hedge against these risks will depend on the extent of
diversification of the fund's common stock portfolio and the sensitivity of such
investments to factors influencing the stock market as a whole.
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Call and put options on stock index futures are similar to options on securities
except that, rather than the right to buy or sell stock at a specified price,
options on stock index futures give the holder the right to receive cash. Upon
exercise of the option, the writer of the option will deliver to the holder of
the option the accumulated balance in the writer's futures margin account
representing the amount that the market price of the futures contract, at
exercise, exceeds, in the case of a call, or is less than, in the case of a put,
the exercise price of the option on the futures contract. If an option is
exercised on the last trading day before the expiration date of the option, the
settlement will be made entirely in cash equal to the difference between the
exercise price of the option and the closing price of the futures contract on
the expiration date.
INTEREST RATE FUTURES AND RELATED OPTIONS. In order to protect its portfolio
securities from fluctuations in interest rates without necessarily buying or
selling the underlying fixed-income securities, a fund may buy and sell interest
rate futures contracts and options on these futures contracts. A fund may also
buy and write put and call options on interest rate futures and enter into
closing transactions with respect to such options.
FUTURES DEVELOPMENTS. The funds may take advantage of opportunities in the area
of options, futures, and options in futures and any other derivative investments
that are not presently contemplated for use by the funds or that are not
currently available but which may be developed, to the extent such opportunities
are consistent with the funds' investment goals and legally permissible for the
funds.
DIVERSIFICATION Each fund, except the Global Health Care, Global Income, Value,
Strategic Income and Technology Funds, will operate as a diversified fund under
federal securities law. Each diversified fund may not, with respect to 75% of
its total assets, purchase the securities of any one issuer (except U.S.
Government securities) if (a) more than 5% of the value of the fund's assets
would be invested in such issuer, or (b) hold more than 10% of any or all
classes of the securities of any one issuer or, in the case of the S&P 500
Index, Asset Strategy, Developing Markets, International Securities, Rising
Dividends, Small Cap and Aggressive Growth Funds, the fund would hold more than
10% of the outstanding voting securities of such issuer.
In addition, each fund intends to diversify its investments to meet the
requirements under federal tax laws relating to regulated investment companies
and variable contracts issued by insurance companies.
A fund's investments in U.S. Government securities are not subject to these
limitations. In the case of funds investing in obligations of U.S. Government
agencies or instrumentalities, each agency or instrumentality is treated as a
separate issuer for purposes of the above rules.
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EQUITY SECURITIES The purchaser of an equity security typically receives an
ownership interest in the company as well as certain voting rights. The owner of
an equity security may participate in a company's success through the receipt of
dividends which are distributions of earnings by the company to its owners.
Equity security owners may also participate in a company's success or lack of
success through increases or decreases in the value of the company's shares as
traded in the public trading market for such shares. Equity securities generally
take the form of common stock or preferred stock. Preferred stockholders
typically receive greater dividends but may receive less appreciation than
common stockholders and may have greater voting rights as well. Equity
securities may also include warrants or rights. Warrants or rights give the
holder the right to purchase a common stock at a given time for a specified
price.
FOREIGN SECURITIES A fund may invest in foreign securities, provided the
investments are consistent with their objectives and comply with their
concentration and diversification policies. The funds may buy the securities of
foreign issuers directly in foreign markets, both in developed and developing
countries. The securities of foreign issuers may be denominated in foreign
currency. The funds may also buy foreign securities that are traded in the U.S.
Investments in foreign securities may offer potential benefits not available
from investments solely in securities of domestic issuers or dollar denominated
securities. These benefits may include the opportunity to invest in foreign
issuers that appear, in the opinion of the manager, to offer:
/bullet/ A better outlook for long-term capital appreciation or current earnings
than investments in domestic issuers;
/bullet/ An opportunity to invest in foreign nations whose economic policies or
business cycles are different from those of the U.S.; and,
/bullet/ The opportunity to reduce fluctuations in portfolio value by taking
advantage of foreign securities markets that do not necessarily move in
a manner parallel to U.S. markets.
/bullet/ Investments in foreign securities where delivery takes place outside
the U.S. will be made in compliance with any applicable U.S. and
foreign currency restrictions and tax and other laws limiting the
amount and types of foreign investments. A fund could experience
investment losses if there are changes of:
/bullet/ governmental administrations;
/bullet/ economic or monetary policies in the U.S. or abroad;
/bullet/ circumstances in dealings between nations; or,
/bullet/ currency convertibility or exchange rates.
Certain funds may invest in debt securities issued by foreign corporations,
governments and their instrumentalities, and by supranational entities. A
supranational entity is an entity designated or supported by the national
government of one or more countries to promote economic reconstruction or
development. Examples of supranational entities include the World Bank, the
European Development Bank and the Asian Development Bank.
Many debt obligations of foreign issuers, and especially emerging markets
issuers, are either (i) rated below investment grade or (ii) not rated by U.S.
rating agencies so that their selection depends on the manager's individual
analysis.
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Certain countries do not permit direct investments. Some countries, such as
South Korea, Chile and India, have authorized the formation of closed-end
investment companies to facilitate indirect foreign investment in their capital
markets. In order to gain investment access to these countries, a fund may
invest up to 10% of its assets in shares of such closed-end investment companies
and up to 5% of its assets in any one closed-end investment company as long as
the investment does not represent more than 3% of the voting stock of the
acquired investment company. If a fund acquires shares of closed-end investment
companies, shareholders would bear both their share of expenses of the fund
(including management and advisory fees) and, indirectly, the expenses of such
closed-end investment companies.
DEPOSITARY RECEIPTS. American Depositary Receipts (ADRs) are typically issued by
a U.S. bank or trust company and evidence ownership of underlying securities
issued by a foreign corporation. European Depositary Receipts (EDRs) and Global
Depositary Receipts (GDRs) are typically issued by foreign banks or trust
companies, although they may be issued by U.S. banks or trust companies, and
evidence ownership of underlying securities issued by either a foreign or a U.S.
corporation. Generally, depositary receipts in registered form are designed for
use in the U.S. securities market and depositary receipts in bearer form are
designed for use in securities markets outside the U.S. Depositary receipts may
not necessarily be denominated in the same currency as the underlying securities
into which they may be converted.
Depositary receipts may be issued by sponsored or unsponsored programs. In
sponsored programs, an issuer has made arrangements to have its securities
traded in the form of depositary receipts. In unsponsored programs, the issuer
may not be directly involved in the creation of the program. Although regulatory
requirements with respect to sponsored and unsponsored programs are generally
similar, in some cases it may be easier to obtain financial information from an
issuer that has participated in the creation of a sponsored program.
Accordingly, there may be less information available regarding issuers of
securities underlying unsponsored programs, and there may not be a correlation
between the availability of such information and the market value of the
depositary receipts. To the extent a fund acquires depositary receipts through
banks that do not have a contractual relationship with the foreign issuer of the
security underlying the depository receipt to issue and service such depository
receipts, there are may be an increased possibility that the fund would not
become aware of and be able to respond to corporate actions such as stock splits
or rights offerings involving the foreign issuer in a timely manner.
Depositary receipts also involve the same risks as direct investments in foreign
securities, as discussed below. For purposes of a fund's investment policies,
the fund will consider its investments in depositary receipts to be investments
in the underlying securities.
EMERGING MARKETS. Each fund that invests in emerging market securities may use a
slightly different definition of emerging market countries. Emerging market
countries generally include countries that are generally considered low or
middle income countries by the International Bank for Reconstruction and
Development (commonly known as the World Bank) or the International Finance
Corporation.
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As many developing countries restructure their existing bank debt and economic
conditions improve, these obligations have become available and may offer the
funds the potential for current U.S. dollar income. Such instruments are not
traded on any exchange. However, the managers believe there may be a market for
such securities either in multi-national companies wishing to purchase such
assets at a discount for further investment or from the issuing governments that
may decide to redeem their obligations at a discount.
ILLIQUID SECURITIES Each fund may invest in securities that cannot be offered to
the public for sale without first being registered under the Securities Act of
1933 ("restricted securities"), or in other securities which, in the opinion of
the Board, may be illiquid. See "Fundamental Investment Restrictions" for more
information about the fund's policies with respect to illiquid securities.
Illiquid securities are generally securities that cannot be sold within seven
days in the normal course of business at approximately the amount at which a
fund has valued them. Reduced liquidity in the secondary market for certain
securities may make it more difficult for the fund to obtain market quotations
based on actual trades for purposes of valuing the fund's portfolio.
Securities acquired outside of the U.S. and that are publicly traded in the U.S.
or on a foreign securities market are not considered to be illiquid assets if:
(a) the fund reasonably believes it can readily dispose of the securities for
cash in the U.S. or foreign market, or (b) current market quotations are readily
available. The funds will not acquire the securities of foreign issuers outside
of the U.S. if, at the time of acquisition, the funds have reason to believe
that they could not resell the securities in a public trading market.
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Subject to each fund's percentage limitation on illiquid securities, the Board
has authorized each fund to invest in restricted securities where such
investment is consistent with each fund's investment goal. The Board has
authorized these securities to be considered liquid to the extent the investment
manager determines on a daily basis that there is a liquid institutional or
other market for such securities - for example, restricted securities which may
be freely transferred among qualified institutional buyers pursuant to Rule 144A
under the Securities Act of 1933, as amended, and for which a liquid
institutional market has developed. The fund's board of trustees will review any
determination by the manager to treat a restricted security as a liquid security
on an ongoing basis, including the manager's assessment of current trading
activity and the availability of reliable price information. In spite of the
managers' determinations in this regard, the Board will remain responsible for
such determinations and will consider appropriate action, consistent with a
fund's goals and policies, if the security should become illiquid after
purchase. In determining whether a restricted security is properly considered a
liquid security, the investment manager and the Board will take into account,
among others, the following factors: (i) the frequency of trades and quotes for
the security; (ii) the number of dealers willing to buy or sell the security and
the number of other potential buyers; (iii) dealer undertakings to make a market
in the security; and (iv) the nature of the security and the nature of the
marketplace trades (e.g., the time needed to dispose of the security, the method
of soliciting offers, and the mechanics of transfer). To the extent a fund
invests in restricted securities that are deemed liquid, the general level of
illiquidity in the fund may be increased if qualified institutional buyers
become uninterested in buying these securities or the market for these
securities contracts.
LOAN PARTICIPATIONS AND DEFAULTED DEBT SECURITIES Loan participations are
interests in floating or variable rate senior loans to U.S. corporations,
partnerships and other entities. Generally, these instruments are sold without a
guarantee by the lending institution, and are subject to the credit risks of
both the borrower and the lending institution. While loan participations
generally trade at par value, a fund may also be able to acquire loan
participations that sell at a discount because of the borrower's credit
problems. To the extent the borrower's credit problems are resolved, such loan
participations may appreciate in value. The manager may acquire loan
participations for a fund when it believes that over the long term appreciation
will occur. Most loan participations in which the funds intend to invest are
illiquid and, to that extent, will be included in a fund's limitation on
illiquid investments described under "Illiquid securities." An investment in
these securities carries substantially the same risks as those for defaulted
debt securities. Interest payments on these securities may be reduced, deferred,
suspended or eliminated and principal payments may likewise be reduced,
deferred, suspended or canceled, causing the loss of the entire amount of the
investment.
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LOANS OF PORTFOLIO SECURITIES To generate additional income, each fund may lend
certain of its portfolio securities to qualified banks and broker-dealers. For
each loan, the borrower must maintain with the fund's custodian collateral
(consisting of any combination of cash, securities issued by the U.S. Government
and its agencies and instrumentalities, or irrevocable letters of credit) with a
value at least equal to 102% of the current market value of the loaned
securities. The fund retains all or a portion of the interest received on
investment of the cash collateral or receives a fee from the borrower. The fund
also continues to receive any distributions paid on the loaned securities. The
fund may terminate a loan at any time and obtain the return of the securities
loaned within the normal settlement period for the security involved.
Where voting rights with respect to the loaned securities pass with the lending
of the securities, the managers intend to call the loaned securities to vote
proxies, or to use other practicable and legally enforceable means to obtain
voting rights, when the managers have knowledge that, in their opinion, a
material event affecting the loaned securities will occur or the managers
otherwise believe it necessary to vote. As with other extensions of credit,
there are risks of delay in recovery or even loss of rights in collateral in the
event of default or insolvency of the borrower. Each fund will loan its
securities only to parties who meet creditworthiness standards approved by the
fund's board of trustees, i.e., banks or broker-dealers that the manager has
determined present no serious risk of becoming involved in bankruptcy
proceedings within the time frame contemplated by the loan.
MORTGAGE DOLLAR ROLLS In a mortgage dollar roll, a fund sells mortgage-backed
securities for delivery in the current month and simultaneously contracts to
repurchase substantially similar (name, type, coupon, and maturity) securities
on a specified future date. During the period between the sale and repurchase
(the "roll period"), the fund foregoes principal and interest paid on the
mortgage-backed securities. The fund is compensated by the difference between
the current sales price and the lower forward price for the future purchase
(often referred to as the "drop"), as well as by the interest earned on the cash
proceeds of the initial sale. A "covered roll" is a specific type of mortgage
dollar roll for which there is an offsetting cash position or a cash equivalent
security position that matures on or before the forward settlement date of the
dollar roll transaction and is maintained in a segregated account. A fund will
not enter into any dollar rolls that are not covered rolls. The fund could
suffer a loss if the contracting party fails to perform the future transaction
and the fund is therefore unable to buy back the mortgage-backed securities it
initially sold. The funds intend to enter into mortgage dollar rolls only with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System.
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PORTFOLIO TURNOVER Portfolio turnover is a measure of how frequently a
portfolio's securities are bought and sold. As required by the SEC, annual
portfolio turnover is calculated generally as the dollar value of the lesser of
a portfolio's purchases or sales of portfolio securities during a given year,
divided by the monthly average value of the portfolio's securities during that
year (excluding securities whose maturity or expiration at the time of
acquisition were less than one year). For example, a portfolio reporting a 100%
portfolio turnover rate would have purchased and sold securities worth as much
as the monthly average value of its portfolio securities during the year. The
portfolio turnover rates for each fund are disclosed in the section entitled
"Financial Highlights" of the fund's prospectus. Except for certain funds noted
in the prospectus, the funds generally do not expect their annual turnover rates
to exceed 100%. It is not possible to estimate future turnover rates with
complete accuracy, however, because so many variable factors are beyond the
control of the managers.
Portfolio turnover is affected by factors within and outside the control of the
fund and its managers. The investment outlook for the type of securities in
which each fund invests may change as a result of unexpected developments in
national or international securities markets, or in economic, monetary or
political relationships. High market volatility may result in a manager using a
more active trading strategy than it might have otherwise pursued. Each fund's
manager will consider the economic effects of portfolio turnover but generally
will not treat portfolio turnover as a limiting factor in making investment
decisions. Investment decisions affecting turnover may include changes in
investment policies, including changes in management personnel, as well as
individual portfolio transactions.
Moreover, turnover may be increased by certain factors wholly outside the
control of the managers. For example, during periods of rapidly declining
interest rates, such as the U.S. experienced in 1991 through 1993, the rate of
mortgage prepayments may increase rapidly. When this happens, "sales" of
portfolio securities are increased due to the return of principal to funds that
invest in mortgage securities. Similarly, the rate of bond calls by issuers of
fixed income securities may increase as interest rates decline. This causes
"sales" of called bonds by funds that invest in fixed-income securities and the
subsequent purchase of replacement investments. In other periods, increased
merger and acquisition activity, or increased rates of bankruptcy or default,
may create involuntary transactions for portfolios that hold affected stocks and
bonds, especially high-yield bonds. Global or international fixed income
securities funds may have higher turnover rates due to the rebalancing of the
portfolio to keep interest rate risk and country allocations at desired levels.
In addition, redemptions or exchanges by investors may require the liquidation
of portfolio securities. Changes in particular portfolio holdings may be made
whenever it is considered that a security is no longer the most appropriate
investment for a fund, or that another security appears to have a relatively
greater opportunity, and will be made without regard to the length of time a
security has been held.
Higher portfolio turnover rates generally increase transaction costs, which are
portfolio expenses, but would not create taxable capital gains for investors
because of the tax-deferred status of variable annuity and life insurance
investments.
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REAL ESTATE INVESTMENT TRUSTS (REITS) typically invest directly in real estate
and/or in mortgages and loans collateralized by real estate. "Equity" REITs are
real estate companies that own and manage income-producing properties such as
apartments, hotels, shopping centers or office buildings. The income, primarily
rent from these properties, is generally passed on to investors in the form of
dividends. These companies provide experienced property management and generally
concentrate on a specific geographic region or property type. "Mortgage" REITs
make loans to commercial real estate developers and earn income from interest
payments.
REPURCHASE AGREEMENTS The funds generally will have a portion of their assets in
cash or cash equivalents for a variety of reasons, including waiting for a
special investment opportunity or taking a defensive position. To earn income on
this portion of its assets, a fund may enter into repurchase agreements. Under a
repurchase agreement, the fund agrees to buy securities guaranteed as to payment
of principal and interest by the U.S. government or its agencies from a
qualified bank or broker-dealer and then to sell the securities back to the bank
or broker-dealer after a short period of time (generally, less than seven days)
at a higher price. The bank or broker-dealer must transfer to the fund's
custodian securities with an initial market value of at least 102% of the dollar
amount invested by the fund in each repurchase agreement. The manager will
monitor the value of such securities daily to determine that the value equals or
exceeds the repurchase price.
Repurchase agreements may involve risks in the event of default or insolvency of
the bank or broker-dealer, including possible delays or restrictions upon the
fund's ability to sell the underlying securities. A fund will enter into
repurchase agreements only with parties who meet certain creditworthiness
standards, i.e., banks or broker-dealers that the manager has determined present
no serious risk of becoming involved in bankruptcy proceedings within the time
frame contemplated by the repurchase transaction.
REVERSE REPURCHASE AGREEMENTS are the opposite of repurchase agreements but
involve similar mechanics and risks. A fund sells securities to a bank or dealer
and agrees to repurchase them at a mutually agreed price and date. Cash or
liquid high-grade debt securities having an initial market value, including
accrued interest, equal to at least 102% of the dollar amount sold by the fund
are segregated, i.e., set aside, as collateral and marked-to-market daily to
maintain coverage of at least 100%. Reverse repurchase agreements involve the
risk that the market value of the securities retained by a fund may decline
below the price of the securities the fund has sold but is obligated to
repurchase under the agreement. A default by the purchaser might cause the fund
to experience a loss or delay in the liquidation costs. The funds intend to
enter into reverse repurchase agreements with domestic or foreign banks or
securities dealers. The manager will evaluate the creditworthiness of these
entities prior to engaging in such transactions and it will conduct these
activities under the general supervision of the Board.
SMALL CAP COMPANIES are often overlooked by investors or undervalued in relation
to their earnings power. Because small cap companies generally are not as well
known to the investing public and have less of an investor following than larger
companies, they may provide greater opportunities for long-term capital growth
as a result of inefficiencies in the marketplace. These companies may be
undervalued because they are part of an industry that is out of favor with
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investors, although the individual companies may have high rates of earnings
growth and be financially sound.
SHORT SALES In a short sale, the fund sells a security it does not own in
anticipation of a decline in the market value of that security. To complete the
transaction, the fund must borrow the security to make delivery to the buyer.
The fund is then obligated to replace the security borrowed by purchasing it at
the market price at the time of replacement. Until the security is replaced, the
fund must pay the lender any dividends or interest that accrues during the
period of the loan. To borrow the security, the fund may also be required to pay
a premium, which would increase the cost of the security sold. The proceeds of
the short sale will be retained by the broker, to the extent necessary to meet
margin requirements, until the short position is closed out.
The fund will incur a loss as a result of the short sale if the price of the
security increases between the date of the short sale and the date on which the
fund replaces the borrowed security, and the fund will realize a gain if the
security declines in price between those same dates. The amount of any gain will
be decreased, and the amount of any loss increased, by the amount of any
premium, dividends or interest the fund is required to pay in connection with
the short sale.
The fund will segregate, in accordance with the law, an amount equal to the
difference between (a) the market value of the securities sold short at the time
they were sold short and (b) any cash or securities required to be deposited as
collateral with the broker in connection with the short sale (not including the
proceeds from the short sale). The segregated amount will be marked-to-market
daily and at no time will the amount segregated d deposited with the broker as
collateral be less than the market value of the securities at the time they sold
short.
A fund may make a short sale when the manager believes the price of the stock
may decline and when, for tax or other reasons, the manager does not currently
want to sell the stock or convertible security it owns. In this case, any
decline in the value of a fund's portfolio securities would be reduced by a gain
in the short sale transaction. Conversely, any increase in the value of a fund's
portfolio securities would be reduced by a loss in the short sale transaction.
Short sales "against the box" are transactions in which a fund sells a security
short for which it owns an equal amount of the securities sold short or owns
securities that are convertible or exchangeable, without payment of further
consideration, into an equal amount of such security.
SECURITIES INDUSTRY RELATED INVESTMENTS Securities issued by companies engaged
in securities related businesses, including companies that are securities
brokers, dealers, underwriters or investment advisors are considered to be part
of the financial services industry. Generally, under the 1940 Act, a fund may
not acquire a security or any interest
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in a securities related business to the extent such acquisition would result in
the fund acquiring in excess of 5% of a class of an issuer's outstanding equity
securities or 10% of the outstanding principal amount of an issuer's debt
securities, or investing more than 5% of the value of the fund's total assets in
securities of the issuer. In addition, any equity security of a
securities-related business must be a marginable security under Federal Reserve
Board regulations and any debt security of a securities-related business must be
investment grade as determined by the Board. The funds that invest in these
securities do not believe that these limitations will impede the attainment of
their investment goals.
STANDBY COMMITMENT AGREEMENTS If a fund enters into a standby commitment
agreement, it will be obligated, for a set period of time, to buy a certain
amount of a security that may be issued and sold to the fund at the option of
the issuer. The price of the security is set at the time of the agreement. The
fund will receive a commitment fee typically equal to 0.5% of the purchase price
of the security. The fund will receive this fee regardless of whether the
security is actually issued.
A fund may enter into a standby commitment agreement to invest in the security
underlying the commitment at a yield or price that the manager believes is
advantageous to the fund. A fund will not enter into a standby commitment if the
remaining term of the commitment is more than 45 days. If a fund enters into a
standby commitment, it will keep cash or high-grade marketable securities in a
segregated account with its custodian bank in an amount equal to the purchase
price of the securities underlying the commitment.
The purchase of a security subject to a standby commitment agreement and the
related commitment fee will be recorded on the fund's books on the date the
security can reasonably be expected to be issued. The value of the security will
then be reflected in the calculation of the fund's net asset value. The cost
basis of the security will be adjusted by the amount of the commitment fee. If
the security is not issued, the commitment fee will be recorded as income on the
expiration date of the standby commitment.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions
are unfavorable for investors, the manager may invest up to 100% of the funds'
assets in a temporary defensive manner or hold a substantial portion of the
funds' portfolio in cash. Unfavorable market or economic conditions may include
excessive volatility or a prolonged general decline in the securities market,
the securities in which the fund normally invests, or the economies of the
countries where the fund invests.
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Temporary defensive investments for all funds (other than the Money Market Fund)
generally may include high quality money market instruments or, in the case of
the Technology and Strategic Income Funds, short-term debt instruments.
High-quality money market instruments include government securities, bank
obligations, the highest quality commercial paper and repurchase agreements.
Short-term debt instruments include high-grade commercial paper, repurchase
agreements, and other money market equivalents. To the extent allowed by
exemptions granted under the 1940 Act and the fund's other investment policies
and restrictions, the manager may also invest the fund's assets in shares of one
or more money market funds managed by the manager or its affiliates. The manager
also may invest in these types of securities or hold cash while looking for
suitable investment opportunities or to maintain liquidity.
In addition, certain funds may also invest in short-term (less than twelve
months to maturity) fixed-income securities, non-U.S. currency, short-term
instruments denominated in non-U.S. currencies, or medium-term (not more than
five years to maturity) obligations issued or guaranteed by the U.S. Government
or the governments of foreign countries, their agencies or instrumentalities.
Certain funds may also invest cash, including cash resulting from purchases and
sales of fund shares, temporarily in short-term debt instruments.
Because each fund has its own goals and strategies, as well as cash flows in and
out, the cash positions of the funds may vary significantly. When a fund's
investments in cash or cash equivalents increase, it may not participate in
market advances or declines to the same extent as it would if the fund were
fully invested in stocks or bonds.
Any decision to make a substantial withdrawal for a sustained period of time
from a fund's investment goals will be reviewed by the Board.
TRADE CLAIMS Trade claims are purchased from creditors of companies in financial
difficulty. For buyers, such as a fund, trade claims offer the potential for
profits since they are often purchased at a significantly discounted value and,
consequently, may generate capital appreciation if the value of the claim
increases as the debtor's financial position improves. If the debtor is able to
pay the full obligation on the face of the claim as a result of a restructuring
or an improvement in the debtor's financial condition, trade claims offer the
potential for higher income due to the difference in the face value of the claim
as compared to the discounted purchase price.
U.S. TREASURY ROLLS In "U.S. Treasury rolls," a fund sells outstanding U.S.
Treasury securities and buys back "when-issued" U.S. Treasury securities of
slightly longer maturity for simultaneous settlement on the settlement date of
the "when-issued" U.S. Treasury security. Two potential advantages of this
strategy are (1) the fund can regularly and incrementally adjust its weighted
average maturity of its portfolio securities (which otherwise would constantly
diminish with the passage of time); and (2) in a normal yield curve environment
(in which shorter maturities yield less than longer maturities), a gain in yield
to maturity can be obtained along with the desired extension.
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During the period before the settlement date, the fund continues to earn
interest on the securities it is selling. It does not earn interest on the
securities that it is purchasing until after the settlement date. The fund could
suffer an opportunity loss if the counterparty to the roll failed to perform its
obligations on the settlement date, and if market conditions changed adversely.
The fund intends, however, to enter into U.S. Treasury rolls only with
government securities dealers recognized by the Federal Reserve Board or with
member banks of the Federal Reserve System.
WHEN-ISSUED, DELAYED DELIVERY AND TO-BE-ANNOUNCED (TBA) TRANSACTIONS are
arrangements under which a fund buys securities that have been authorized but
not yet issued with payment for and delivery of the security scheduled for a
future time, generally within 15 to 60 days. Purchases of securities on a
when-issued or delayed delivery basis are subject to the risk that the value or
the yields at delivery may be more or less than the purchase price or yields
available when the transaction was entered into. To the extent a fund engages in
these transactions, it will do so only for the purpose of acquiring portfolio
securities consistent with its investment objectives and policies, and not for
the purpose of investment leverage. Although the funds will generally buy
securities on a when-issued or TBA basis with the intention of holding the
securities, they may sell the securities before the settlement date if the
manager believes it is advisable to do so.
When a fund is the buyer in this type of transaction, it will maintain, in a
segregated account with its custodian bank, cash or marketable securities having
an aggregate value equal to the amount of the fund's purchase commitments until
payment is made. As a buyer in one of these transactions, the fund relies on the
seller to complete the transaction. The seller's failure to do so may cause a
fund to miss a price or yield considered advantageous to the fund. Securities
purchased on a when-issued or delayed delivery basis do not generally earn
interest until their scheduled delivery date. Entering into a when-issued,
delayed delivery or TBA transaction is a form of leverage that may affect
changes in net asset value to a greater extent.
RISKS OF SECURITIES AND INVESTMENT TECHNIQUES
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The value of your shares will increase as the value of the securities owned by a
fund increases and will decrease as the value of the fund's investments
decrease. In this way, you participate in any change in the value of the
securities owned by the fund. In addition to the factors that affect the value
of any particular security that the fund owns, the value of fund shares may also
change with movements in the stock and bond markets as a whole.
The U.S. economy is currently in its longest period of expansion in its history.
Over the past few years, gains in the stock market, and for many individual
securities, have significantly exceeded prior historical norms. Investors should
not have unrealistic expectations that this expansion or the pace of gains will
continue in the future indefinitely.
In addition to the risks described in each fund's prospectus and the individual
fund summaries in this SAI, investors should consider the following risks that
pertain to the funds that may invest in these instruments or engage in these
strategies.
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CONVERTIBLE SECURITIES have risk characteristics of both equity and debt
securities. Their value may rise and fall with the market value of the
underlying stock or, like a debt security, vary with changes in interest rates
and the credit quality of the issuer. A convertible security tends to perform
more like a stock when the underlying stock price is high (because it is assumed
it will be converted) and more like a debt security when the underlying stock
price is low (because it is assumed it will not be converted). Because its value
can be influenced by many different factors, a convertible security is not as
sensitive to interest rate changes as a similar non-convertible debt security,
and generally has less potential for gain or loss than the underlying stock.
A fund may have difficulty disposing of such securities because there may be a
thin trading market for a particular security at any given time. Reduced
liquidity may have an adverse impact on market price and a fund's ability to
dispose of particular securities, when necessary, to meet a fund's liquidity
needs or in response to a specific economic event, such as the deterioration in
the creditworthiness of an issuer. Reduced liquidity in the secondary market for
certain securities may also make it more difficult for a fund to obtain market
quotations based on actual trades for purposes of valuing a fund's portfolio.
The funds, however, intend to acquire liquid securities, though there can be no
assurances that this will be achieved.
DEBT SECURITIES
ASSET-BACKED SECURITIES have risks similar to mortgage-backed securities.
However, these securities present certain additional risks that are not
presented by mortgage-backed securities because asset-backed securities
generally do not have the benefit of a security interest in collateral, i.e., a
lien on the item purchased by the consumer, that is comparable to mortgage
assets. There is the possibility that, in some cases, recoveries on repossessed
collateral may not be available to support payments on these securities.
GINNIE MAE yields (interest income as a percentage of price) have historically
exceeded the current yields on other types of U.S. Government securities with
comparable maturities. The effects of interest rate fluctuations and
unpredictable prepayments of principal, however, can greatly change realized
yields. As with most bonds, in a period of rising interest rates, the value of a
Ginnie Mae will generally decline. In a period of declining interest rates, it
is more likely that mortgages contained in Ginnie Mae pools will be prepaid,
thus reducing the effective yield. This potential for prepayment during periods
of declining interest rates may reduce the general upward price increases of
Ginnie Maes as compared to the increases experienced by noncallable debt
securities over the same periods. In addition, any premium paid on the purchase
of a Ginnie Mae will be lost if the obligation is prepaid. Of course, price
changes of Ginnie Maes and other securities held by the funds will have a direct
impact on the net asset value per share of the funds.
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INTEREST RATE To the extent a fund invests in debt securities, changes in
interest rates in any country where the fund is invested will affect the value
of the fund's portfolio and its share price. Rising interest rates, which often
occur during times of inflation or a growing economy, are likely to have a
negative effect on the value of the fund's shares. Of course, interest rates
throughout the world have increased and decreased, sometimes very dramatically,
in the past. These changes are likely to occur again in the future at
unpredictable times.
LOWER-RATED SECURITIES An investment in any fund that invests in non-investment
grade securities, including those issued by foreign companies and governments,
is subject to a higher degree of risk than an investment in a fund that invests
primarily in higher-quality securities. You should consider the increased risk
of loss to income and principal that is present with an investment in higher
risk securities, such as those in which certain funds invest. Accordingly, an
investment in any fund should not be considered a complete investment program
and should be carefully evaluated for its appropriateness in light of your
overall investment needs and goals.
Adverse publicity and investor perceptions, whether or not based on fundamental
analysis, may decrease the values and liquidity of lower-rated debt securities,
especially in a thinly traded market. Analysis of the creditworthiness of
issuers of lower-rated debt securities may be more complex than for issuers of
higher rated securities. The ability of a fund to achieve its investment goal
may, to the extent of investment in lower-rated debt securities, be more
dependent upon such creditworthiness analysis than would be the case if the fund
were investing in higher rated securities. A fund relies on the manager's
judgment, analysis and experience in evaluating the creditworthiness of an
issuer. In this evaluation, the manager takes into consideration, among other
things, the issuer's financial resources, its sensitivity to economic conditions
and trends, its operating history, the quality of the issuer's management and
regulatory matters.
Low rated debt securities may be more susceptible to real or perceived adverse
economic and competitive industry conditions than investment grade securities.
The prices of low rated debt securities have been found to be less sensitive to
interest rate changes than higher rated investments, but more sensitive to
adverse economic downturns or individual corporate developments. A projection of
an economic downturn or of a period of raising interest rates, for example,
could cause a decline in low rated debt securities prices because the advent of
a recession could lessen the ability of a highly leveraged company to make
principal and interest payments on its debt securities. If the issuer of low
rated debt securities defaults, the fund may incur additional expenses to seek
recovery.
The risk of loss due to default may also be considerably greater with
lower-quality securities because they are generally unsecured and are often
subordinated to other creditors of the issuer. If the issuer of a security in a
fund's portfolio defaults, the fund may have unrealized losses on the security,
which may lower the fund's net asset value. Defaulted securities tend to lose
much of their value before they default. Thus, a fund's net asset value may be
adversely affected before an issuer defaults. In addition, a fund may incur
additional expenses if it must try to recover principal or interest payments on
a defaulted security.
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High yield, fixed-income securities frequently have call or buy-back features
that allow an issuer to redeem the securities from a fund. Although these
securities are typically not callable for a period of time, usually for three to
five years from the date of issue, if an issuer calls its securities during
periods of declining interest rates, the manager may find it necessary to
replace the securities with lower-yielding securities, which could result in
less net investment income for a fund. The premature disposition of a high yield
security due to a call or buy-back feature, the deterioration of an issuer's
creditworthiness, or a default by an issuer may make it more difficult for a
fund to manage the timing of its income. To generate cash for distributions, a
fund may have to sell portfolio securities that it otherwise may have continued
to hold or use cash flows from other sources, such as the sale of fund shares. A
portfolio may be required under the Code and U.S. Treasury Regulations to accrue
income for income tax purposes on defaulted obligations and to distribute such
income to the portfolio shareholders even though the portfolio is not currently
receiving interest principal payments on such obligations.
The markets in which low rated and unrated debt securities are traded are more
limited than those in which higher rated securities are traded. The existence of
limited markets for particular securities may diminish the fund's ability to
sell the securities at fair value either to meet redemption requests or to
respond to a specific economic event such as a deterioration in the
creditworthiness of the issuer. Reduced secondary market liquidity for certain
low rated or unrated debt securities may also make it more difficult for the
fund to obtain accurate market quotations for the purposes of valuing the fund's
portfolio. Market quotations are generally available on many low rated or
unrated securities only from a limited number of dealers and may not necessarily
represent firm bids of such dealers or prices for actual sales.
High yield, fixed-income securities that are sold without registration under the
federal securities laws carry restrictions on resale. While many high yielding
securities have been sold with registration rights, covenants and penalty
provisions for delayed registration, if a fund is required to sell restricted
securities before the securities have been registered, it may be deemed an
underwriter of the securities under the Securities Act of 1933, which entails
special responsibilities and liabilities. A fund may also incur special costs in
disposing of restricted securities, although the fund will generally not incur
any costs when the issuer is responsible for registering the securities.
High yield, fixed-income securities acquired during an initial underwriting
involve special risks because they are new issues. The manager will carefully
review their credit and other characteristics. The funds have no arrangement
with its underwriter or any other person concerning the acquisition of these
securities.
The high yield securities market is relatively new and much of its growth before
1990 paralleled a long economic expansion. Since 1990, the market for high yield
securities has been adversely affected during periods of recessions such as that
which began in 1990. The current economic expansion is the longest in U.S.
history, but if another recession occurs, the results of the 1990 recession may
be repeated. Factors adversely impacting the market value of high yield
securities may lower a fund's net asset value.
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The credit risk factors above also apply to lower-quality zero coupon, deferred
interest and pay-in-kind securities. These securities have an additional risk,
however, because unlike securities that pay interest throughout the time until
maturity, a fund will not receive any cash until the cash payment date. If the
issuer defaults, a fund may not obtain any return on its investment.
Zero coupon or deferred interest securities are debt securities that make no
periodic interest payments before maturity or a specified date when the
securities begin paying current interest (the "cash payment date"), and
therefore are generally issued and traded at a discount from their face amount
or par value. The discount varies depending on the time remaining until maturity
or the cash payment date, as well as prevailing interest rates, liquidity of the
security, and the perceived credit quality of the issuer. The discount, in the
absence of financial difficulties of the issuer, typically decreases as the
final maturity or cash payment date approaches.
The value of zero coupon securities is generally more volatile than the value of
other fixed-income securities that pay interest periodically. Zero-coupon
securities are also likely to respond to changes in interest rates to a greater
degree than other fixed-income securities having similar maturities and credit
quality.
Certain of the high yielding, fixed-income securities in which the funds may
invest may be purchased at a discount. When held to maturity or retired, these
securities may include an element of capital gain. Capital losses may be
realized when securities purchased at a premium, that is, in excess of their
stated or par value, are held to maturity or are called or redeemed at a price
lower than their purchase price. Capital gains or losses also may be realized
upon the sale of securities.
DEFAULTED DEBT. A fund will buy defaulted debt securities if, in the opinion of
the manager, they may present an opportunity for later price recovery, the
issuer may resume interest payments, or other advantageous developments appear
likely in the near future. In general, securities that default lose much of
their value before the actual default so that the security, and thus the fund's
net asset value, would be impacted before the default. Defaulted debt securities
may be illiquid and, as such, will be part of the percentage limits discussed
under "Investment Restrictions."
MORTGAGE-BACKED SECURITIES differ from conventional bonds in that the principal
is paid back over the life of the certificate rather than at maturity. As a
result, funds invested in these securities will receive monthly scheduled
payments of principal and interest on its investment in these securities, and
may receive unscheduled principal payments representing prepayments on the
underlying mortgages. When a fund reinvests the payments and any unscheduled
prepayments of principal it receives, it may receive a rate of interest that is
lower than the rate on the existing security. For this reason, mortgage-backed
securities may be less effective than other types of U.S. Government securities
as a means of "locking in" long-term interest rates.
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The market value of mortgage-backed securities, like other U.S. Government
securities in the funds, will generally vary inversely with changes in market
interest rates, declining when interest rates rise and rising when interest
rates decline. However, mortgage-backed securities, while having comparable risk
of decline in value during periods of rising rates, may have less potential for
capital appreciation than other investments of comparable maturities due to the
likelihood of increased prepayments of mortgages as interest rates decline. To
the extent these securities are purchased at a premium, mortgage foreclosures
and unscheduled principal prepayments may result in some loss of a fund's
principal investment to the extent of the premium paid.
SBA As with mortgage-backed securities such as GNMAs, prepayments can greatly
change realized yields for SBA securities. While the prepayment rate of
mortgage-backed securities has generally been a function of market interest
rates, the prepayment rate of SBA securities has historically depended more on
the purpose and term of the loan and the rate of borrower default. Shorter-term
SBA loans have had the highest prepayment rates, particularly if the loans were
for working capital; long-term, real-estate backed SBA loans prepay much more
slowly. SBA securities are sometimes offered at a premium above their principal
amount, which increases the risks posed by prepayment.
STRUCTURED NOTES may be much more volatile than the underlying instruments
themselves, depending on the direction of interest rates, and may present many
of the same risks as investing in futures and options. Certain structured notes
without leverage characteristics may still be considered risky and an investor
could lose an amount equal to the amount invested. As with any debt instruments,
structured notes pose credit risk, i.e., the issuer may be unable to make the
required payments. Finally, some structured notes may be illiquid, that is, the
securities may not be sold as readily as other securities because few investors
or dealers trade in such securities or because the notes are complex and
difficult to price. Such potential illiquidity may be especially pronounced
during severe bond market corrections, i.e., a change or a reversal in the
direction of the market. The Board of Trustees will monitor the liquidity of
structured notes. Notes determined to be illiquid will be subject to a fund's
percentage limits on illiquid securities. These notes would have coupon resets
that may cause the current coupon to fall to, but not below, zero. Existing
credit quality, duration and liquidity standards would apply so that a fund may
not invest in structured notes unless the manager believes that the notes pose
no greater credit or market risk than stripped notes. These notes may, however,
carry risks similar to those of stripped securities.
DERIVATIVE SECURITIES
FORWARD CONTRACTS, CURRENCY FUTURES CONTRACTS AND OPTIONS ON FOREIGN CURRENCIES
Successful use of forward contracts, currency futures contracts and options on
foreign currencies depends on the manager's ability to properly predict
movements in the foreign currency markets. There may be an imperfect correlation
between movements in the foreign currency on which a forward contract, currency
futures contract, or option on a foreign currency is based and movements in the
foreign currency.
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There can be no assurance that a continuous, liquid secondary market will exist
for any particular OTC option at any specific time. Consequently, a fund may be
able to realize the value of an OTC option it has purchased only by exercising
it or entering into a closing sale transaction with the dealer that issued it.
Similarly, when a fund writes an OTC option, it generally can close out that
option before its expiration only by entering into a closing purchase
transaction with the dealer to which the fund originally wrote it. If a covered
call option writer cannot effect a closing transaction, it cannot sell the
underlying security until the option expires or the option is exercised.
Therefore, a covered call option writer of an OTC option may not be able to sell
an underlying security even though it might otherwise be advantageous to do so.
Likewise, a secured put writer of an OTC option may be unable to sell the
securities pledged to secure the put for other investment purposes while it is
obligated as a put writer. Similarly, a buyer of a put or call option might also
find it difficult to terminate its position on a timely basis in the absence of
a secondary market.
The CFTC and the various exchanges have established limits referred to as
"speculative position limits" on the maximum net long or net short position
which any person may hold or control in a particular futures contract. Trading
limits are also imposed on the maximum number of contracts that any person may
trade on a particular trading day. An exchange may order the liquidation of
positions found to be in violation of these limits and it may impose other
sanctions or restrictions. The funds do not believe that these trading and
positions limits will have an adverse impact on the funds' strategies for
hedging their securities.
Forward contracts are not traded on contract markets regulated by the CFTC or by
the SEC. The ability of a fund to use forward contracts could be restricted to
the extent that Congress authorizes the CFTC or the SEC to regulate such
transactions. Forward contracts are traded through financial institutions acting
as market makers. Also, a hedging strategy may not be successful if the fund is
unable to sell its forward contract, currency futures contract, or option on a
foreign currency with the market maker from which it bought the security.
If a fund retains a portfolio security and enters into a closing transaction,
the fund will have a gain or a loss to the extent that the forward contract
prices have increased or decreased. If a fund enters into a closing transaction,
it may subsequently enter into a new forward contract to sell the foreign
currency. If forward prices decline between the date that a fund enters into a
forward contract for the sale of a foreign currency and the date it enters into
an offsetting contract for the purchase of the foreign currency, the fund will
realize a gain. If forward prices increase, a fund will suffer a loss.
The purchase and sale of exchange-traded foreign currency options are subject to
the risks of the availability of a liquid secondary market, as well as the risks
of adverse market movements, possible intervention by governmental authorities,
and the effects of other political and economic events.
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FUTURES CONTRACTS ON CURRENCIES AND OPTIONS ON FOREIGN CURRENCIES may be traded
on foreign exchanges. These transactions are subject to the risk of governmental
actions affecting trading in or the prices of foreign currencies. The value of
such positions could also be adversely affected by (i) other foreign political
and economic factors, (ii) less available data than in the U.S. on which to base
trading decisions, (iii) delays in a fund's ability to act upon economic events
occurring in foreign markets during non-business hours in the U.S., (iv) the
imposition of exercise and settlement terms and procedures, and margin
requirements different from those in the U.S., and (v) lesser trading volume.
FUTURES CONTRACTS A purchase or sale of a futures contract may result in losses
in excess of the amount invested. A fund may not be able to properly hedge its
securities where a liquid secondary market is unavailable for the futures
contract the fund wishes to close. In addition, there may be an imperfect
correlation between movements in the securities or foreign currency on which the
futures or options contract is based and movements in the securities or currency
held by the fund. Adverse market movements could cause the fund to lose up to
its full investment in a call option contract and/or to experience substantial
losses on an investment in a futures contract. There is also the risk of loss by
the fund of margin deposits in the event of bankruptcy of a broker with whom the
fund has an open position in a futures contract or option.
Although the manager believes that the use of futures contracts will benefit
certain funds, if the manager's investment judgment about the general direction
of interest or currency exchange rates is incorrect, a fund's overall
performance would be poorer than if it had not entered into any such contract.
For example, if a fund has hedged against the possibility of an increase in
interest rates that would adversely affect the price of bonds held in its
portfolio and interest rates decrease instead, the fund will lose part or all of
the benefit of the increased value of the bonds which it has hedged because it
will have offsetting losses in its futures positions. Similarly, if a fund sells
a foreign currency futures contract and the U.S. dollar value of the currency
unexpectedly increases, the fund will lose the beneficial effect of the increase
on the value of the security denominated in that currency. In addition, in such
situations, if a fund has insufficient cash, it may have to sell bonds from its
portfolio to meet daily variation margin requirements. Sales of bonds may be,
but are not necessarily, at increased prices that reflect the rising market. A
fund may have to sell securities at a time when it may be disadvantageous to do
so.
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The ordinary spreads between prices in the cash and futures markets, due to
differences in the nature of those markets, are subject to distortions. First,
all participants in the futures market are subject to initial deposit and
variation margin requirements. Rather than meeting additional variation margin
requirements, investors may close futures contracts through offsetting
transactions that could distort the normal relationship between the cash and
futures markets. Second, the liquidity of the futures market depends on
participants entering into offsetting transactions rather than making or taking
delivery. To the extent participants decide to make or take delivery, liquidity
in the futures market could be reduced, thus producing distortion. Third, from
the point of view of speculators, the margin deposit requirements in the futures
market are less onerous than margin requirements in the securities market.
Therefore, increased participation by speculators in the futures market may
cause temporary price distortions. Due to the possibility of distortion, a
correct forecast of general interest rate trends by the manager may still not
result in a successful transaction.
Futures exchanges may limit the amount of fluctuation permitted in certain
futures contract prices during a single trading day. The daily limit establishes
the maximum amount that the price of a futures contract may vary either up or
down from the previous day's settlement price. Once the daily limit has been
reached in a futures contract subject to the limit, no more trades may be made
on that day at a price beyond that limit. The daily limit governs only price
movements during a particular trading day and, therefore, does not limit
potential losses because the limit may work to prevent the liquidation of
unfavorable positions. For example, futures prices have occasionally moved to
the daily limit for several consecutive trading days with little or no trading,
thereby preventing prompt liquidation of positions and subjecting some holders
of futures contracts to substantial losses.
The funds which are authorized to engage in futures transactions intend to
purchase or sell futures only on exchanges or boards of trade where there
appears to be an active secondary market, but there is no assurance that a
liquid secondary market will exist for any particular contract or at any
particular time. In addition, many of the futures contracts available may be
relatively new instruments without a significant trading history. As a result,
there can be no assurance that an active secondary market will develop or
continue to exist. A fund may not be able to achieve a perfect correlation
between its futures positions and portfolio positions in corporate fixed-income
securities because futures contracts based on these securities are not currently
available.
Futures contracts that are purchased on foreign exchanges may not be as liquid
as those purchased on CTFC-designated contract markets. In addition, foreign
futures contracts may be subject to varied regulatory oversight. The price of
any foreign futures contract and, therefore, the potential profit and loss
thereon, may be affected by any variance in the foreign exchange rate between
the time a particular order is placed and the time it is liquidated, offset or
exercised.
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INTEREST RATE AND CURRENCY SWAPS A fund will only enter into interest rate swaps
on a net basis, which means that the fund will receive or pay, as the case may
be, only the net amount of the two payments. Interest rate swaps do not involve
the delivery of securities, other underlying assets or principal. Accordingly, a
fund's risk of loss with respect to interest rate swaps is limited to the net
amount of interest payments that the fund must make. If the other party to an
interest rate swap defaults, a fund's risk of loss consists of the net amount of
interest payments that the fund is entitled to receive.
In contrast, currency swaps usually involve the delivery of the entire principal
value of one designated currency in exchange for the other designated currency.
Therefore, a fund could lose the entire principal value of a currency swap if
the other party defaults.
The use of interest rate and currency swaps is a highly specialized activity
that involves investment techniques and risks different from those associated
with ordinary portfolio securities transactions. If the managers are incorrect
in their forecasts of market values, interest rates and currency exchange rates,
the investment performance of a fund would be less favorable than it would have
been if this investment technique were not used.
OPTIONS ON FUTURES CONTRACTS The amount of risk a fund assumes when it purchases
an option on a futures contract is the premium paid for the option plus related
transaction costs. In writing options on futures, a fund's loss is potentially
unlimited and may exceed the amount of the premium received. Also, a fund may
not be able to properly hedge its securities or close out option contract
positions where a liquid secondary market is unavailable for the option the fund
wishes to close. In addition to the correlation risks discussed above, the
purchase of an option also entails the risk that changes in the value of the
underlying futures contract will not be fully reflected in the value of the
option purchased. Unless a fund has a stated policy otherwise, it will purchase
a put option on a futures contract only to hedge the fund's portfolio against
the risk of rising interest rates or the decline in the value of securities
denominated in a foreign currency.
OPTIONS ON SECURITIES A fund's options investments involve certain risks. The
effectiveness of an options strategy depends on the degree to which price
movements in the underlying securities correlate with price movements in the
relevant portion of the fund's portfolio. In addition, the fund bears the risk
that the prices of its portfolio securities will not move in the same amount as
the option it has purchased, or that there may be a negative correlation that
would result in a loss on both the securities and the option. If the manager is
not successful in using options in managing a fund's investments, the fund's
performance will be worse than if the manager did not employ such strategies.
When trading options on foreign exchanges or in the over-the-counter market,
many of the protections afforded to exchange participants will not be available.
For example, there are no daily price fluctuation limits, and adverse market
movements could therefore continue to an unlimited extent over a period of time.
The purchaser of an option can lose the amount of the premium plus related
transaction costs. Moreover, a fund as an option writer could lose amounts
substantially in excess of its initial investment, due to the margin and
collateral requirements associated with option writing.
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Options on securities traded on national securities exchanges are within the
jurisdiction of the SEC, as are other securities traded on such exchanges. As a
result, many of the protections provided to traders on organized exchanges will
be available with respect to such transactions. In particular, all option
positions entered into on a national securities exchange are cleared and
guaranteed by the Options Clearing Corporation, thereby reducing the risk of
counterparty default. Further, a liquid secondary market in options traded on a
national securities exchange may be more readily available than in the
over-the-counter market, potentially permitting a fund to liquidate open
positions at a profit prior to exercise or expiration, or to limit losses in the
event of adverse market movements.
Although a fund will generally purchase or write only those options for which
there appears to be an active secondary market, there is no assurance that a
liquid secondary market on an exchange will exist for any particular option, or
at any particular time. For some options, no secondary market on an exchange may
exist and a fund may have difficulty effecting closing transactions in
particular options. Therefore, the fund would have to exercise its options in
order to realize any profit and would incur transaction costs upon the sale of
underlying securities where a buyer exercises put or call options. If a fund as
a covered call option writer is unable to effect a closing purchase transaction
in a secondary market, it will not be able to sell the underlying security until
the option expires or it delivers the underlying security upon exercise. There
is no assurance that higher than anticipated trading activity or other
unforeseen events might not, at times, render certain of the facilities of the
Options Clearing Corporation inadequate, and thereby result in the institution
by an exchange of special procedures which may interfere with the timely
execution of customers' orders.
OPTIONS ON STOCK INDICES A fund's ability effectively to use options on stock
indexes depends on the degree to which price movements in the underlying index
or underlying securities correlate with price movements in the relevant portion
of the fund's portfolio. Inasmuch as these securities will not duplicate the
components of any index, the correlation will not be perfect. Consequently, a
fund bears the risk that the prices of the securities underlying the option will
not move in the same amount as the option. It is also possible that there may be
a negative correlation between the index and the hedged securities that would
result in a loss on both the securities and the instrument. Accordingly,
successful use by a fund of options on stock indexes, will be subject to the
manager's ability to predict correctly movements in the direction of the
securities markets generally or of a particular segment. This requires different
skills and techniques than predicting changes in the price of individual stocks.
Positions in stock index options may be closed out only on an exchange that
provides a secondary market. There can be no assurance that a liquid secondary
market will exist for any particular stock index option at any specific time.
Thus, it may not be possible to close an option position. The inability to close
options positions could have an adverse impact on the fund's performance.
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FOREIGN SECURITIES The value of foreign (and U.S.) securities is affected by
general economic conditions and individual company and industry earnings
prospects. While foreign securities may offer significant opportunities for
gain, they also involve additional risks that can increase the potential for
losses in the fund. These risks can be significantly greater for investments in
emerging markets. Investments in Depositary Receipts also involve some or all of
the risks described below.
The political, economic, and social structures of some countries in which the
fund invests may be less stable and more volatile than those in the U.S. The
risks of investing in these countries include the possibility of the imposition
of exchange controls, expropriation, restrictions on removal of currency or
other assets, nationalization of assets, and punitive taxes.
There may be less publicly available information about foreign companies or
governments compared to the reports and ratings published about U.S. companies
and available information about public entities in the U.S. Certain countries'
financial markets and services are less developed than those in the U.S. or
other major economies. As a result, they may not have uniform accounting,
auditing, and financial reporting standards and may have less government
supervision of financial markets. A fund, therefore, may encounter difficulty in
obtaining market quotations for purposes of valuing its portfolio and
calculating its net asset value. Foreign securities markets may have
substantially lower trading volumes than U.S. markets, resulting in less
liquidity and more volatility than experienced in the U.S. Transaction costs
(the costs associates with buying and selling securities) on foreign securities
markets, including those for custodial services are generally higher than in the
U.S. The settlement practices may be cumbersome and result in delays that may
affect portfolio liquidity. The fund may have greater difficulty voting proxies,
exercising shareholder rights, pursuing legal remedies, and obtaining judgments
with respect to foreign investments in foreign courts than with respect to
domestic issuers in U.S. courts.
Investments in securities of issuers in foreign nations may also be affected by
cessation of trading on national exchanges, expropriation, nationalization, or
confiscatory taxation, withholding, and other foreign taxes on income or other
amounts, foreign exchange controls (which may include suspension of the ability
to transfer currency from a given country), default in foreign government
securities, political or social instability, or diplomatic developments.
Expropriation of assets refers to the possibility that a country's laws will
prohibit the return to the U.S. of any monies which a fund has invested in the
country. Confiscatory taxation refers to the possibility that a foreign country
will adopt a tax law which has the effect of requiring the fund to pay
significant amounts, if not all, of the value of the fund's investment to the
foreign country's taxing authority. Diplomatic developments means that all
communications and other official governmental relations between the country and
the United States could be severed. This may occur as a result of certain
actions occurring within a foreign country, such as significant civil rights
violations, or because of the actions of the United States during a time of
crisis in the particular country. As a result of such diplomatic developments,
U.S. investors' money in the particular country, including that of the funds,
could be abandoned with no way to recover the money.
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A fund's investments in foreign securities may increase the risks with respect
to the liquidity of the fund's portfolio. This could inhibit the fund's ability
to meet a large number of shareholder redemption requests in the event of
economic or political turmoil in a country in which the fund has a substantial
portion of its assets invested or deterioration in relations between the U.S.
and the foreign country.
Through the funds' flexible policy, management endeavors to avoid unfavorable
consequences and to take advantage of favorable developments in particular
nations where, from time to time, it places the funds' investments. The exercise
of this flexible policy may include decisions to purchase securities with
substantial risk characteristics and other decisions such as changing the
emphasis on investments from one nation to another and from one type of security
to another. Some of these decisions may later prove profitable and others may
not. No assurance can be given that profits, if any, will exceed losses.
The board of trustees considers the degree of risk involved through the holding
of portfolio securities in domestic and foreign securities depositories.
However, in the absence of willful misfeasance, bad faith, or gross negligence
on the part of the funds' manager, any losses resulting from the holding of the
funds' portfolio securities in foreign countries and/or with securities
depositories will be at the risk of the shareholders. No assurance can be given
that the board of trustees' appraisal of the risks will always be correct or
that such exchange control restrictions or political acts of foreign governments
might not occur.
EMERGING MARKETS. Investments in companies domiciled or operating in emerging
countries may be subject to potentially higher risks, making these investments
more volatile, than investments in developed countries. These risks include (i)
less social, political and economic stability; (ii) the risk that the small size
of the markets for such securities and the low or nonexistent volume of trading
may result in a lack of liquidity and in greater price volatility; (iii) the
existence of certain national policies which may restrict each fund's investment
opportunities, including restrictions on investment in issuers or industries
deemed sensitive to national interests; (iv) foreign taxation; (v) the absence
of developed legal structures governing private or foreign investment or
allowing for judicial redress for injury to private property; (vi) the absence,
until recently in many developing countries, of a capital market structure or
market-oriented economy; and (vii) the possibility that recent favorable
economic developments in some emerging countries may be slowed or reversed by
unanticipated political or social events in such countries.
In addition, many countries in which the funds may invest have experienced
substantial, and in some periods extremely high, rates of inflation for many
years. Inflation and rapid fluctuations in inflation rates have had and may
continue to have negative effects on the economies and securities markets of
certain countries. Moreover, the economies of some emerging countries may differ
favorably or unfavorably from the U.S. economy in such respects as growth of
gross domestic product, rate of inflation, currency depreciation, capital
reinvestment, resource self-sufficiency and balance of payments position.
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Investments in emerging countries may involve increased risks of
nationalization, expropriation and confiscatory taxation. For example, the
Communist governments of a number of Eastern European countries expropriated
large amounts of private property in the past, in many cases without adequate
compensation, and there can be no assurance that such expropriation will not
occur in the future. In the event of expropriation, each fund could lose a
substantial portion of any investments it has made in the affected countries.
Further, no accounting standards exist in certain emerging countries. Finally,
even though the currencies of some emerging countries, such as certain Eastern
European countries may be convertible into U.S. dollars, the conversion rates
may be artificial to the actual market values and may be adverse to a funds'
shareholders.
Repatriation, that is, the return to an investor's homeland, of investment
income, capital and proceeds of sales by foreign investors may require
governmental registration or approval in some developing countries. Delays in or
a refusal to grant any required governmental registration or approval for such
repatriation could adversely affect the funds. Further, the economies of
emerging countries generally are heavily dependent upon international trade and,
accordingly, have been and may continue to be adversely affected by trade
barriers, exchange controls, managed adjustments in relative currency values and
other protectionist measures imposed or negotiated by the countries with which
they trade. These economies also have been and may continue to be adversely
affected by economic conditions in the countries with which they trade.
RUSSIAN SECURITIES involve all of the risks of emerging markets. No fund will
invest more than 5% of its assets in Russian securities.
Investing in Russian companies involves a high degree of risk and special
considerations not typically associated with investing in the U.S. securities
markets, and should be considered highly speculative. Such risks include,
together with Russia's continuing political and economic instability and the
slow-paced development of its market economy, the following:
(a) delays in settling portfolio transactions and the risk of loss arising
out of Russia's unsophisticated system of share registration and custody;
(b) the risk that it may be impossible or more difficult than in other
countries to obtain and/or enforce a court-ordered judgment;
(c) the pervasiveness of corruption, insider-trading, and crime in the
Russian economic system;
(d) currency exchange rate volatility and the lack of available currency
hedging instruments such as the techniques discussed under "Currency
techniques and hedging" in this SAI;
(e) higher rates of inflation (including the risk of social unrest
associated with periods of hyper-inflation);
(f) controls on foreign investment and local practices disfavoring foreign
investors, and limitations on repatriation of invested capital, profits and
dividends;
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(g) the risk that the government of Russia or other executive or
legislative bodies may decide not to continue to support the economic
reform programs implemented since the dissolution of the Soviet Union and
could follow radically different political and/or economic policies to the
detriment of investors, including non-market-oriented policies such as the
support of certain industries at the expense of other sectors or investors,
a return to the centrally planned economy that existed prior to the
dissolution of the Soviet Union, or the nationalization of privatized
enterprises;
(h) the risks of investing in securities with substantially less liquidity
and in issuers having significantly smaller market capitalizations, when
compared to securities and issuers in more developed markets;
(i) the difficulties associated in obtaining accurate market valuations of
many Russian securities, based partly on the limited amount of publicly
available information;
(j) the financial condition of Russian companies, including large amounts
of inter-company debt which may create a payments crisis on a national
scale;
(k) dependency on exports and the corresponding importance of international
trade;
(l) the risk that the Russian tax system will not be reformed to prevent
inconsistent, retroactive and/or exorbitant taxation or, in the
alternative, the risk that a reformed tax system may result in the
inconsistent and unpredictable enforcement of the new tax laws;
(m) possible difficulty in identifying a purchaser of securities held by
the funds due to the underdeveloped nature of the securities markets;
(n) the possibility that legislation could restrict the levels of foreign
investment in certain industries, thereby limiting the number of investment
opportunities in Russia;
(o) the risk that legislation would confer to Russian courts the exclusive
jurisdiction to resolve disputes between foreign investors and the Russian
government, instead of bringing such disputes before an
internationally-accepted third-country arbitrator; and
(p) the difficulty in obtaining information about the financial condition
of Russian issuers, in light of the different disclosure and accounting
standards applicable to Russian companies.
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There is little long-term historical data on Russian securities markets because
they are relatively new and a substantial proportion of securities transactions
in Russia is privately negotiated outside of stock exchanges. Because of the
recent formation of the securities markets as well as the underdeveloped state
of the banking and telecommunications systems, settlement, clearing and
registration of securities transactions are subject to significant risks.
Ownership of shares (except where shares are held through depositories that meet
the requirements of the 1940 Act) is defined according to entries in the
company's share register and normally evidenced by extracts from the register or
by formal share certificates. However, there is no central registration system
for shareholders and these services are carried out by the companies themselves
or by registrars located throughout Russia. These registrars are not necessarily
subject to effective state supervision nor are they licensed with any
governmental entity and it is possible for the funds to lose their registration
through fraud, negligence or even mere oversight. While each fund will endeavor
to ensure that its interest continues to be appropriately recorded by either
itself or through a custodian or other agent inspecting the share register and
by obtaining extracts of share registers through regular confirmations, these
extracts have no legal enforceability and it is possible that subsequent illegal
amendment or other fraudulent act may deprive the funds of their ownership
rights or improperly dilute their interests. In addition, while applicable
Russian regulations impose liability on registrars for losses resulting from
their errors, it may be difficult for the funds to enforce any rights they may
have against the registrar or issuer of the securities in the event of loss of
share registration. Furthermore, although a Russian public enterprise with more
than 500 shareholders is required by law to contract out the maintenance of its
shareholder register to an independent entity that meets certain criteria, in
practice this regulation has not always been strictly enforced. Because of this
lack of independence, management of a company may be able to exert considerable
influence over who can purchase and sell the company's shares by illegally
instructing the registrar to refuse to record transactions in the share
register. In addition, so-called "financial-industrial groups" have emerged in
recent years that seek to deter outside investors from interfering in the
management of companies they control. These practices may prevent the funds from
investing in the securities of certain Russian companies deemed suitable by the
manager. Further, this also could cause a delay in the sale of Russian company
securities by a fund if a potential purchaser is deemed unsuitable, which may
expose the fund to potential loss on the investment.
CURRENCY If a fund holds securities denominated in foreign currencies, changes
in foreign currency exchange rates will affect the value of what the funds owns
and its share price. In addition, changes in foreign currency exchange rates
will affect a fund's income and distributions to shareholders. Some countries in
which the funds may invest may also have fixed or managed currencies that are
not free-floating against the U.S. dollar. Certain currencies may not be
internationally traded. To the extent that the manager intends to hedge currency
risk in certain funds, the funds endeavor to buy and sell foreign currencies on
as favorable a basis as practicable. Some price spread in currency exchange (to
cover service charges) may be incurred, particularly when a fund changes
investments from one country to another or when proceeds of the sale of shares
in U.S. dollars are used for the purchase of securities in foreign countries.
Some countries may adopt policies that would prevent the funds from transferring
cash out of the country or withhold portions of interest and dividends at the
source.
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Certain currencies have experienced a steady devaluation relative to the U.S.
dollar. Any devaluations in the currencies in which a fund's portfolio
securities are denominated may have a detrimental impact on the fund. Where the
exchange rate for a currency declines materially after a fund's income has been
accrued and translated into U.S. dollars, a fund may need to redeem portfolio
securities to make required distributions. Similarly, if an exchange rate
declines between the time a fund incurs expenses in U.S. dollars and the time
such expenses are paid, the fund will have to convert a greater amount of the
currency into U.S. dollars in order to pay the expenses.
EURO On January 1, 1999, the European Economic and Monetary Union (EMU)
introduced a new single currency called the euro. By July 1, 2002, the euro,
which will be implemented in stages, will have replaced the national currencies
of member countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy,
Luxembourg, the Netherlands, Portugal and Spain.
Currently, the exchange rate of the currencies of each of these countries is
fixed to the euro. The euro trades on currency exchanges and is available for
non-cash transaction. The participating countries currently issue sovereign debt
exclusively in euro. By July 1, 2002, euro-denominated bills and coins will
replace the bills and coins of the above countries.
The new European Central Banks has control over each country's monetary
policies. Therefore, the participating countries no longer control their own
monetary policies by directing independent interest rates for their currencies.
The national governments of the participating countries, however, have retained
the authority to set tax policies and public debt levels.
The change to the euro as a single currency is new and untested. It is not
possible to predict the impact of the euro on currency values or on the business
or financial condition of European countries and issuers, and issuers in other
regions, whose securities the fund may hold, or the impact, if any, on fund
performance. In the first six months of the euro's existence, the exchange rates
of the euro versus many of the world's major currencies steadily declined. In
this environment, U.S. and other foreign investors experienced erosion of their
investment returns on their euro-denominated securities. The transition and the
elimination of currency risk among EMU countries may change the economic
environment and behavior of investors, particularly in European markets.
While the implementation of the euro could have a negative effect on the fund,
the fund's manager and its affiliated service providers are taking steps they
believe are reasonably designed to address the euro issue.
REAL ESTATE Although none of the funds invest directly in real estate, through
an investment in a company in the real estate industry, a fund could ultimately
own real estate directly as a result of a default on debt securities it may own.
Receipt of rental income or income from the disposition of real property by a
fund may adversely affect its ability to retain its tax status as a regulated
investment company.
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REPURCHASE AGREEMENTS The use of repurchase agreements involves certain risks.
For example, if the other party to the agreement defaults on its obligation to
repurchase the underlying security at a time when the value of the security has
declined, a fund may incur a loss upon disposition of the security. If the other
party to the agreement becomes insolvent and subject to liquidation or
reorganization under the bankruptcy code or other laws, a court may determine
that the underlying security is collateral for a loan by a fund not within the
control of a fund, and therefore the realization by the fund on the collateral
may be automatically stayed. Finally, it is possible that the fund may not be
able to substantiate its interest in the underlying security and may be deemed
an unsecured creditor of the other party to the agreement. While the manager
acknowledges these risks, it is expected that if repurchase agreements are
otherwise deemed useful to a fund, these risks can be controlled through careful
monitoring procedures.
REVERSE REPURCHASE AGREEMENTS are considered borrowings by the funds and as such
are subject to the investment limitations discussed under "Fundamental
Investment Restrictions." These transactions may increase the volatility of a
fund's income or net asset value. The fund carries the risk that any securities
purchased with the proceeds of the transaction will depreciate or not generate
enough income to cover the fund's obligations under the reverse repurchase
transaction. These transactions also increase the interest and operating
expenses of a fund.
SHORT SALES Short sales carry risks of loss if the price of the security sold
short increases after the sale. In this situation, when a fund replaces a
borrowed security by buying the security in the securities markets, the fund may
pay more for the security than it has received from the purchaser in the short
sale. A fund may, however profit from a change in the value of the security sold
short, if the price decreases.
SMALLER COMPANIES Historically, smaller company stocks have been more volatile
in price than larger company stocks. Among the reasons for the greater price
volatility of these securities are the less certain growth prospects of smaller
firms, the lower degree of liquidity in the markets for such stocks, and the
greater sensitivity of smaller companies to changing economic conditions.
Besides exhibiting greater volatility, smaller company stocks may, to a degree,
fluctuate independently of larger company stocks. Small company stocks may
decline in price as large company stocks rise, or rise in price as large company
stocks decline. Investors should therefore expect that the net asset value of a
fund that invests a substantial portion of its net assets in smaller company
stocks may be more volatile than the shares of a fund that invests solely in
larger company stocks.
TRADE CLAIMS An investment in trade claims is speculative and carries a high
degree of risk. There can be no guarantee that the debtor will ever be able to
satisfy the obligation on the trade claim. Trade claims are not regulated by
federal securities laws or the SEC. Currently, trade claims are regulated
primarily by bankruptcy laws. Because trade claims are unsecured, holders of
trade claims may have a lower priority in terms of payment than most other
creditors in a bankruptcy proceeding.
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WHEN ISSUED OR DELAYED DELIVERY TRANSACTIONS The securities underlying these
transactions are subject to market fluctuation prior to the delivery and
generally do not earn interest until their scheduled delivery date. There is the
risk that the value or yield of the security at the time of delivery may be more
or less than the price for the security or the yield available when the
transaction was entered into.
NON-FUNDAMENTAL POLICIES AFFECTING MULTIPLE FUNDS
It is the present policy of each fund, except the Mutual Discovery Fund and
Mutual Shares Fund, (which may be changed without the approval of a majority of
its outstanding shares) not to pledge, mortgage or hypothecate its assets as
security for loans (except to the extent of allowable temporary loans), nor to
engage in joint or joint and several trading accounts in securities, except that
the funds (including the Mutual Discovery Fund and Mutual Shares Fund) may
participate with other investment companies in the Franklin Templeton Group of
Funds(R) in a joint account to engage in certain large repurchase transactions
and may combine orders to purchase or sell securities with orders from other
persons to obtain lower brokerage commissions. It is not any fund's policy to
invest in interests (other than publicly traded equity securities) in oil, gas
or other mineral exploration or development programs.
FUNDAMENTAL INVESTMENT RESTRICTIONS
- --------------------------------------------------------------------------------
Each fund (except the Aggressive Growth, Asset Strategy, Developing Markets,
International Securities, Rising Dividends, Small Cap, S&P 500 Index, Strategic
Income and Technology Funds) has adopted the following restrictions as
fundamental policies. This means they may only be changed if the change is
approved by (i) more than 50% of the fund's outstanding shares or (ii) 67% or
more of the fund's shares present at a shareholder meeting if more than 50% of
the fund's outstanding shares are represented at the meeting in person or by
proxy, whichever is less.
Each fund may not:
1. with respect to 75% of its total assets, except for the Global Income, Global
Health Care and Value Funds, purchase the securities of any one issuer (other
than cash, cash items and obligations of the U.S. Government) if immediately
thereafter, and as a result of the purchase, the fund would (a) have more than
5% of the value of its total assets invested in the securities of such issuer or
(b) hold more than 10% of any or all classes of the securities of any one
issuer;
2. borrow money in an amount in excess of 5% of the value of its total assets,
except from banks for temporary or emergency purposes, and not for direct
investment in securities (except the Global Health Care, International Smaller
Companies, Mutual Discovery, Mutual Shares, and Value Funds). The Global Health
Care, International Smaller Companies, Mutual Discovery, Mutual Shares, and
Value Funds may borrow money from banks in an amount not exceeding 33 1/3% of
the value of the fund's total assets including the amount borrowed. Each of
these funds may also pledge, mortgage or hypothecate its assets to secure
borrowings to an extent not greater than 15% of the fund's total assets.
Arrangements with respect to margin for futures contracts, forward contracts and
related options are not deemed to be a pledge of assets.
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3. lend its assets, except through the purchase or acquisition of bonds,
debentures or other debt securities of any type customarily purchased by
institutional investors, or through loans of portfolio securities, or to the
extent the entry into a repurchase agreement may be deemed a loan;
4. underwrite securities of other issuers, except as noted in number 6 below and
except insofar as a fund may be technically deemed an underwriter under the
federal securities laws in connection with the disposition of portfolio
securities;
5. purchase illiquid securities, including illiquid securities which, at the
time of acquisition, could be disposed of publicly by the funds only after
registration under the Securities Act of 1933, if as a result more than 10% of
their net assets would be invested in such illiquid securities (not applicable
to the Global Health Care, International Smaller Companies, Mutual Discovery,
Mutual Shares or Value Funds each of which has a 15% limitation on investments
in illiquid securities);
6. invest in securities for the purpose of exercising management or control of
the issuer (not applicable to the Mutual Discovery, Mutual Shares or Value
Funds);
7. invest more than 25% of its assets (measured at the time of the most recent
investment) in any single industry (not applicable to the Global Health Care,
Global Communications, Natural Resources or Real Estate Funds) each of which has
a 15% limitation on investments in alleged securities;
8. invest in companies which have a record of less than three years of
continuous operation, including the operations of any predecessor companies,
except that the Real Estate, Large Cap, Growth and Income, Global Income,
Pacific Growth and Growth Securities Funds may invest up to 5% of their
respective assets in such companies, the Natural Resources Fund may invest up to
10% of its assets in such companies, and such limitation shall not apply to the
Global Health Care, International Smaller Companies, Mutual Discovery, Mutual
Shares or Value Funds;
9. maintain a margin account with a securities dealer or effect short sales,
with the exceptions that (i) the Growth and Income and Income Securities Funds
may effect short sales if the fund owns securities equivalent in kind and amount
to those sold, (ii) Mutual Discovery, Mutual Shares, Global Health Care and
Value Funds may engage in short sales to the extent described in the prospectus
and SAI, and (iii) the Natural Resources, Global Health Care, Global Income,
Growth Securities, International Smaller Companies, Pacific Growth , Mutual
Discovery, Mutual Shares and Value Funds may make initial deposits and pay
variation margin in connection with futures contracts;
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10. invest in commodities or commodity pools, except that (i) certain funds may
purchase and sell Forward Contracts in amounts necessary to effect transactions
in foreign securities, (ii) the Global Health Care, Global Income, International
Smaller Companies, Pacific Growth, Growth Securities, Mutual Discovery, Mutual
Shares and Value Funds may enter into Futures Contracts and may invest in
foreign currency and (iii) the Natural Resources Fund may invest in commodities
and commodity futures contracts with respect to commodities related to the
natural resources sector as defined in the prospectus. Securities or other
instruments backed by commodities are not considered commodities or commodity
contracts for the purpose of this restriction;
11. invest directly in real estate, although certain funds may invest in real
estate investment trusts or other publicly traded securities engaged in the real
estate industry. First mortgage loans or other direct obligations secured by
real estate are not considered real estate for purposes of this restriction;
12. invest in the securities of other open-end investment companies (except that
securities of another open-end investment company may be acquired pursuant to a
plan of reorganization, merger, consolidation or acquisition). This restriction
is not applicable to the Large Cap, Global Health Care, International Smaller
Companies, Mutual Discovery, Mutual Shares, Pacific Growth or Value Funds;
13. invest in assessable securities or securities involving unlimited liability
on the part of the fund;
14. invest an aggregate of more than 10% of its assets in securities with legal
or contractual restrictions on resale, securities which are not readily
marketable (including over-the-counter options and assets used to cover such
options), and repurchase agreements with more than seven days to maturity (this
restriction does not apply to the Global Health Care, Value, Mutual Discovery,
Mutual Shares, or Value Funds);
15. purchase or retain any security if any officer, director or security holder
of the issuer is at the same time an officer, trustee or employee of the Trust
or of the fund's Manager and such person owns beneficially more than one-half of
1% of the securities and all such persons owning more than one-half of 1% own
more than 5% of the outstanding securities of the issuer;
16. invest its assets in a manner which does not comply with the investment
diversification requirements of Section 817(h) of the Code;
17. invest more than 10% of its assets in illiquid securities (including
illiquid equity securities, repurchase agreements of more than seven days
duration, over-the-counter options and assets used to cover such options, and
other securities which are not readily marketable), as more fully described in
the prospectus and SAI. This policy shall not apply to the Global Health Care,
International Smaller Companies, Mutual Discovery, Mutual Shares or Value Funds;
18. The Growth Securities Fund may not invest more than 5% of its assets in
warrants, whether or not listed on the New York or American Exchange, including
no more than 2% of its total assets which may be invested in warrants that are
not listed on those exchanges. Warrants acquired by the funds in units or
attached to securities are not included in this restriction; or
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19. The Growth Securities Fund will not invest more than 15% of its assets in
securities of foreign issuers that are not listed on a recognized U.S. or
foreign securities exchange, including no more than 10% in illiquid investments.
The Aggressive Growth, Asset Strategy, Developing Markets, International
Securities, Rising Dividends, Small Cap, S&P 500 Index, Strategic Income and
Technology Funds have each adopted the following restrictions as fundamental
policies. This means they may only be changed if the change is approved by (i)
more than 50% of the fund's outstanding shares or (ii) 67% or more of the fund's
shares present at a shareholder meeting if more than 50% of the fund's
outstanding shares are represented at the meeting in person or by proxy,
whichever is less.
Each fund may not:
1. Borrow money, except that the fund may borrow money from banks or affiliated
investment companies to the extent permitted (a) by the 1940 Act, or (b) any
exemptions therefrom which may be granted by the SEC, or (c) for temporary or
emergency purposes and then in an amount not exceeding 33 1/3% of the value of
the fund's total assets (including the amount borrowed).
2. Act as an underwriter except to the extent the fund may be deemed to be an
underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans to other persons except (a) through the lending of its portfolio
securities, (b) through the purchase of debt securities, loan participations
and/or engaging in direct corporate loans in accordance with its investment
objectives and policies, and (c) to the extent the entry into a repurchase
agreement is deemed to be a loan. The fund may also make loans to affiliated
investment companies to the extent permitted by the 1940 Act or any exemptions
therefrom which may be granted by the SEC.
4. Purchase or sell real estate and commodities, except that the fund may
purchase or sell securities of real estate investment trusts, may purchase or
sell currencies, may enter into futures contracts on securities, currencies, and
other indices or any other financial instruments, and may purchase and sell
options on such futures contracts.
5. Issue securities senior to the fund's presently authorized shares of
beneficial interest, except that this restriction shall not be deemed to
prohibit the fund from (a) making any permitted borrowings, loans, mortgages or
pledges, (b) entering into options, futures contracts, forward contracts,
repurchase transactions or reverse repurchase transactions, or (c) making short
sales of securities to the extent permitted by the 1940 Act and any rule or
order thereunder, or SEC staff interpretations thereof.
6. Concentrate (invest more than 25% of its net assets) in securities of issuers
in a particular industry (other than securities issued or guaranteed by the U.S.
Government or any of its agencies or instrumentalities or securities of other
investment companies) (not applicable to the Technology Fund).
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7. Purchase the securities of any one issuer (other than the U.S. Government or
any of its agencies or instrumentalities, or securities of other investment
companies) if immediately after such investment (a) more than 5% of the value of
the fund's total assets would be invested in such issuer or (b) more than 10% of
the outstanding voting securities of such issuer would be owned by the fund,
except that up to 25% of the value of the fund's total assets may be invested
without regard to such 5% and 10% limitations (not applicable to the Strategic
Income and Technology Funds).
If a bankruptcy or other extraordinary event occurs concerning a particular
security the fund owns, the fund may receive stock, real estate, or other
investments that the fund would not, or could not, buy. If this happens, the
fund intends to sell such investments as soon as practicable while maximizing
the return to shareholders.
Generally, the policies and restrictions discussed in this SAI and in the
prospectuses apply when a fund makes an investment. In most cases, the fund is
not required to sell a security because circumstances change and the security no
longer meets one or more of a fund's policies or restrictions. If a percentage
restriction or limitation is met at the time of investment, a later increase or
decrease in the percentage due to a change in the value or liquidity of
portfolio securities will not be considered a violation of the restriction or
limitation.
OFFICERS AND TRUSTEES
- --------------------------------------------------------------------------------
The Trust has a board of trustees. The board is responsible for the overall
management of the Trust, including general supervision and review of each fund's
investment activities. The board, in turn, elects the officers of the Trust who
are responsible for administering the Trust's day-to-day operations. The board
also monitors each fund to ensure no material conflicts exist among share
classes, among different insurance companies or between owners of variable
annuity and variable life insurance contracts. While none is expected, the board
will act appropriately to resolve any material conflict that may arise.
The name, age and address of the officers and board members, as well as their
affiliations, positions held with the Trust, and principal occupations during
the past five years are shown below.
Frank H. Abbott, III (79)
1045 Sansome Street, San Francisco, CA 94111
TRUSTEE
President and Director, Abbott Corporation (an investment company); director or
trustee, as the case may be, of 28 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, Director, MotherLode Gold Mines
Consolidated (gold mining) (until 1996) and Vacu-Dry Co. (food processing)
(until 1996).
Harris J. Ashton (67)
191 Clapboard Ridge Road, Greenwich, CT 06830
TRUSTEE
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Director, RBC Holdings, Inc. (bank holding company) and Bar-S Foods (meat
packing company); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
President, Chief Executive Officer and Chairman of the Board, General Host
Corporation (nursery and craft centers) (until 1998).
Robert F. Carlson (72)
2120 Lambeth Way, Carmichael, CA 95608
TRUSTEE
Member and past President, Board of Administration, California Public Employees
Retirement Systems (CALPERS); director or trustee, as the case may be, of nine
of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, member and Chairman of the Board, Sutter Community Hospitals, member,
Corporate Board, Blue Shield of California, and Chief Counsel, California
Department of Transportation.
S. Joseph Fortunato (67)
Park Avenue at Morris County, P.O. Box 1945
Morristown, NJ 07962-1945
TRUSTEE
Member of the law firm of Pitney, Hardin, Kipp & Szuch; and director or trustee,
as the case may be, of 50 of the investment companies in the Franklin Templeton
Group of Funds.
Robert S. James (61)
1750 Hennepin Avenue South, Minneapolis, MN 55403-2195
Trustee
President, Individual Insurance Division, Allianz Life Insurance Company of
North America; and Director, Preferred Life Insurance Company of New York and
LifeUSA of Minneapolis.
*Charles B. Johnson (67)
777 Mariners Island Blvd., San Mateo, CA 94404
CHAIRMAN OF THE BOARD AND TRUSTEE
Chairman of the Board, Chief Executive Officer, Member - Office of the Chairman
and Director, Franklin Resources, Inc.; Chairman of the Board and Director,
Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Vice
President, Franklin Templeton Distributors, Inc.; Director, Franklin/Templeton
Investor Services, Inc. and Franklin Templeton Services, Inc.; officer and/or
director or trustee, as the case may be, of most of the other subsidiaries of
Franklin Resources, Inc. and of 49 of the investment companies in the Franklin
Templeton Group of Funds.
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*Charles E. Johnson (43)
777 Mariners Island Blvd., San Mateo, CA 94404
PRESIDENT AND TRUSTEE
President, Member - Office of the President and Director, Franklin Resources,
Inc.; Senior Vice President, Franklin Templeton Distributors, Inc.; President
and Director, Templeton Worldwide, Inc.; Director, Templeton Investment Counsel,
Inc.; President, Franklin Advisers, Inc. and Franklin Investment Advisory
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 33 of the investment companies in the Franklin Templeton Group of
Funds.
*Rupert H. Johnson, Jr. (59)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND TRUSTEE
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc.; Director, Franklin Advisers, Inc., Franklin Investment Advisory Services,
Inc. and Franklin/Templeton Investor Services, Inc.; Senior Vice President,
Franklin Advisory Services, LLC; and officer and/or director or trustee, as the
case may be, of most of the other subsidiaries of Franklin Resources, Inc. and
of 52 of the investment companies in the Franklin Templeton Group of Funds.
Frank W.T. LaHaye (71)
20833 Stevens Creek Blvd., Suite 102, Cupertino, CA 95014
TRUSTEE
Chairman, Peregrine Venture Management Company (venture capital); Director, The
California Center for Land Recycling (redevelopment); director or trustee, as
the case may be, of 28 of the investment companies in the Franklin Templeton
Group of Funds; and FORMERLY, General Partner, Miller & LaHaye and Peregrine
Associates, the general partners of Peregrine Venture funds.
Gordon S. Macklin (71)
8212 Burning Tree Road, Bethesda, MD 20817
TRUSTEE
Director, Martek Biosciences Corporation, MCI WorldCom, Inc. (information
services), MedImmune, Inc. (biotechnology), Overstock.com (internet services),
White Mountains Insurance Group, Ltd. (holding company) and Spacehab, Inc.
(aerospace services); director or trustee, as the case may be, of 48 of the
investment companies in the Franklin Templeton Group of Funds; and FORMERLY,
Chairman, White River Corporation (financial services) (until 1998) and
Hambrecht & Quist Group (investment banking) (until 1992), and President,
National Association of Securities Dealers, Inc. (until 1987).
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Harmon E. Burns (55)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources,
Inc.; Executive Vice President and Director, Franklin Templeton Distributors,
Inc. and Franklin Templeton Services, Inc.; Executive Vice President, Franklin
Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc. and
Franklin/Templeton Investor Services, Inc.; and officer and/or director or
trustee, as the case may be, of most of the other subsidiaries of Franklin
Resources, Inc. and of 52 of the investment companies in the Franklin Templeton
Group of Funds.
Martin L. Flanagan (39)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
President, Member - Office of the President, Franklin Resources, Inc.; Senior
Vice President, Chief Financial Officer and Director, Franklin/Templeton
Investor Services, Inc.; Senior Vice President and Chief Financial Officer,
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.; Director, Franklin Templeton Services, Inc.; officer
and/or director of some of the other subsidiaries of Franklin Resources, Inc.;
and officer and/or director or trustee, as the case may be, of 52 of the
investment companies in the Franklin Templeton Group of Funds.
Deborah R. Gatzek (51)
1840 Gateway Drive, San Mateo, CA 94404
Secretary
Partner, Stradley, Ronon, Stevens & Young, LLP; officer of 34 of the investment
companies in the Franklin Templeton Group of Funds; and FORMERLY, 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, and Vice President,
Chief Legal Officer and Chief Operating Officer, Franklin Investment Advisory
Services, Inc. (until January 2000).
David Goss (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
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President, Chief Executive Officer and Director, Franklin Select Realty Trust,
Property Resources, Inc., Property Resources Equity Trust and Franklin Real
Estate Management, Inc.; President and Chief Executive Officer, Franklin
Properties, Inc.; officer of 53 of the investment companies in the Franklin
Templeton Group of Funds; and FORMERLY, President, Chief Executive Officer and
Director, Franklin Real Estate Income Fund and Franklin Advantage Real Estate
Income Fund (until 1996).
Barbara J. Green (52)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Vice President and Deputy General Counsel, Franklin Resources, Inc.; Senior Vice
President, Templeton Worldwide, Inc. and Templeton Global Investors, Inc.;
officer of 53 of the investment companies in the Franklin Templeton Group of
Funds; and FORMERLY, Deputy Director, Division of Investment Management,
Executive Assistant and Senior Advisor to the Chairman, Counselor to the
Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange
Commission (1986-1995), Attorney, Rogers & Wells (until 1986), and Judicial
Clerk, U.S. District Court (District of Massachusetts) (until 1979).
Edward V. McVey (62)
777 Mariners Island Blvd., San Mateo, CA 94404
Vice President
Senior Vice President and National Sales Manager, Franklin Templeton
Distributors, Inc.; and officer of 29 of the investment companies in the
Franklin Templeton Group of Funds.
Kimberley Monasterio (36)
777 Mariners Island Blvd., San Mateo, CA 94404
Treasurer and Principal Accounting Officer
Vice President, Franklin Templeton Services, Inc.; and officer of 33 of the
investment companies in the Franklin Templeton Group of Funds.
Murray L. Simpson (62)
777 Mariners Island Blvd., San Mateo, CA 94404
VICE PRESIDENT
Executive Vice President and General Counsel, Franklin Resources, Inc.; officer
of 53 of the investment companies in the Franklin Templeton Group of Funds; and
FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin
Investment Services (Asia) Limited (until January 2000) and Director, Templeton
Asset Management Ltd. (until 1999).
*This board member is considered an "interested person" under federal securities
laws.
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Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father
and uncle, respectively, of Charles E. Johnson.
The Trust pays noninterested board members $675 per month plus $550 per meeting
attended. Board members who serve on the audit committee of the Trust and other
funds in the Franklin Templeton Group of Funds receive a flat fee of $2,000 per
committee meeting attended, a portion of which is allocated to the Trust.
Members of a committee are not compensated for any committee meeting held on the
day of a board meeting. Noninterested board members also may serve as directors
or trustees of other funds in the Franklin Templeton Group of Funds and may
receive fees from these funds for their services. The fees payable to certain
noninterested board members by the Trust are subject to reductions resulting
from fee caps limiting the amount of fees payable to board members who serve on
other boards within the Franklin Templeton Group of Funds. The following table
provides the total fees paid to noninterested board members by the Trust and by
the Franklin Templeton Group of Funds.
<TABLE>
<CAPTION>
TOTAL FEES RECEIVED FROM THE NUMBER OF BOARDS IN THE
TOTAL FEES RECEIVED FRANKLIN TEMPLETON GROUP OF FRANKLIN TEMPLETON GROUP OF
FROM THE FUNDS2 ($) FUNDS ON WHICH EACH SERVES3
NAME TRUST1 ($)
- -------------------------------------- -------------------- ------------------------------ -----------------------------
<S> <C> <C> <C>
Frank H. Abbott 10,297 156,060 28
Harris Ashton 11,266 363,165 48
Robert F. Carlson 14,150 89,690 9
S. Joseph Fortunato 10,495 363,238 50
Robert S. James -- --
Frank W.T. LaHaye 10,297 156,060 28
Gordon Macklin 11,266 363,165 48
</TABLE>
1. For the fiscal year ended December 31, 1999.
2. For the calendar year ended December 31, 1999.
3. We base the number of boards on the number of registered investment companies
in the Franklin Templeton Group of Funds. This number does not include the total
number of series or funds within each investment company for which the board
members are responsible. The Franklin Templeton Group of Funds currently
includes 53 registered investment companies, with approximately 155 U.S. based
funds or series.
Noninterested board members are reimbursed for expenses incurred in connection
with attending board meetings, paid pro rata by each fund in the Franklin
Templeton Group of Funds for which they serve as director or trustee. No officer
or board member received any other compensation, including pension or retirement
benefits, directly or indirectly from the fund or other funds in the Franklin
Templeton Group of Funds. Certain officers or board members who are shareholders
of Franklin Resources, Inc. may be deemed to receive indirect remuneration by
virtue of their participation, if any, in the fees paid to its subsidiaries.
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Board members historically have followed a policy of having substantial
investments in one or more of the funds in the Franklin Templeton Group of
Funds, as is consistent with their individual financial goals. In February 1998,
this policy was formalized through adoption of a requirement that each board
member invest one-third of fees received for serving as a director or trustee of
a Templeton fund in shares of one or more Templeton funds and one-third of fees
received for serving as a director or trustee of a Franklin fund in shares of
one or more Franklin funds until the value of such investments equals or exceeds
five times the annual fees paid such board member. Investments in the name of
family members or entities controlled by a board member constitute fund holdings
of such board member for purposes of this policy, and a three year phase-in
period applies to such investment requirements for newly elected board members.
In implementing such policy, a board member's fund holdings existing on February
27, 1998, are valued as of such date with subsequent investments valued at cost.
MANAGEMENT AND OTHER SERVICES
- --------------------------------------------------------------------------------
MANAGERS AND SERVICES PROVIDED
The managers are:
INVESTMENT ADVISER FUND
- --------------------------------------------------------------------------------
FRANKLIN ADVISERS, INC. (FAI) Aggressive Growth Fund
Global Communications Fund
Global Health Care Fund
Growth and Income Fund
High Income Fund
Income Securities Fund
Large Cap Growth Fund
Money Fund
Natural Resources Fund
Real Estate Fund
Small Cap Fund
S&P 500 Index Fund
Strategic Income Fund
Technology Fund
Government Fund
Zero Coupon Fund - 2000
Zero Coupon Fund - 2005
Zero Coupon Fund - 2010
Global Income Fund
Pacific Growth Fund
FRANKLIN ADVISORY SERVICES, LLC (FAS) Rising Dividends Fund
Value Fund
Franklin Mutual Advisers, LLC Mutual Discovery Fund
Mutual Shares Fund
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<PAGE>
Templeton Investment Counsel, Inc. (TICI) Asset Strategy Fund
International Securities Fund
International Smaller Companies Fund
Templeton Global Advisors Growth Securities Fund
Limited (TGAL)
TGAL renders its services to the
fund from outside the U.S.
Templeton Asset Management Limited Developing Markets Securities Fund
(TAML) in Hong Kong
The managers are directly or indirectly wholly owned by Franklin Resources, Inc.
(Resources), a publicly owned company engaged in the financial services industry
through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the
principal shareholders of Resources.
The managers provide investment research and portfolio management services, and
select the securities for the funds to buy, hold or sell. The managers also
select the brokers who execute the Funds' portfolio transactions. The managers
provide periodic reports to the board, which reviews and supervises the
managers' investment activities. To protect the funds, the managers and their
officers, directors and employees are covered by fidelity insurance. Templeton
Asset Management Ltd. and Templeton Global Advisors Limited render their
services to the funds from outside the U.S.
The Templeton organization has been investing globally since 1940. The managers
and their affiliates have offices in Argentina, Australia, Bahamas, Brazil,
Canada, Peoples' Republic of China, Cyprus, France, Germany, Hong Kong, India,
Italy, Japan, Korea, Luxembourg, Mauritius, the Netherlands, Poland, Russia,
Singapore, South Africa, Spain, Sweden, Switzerland, Taiwan, United Kingdom and
the U.S.
The manager and its affiliates manage numerous other investment companies and
accounts. The manager may give advice and take action with respect to any of the
other funds it manages, or for its own account, that may differ from action
taken by the manager on behalf of the fund. Similarly, with respect to the fund,
the manager is not obligated to recommend, buy or sell, or to refrain from
recommending, buying or selling any security that the manager and access
persons, as defined by applicable federal securities laws, may buy or sell for
its or their own account or for the accounts of any other fund. The manager is
not obligated to refrain from investing in securities held by the fund or other
funds it manages.
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<PAGE>
The fund, its manager and principal underwriter have each adopted a code of
ethics, as required by federal securities laws. Under the code of ethics,
employees who are designated as access persons may engage in personal securities
transactions, including transactions involving securities that are being
considered for the fund or that are currently held by the fund, subject to
certain general restrictions and procedures. The personal securities
transactions of access persons of the fund, its manager and principal
underwriter will be governed by the code of ethics. The code of ethics is on
file with, and available from, the U.S. Securities and Exchange Commission
(SEC).
Templeton Investment Counsel, Inc. is the sub-adviser to Strategic Income Fund,
Asset Strategy Fund and Templeton Global Income Securities. State Street Global
Advisors, a division of State Street Bank and Trust Company is the sub-adviser
to the S&P 500 Index Fund. The sub-advisers have agreements with the managers
and provide the managers with investment management advice and assistance. The
sub-advisers' activities are subject to the board's review and control, as well
as the managers' instructions and supervision.
MANAGEMENT FEES Each Fund pays the manager a fee equal to an annual rate as
follows:
<TABLE>
<CAPTION>
FUND MANAGEMENT FEE RATES
- ----------------------------------------------------------------------------------------------------------------------
<S> <C>
Global Communications Fund 0.625% of the value of net assets up to an including $100 million;
Growth and Income Fund 0.50% of the value of net assets over $100 million up to and
High Income Fund including $250 million;
Income Securities Fund 0.45% of the value of net assets over $250 million up to and
Money Fund including $10 billion;
Natural Resources Fund 0.44% of the value of net assets over $10 billion up to and including
Real Estate Fund $12.5 billion; plus
Government Fund 0.42% of the value of net assets over $12.5 billion up to and
Zero Coupon Fund - 2000 including $15 billion; plus
Zero Coupon Fund - 2005 0.40% of the value of net assets over $15 billion.
Zero Coupon Fund - 2010
Global Income Fund
LARGE CAP FUND 0.75% of the value of net assets up to $500 million;
RISING DIVIDENDS FUND 0.625% of the value of net assets over $500 million up to and
including $1 billion; and
0.50% of the value of net assets in excess of $1 billion.
Growth Securities Fund 1.00% of the value of net assets up to $100 million;
Pacific Growth Fund 0.90% of the value of net assets over $100 million up to and
including $250 million;
0.80% of the value of net assets
over $250 million up to and
including $500 million; and 0.75%
of the value of net assets over
$500 million.
</TABLE>
111
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
International Securities Fund 0.75% of the
value of net assets up to and
including $200 million; 0.675% of
the value of net assets over $200
million up to and including $1.3
billion; 0.60% of the value of
net assets over $1.3 billion.
Developing Markets Fund 1.25% of the value of net assets.
ASSET STRATEGY FUND 0.65% of the value
of net assets up to and including
$200 million; 0.585% of the value
of net assets over $200 million
up to and including $1.3 billion;
0.52% of the value of net assets
over $1.3 billion.
INTERNATIONAL SMALLER COMPANIES FUND 0.85% of
the value of net assets up to and
including $200 million; 0.765% of
the value of the Fund's net
assets over $200 million up to
and including $1.3 billion; 0.68%
of the value of the Fund's net
assets over $1.3 billion.
GLOBAL HEALTH CARE FUND 0.60% of the value of net assets up to an including $200 million;
VALUE FUND
0.50% of the value of net assets
up to and including $1.3 billion;
and 0.40% of value of net assets
over $1.3 billion.
MUTUAL DISCOVERY FUND 0.80% of the value of net assets.
MUTUAL SHARES FUND 0.60% of the value of net assets.
AGGRESSIVE GROWTH FUND 0.500% of the value of net assets up to $500 million;
0.400% of the value of net assets over $500 million up to and
including $1 billion;
0.350% of the value of net assets over $1 billion up to and including
$1.5 billion;
</TABLE>
112
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
0.300% of the value of net assets over $1.5 billion up to and
including $6.5 billion;
0.275% of the value of net assets over $6.5 billion up to and
including $11.5 billion;
0.250% of the value of net assets over $11.5 billion up to and
including $16.5 billion;
0.240% of the value of net assets over $16.5 billion up to and
including $19 billion;
0.230% of the value of net assets over $19 billion up to and
including $21.5 billion; and
0.220% of the value of net assets over $21.5 billion.
SMALL CAP FUND 0.550% of the value of net assets up to $500 million;
TECHNOLOGY FUND 0.450% of the value of net assets over $500 million up to and
including $1 billion;
0.400% of the value of net assets
over $1 billion up to and
including $1.5 billion; 0.350% of
the value of net assets over $1.5
billion up to and including $6.5
billion; 0.325% of the value of
net assets over $6.5 billion up
to and including $11.5 billion;
0.300% of the value of net assets
over $11.5 billion up to and
including $16.5 billion; 0.290%
of the value of net assets over
$16.5 billion up to and including
$19 billion; 0.280% of the value
of net assets over $19 billion up
to and including $21.5 billion;
and 0.270% of the value of net
assets over $21.5 billion.
S&P 500 INDEX FUND 0.15% of the value of net assets.
STRATEGIC INCOME FUND 0.425% of the value of net assets up to $500 million;
0.325% of the value of net assets over $500 million up to and
including $1 billion;
0.280% of the value of net assets over $1 billion up to and including
$1.5 billion;
0.235% of the value of net assets over $1.5 billion up to and
including $6.5 billion;
0.215% of the value of net assets over $6.5 billion up to and
including $11.5 billion;
0.200% of the value of net assets over $11.5 billion up to and
including $16.5 billion;
0.190% of the value of net assets over $16.5 billion up to and
including $19 billion;
0.180% of the value of net assets over $19 billion up to and
including $21.5 billion; and
0.170% of the value of net assets over $21.5 billion.
</TABLE>
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<PAGE>
The fees are computed daily according to the terms of the management agreements.
Each class of a Fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended December 31, the Funds paid the following
management fees:
<TABLE>
<CAPTION>
MANAGEMENT FEES PAID ($)
------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Communications Fund 4,247,909 4,965,295 5,139,011
Global Health Care Fund 59,620 18,1195 --
Growth and Income Fund 5,454,205 6,301,582 5,667,415
High Income Fund 1,992,885 2,439,509 2,305,480
Income Securities Fund 4,605,869 6,133,729 6,348,820
Large Cap Fund 2,501,063 1,140,016 558,503
Money Fund1 1,971,026 1,671,303 1,740,190
Natural Resources Fund 293,810 388,527 584,675
Real Estate Fund 1,197,913 1,911,113 1,988,023
Rising Dividends Fund 4,308,795 5,508,829 4,942,390
Small Cap Fund 2,375,111 2,365,309 1,878,273
Strategic Income Fund2,4 0 -- --
S&P 500 Index Fund3,4 0 -- --
Government Fund 3,000,062 3,530,641 3,775,626
Value Fund 62,295 17,9684 --
Zero Coupon Fund - 20001 506,237 377,990 442,683
Zero Coupon Fund - 20051 470,096 292,474 290,964
Zero Coupon Fund - 20101 502,424 326,495 293,620
Mutual Discovery Fund 1,617,147 1,904,631 930,954
Mutual Shares Fund 2,833,172 2,841,641 1,265,341
Asset Strategy Fund4 4,072,911 4,500,289 3,834,087
Developing Markets Fund4 3,292,465 2,255,183 1,859,449
Global Income Fund 714,454 959,858 1,133,609
Growth Securities Fund 5,923,920 6,409,332 5,894,743
International Securities Fund4 7,168,839 7,098,752 5,356,048
International Smaller Companies Fund 201,942 259,908 239,272
Pacific Growth Fund 995,038 1,142,027 2,608,312
</TABLE>
1. Under an agreement by the manager to waive or limit its management fees, the
funds' management fees before any advance waiver were ($):
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Money Fund 1,971,026 1,986,485 2,072,982
Strategic Income Fund 6,732 2 n/a n/a
S&P 500 Index Fund 1,735 3 n/a n/a
Zero Coupon Fund - 2000 506,237 639,490 724,202
Zero Coupon Fund - 2005 470,096 498,204 485,690
Zero Coupon Fund - 2010 502,424 552,900 491,457
</TABLE>
2. For the period July 1, 1999 (commencement of operations) to December 31,
1999.
3. For the period November 1, 1999 (commencement of operations) to December 31,
1999.
114
<PAGE>
4. Included in the financials in the TVP Annual Report to Shareholders for the
fiscal year ended December 31, 1999.
5. For the period from May 1, 1998 (commencement of operations) to December 31,
1998.
For services provided to the funds, the managers pay the sub-advisers the
following fees:
<TABLE>
<CAPTION>
SUB-ADVISOR FUND ANNUAL FEE RATES
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
State Street Global S&P 500 INDEX FUND 0.05% of the value of the fund's net assets up to
Advisors and including $50,000,000; and
0.04% of the value of the fund's net assets over
$50,000,000 up to and including $100,000,000; and
0.02% of the value of the fund's net assets over
$100,000,0000.
Templeton Investment Strategic Income Fund 25% OF THE FEES RECEIVED BY THE MANAGER.
Counsel, Inc
Templeton Investment GLOBAL INCOME FUND 0.35% of the value of the net assets up to and
Counsel, Inc PACIFIC GROWTH FUND including $100 million;
0.25% of the value of net assets over $100
million up to and including $250 million; and
0.20% of the value of net assets over $250
million.
</TABLE>
The managers pay sub-advisory fees from the management fees they receive from
the funds. For the last three fiscal years, the managers paid the following
sub-advisory fees:
<TABLE>
<CAPTION>
SUB-ADVISORY FEES PAID ($)
-------------------------------------------------
1999 1998 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
S&P 500 Index Fund(1) 576 n/a n/a
Global Income Fund 394,727 517,646 646,108
Pacific Growth Fund 348,263 561,199 1,184,097
</TABLE>
1. For the period November 1, 1999 (commencement of operations) to December 31,
1999.
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, Inc. (FT
Services) provides certain administrative services and facilities for each fund.
FT Services has direct agreements with the following funds:
Global Health Care Fund
Small Cap Fund
S&P 500 Index Fund
Strategic Income Fund
Technology Fund
115
<PAGE>
Mutual Discovery Fund
Mutual Shares Fund
Value Fund
Asset Strategy Fund
Developing Markets
Fund International Securities Fund
International Smaller Companies Fund
FT Services has subcontracts with the managers of all other funds. The
administrative services FT Services provides include preparing and maintaining
books, records, and tax and financial reports, and monitoring compliance with
regulatory requirements. FT Services may make certain payments to insurance
companies for administrative services. FT Services subcontracts with Templeton
Funds Annuity Company (TFAC) to provide certain of these services. FT Services
and TFAC are direct or indirect wholly owned subsidiaries of Resources and are
affiliates of the Trust's managers and principal underwriter.
ADMINISTRATION FEES The funds, in the case of the funds with direct agreement
with TF Services (except for Small Cap Fund, Strategic Income Fund, S&P 500
Index Fund and Technology Fund) and the managers for all other funds, pay FT
Services a monthly fee for each fund, equal to an annual rate of:
/bullet/ 0.15% of the fund's average daily net assets up to $200 million;
/bullet/ 0.135% of average daily net assets over $200 million up to $700
million;
/bullet/ 0.10% of average daily net assets over $700 million up to $1.2 billion;
and
/bullet/ 0.075% of average daily net assets over $1.2 billion.
SMALL CAP FUND AND TECHNOLOGY FUND each pays FT Services a monthly fee equal to
an annual rate of 0.25% of the average daily net assets of the fund during the
preceding month.
STRATEGIC INCOME FUND pays FT Services a monthly fee equal to an annual rate of
0.20% of the average daily net assets of the fund during the preceding month.
S&P 500 INDEX FUND pays FT Services a monthly fee equal to an annual rate of
0.10% of the fund's average daily net assets.
During the last three fiscal years ended December 31, the funds or the managers,
as applicable, paid FT services the following administration fees:
116
<PAGE>
<TABLE>
<CAPTION>
ADMINISTRATION FEES PAID ($)
----------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Communications Fund 1,163,467 1,323,099 1,361,793
Global Health Care Fund 15,012 4,4711 --
Growth and Income Fund 1,427,064 1,583,739 1,468,417
High Income Fund 553,410 687,089 646,500
Income Securities Fund 1,243,737 1,555,839 1,591,448
Large Cap Fund 479,784 227,544 111,486
Money Fund 546,502 550,742 577,131
Natural Resources Fund 70,473 93,364 140,730
Real Estate Fund 318,900 528,864 551,077
Rising Dividends Fund 826,684 1,054,751 952,330
Small Cap Fund 457,520 455,754 367,289
S&P 500 Index Fund 1,1404,5 -- --
Strategic Income Fund 3,5254,5 -- --
Government Fund 855,487 1,004,140 1,058,686
Value Fund 15,666 4,433(1) --
Zero Coupon Fund - 2000 121,576 152,304 179,811
Zero Coupon Fund - 2005 112,884 119,555 116,587
Zero Coupon Fund - 2010 120,676 132,677 117,989
Mutual Discovery Fund 302,448 351,377 174,554
Mutual Shares Fund 667,459 669,378 314,146
Asset Strategy Fund2,4 650,654 715,727(3) 667,977
Templeton Developing Markets Fund2,4 254,273 172,848(3) 146,221
Global Income Fund 177,066 250,588 301,966
Growth Securities Fund 982,673 1,048,256 912,622
International Securities Fund2,4 1,004,768 986,271(3) 838,726
International Smaller Companies Fund 35,637 45,867 42,916
Templeton Pacific Growth Fund 149,144 174,507 410,919
</TABLE>
1. For the period from May 1, 1998 to December 31, 1998.
2. The fund's administrative fees are based on the total net assets of TVP, with
each fund paying its proportionate share based on each fund's average net
assets.
3. Before November 1, 1998, Templeton Funds Annuity Company acted as fund
administrator of the Trust. TFAC was responsible for providing substantially the
same services as FT Services now performs under a contract with an identical fee
schedule.
4. Included in the financials in the TVP Annual Report to Shareholders.
5. Under an agreement by the administrator to waive its fees, the funds paid no
administration fees.
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin/Templeton Investor Services,
Inc. (Investor Services) is the fund's shareholder servicing agent and acts as
the fund's transfer agent and dividend-paying agent. Investor Services is
located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777.
CUSTODIANS Bank of New York, Mutual Funds Division, 90 Washington Street, New
York, NY 10286, acts as custodian of the funds' securities and other assets. In
addition, The Chase Manhattan Bank, at its principal office at MetroTech Center,
Brooklyn, NY 11245, and at the offices of its branches and agencies throughout
the world, acts as custodian of the assets of Asset Strategy Fund, Developing
Markets Fund, Global Income Fund, Growth Securities Fund, International
Securities Fund and Pacific Growth Fund. As foreign custody manager, the bank
selects and monitors foreign sub-custodian banks, selects and evaluates
non-compulsory foreign depositories, and furnishes information relevant to the
selection of compulsory depositories.
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<PAGE>
AUDITOR PricewaterhouseCoopers LLP, 333 Market Street, San Francisco, CA 94105
is the Trust's independent auditor. The auditor gives an opinion on the
financial statements included in the Trust's Annual Report to Shareholders and
reviews the Trust's registration statement filed with the SEC.
RESEARCH SERVICES The managers may receive services from various affiliates. The
services may include information, analytical reports, computer screening
studies, statistical data, and factual resumes pertaining to securities eligible
for purchase by the funds. Such supplemental research, when utilized, is subject
to analysis by the managers before being incorporated into the investment
advisory process.
PORTFOLIO TRANSACTIONS
- --------------------------------------------------------------------------------
The managers select brokers and dealers to execute the funds' portfolio
transactions in accordance with criteria set forth in the management agreements
and any directions that the board may give.
When placing a portfolio transaction, the managers seek to obtain prompt
execution of orders at the most favorable net price. For portfolio transactions
on a securities exchange, the amount of commission paid is negotiated between
the manager and the broker executing the transaction. The determination and
evaluation of the reasonableness of the brokerage commissions paid are based to
a large degree on the professional opinions of the persons responsible for
placement and review of the transactions. These opinions are based on the
experience of these individuals in the securities industry and information
available to them about the level of commissions being paid by other
institutional investors of comparable size. The managers will ordinarily place
orders to buy and sell over-the-counter securities on a principal rather than
agency basis with a principal market maker unless, in the opinion of the
managers, a better price and execution can otherwise be obtained. Purchases of
portfolio securities from underwriters will include a commission or concession
paid by the issuer to the underwriter, and purchases from dealers will include a
spread between the bid and ask price.
The managers may pay certain brokers commissions that are higher than those
another broker may charge, if the managers determine in good faith that the
amount paid is reasonable in relation to the value of the brokerage and research
services they receive. This may be viewed in terms of either the particular
transaction or the managers' overall responsibilities to client accounts over
which they exercise investment discretion. The services that brokers may provide
to the managers include, among others, supplying information about particular
companies, markets, countries, or local, regional, national or transnational
economies, statistical data, quotations and other securities pricing
information, and other information that provides lawful and appropriate
assistance to the managers in carrying out their
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<PAGE>
investment advisory responsibilities. These services may not always directly
benefit the funds. They must, however, be of value to the managers in carrying
out their overall responsibilities to their clients.
To the extent a fund invests in bonds or participates in other principal
transactions at net prices, the fund incurs little or no brokerage costs. The
fund deals directly with the selling or buying principal or market maker without
incurring charges for the services of a broker on its behalf, unless it is
determined that a better price or execution may be obtained by using the
services of a broker.
Purchases of portfolio securities from underwriters will include a commission or
concession paid by the issuer to the underwriter, and purchases from dealers
will include a spread between the bid and ask prices. The funds seek to obtain
prompt execution of orders at the most favorable net price. Transactions may be
directed to dealers in return for research and statistical information, as well
as for special services provided by the dealers in the execution of orders.
It is not possible to place a dollar value on the special executions or on the
research services the managers receive from dealers effecting transactions in
portfolio securities. The allocation of transactions to obtain additional
research services allows the managers to supplement their own research and
analysis activities and to receive the views and information of individuals and
research staffs of other securities firms. As long as it is lawful and
appropriate to do so, the managers and their affiliates may use this research
and data in their investment advisory capacities with other clients. If the
Trust's officers are satisfied that the best execution is obtained, the sale of
fund shares, as well as shares of other funds in the Franklin Templeton Group of
Funds, also may be considered a factor in the selection of broker-dealers to
execute the funds' portfolio transactions.
Because Franklin Templeton Distributors, Inc. (Distributors) is a member of the
National Association of Securities Dealers, Inc., it may sometimes receive
certain fees when a fund tenders portfolio securities pursuant to a tender-offer
solicitation. To recapture brokerage for the benefit of the fund, any portfolio
securities tendered by the fund will be tendered through Distributors if it is
legally permissible to do so. In turn, the next management fee payable to the
manager will be reduced by the amount of any fees received by Distributors in
cash, less any costs and expenses incurred in connection with the tender.
If purchases or sales of securities of a fund and one or more other investment
companies or clients supervised by the manager are considered at or about the
same time, transactions in these securities will be allocated among the several
investment companies and clients in a manner deemed equitable to all by the
manager, taking into account the respective sizes of the funds and the amount of
securities to be purchased or sold. In some cases this procedure could have a
detrimental effect on the price or volume of the security so far as the
119
<PAGE>
fund is concerned. In other cases it is possible that the ability to participate
in volume transactions may improve execution and reduce transaction costs to the
fund.
During the last three fiscal years ended December 31, the funds paid the
following brokerage commissions:
<TABLE>
<CAPTION>
BROKER COMMISSIONS ($)
--------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------- --------------- ---------------------- -----------------
<S> <C> <C> <C>
Global Communications Fund 2,240,233 1,260,209 987,011
Global Health Care Fund 34,233 7,679 --
Growth and Income Fund 1,462,576 978,165 1,277,652
High Income Fund 1,469 0 0
Income Securities Fund 0 135,052 130,787
Large Cap Fund 285,773 97,932 57,736
Money Fund 0 0 0
Natural Resources Fund 118,031 221,927 347,537
Real Estate Fund 321,201 360,482 213,815
Rising Dividends Fund 468,845 687,070 615,127
Small Cap Fund 170,758 205,822 242,801
S&P 500 Index Fund 4,396(1) - -
Strategic Income Fund 353(1) - -
Government Fund 0 0 0
Value Fund 29,749 23,936 -
Zero Coupon Fund - 2000 0 0 0
Zero Coupon Fund - 2005 0 0 0
Zero Coupon Fund - 2010 0 0 0
Mutual Discovery Fund 826,555 752,153 247,576
Mutual Shares Fund 1,073,693 856,291 310,461
Asset Strategy Fund(1) 1,099,879 755,187 736,781
Developing Markets Fund(1) 1,207,123 623,160 960,703
Global Income Fund 0 0 0
Growth Securities Fund 1,563,908 965,410 860,436
International Securities Fund(1) 1,430,276 1,302,179 1,041,978
International Smaller Companies Fund 27,797 26,352 109,554
Templeton Pacific Growth Fund 208,931 267,116 487,776
</TABLE>
1. Included in the financials in the TVP Annual Report to Shareholders.
Because the funds may, from time to time, invest in broker-dealers, it is
possible that a fund will own more than 5% of the voting securities of one or
more broker-dealers through whom a fund places portfolio brokerage transactions.
In such circumstances, the broker-dealer would be considered an affiliated
person of the fund. To the extent a fund places brokerage transactions through
such a broker-dealer at a time when the broker-dealer is considered to be an
affiliate of the fund, the fund will be required to adhere to certain rules
relating to the payment of commissions to an affiliated broker-dealer. These
rules require the fund to adhere to procedures adopted by the board relating to
ensuring that the commissions paid to such broker-dealers do not exceed what
would otherwise be the usual and customary brokerage commissions for similar
transactions.
The following table identifies each fund which held securities of its regular
brokers or dealers during 1999, the names of each such broker or dealer, and the
value, if any, of such securities as of December 31, 1999.
120
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, 1999
FUND NAME REGULAR BROKER OR DEALER VALUE ($)
- ---------------------------------- ------------------------------------------ ----------------------
<S> <C> <C>
Money Fund Bank of America NT & SA 10,000,000
Merrill Lynch & Co. 14,853,918
Morgan Stanley Dean Witter & Co. 14,914,056
Salomon Smith Barney 14,823,979
Growth & Income J.P. Morgan & Co., Inc. 10,395,913
Mutual Discovery Fund Morgan Stanley Dean Witter & Co. 185,575
Mutual Shares Fund Bear Stearns Co. Inc. 7,342,441
</TABLE>
DISTRIBUTIONS AND TAXES
- --------------------------------------------------------------------------------
The funds calculate dividends and capital gains the same way for each class. The
amount of any income dividends per share will differ, however, generally due to
the difference in the distribution and service (Rule 12b-1) fees of each class.
Distributions are subject to approval by the board. The funds do not pay
"interest" or guarantee any fixed rate of return on investments in their shares.
EFFECT OF FOREIGN INVESTMENTS ON DISTRIBUTIONS Most foreign exchange gains
realized on the sale of debt securities are treated as ordinary income by a
fund. Similarly, foreign exchange losses realized by a fund on the sale of debt
securities are generally treated as ordinary losses by a fund. These gains when
distributed will be treated as ordinary dividends, and any losses will reduce a
fund's ordinary income otherwise available for distribution. This treatment
could increase or reduce a fund's ordinary income distributions, and may cause
some or all of a fund's previously distributed income to be classified as a
return of capital.
A fund may be subject to foreign withholding taxes on income from certain of its
foreign securities.
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<PAGE>
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY Each fund has elected to
be treated as a regulated investment company under Subchapter M of the Internal
Revenue Code. The funds have qualified as regulated investment companies for
their most recent fiscal year, and intend to continue to qualify during the
current fiscal year. As regulated investment companies, the funds generally pay
no federal income tax on the income and gains they distribute. To ensure that
individuals holding the Contracts whose assets are invested in a fund will not
be subject to federal income tax on distributions made by the fund prior to
receipt of payments under the Contracts, each fund intends to comply with the
additional requirements of Section 817(h) of the Internal Revenue Code relating
to diversification of its assets. The board reserves the right not to maintain
the qualification of a fund as a regulated investment company if it determines
such course of action to be beneficial to shareholders. In such case, the fund
will be subject to federal, and possibly state, corporate taxes on its taxable
income and gains.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Internal
Revenue Code requires a fund to make certain minimum distributions by December
31 of each year. Federal excise taxes will not apply to a fund in a given
calendar year, however, if all of its shareholders at all times during the
calendar year are segregated asset accounts of life insurance companies where
the shares are held in connection with variable products.
INVESTMENT IN COMPLEX SECURITIES A fund may invest in complex securities. These
investments may be subject to numerous special and complex tax rules. These
rules could affect whether gains and losses recognized by a fund are treated as
ordinary income or capital gain, accelerate the recognition of income to a fund
and/or defer a fund's ability to recognize losses, and, in limited cases,
subject a fund to U.S. federal income tax on income from certain of its foreign
securities. In turn, these rules may affect the amount, timing or character of
the income distributed by a fund.
ORGANIZATION, VOTING RIGHTS AND PRINCIPAL HOLDERS
- --------------------------------------------------------------------------------
The Trust is an open-end management investment company, commonly called a mutual
fund. The Trust was organized as a Massachusetts business Trust on April 26,
1988 and is registered with the SEC. Each fund, except Global Health Care Fund,
Strategic Income Fund, Technology Fund, Value Fund and Global Income Fund, is a
diversified series of the Trust.
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<PAGE>
As a shareholder of a Massachusetts business trust, you could, under certain
circumstances, be held personally liable as a partner for its obligations. The
Agreement and Declaration of Trust, however, contains an express disclaimer of
shareholder liability for acts or obligations of the fund. The Declaration of
Trust also provides for indemnification and reimbursement of expenses out of the
fund's assets if you are held personally liable for obligations of the fund. The
Declaration of Trust provides that the fund shall, upon request, assume the
defense of any claim made against you for any act or obligation of the fund and
satisfy any judgment thereon. All such rights are limited to the assets of the
fund. The Declaration of Trust further provides that the fund may maintain
appropriate insurance (for example, fidelity bonding and errors and omissions
insurance) for the protection of the fund, its shareholders, trustees, officers,
employees and agents to cover possible tort and other liabilities. Furthermore,
the activities of the fund as an investment company, as distinguished from an
operating company, would not likely give rise to liabilities in excess of the
fund's total assets. Thus, the risk that you would incur financial loss on
account of shareholder liability is limited to the unlikely circumstance in
which both inadequate insurance exists and the fund itself is unable to meet its
obligations.
The Trust currently offers two classes of shares for each series, class 1 and
class 2, except for S&P 500 Index Fund which currently offers class 1, class 2
and class 3. The full title of each series and class is:
/bullet/ Franklin Aggressive Growth Securities Fund - Class 1
/bullet/ Franklin Aggressive Growth Securities Fund - Class 2
/bullet/ Franklin Global Communications Securities Fund - Class 1(1) (prior to
11/15/99, Franklin Global Utilities Securities Fund) (prior to 5/1/98,
Utility Equity Fund)
/bullet/ Franklin Global Communications Securities Fund - Class 2(1)
/bullet/ Franklin Global Health Care Securities Fund - Class 1(1)
/bullet/ Franklin Global Health Care Securities Fund - Class 2(1)
/bullet/ Franklin Growth and Income Fund - Class 1(1)
(prior to 5/1/95, Equity Growth Fund)
/bullet/ Franklin Growth and Income Fund - Class 2(1)
/bullet/ Franklin High Income Fund - Class 1(1)
/bullet/ Franklin High Income Fund - Class 2(1)
/bullet/ Franklin Income Securities Fund - Class 1(1)
/bullet/ Franklin Income Securities Fund Class 2(1)
/bullet/ Franklin Large Cap Growth Securities Fund - Class 1(1)
(prior to 12/15/99, Franklin Capital Growth Fund)
/bullet/ Franklin Large Cap Growth Securities Fund - Class 2(1)
/bullet/ Franklin Money Market Fund - Class 1(1)
/bullet/ Franklin Money Market Fund - Class 2(1)
/bullet/ Franklin Natural Resources Securities Fund - Class 1(1)
(prior to 5/1/97, Precious Metals Fund)
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<PAGE>
/bullet/ Franklin Natural Resources Securities Fund - Class 2(1)
/bullet/ Franklin Real Estate Fund - Class 1
(prior to September 1999, Real Estate Securities Fund)
/bullet/ Franklin Real Estate Fund - Class 2
(same as Class 1)
/bullet/ Franklin Rising Dividend Securities Fund - Class 1
(prior to September 1999, Rising Dividends Fund)
/bullet/ Franklin Rising Dividend Securities Fund - Class 2
(same as Class 1)
/bullet/ Franklin Small Cap Fund - Class 1(1)
/bullet/ Franklin Small Cap Fund - Class 2(1)
/bullet/ Franklin S&P 500 Index Fund - Class 1(2)
/bullet/ Franklin S&P 500 Index Fund - Class 2(2)
/bullet/ Franklin S&P 500 Index Fund - Class 3(2)
/bullet/ Franklin Strategic Income Securities Fund - Class 1(2)
/bullet/ Franklin Strategic Income Securities Fund - Class 2(2)
/bullet/ Franklin Technology Securities Fund - Class 1
/bullet/ Franklin Technology Securities Fund - Class 2
/bullet/ Franklin U.S. Government Fund - Class 1(1)
/bullet/ Franklin U.S. Government Fund - Class 2(1)
/bullet/ Franklin Value Securities Fund - Class 1(1)
/bullet/ Franklin Value Securities Fund - Class 2(1)
/bullet/ Franklin Zero Coupon Fund - 2000 - Class 1(1)
/bullet/ Franklin Zero Coupon Fund - 2000 - Class 2(1)
/bullet/ Franklin Zero Coupon Fund - 2005 - Class 1(1)
/bullet/ Franklin Zero Coupon Fund - 2005 - Class 2(1)
/bullet/ Franklin Zero Coupon Fund - 2010 - Class 1(1)
/bullet/ Franklin Zero Coupon Fund - 2010 - Class 2(1)
/bullet/ Mutual Discovery Securities Fund - Class 1
/bullet/ Mutual Discovery Securities Fund - Class 2
/bullet/ Mutual Shares Securities Fund - Class 1
/bullet/ Mutual Shares Securities Fund - Class 2
/bullet/ Templeton Asset Strategy Fund - Class 1
/bullet/ (prior to May 1, 2000, Templeton Asset Allocation Fund)
/bullet/ Templeton Asset Strategy Fund - Class 2(2)
/bullet/ (same as Class 1)
/bullet/ Templeton Developing Markets Securities Fund - Class 1(2)
/bullet/ (prior to May 1, 2000, Templeton Developing Markets Fund)
/bullet/ Templeton Developing Markets Securities Fund - Class 2(2)
(same as Class 1)
/bullet/ Templeton Growth Securities Fund - Class 1
/bullet/ Templeton Growth Securities Fund - Class 2
/bullet/ Templeton Global Income Securities Fund Class 1
(prior to 5/1/96, Global Income Fund)
/bullet/ Templeton Global Income Securities Fund Class 2
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<PAGE>
/bullet/ Templeton International Securities Fund - Class 1(2)
(prior to May 1, 2000, Templeton International Fund)
/bullet/ Templeton International Securities Fund - Class 2(2)
(same as Class 1)
/bullet/ Templeton International Smaller Companies Fund - Class 1
/bullet/ Templeton International Smaller Companies Fund - Class 2
/bullet/ Templeton Pacific Growth Securities Fund - Class 1
/bullet/ Templeton Pacific Growth Securities Fund - Class 2
1. In September 1999, the names of the Funds were changed to include "Franklin".
2. On February 8, 2000, fund shareholders approved a merger and reorganization
that combined the fund, a series of TVP with a similar fund of the Trust,
effective May 1, 2000. The fund is the surviving fund of the merger.
Shares of each class represent proportionate interests in a fund's assets and
are identical except that the fund's class 2 shares and class 3 shares will bear
the expense of the class 2 and class 3 distribution plan. (See "The Underwriter"
below, for a description of these plans.) In addition, class 3 of S&P 500 Index
Fund will bear its own registration expenses under state and federal securities
laws and transfer agency (shareholder account maintenance) expenses. On matters
that affect the fund as a whole, each class has the same voting and other rights
and preferences as any other class. On matters that affect only one class, only
shareholders of that class may vote. Each class votes separately on matters
affecting only that class, or expressly required to be voted on separately by
state or federal law. Shares of each class of a series have the same voting and
other rights and preferences as the other classes and series of the Trust for
matters that affect the Trust as a whole. Additional series and/or classes may
be offered in the future.
The Trust has non-cumulative voting rights. For board member elections, this
gives holders of more than 50% of the shares voting the ability to elect all of
the members of the board. If this happens, holders of the remaining shares
voting will not be able to elect anyone to the board.
The Trust does not intend to hold annual shareholder meetings. The Trust or a
series of the Trust may hold special meetings, however, for matters requiring
shareholder approval. A meeting may also be called by the board to consider the
removal of a board member if requested in writing by shareholders holding at
least 10% of the outstanding shares. In certain circumstances, we are required
to help shareholders communicate with other shareholders about the removal of a
board member. A special meeting may also be called by the board in its
discretion.
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<PAGE>
PRINCIPAL SHAREHOLDERS Class 1 and class 2 shares of the funds are sold to and
owned only by insurance company separate accounts to serve as the investment
vehicle for variable annuity and life insurance contracts. Class 3 shares of the
S&P 500 Index Fund are offered as an investment option only to defined
contribution plans participating in Franklin Templeton ValuSelect(R) and certain
other qualified retirement plans that have executed a special agreement with the
fund or its agents.
The insurance companies will exercise voting rights attributable to shares they
own in accordance with voting instructions received by owners of the contracts
issued by the insurance companies. To this extent, the insurance companies do
not exercise control over the Trust by virtue of the voting rights from their
ownership of Trust shares. Voting rights attributable to shares of the S&P 500
Index Fund owned by defined contribution plans participating in Franklin
Templeton ValuSelect and other qualified retirement plans will be voted as
required by applicable law and the governing plan documents.
As of March 31, 2000, the principal shareholders of the funds, beneficial or of
record, were:
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<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------------------------------------------- ------------------------
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- ---------------------------------------- ---------------------------------------------------- ------------------------
<S> <C> <C>
Allianz Life Insurance Global Communications Fund - class 1 91.70
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 8.30
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Global Communications Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance Global Health Care Fund- class 1 93.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 7.00
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Global Health Care Fund - class 2 100.00
1750 Hennepin Ave. Minneapolis, MN
55403
Allianz Life Insurance Growth and Income Fund - class 1 91.20
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of
New York 8.80
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Growth and Income Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance High Income Fund - class 1 90.9
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 9.10
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance High Income Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance Income Securities Fund - class 1 92.9
1750 Hennepin Ave.
Minneapolis, MN 55403
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------------------------------------------- ------------------------
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- ---------------------------------------- ---------------------------------------------------- ------------------------
<S> <C> <C>
Preferred Life Insurance Company of 7.1
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Income Securities Fund - class 2 99.9
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance Large Cap Fund - class 1 93.1
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 6.9
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Large Cap Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance Money Fund - class 1 93.3
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 6.7
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Money Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance Natural Resources Fund - class 1 93.3
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 6.7
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Natural Resources Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance Real Estate Fund - class 1 93.4
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 6.6
New York
152 West 57th Street, 18th Floor
New York, NY 10019
</TABLE>
128
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------------------------------------------- ------------------------
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- ---------------------------------------- ---------------------------------------------------- ------------------------
<S> <C> <C>
Allianz Life Insurance Real Estate Fund - class 2 8.9
1750 Hennepin Ave.
Minneapolis, MN 55403
American Enterprise Life 72.2
IDS Tower 10 T11/1646
Minneapolis, MN 55440
Hartford Life 18.9
PO Box 2999
Hartford, CT 06104-2999
Allianz Life Insurance Rising Dividends Fund - class 1 90.3
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 9.7
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Rising Dividends Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance Small Cap Fund - class 1 95.0
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 5.0
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Small Cap Fund - class 2 4.5
1750 Hennepin Ave.
Minneapolis, MN 55403
Lincoln National Life 10.4
1300 South Clinton
Fort Wayne, IN 46802
Hartford Life 85.0
PO Box 2999
Hartford, CT 06104-2999
Hartford Life Strategic Income Fund - class 1 13.70%
PO Box 2999
Hartford, CT 06104-2999
Hartford Life & Annuity 33.90%
Po Box 2999
Hartford, CT 06104-2999
Templeton Funds Annuity Company 52.50%
100 Fountain Parkway 100/2
St. Petersburg, FL 33716
Strategic Income Fund - class 2
</TABLE>
129
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------------------------------------------- ------------------------
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- ---------------------------------------- ---------------------------------------------------- ------------------------
<S> <C> <C>
Allianz Life Insurance S&P 500 Index Fund - class 1 94.80%
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 5.00%
New York
152 West 57th Street, 18th Floor
New York, NY 10019
FTTC TTEE for Valuselect S&P 500 Index Fund - class 3 14.86
Franklin Tempelton 401k
Attn Trading
PO Box 2438
Rancho Cordova CA 95741-2438
FTTC TTEE for Valuselect
Florida Education Association 5.93
Attn Trading
PO Box 2438
Rancho Cordova CA 95741-2438
Allianz Life Insurance Government Fund - class 1 89.6
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 10.4
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Government Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance Value Fund - class 1 94.7
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 5.3
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Value Fund - class 2 13.4
1750 Hennepin Ave.
Minneapolis, MN 55403
American Enterprise Life 86.6
IDS Tower 10 T11/1646
Minneapolis, MN 55440
Allianz Life Insurance Zero Coupon Fund - 2000 - class 1 83.9
1750 Hennepin Ave.
Minneapolis, MN 55403
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------------------------------------------- ------------------------
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- ---------------------------------------- ---------------------------------------------------- ------------------------
<S> <C> <C>
Preferred Life Insurance Company of 16.1
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Zero Coupon Fund - 2005 - class 1 90.5
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 9.5
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Zero Coupon Fund - 2010 - class 1 92.8
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 7.2
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Mutual Discovery Fund - class 1 94.1
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 5.9
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Mutual Discovery Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance Mutual Shares Fund - class 1 93.7
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 6.3
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Mutual Shares Fund - class 2 12.6
1750 Hennepin Ave.
Minneapolis, MN 55403
Hartford Life 85.5
PO Box 2999
Hartford, CT 06104-2999
Phoenix Home Life Asset Strategy Fund - class 1 14.90%
One American Row
Hartford, CT 06115
Travelers Insurance Company 36.60%
One Tower Square
Hartford, CT 06183
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------------------------------------------- ------------------------
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- ---------------------------------------- ---------------------------------------------------- ------------------------
<S> <C> <C>
VALIC 48.20%
2929 Allen Parkway
Houston, TX 77019
Phoenix Home Life Asset Strategy Fund - class 2 78.40%
One American Row
Hartford, CT 06115
Hartford Life & Annuity 13.50%
Po Box 2999
Hartford, CT 06104-2999
IDS Life Insurance Company Developing Markets Fund - class 1 85.20%
IDS Tower 10 T11/1646
Minneapolis, MN 55440
IDS Life of New York 5.90%
IDS Tower 10 T11/1646
Minneapolis, MN 55440
Phoenix Home Life Developing Markets Fund - class 2 19.50%
One American Row
Hartford, CT 06115
CUNA 26.60%
2000 Heritage Way
Waverly, IA 50677
Minnesota Life Insurance Company 25.00%
400 Robert Street North
St. Paul, MN 55101-2098
Travelers Insurance Company
One Tower Square 18.90%
Hartford, CT 06183
Allianz Life Insurance Global Income Fund - class 1 89.8
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 10.2
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Global Income Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
Allianz Life Insurance Growth Securities Fund - class 1 94.5
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 5.5
New York
152 West 57th Street, 18th Floor
New York, NY 10019
</TABLE>
132
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------- ---------------------------------------------------- ------------------------
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%)
- ---------------------------------------- ---------------------------------------------------- ------------------------
<S> <C> <C>
Allianz Life Insurance Growth Securities Fund - class 2 17.4
1750 Hennepin Ave.
Minneapolis, MN 55403
Hartford Life & Annuity 78.9
Po Box 2999
Hartford, CT 06104-2999
Phoenix Home Life International Securities Fund - class 1 7.10%
One American Row
Hartford, CT 06115
VALIC 76.40%
2929 Allen Parkway
Houston, TX 77019
Jefferson Pilot 7.00%
One Granit Place
PO Box 515
Concord, NH 03302-0515
Phoenix Home Life International Securities Fund - class 2 26.40%
One American Row
Hartford, CT 061115
Union Central 14.70%
PO Box 40888
1876 Waycross Road
Cincinnati, OH 45240
Travelers Insurance Company 23.00%
One Tower Square
Hartford, CT 06183
Allianz Life Insurance International Smaller Companies Fund - class 1 95.6
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 4.4
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance International Smaller Companies Fund - class 2 3.2
1750 Hennepin Ave.
Minneapolis, MN 55403
American Enterprise Life 96.8
IDS Tower 10 T11/1646
Minneapolis, MN 55440
Allianz Life Insurance Pacific Growth Fund - class 1 92.7
1750 Hennepin Ave.
Minneapolis, MN 55403
Preferred Life Insurance Company of 7.3
New York
152 West 57th Street, 18th Floor
New York, NY 10019
Allianz Life Insurance Pacific Growth Fund - class 2 100.00
1750 Hennepin Ave.
Minneapolis, MN 55403
</TABLE>
As of March 31, 2000, Board members and officers, as a group, owned less than
1%, of record or beneficially, of the outstanding shares of Trust.
PRICING SHARES
- --------------------------------------------------------------------------------
When they buy and sell shares, the Trust's shareholders pay and receive the net
asset value (NAV) per share.
The value of a mutual fund is determined by deducting the fund's liabilities
from the total assets of the portfolio. The net asset value per share is
determined by dividing the net asset value of the fund by the number of shares
outstanding.
The funds calculates the NAV per share of each class each business day at the
close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific
time). The funds do not calculate the NAV on days the New York Stock Exchange
(NYSE) is closed for trading, which include New Year's Day, Martin Luther King
Jr. Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving Day and Christmas Day.
133
<PAGE>
FUNDS OTHER THAN MONEY FUND When determining its NAV, a fund values cash and
receivables at their realizable amounts, and records interest as accrued and
dividends on the ex-dividend date. If market quotations are readily available
for portfolio securities listed on a securities exchange or on the Nasdaq
National Market System, the fund values those securities at the last quoted sale
price of the day or, if there is no reported sale, within the range of the most
recent quoted bid and ask prices. The fund values over-the-counter portfolio
securities within the range of the most recent quoted bid and ask prices. If
portfolio securities trade both in the over-the-counter market and on a stock
exchange, the fund values them according to the broadest and most representative
market as determined by the manager.
A fund values portfolio securities underlying actively traded call options at
their market price as determined above. The current market value of any option
the fund holds is its last sale price on the relevant exchange before the fund
values its assets. If there are no sales that day or if the last sale price is
outside the bid and ask prices, the fund values options within the range of the
current closing bid and ask prices if the fund believes the valuation fairly
reflects the contract's market value.
A fund determines the value of a foreign security as of the close of trading on
the foreign exchange on which the security is traded or as of the close of
trading on the NYSE, if that is earlier. The value is then converted into its
U.S. dollar equivalent at the foreign exchange rate in effect at noon, New York
time, on the day the value of the foreign security is determined. If no sale is
reported at that time, the foreign security is valued within the range of the
most recent quoted bid and ask prices. Occasionally events that affect the
values of foreign securities and foreign exchange rates may occur between the
times at which they are determined and the close of the exchange and will,
therefore, not be reflected in the computation of the NAV. If events materially
affecting the values of these foreign securities occur during this period, the
securities will be valued in accordance with procedures established by the
board. Generally, trading in corporate bonds, U.S. government securities and
money market instruments is substantially completed each day at various times
before the close of the NYSE. The value of these securities used in computing
the NAV is determined as of such times. Occasionally, events affecting the
values of these securities may occur between the times at which they are
determined and the close of the NYSE that will not be reflected in the
computation of the NAV. If events materially affecting the values of these
securities occur during this period, the securities will be valued at their fair
value as determined in good faith by the board.
Other securities for which market quotations are readily available are valued at
the current market price, which may be obtained from a pricing service, based on
a variety of factors including recent trades, institutional size trading in
similar types of securities (considering yield, risk and maturity) and/or
developments related to
134
<PAGE>
specific issues. Securities and other assets for which market prices are not
readily available are valued at fair value as determined following procedures
approved by the board. With the approval of the board, the fund may use a
pricing service, bank or securities dealer to perform any of the above described
functions.
MONEY FUND The valuation of the fund's portfolio securities, including any
securities set aside on the fund's books for when-issued securities, is based on
the amortized cost of the securities, which does not take into account
unrealized capital gains or losses. This method involves valuing an instrument
at its cost and thereafter assuming a constant amortization to maturity of any
discount or premium, regardless of the impact of fluctuating interest rates on
the market value of the instrument. While this method provides certainty in
calculation, it may result in periods during which value, as determined by
amortized cost, is higher or lower than the price the fund would receive if it
sold the instrument. During periods of declining interest rates, the daily yield
on shares of the fund computed as described above may tend to be higher than a
like computation made by a fund with identical investments but using a method of
valuation based upon market prices and estimates of market prices for all of its
portfolio instruments. Thus, if the use of amortized cost by the fund resulted
in a lower aggregate portfolio value on a particular day, a prospective investor
in the fund would be able to obtain a somewhat higher yield than would result
from an investment in a fund using only market values, and existing investors in
the fund would receive less investment income. The opposite would be true in a
period of rising interest rates. The fund's use of amortized cost, which helps
the fund maintain a $1 share price, is permitted by a rule adopted by the U.S.
Securities and Exchange Commission (SEC).
The board has established procedures designed to stabilize, to the extent
reasonably possible, the fund's price per share at $1, as computed for the
purpose of sales and redemptions. These procedures include a review of the
fund's holdings by the board, at such intervals as it may deem appropriate, to
determine if the fund's net asset value calculated by using available market
quotations deviates from $1 per share based on amortized cost. The extent of any
deviation will be examined by the board. If a deviation exceeds 1/2 of 1%, the
board will promptly consider what action, if any, will be initiated. If the
board determines that a deviation exists that may result in material dilution or
other unfair results to investors or existing shareholders, it will take
corrective action that it regards as necessary and appropriate, which may
include selling portfolio instruments before maturity to realize capital gains
or losses or to shorten average portfolio maturity, withholding dividends,
redeeming shares in kind, or establishing a net asset value per share by using
available market quotations.
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<PAGE>
THE UNDERWRITER
- --------------------------------------------------------------------------------
Distributors acts as the principal underwriter in the continuous public offering
of the Trust's shares.
DISTRIBUTORS is located at 777 Mariners Island Blvd., San Mateo, CA 94404.
Distributors pays the expenses of the distribution of fund shares, except to the
extent these expenses are borne by the insurance companies. These expenses
include advertising expenses and the costs of printing sales material and
prospectuses used to offer shares to the public. The Trust pays the expenses of
preparing and printing amendments to its registration statements and
prospectuses (other than those necessitated by the activities of Distributors)
and of sending prospectuses to existing shareholders.
Distributors may be entitled to receive payment under the class 2 and class 3
rule 12b-1 plans, as discussed below. Except as noted below, Distributors
receives no other compensation from the Trust for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES Each fund's class 2 has a separate
distribution or "rule 12b-1" plan. Under each fund's plan, except for S&P 500
Index Fund and Strategic Income Fund, the fund may pay up to a maximum of 0.35%
per year of the average daily net assets attributable to its class 2 shares. The
board, however, has set the current rate at 0.25% per year, effective July 1,
1999. From January 6, 1999 to June 30, 1999, the fees were set at 0.30% per
year. The maximum rate for class 2 and class 3 of S&P 500 Index Fund and class 2
of Strategic Income Fund has been set at 0.25% per year under the plans.
The plans are expected to, among other things, increase advertising of the
funds, encourage sales of the funds and service to its shareholders, and
increase or maintain assets of the fund so that certain fixed expenses may be
spread over a broader asset base, resulting in lower per share expense ratios.
In addition, a positive cash flow into the funds is useful in managing the funds
because the managers have more flexibility in taking advantage of new investment
opportunities and handling shareholder redemptions.
Under each plan, the funds pay Distributors, the insurance companies or others
to assist in the promotion and distribution of class 2 and class 3 shares or
variable contracts offering class 2 shares and class 3 shares. Payments made
under the plans may be used for, among other things, the printing of
prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution-related
expenses, including a prorated portion of Distributors' or the insurance
companies' overhead expenses attributable to the distribution of these variable
contracts or shares of the funds. Payments made under the plans may also be used
to pay insurance companies, dealers, and with respect to Class 3 Shares, 401(k)
plan record keeping and servicing agents, or others for, among other things,
furnishing personal services and maintaining customer accounts and records, or
as service fees as
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defined under NASD rules. Together, these expenses, including the service fees,
are "eligible expenses." The distribution and service (12b-1) fees charged to
each class are based only on the fees attributable to that particular class.
Agreements for the payment of fees to the insurance Companies or others shall be
in a form which has been approved from time to time by the Board, including the
non-interested Board members. In addition, payments made under the Plan may be
used to pay record-keeping and sub-shareholder servicing expenses incurred by
administrators or related persons of 401(k) plans.
For the fiscal year ended December 31, 1999, the amounts paid by each fund
pursuant to the plans, which were used by Distributors to pay insurance
companies or their affiliates, and in the case of class 3 of S&P 500 Index Fund,
to the administrators or related persons of 401(k) plans, for providing
administrative or other services were as follows:
FUND AMOUNTS PAID ($)
- --------------------------------------------------------------------------
Global Communications Fund 386
Global Health Care Fund 51
Growth and Income Fund 982
High Income Fund 247
Income Securities Fund 716
Large Cap Fund 692
Money Fund 4,643
Natural Resources Fund 82
Real Estate Fund 202
Rising Dividends Fund 528
Small Cap Fund 413
Strategic Income Fund 0(1)
S&P 500 Index Fund - Class 2 36(1)
S&P 500 Index Fund - Class 3 513(1)
Government Fund 2,356
Value Fund 219
Zero Coupon Fund - 2000 0
Zero Coupon Fund - 2005 0
Zero Coupon Fund - 2010 0
Mutual Discovery Fund 478
Mutual Shares Fund 3,794
Asset Strategy Fund 40,932(1)
Developing Markets Fund 76,418(1)
Global Income Fund 328
Growth Securities Fund 4,155
International Securities Fund 163,550(1)
International Smaller Companies Fund 1,086
Pacific Growth Fund 217
1. Included in the financials in the TVP Annual Report to Shareholders for
fiscal year ended December 31, 1999.
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Distributors must provide written reports to the board at least quarterly on the
amounts and purpose of any payment made under the plans and any related
agreements, and furnish the board with such other information as the board may
reasonably request to enable it to make an informed determination of whether the
plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The terms
and provisions of each plan also are consistent with Rule 12b-1.
PERFORMANCE
- --------------------------------------------------------------------------------
Performance quotations are subject to SEC rules. These rules require the use of
standardized performance quotations or, alternatively, that every
non-standardized performance quotation furnished by a fund be accompanied by
certain standardized performance information computed as required by the SEC.
Average annual total return and current yield quotations used by a Fund are
based on the standardized methods of computing performance mandated by the SEC.
Performance figures reflect Rule 12b-1 fees from the date of the plan's
implementation. An explanation of these and other methods used by the fund to
compute or express performance follows.
For share classes offered only to insurance company separate accounts for use in
variable annuity and variable life insurance contracts, to the extent required
by SEC rules, the advertised performance of such share classes will be displayed
no more prominently than standardized performance of the applicable insurance
company separate accounts/contracts. For information about how an insurance
company may advertise such performance, please consult the contract prospectus
which accompanies the Trust prospectus.
Regardless of the method used, past performance does not guarantee future
results, and is an indication of the return to shareholders only for the limited
historical period used.
For class 2 shares which were started at a later date than class 1 shares,
standardized performance reflects a "blended" figure, combining: (a) for periods
prior to class 2's inception historical results of class 1 shares, and (b) for
periods after the class 2's inception, class 2's results reflecting an
additional 12b-1 fee expense which also affects all future performance.
Historical performance data for class 2 shares, based on class 1 performance,
will generally not be restated to include 12b-1 fees, although each Fund may
restate these figures consistent with SEC rules.
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AVERAGE ANNUAL TOTAL RETURN is determined by finding the average annual rates of
return over the periods indicated below that would equate an initial
hypothetical $1,000 investment to its ending redeemable value. The calculation
assumes income dividends and capital gain distributions are reinvested at net
asset value. The quotation assumes the account was completely redeemed at the
end of each period and the deduction of all applicable fund charges and fees. It
does NOT however, include any fees or sales charges imposed by the variable
insurance contract for which the funds' class 1 and class 2 shares are
investment options or plan administration expenses imposed on retirement plans
for which the S&P 500 Index Fund's Class 3 shares are an investment option. If
they were included, performance would be lower. The average annual total returns
for each fund for the periods ended December 31, 1999, are reflected in the
Trust's Annual Report to Shareholders for the fiscal year ended December 31,
1999, which is incorporated herein by reference.
The following SEC formula was used to calculate the figures:
P(1+T)n = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of each period at the end of each period
CUMULATIVE TOTAL RETURN Like average annual total return, the calculation for
cumulative total return assumes income dividends and capital gain distributions
are reinvested at net asset value. It does NOT however, include any fees or
sales charges imposed by the variable insurance contract for which the funds'
class 1 and class 2 shares are investment options or plan administration
expenses imposed on retirement plans for which the S&P 500 Index Fund's Class 3
shares are an investment option. If they were included, performance would be
lower. Cumulative total return, however, is based on the actual return for a
specified period rather than on the average return over the periods indicated in
the annual report. The cumulative total returns for the indicated periods ended
December 31, 1999, were:
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<TABLE>
<CAPTION>
TEN YEAR
ONE FIVE OR FROM
YEAR YEAR INCEPTION
(%) (%) (%)
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Global Communications Fund - Class 1 39.42 176.36 272.49
Global Communications Fund - Class 39.00 175.55 271.39
Global Health Care Fund - Class 1 -8.10 -- -1.571
Global Health Care Fund - Class 2 -8.38 -- -1.871
Growth and Income Fund - Class 1 1.10 112.23 195.59
Growth and Income Fund - Class 2 0.84 111.68 194.82
High Income Fund - Class 1 -0.07 53.46 139.77
High Income Fund - Class 2 -0.37 53.00 139.04
Income Securities Fund - Class 1 -1.82 59.16 159.41
Income Securities Fund Class 2 -2.07 58.75 158.74
Large Cap Fund - Class 1 31.65 -- 112.842
Franklin Large Cap Growth Fund - Class 2 31.21 -- 112.132
Money Fund - Class 1 4.76 29.04 60.70
Money Fund - Class 2 4.47 28.69 60.26
Natural Resources Fund - Class 1 32.25 -14.89 3.81
Natural Resources Fund - Class 2 32.01 -15.05 3.62
Real Estate Fund - Class 1 -6.14 47.10 137.25
Real Estate Fund - Class 2 -6.36 46.76 136.70
Franklin Rising Dividend Securities Fund - Class 1 -9.70 106.93 110.363
Franklin Rising Dividend Securities Fund - Class 2 -10.00 106.24 109.663
Small Cap Fund - Class 1 96.94 -- 202.364
Small Cap Fund - Class 2 96.36 -- 201.474
Government Fund - Class 1 -0.94 44.00 105.06
Government Fund - Class 2 -1.10 43.76 104.72
Value Fund - Class 1 1.65 -- -20.811
Value Fund - Class 2 1.39 -- -21.011
Zero Coupon Fund - 2000 - Class 1 3.07 46.68 120.51
Zero Coupon Fund - 2005 - Class 1 -5.88 54.63 134.07
Zero Coupon Fund - 2010 - Class 1 -12.24 62.70 142.11
Mutual Discovery Fund - Class 1 23.76 -- 43.165
Mutual Discovery Fund - Class 2 23.49 -- 42.855
Mutual Shares Fund - Class 1 13.40 -- 38.315
Mutual Shares Fund - Class 2 13.58 -- 38.535
Asset Strategy Fund - Class 1 22.86 119.99 241.91
Asset Strategy Fund - Class 2 22.54 118.49 239.57
Developing Markets Fund - Class 1 53.84 -- -18.826
Developing Markets Fund - Class 2 53.27 -- -19.346
Growth Securities Fund - Class 1 21.04 104.68 111.127
Growth Securities Fund - Class 2 20.84 104.34 110.777
Global Income Fund Class 1 -5.79 29.99 77.10
Global Income Fund Class 2 -6.09 29.56 76.52
International Securities Fund - Class 1 23.61 121.18 199.099
International Securities Fund - Class 2 23.23 119.55 196.889
International Smaller Companies Fund - Class 1 23.90 -- 20.442
International Smaller Companies Fund - Class 2 23.90 -- 20.442
Pacific Growth Fund - Class 1 37.02 -8.55 21.873
Pacific Growth Fund - Class 2 36.89 -8.63 21.753
1. Inception date 05-01-98.
2. Inception date 05-01-96.
3. Inception date 01-27-92.
4. Inception date 11-01-95.
5. Inception date 11-08-96.
6. Inception date 03-04-96.
7. Inception date 03-15-94.
8. Inception date 05-01-92.
</TABLE>
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YIELD, MONEY FUND
CURRENT YIELD Current yield shows the income per share earned by the Fund. It is
calculated by determining the net change, excluding capital changes, in the
value of a hypothetical pre-existing account having a balance of one share at
the beginning of the period, subtracting a hypothetical charge reflecting
deductions from shareholder accounts, and dividing the difference by the value
of the account at the beginning of the base period to obtain the base period
return. The result is then annualized by multiplying the base period return by
(365/7). It does NOT include any fees or sales charges imposed by the variable
insurance contract for which the fund is an investment option. The fund's
current yield for the seven day period ended December 31, 1999, was 5.15% for
class 1 and 4.90% for class 2.
EFFECTIVE YIELD. The fund's effective yield is calculated in the same manner as
its current yield, except the annualization of the return for the seven day
period reflects the results of compounding. The fund's effective yield for the
seven day period ended December 31, 1999, was 5.29% for class 1 and 5.02% for
class 2.
This figure was obtained using the following SEC formula:
Effective Yield = [(Base Period Return + 1)365/7] - 1
YIELD, OTHER THAN MONEY FUND From time to time, the current yields of the funds
may be published in advertisements and communications to Contract Owners. The
current yield for each fund will be calculated by dividing the annualization of
the income earned by the fund during a recent 30-day period by the net asset
value per share at the end of such period. In addition, aggregate, cumulative
and average total return information for each fund over different periods of
time may also be advertised. Except as stated above, each fund will use the same
methods for calculating its performance.
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<PAGE>
A distribution rate for each fund may also be published in communications
preceded or accompanied by a copy of the Trust's current prospectus. The fund's
current distribution rate will be calculated by dividing the annualization of
the total distributions made by that fund during the most recent preceding
fiscal quarter by the net asset value per share at the end of such period. The
current distribution rate may differ from current yield because the distribution
rate will be for a different period of time and may contain items of capital
gain and other items of income, while current yield reflects only earned income.
Uniformly computed yield and total return figures for each fund will also be
published along with publication of its distribution rate.
Hypothetical performance information may also be prepared for sales literature
or advertisements. See the appropriate insurance company separate account
prospectus and SAI.
VOLATILITY Occasionally statistics may be used to show the fund's volatility or
risk. Measures of volatility or risk are generally used to compare the fund's
net asset value or performance to a market index. One measure of volatility is
beta. Beta is the volatility of a fund relative to the total market, as
represented by an index considered representative of the types of securities in
which the fund invests. A beta of more than 1.00 indicates volatility greater
than the market and a beta of less than 1.00 indicates volatility less than the
market. Another measure of volatility or risk is standard deviation. Standard
deviation is used to measure variability of net asset value or total return
around an average over a specified period of time. The idea is that greater
volatility means greater risk undertaken in achieving performance.
COMPARISONS To help you better evaluate how an investment in a fund may satisfy
your investment goal, advertisements and other materials about the fund may
discuss certain measures of fund performance as reported by various financial
publications. Materials may also compare performance (as calculated above) to
performance as reported by other investments, indices, and averages. These
comparisons may include, but are not limited to, the following examples:
/bullet/ Consumer Price Index (or Cost of Living Index), published by the U.S.
Bureau of Labor Statistics - a statistical measure of change, over
time, in the price of goods and services in major expenditure groups.
/bullet/ CDA Mutual Fund Report, published by CDA Investment Technologies, Inc.
- analyzes price, current yield, risk, total return, and average
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rate of return (average annual compounded growth rate) over specified
time periods for the mutual fund industry.
/bullet/ CREDIT SUISSE FIRST BOSTON GLOBAL HIGH YIELD (CSFB HY) INDEX - The
index is an unmanaged, trader-priced portfolio constructed to mirror
the high yield debt market. The index has several modules representing
different sectors of the high yield market including a cash paying
module, a zerofix module, a pay-in-kind module, and a defaulted module.
The modular nature of the index allows customization of data to meet
client needs. The index is divided into other categories including
industry, rating, seniority, liquidity, market value, security price
range, yield range and other sector divisions. The CSFB HY Index
follows a total of 250 sectors. CS First Boston has maintained the
index since January 1986. While the index is priced and run weekly,
monthly returns are typically used for performance attribution.
/bullet/ Dow Jones(R) Composite Average and its component averages - a
price-weighted average of 65 stocks that trade on the New York Stock
Exchange. The average is a combination of the Dow Jones Industrial
Average (30 blue-chip stocks that are generally leaders in their
industry), the Dow Jones Transportation Average (20 transportation
stocks), and the Dow Jones Utilities Average (15 utility stocks
involved in the production of electrical energy).
/bullet/ FINANCIAL TIMES/ S&P ACTUARIES WORLD (ENERGY 50%/BASIC INDUSTRIES 50%)
COMPOSITE INDEX - Franklin Templeton customizes this index using 50% of
the Financial Times/S&P Actuaries World Energy Index and 50% of the
Financial Times/S&P Actuaries World Basic Industries Index. Both
indices are compiled by the Financial Times, Goldman Sachs & Co. and
Wood Mackenzie & Co., Ltd. in conjunction with the Institute of
Actuaries and the Faculty of Actuaries. The index includes electric
utilities, waterworks supply and telephone utilities. The indices are
weighted arithmetic averages of the market prices of the elements that
make them up. They also adjust for the intervening price changes of
these elements.
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/bullet/ FINANCIAL TIMES/ S&P ACTUARIES WORLD UTILITIES INDEX - This index is
compiled by the Financial Times, Goldman Sachs & Co. and Wood Mackenzie
& Co., Ltd. in conjunction with the Institute of Actuaries and the
Faculty of Actuaries. The utilities sector includes electric utilities,
waterworks supply, natural gas utilities and telephone companies. The
indices are weighted arithmetic averages of the market prices of the
elements that make them up. They also adjust for the intervening price
changes of these elements. This is a total return index in $U.S.
/bullet/ INTERNATIONAL FINANCE CORPORATION'S (IFC) INVESTABLE COMPOSITE INDEX -
The index tracks the emerging stock markets of three world regions
based on market capitalization weighting. Those regions are Latin
America, Asia and Europe/Mideast/Africa. As of November 199, the
regional weights of the IFC Composite Index were distributed
accordingly: Asia, 43.5%; Latin America, 24.9%; and
Europe/Mideast/Africa, 31.6%.
/bullet/ JP MORGAN GLOBAL GOVERNMENT BOND INDEX (UNHEDGED) - The index comprises
13 markets, including Australia, Belgium, Canada, Denmark, France,
Germany, Italy, Japan, Netherlands, Spain, Sweden, the U.K. and the
U.S. Each country's weight is determined by the total market
capitalization in $U.S. of all the bonds in that country's traded
index. The J.P. Morgan Global Government Bond Total Return Index
includes only actively traded, fixed-rate bonds with a remaining
maturity of one year or longer. The index is unhedged and expressed in
terms of $U.S.
/bullet/ LEHMAN BROTHERS GOVERNMENT/CORPORATE BOND INDEX - The index includes
securities in the Lehman Brothers Government and Corporate indices.
These securities must have at least $100 million par amount outstanding
and must be rated investment grade (Baa3 or better) by Moody's
Investors Service. If a Moody's rating is not available, the Standard &
Poor's or Fitch rating is used. These must be fixed-rate securities,
although they can carry a coupon that steps up or changes according to
a predetermined schedule, and they must be dollar-denominated and
non-convertible.
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/bullet/ LEHMAN BROTHERS INTERMEDIATE GOVERNMENT BOND INDEX - This index
includes securities issued by the U.S. government or its agencies with
maturities from one up to, but not including, 10 years. These
securities must have at least $100 million par amount outstanding and
must be rated investment grade (Baa3 or better) by Moody's Investors
Service. If a Moody's rating is not available, the Standard & Poor's or
Fitch rating is used. These must be fixed-rate securities, although
they can carry a coupon that steps up or changes according to a
predetermined schedule, and they must be dollar-denominated and
non-convertible.
/bullet/ Lipper - Mutual Fund Performance Analysis and Lipper - Equity Fund
Performance Analysis - measure total return and average current yield
for the mutual fund industry and rank individual mutual fund
performance over specified time periods, assuming reinvestment of all
distributions, exclusive of any applicable sales charges.
/bullet/ LIPPER GROWTH & INCOME FUNDS OBJECTIVE AVERAGE - This is an equally
weighted average calculation of performance figures for all funds
within the Lipper Growth and Income Funds Objective Category, which is
defined as all mutual funds that combine a growth of earnings
orientation and an income requirement for level and/or rising
dividends. As of September 23, there were 30 funds in this category.
/bullet/ LIPPER INCOME FUNDS OBJECTIVE AVERAGE - This is an equally weighted
average calculation of performance figures for all funds within the
Lipper Income Funds Objective Category, which is defined as all mutual
funds that normally seek a high level of current income through
investing in income-producing stocks, bonds and money market
instruments. As of September 23, 1998, there were 10 funds in this
category.
/bullet/ MERRILL LYNCH TREASURY ZERO COUPON 1-, 5-, 10-, 20-YEAR BOND TOTAL
RETURN INDICES - The indices include zero coupon bonds that pay no
interest and are issued at a discount from redemption price.
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/bullet/ MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) ALL COUNTRY WORLD FREE
INDEX - The index represents both developed and emerging markets around
the world. "Free" in the title reflects the actual buying opportunities
for global investors by taking into account local market restrictions
on share ownership by foreigners. The MSCI indices define the local
market for each country by constructing a matrix of all listed
securities, sorting the matrix by industry, and seeking to capture 60%
of the market capitalization for each group by selecting the most
investable stocks in each industry. The index applies full market
capitalization weights to each included stock.
/bullet/ MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) ALL COUNTRY - WORLD EX-U.S.
FREE INDEX - The index comprises 48 countries around the world, both
developed and emerging markets, except the U.S. "Free" in the title
reflects the actual buying opportunities for global investors by taking
into account local market restrictions on share ownership by
foreigners. The MSCI indices define the local market for each country
by constructing a matrix of all listed securities, sorting the matrix
by industry, and seeking to capture 60% of the market capitalization
for each group by selecting the most investable stocks in each
industry. The index applies full market capitalization weights to each
included stock.
/bullet/ MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EUROPE AUSTRALASIA, FAR
EAST (EAFE) INDEX - This index represents 20 developed market countries
for Europe Australasia and the Far East: Australia, Austria, Belgium,
Denmark, Finland, France, Germany, Hong Kong, Ireland, Italy, Japan,
the Netherlands, New Zealand, Norway, Portugal, Singapore, Spain,
Sweden, Switzerland and the U.K. The MSCI indices define the local
market for each country by constructing a matrix of all listed
securities, sorting the matrix by industry, and seeking to capture 60%
of the market cap for each group by selecting the most investable
stocks in each industry. The index applies full market cap weights to
each included stock.
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/bullet/ MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) EMERGING MARKETS FREE INDEX
- This is a market capitalization-weighted equity index comprising 26
of the 48 countries in the MSCI universe. "Free" denotes investment
opportunities in the developing world available to foreign investors.
EMF performance data is calculated in $US and local currency. The MSCI
indices define the local market for each country by constructing a
matrix of all listed securities, sorting the matrix by industry, and
seeking to capture 60% of the market cap for each group by selecting
the most investable stocks in each industry. The index applies full
market cap weights to each included stock.
/bullet/ MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) PACIFIC INDEX - The index
comprises five developed market countries or regions in the Pacific:
Australia, Hong Kong, Japan, New Zealand and Singapore. The MSCI
indices define the local market for each country by constructing a
matrix of all listed securities, sorting the matrix by industry, and
seeking to capture 60% of the market capitalization for each group by
selecting the most investable stocks in each industry. The index
applies full market capitalization weights to each included stock.
/bullet/ MORGAN STANLEY CAPITAL INTERNATIONAL (MSCI) WORLD INDEX - The index
comprises the developed markets of 22 countries around the world. The
MSCI indices define the local market for each country by constructing a
matrix of all listed securities, sorting the matrix by industry, and
seeking to capture 60% of the market cap for each group by selecting
the most investable stocks in each industry. The index applies full
market cap weights to each included stock.
/bullet/ New York Stock Exchange composite or component indices - an unmanaged
index of all industrial, utilities, transportation, and finance stocks
listed on the NYSE.
/bullet/ RUSSELL MIDCAP VALUE INDEX - This index measures the performance of
those Russell Midcap companies with lower price-to-book ratios and
lower forecasted growth values. The stocks are also members of the
Russell 1000 Value Index.
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/bullet/ RUSSELL 1000 INDEX - Published by Frank Russell Company, the index
measures the performance of the 1,000 largest companies in the Russell
3000 Index, representing 92% of the market capitalization of the
Russell 3000. The Russell 3000 contains the 3,000 largest companies
incorporated in the U.S. and its territories. As of the latest
reconstitution, the average market capitalization of the companies in
the Russell 1000 was approximately $12.1 billion; the median market
capitalization was approximately $3.8 billion. The smallest company in
the index had an approximate market capitalization of $1,350.8 million.
/bullet/ RUSSELL 2000 INDEX - The index measures the performance of the 2,000
smallest companies in the Russell 3000 Index, representing
approximately 8% of the total market capitalization of the companies in
the Russell 3000. The Russell 3000 contains the 3,000 largest companies
incorporated in the U.S. and its territories. As of the latest
reconstitution, the average market capitalization of the Russell 2000
was approximately $526.4 million; the median market capitalization was
approximately $428.0 million. The largest company in the index had an
approximate market capitalization of $1,349.8 million.
/bullet/ RUSSELL 2000 GROWTH INDEX - The index measures the performance of those
Russell 2000 companies with higher price-to-book ratios and higher
forecasted growth values.
/bullet/ RUSSELL 2000 VALUE INDEX - The index measures the performance of those
Russell 2000 companies with lower price-to-book ratios and lower
forecasted growth values.
/bullet/ RUSSELL 2500 INDEX - Published by Frank Russell Company, the index
measures the performance of the 2,500 smallest companies in the Russell
3000 Index, representing approximately 23% of the total market
capitalization of the companies in the Russell 3000. The Russell 3000
contains the 3,000 largest companies incorporated in the U.S. and its
territories. As of the latest reconstitution, the average market
capitalization of the Russell 2500 was approximately $876.2 million;
the median market capitalization was approximately $553.5 million. The
largest company in the index had an approximate market capitalization
of $3.8 billion.
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/bullet/ RUSSELL 3000 VALUE INDEX - The index measures the performance of those
Russell 3000 Index companies with lower price-to-book ratios and lower
forecasted growth values. The stocks in this index are also members of
either the Russell 1000 Value or the Russell 2000 Value Indices.
/bullet/ SALOMON SMITH BARNEY GLOBAL EX-U.S. Less Than $1 Billion Index - This
is a total-capitalization weighted index that includes all developed
and emerging countries, except the U.S., and includes companies with a
total market capitalization below U.S. $1 billion.
/bullet/ SALOMON SMITH BARNEY WORLD EX-U.S. EXTENDED MARKET INDEX (EMI) - This
is a comprehensive float-weighted equity index consisting of every
company with an investable market capitalization of over $100 million
in 22 countries, except the U.S. The broad market index (BMI) is
segregated into the primary market index (PMI) and extended market
index (EMI), consisting of large and small capitalization issues,
respectively.
/bullet/ STANDARD & POOR'S(R) 500 INDEX (S&P 500) - The S&P 500 consists of 500
widely held domestic common stocks, consisting of four broad sectors:
industrials, utilities, financials and transportation. It is a market
value-weighted index, where the stock price is multiplied by the number
of shares outstanding, with each stock affecting the index in
proportion to its market value. This index, calculated by Standard &
Poor's, is a total return index with dividends reinvested.
/bullet/ STANDARD & POOR'S HEALTH CARE COMPOSITE INDEX - This is a
capitalization-weighted index of all of the stocks in the Standard &
Poor's 500 that are involved in the business of health care related
products or services. The index was developed with a base level of 100
as of January 14, 1987.
/bullet/ Wilshire 5000 Equity Index - represents the return on the market value
of all common equity securities for which daily pricing is available.
Comparisons of performance assume reinvestment of dividends.
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/bullet/ WILSHIRE MID CAP COMPANY GROWTH INDEX - This index overlaps the top 750
and the next 1,750 of Wilshire Asset Management's Wilshire 2500
universe (the top 2,500 companies and 99% of the market capitalization
of the Wilshire 5000). Wilshire includes companies that have market
capitalizations ranging from $645 million to $4.3 billion.
/bullet/ WILSHIRE REAL ESTATE SECURITIES INDEX - This is a market
capitalization-weighted index of publicly traded real estate
securities, such as real estate investment trusts (REITs), Real Estate
Operating Companies (REOCs) and partnerships. The index is composed of
companies whose charter is the equity ownership and operation of
commercial real estate. The index rebalances monthly and returns are
calculated on a buy-and-hold basis.
/bullet/ WILSHIRE SMALL COMPANY VALUE INDEX - The index is created by screening
the bottom 1,750 large companies of Wilshire Asset Management's
Wilshire 2500 universe (the top companies and 99% of the market
capitalization of the Wilshire 5000). These companies have market
capitalizations ranging from $190 million to $1.9 billion. Wilshire
excludes companies with high price/earnings ratios, low yields, or high
price/book ratios.
From time to time, the funds and the managers also may refer to the following
information:
/bullet/ The managers' and affiliates' market share of international equities
managed in mutual funds prepared or published by Strategic Insight or a
similar statistical organization.
/bullet/ The performance of U.S. equity and debt markets relative to foreign
markets prepared or published by Morgan Stanley Capital International
or a similar financial organization.
/bullet/ The capitalization of U.S. and foreign stock markets as prepared or
published by the International Finance Corporation, Morgan Stanley
Capital International or a similar financial organization.
/bullet/ The geographic and industry distribution of the fund's portfolio and
the fund's top ten holdings.
/bullet/ The gross national product and populations, including age
characteristics, literacy rates, foreign investment improvements due to
a liberalization of securities laws and a reduction of foreign exchange
controls, and improving
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communication technology, of various countries as published by various
statistical organizations.
/bullet/ To assist investors in understanding the different returns and risk
characteristics of various investments, the fund may show historical
returns of various investments and published indices (e.g., Ibbotson
Associates, Inc. Charts and Morgan Stanley Capital International
EAFE(R)Index).
/bullet/ The major industries located in various jurisdictions as published by
the Morgan Stanley Index.
/bullet/ Rankings by DALBAR Surveys, Inc. with respect to mutual fund
shareholder services.
/bullet/ Allegorical stories illustrating the importance of persistent long-term
investing.
/bullet/ The fund's portfolio turnover rate and its ranking relative to industry
standards as published by Lipper(R)Inc. or Morningstar, Inc.
/bullet/ A description of the Templeton organization's investment management
philosophy and approach, including its worldwide search for undervalued
or "bargain" securities and its diversification by industry, nation and
type of stocks or other securities.
/bullet/ Comparison of the characteristics of various emerging markets,
including population, financial and economic conditions.
/bullet/ Quotations from the Templeton organization's founder, Sir John
Templeton,* advocating the virtues of diversification and long-term
investing.
From time to time, advertisements or information for the fund may include a
discussion of certain attributes or benefits to be derived from an investment in
the fund. The advertisements or information may include symbols, headlines, or
other material that highlights or summarizes the information discussed in more
detail in the communication.
- ----------------------
* Sir John Templeton sold the Templeton organization to Franklin
Resources, Inc. in October 1992 and resigned from the board on April
16, 1995. He is no longer involved with the investment management
process.
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<PAGE>
Advertisements or information also may compare the fund's performance to the
return on certificates of deposit (CDs) or other investments. You should be
aware, however, that an investment in the fund involves the risk of fluctuation
of principal value, a risk generally not present in an investment in a CD issued
by a bank. CDs are frequently insured by an agency of the U.S. government. An
investment in the fund is not insured by any federal, state or private entity.
In assessing comparisons of performance, you should keep in mind that the
composition of the investments in the reported indices and averages is not
identical to the fund's portfolio, the indices and averages are generally
unmanaged, and the items included in the calculations of the averages may not be
identical to the formula used by the fund to calculate its figures. In addition,
there can be no assurance that the fund will continue its performance as
compared to these other averages.
MISCELLANEOUS INFORMATION
- --------------------------------------------------------------------------------
The funds are members of the Franklin Templeton Group of Funds, one of the
largest mutual fund organizations in the U.S., and may be considered in a
program for diversification of assets. Founded in 1947, Franklin is one of the
oldest mutual fund organizations and now services approximately 3 million
shareholder accounts. In 1992, Franklin, a leader in managing fixed-income
mutual funds and an innovator in creating domestic equity funds, joined forces
with Templeton, a pioneer in international investing. The Mutual Series team,
known for its value-driven approach to domestic equity investing, became part of
the organization four years later. Together, the Franklin Templeton Group has
over $233 billion in assets under management for more than 5 million U.S. based
mutual fund shareholder and other accounts. The Franklin Templeton Group of
Funds offers 103 U.S. based open-end investment companies to the public. The
fund may identify itself by its Nasdaq symbol or CUSIP number.
FUND SIMILARITY The investment objectives and policies of certain funds are
similar but not identical to those of certain public Franklin Templeton Funds
indicated in the following table. Because of differences in portfolio size, the
investments held, the timing of purchases of similar investments, cash flows,
minor differences in certain investment policies, insurance product related tax
diversification requirements, state insurance regulations, and additional
administrative and insurance costs associated with insurance company separate
accounts, the investment performance of the funds will differ from the
performance of the corresponding Franklin Templeton Funds:
152
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FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
<TABLE>
<CAPTION>
FRANKLIN TEMPLETON FUNDS
- ------------------------------------------------------------ ---------------------------------------------------------
<S> <C>
FRANKLIN CUSTODIAN FUNDS:
Income Securities Fund Income Series
Government Fund U.S. Government Securities Series
FRANKLIN HIGH INCOME TRUST:
High Income Fund AGE High Income Fund
FRANKLIN INVESTORS SECURITIES TRUST:
Franklin Growth and Income Fund Franklin Equity Income Fund
Franklin Managed Trust:
Rising Dividends Fund Franklin Rising Dividends Fund
Money Fund Franklin Money Fund
FRANKLIN MUTUAL SERIES FUND INC.:
Mutual Discovery Fund Mutual Discovery Fund
Mutual Shares Fund Mutual Shares Fund
FRANKLIN REAL ESTATE SECURITIES TRUST:
Real Estate Fund Franklin Real Estate Securities Fund
FRANKLIN STRATEGIC SERIES:
Aggressive Growth Fund Franklin Aggressive Growth Fund
Global Communications Fund Franklin Global Communications Fund
Global Health Care Fund Franklin Global Health Care Fund
Large Cap Fund Franklin Large Cap Growth Fund
Natural Resources Fund Franklin Natural Resources Fund
Small Cap Fund Franklin Small Cap Growth Fund
Strategic Income Fund Franklin Strategic Income Fund
Technology Fund Franklin Technology Fund
FRANKLIN VALUE INVESTMENT TRUST:
Value Fund Franklin Value Fund
FRANKLIN TEMPLETON INTERNATIONAL TRUST:
Pacific Growth Fund Templeton Pacific Growth Fund
International Smaller Companies Fund Templeton Foreign Smaller Companies Fund
Developing Markets Fund TEMPLETON DEVELOPING MARKETS TRUST
</TABLE>
DESCRIPTION OF BOND RATINGS
- --------------------------------------------------------------------------------
CORPORATE BOND RATINGS
MOODY'S INVESTORS SERVICE, INC. (MOODY'S)
INVESTMENT GRADE
Aaa: Bonds rated Aaa are judged to be of the best quality. They carry the
smallest degree of investment risk and are generally referred to as
"gilt-edged." Interest payments are protected by a large or exceptionally stable
margin, and principal is secure. While the various protective elements are
likely to change, such changes as can be visualized are most unlikely to impair
the fundamentally strong position of such issues.
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<PAGE>
Aa: Bonds rated Aa are judged to be high quality by all standards. Together with
the Aaa group, they comprise what are generally known as high-grade bonds. They
are rated lower than the best bonds because margins of protection may not be as
large, fluctuation of protective elements may be of greater amplitude, or there
may be other elements present that make the long-term risks appear somewhat
larger.
A: Bonds rated A possess many favorable investment attributes and are considered
upper medium-grade obligations. Factors giving security to principal and
interest are considered adequate, but elements may be present that suggest a
susceptibility to impairment sometime in the future.
Baa: Bonds rated Baa are considered medium-grade obligations. They are neither
highly protected nor poorly secured. Interest payments and principal security
appear adequate for the present but certain protective elements may be lacking
or may be characteristically unreliable over any great length of time. These
bonds lack outstanding investment characteristics and, in fact, have speculative
characteristics as well.
BELOW INVESTMENT GRADE
Ba: Bonds rated Ba are judged to have predominantly speculative elements and
their future cannot be considered well assured. Often the protection of interest
and principal payments is very moderate and, thereby, not well safeguarded
during both good and bad times over the future. Uncertainty of position
characterizes bonds in this class.
B: Bonds rated B generally lack characteristics of the desirable investment.
Assurance of interest and principal payments or of maintenance of other terms of
the contract over any long period of time may be small.
Caa: Bonds rated Caa are of poor standing. These issues may be in default or
there may be present elements of danger with respect to principal or interest.
Ca: Bonds rated Ca represent obligations that are speculative to a high degree.
These issues are often in default or have other marked shortcomings.
C: Bonds rated C are the lowest rated class of bonds and can be regarded as
having extremely poor prospects of ever attaining any real investment standing.
154
<PAGE>
Note: Moody's applies numerical modifiers 1, 2 and 3 in each generic rating
classification from Aa through B in its corporate bond ratings. The modifier 1
indicates that the security ranks in the higher end of its generic rating
category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates
that the issue ranks in the lower end of its generic rating category.
STANDARD & POOR'S RATINGS GROUP (S&P(R))
INVESTMENT GRADE
AAA: This is the highest rating assigned by S&P to a debt obligation and
indicates an extremely strong capacity to pay principal and interest.
AA: Bonds rated AA also qualify as high-quality debt obligations. Capacity to
pay principal and interest is very strong and, in the majority of instances,
differ from AAA issues only in a small degree.
A: Bonds rated A have a strong capacity to pay principal and interest, although
they are somewhat more susceptible to the adverse effects of changes in
circumstances and economic conditions.
BBB: Bonds rated BBB are regarded as having an adequate capacity to pay
principal and interest. Whereas they normally exhibit protection parameters,
adverse economic conditions or changing circumstances are more likely to lead to
a weakened capacity to pay principal and interest for bonds in this category
than for bonds in the A category.
BELOW INVESTMENT GRADE
BB, B, CCC, CC: Bonds rated BB, B, CCC and CC are regarded, on balance, as
predominantly speculative with respect to the issuer's capacity to pay interest
and repay principal in accordance with the terms of the obligations. BB
indicates the lowest degree of speculation and CC the highest degree of
speculation. While these bonds will likely have some quality and protective
characteristics, they are outweighed by large uncertainties or major risk
exposures to adverse conditions.
C: Bonds rated C are typically subordinated debt to senior debt that is assigned
an actual or implied CCC- rating. The C rating also may reflect the filing of a
bankruptcy petition under circumstances where debt service payments are
continuing. The C1 rating is reserved for income bonds on which no interest is
being paid.
D: Debt rated D is in default and payment of interest and/or repayment of
principal is in arrears.
155
<PAGE>
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the
addition of a plus or minus sign to show relative standing within the major
rating categories.
SHORT-TERM DEBT & COMMERCIAL PAPER RATINGS
MOODY'S
Moody's short-term debt ratings are opinions of the ability of issuers to repay
punctually senior debt obligations. These obligations have an original maturity
not exceeding one year, unless explicitly noted. Moody's commercial paper
ratings are opinions of the ability of issuers to repay punctually their
promissory obligations not having an original maturity in excess of nine months.
Moody's employs the following designations for both short-term debt and
commercial paper, all judged to be investment grade, to indicate the relative
repayment capacity of rated issuers:
P-1 (Prime-1): Superior capacity for repayment.
P-2 (Prime-2): Strong capacity for repayment.
S&P
S&P's ratings are a current assessment of the likelihood of timely payment of
debt having an original maturity of no more than 365 days. Ratings are graded
into four categories, ranging from "A" for the highest quality obligations to
"D" for the lowest. Issues within the "A" category are delineated with the
numbers 1, 2 and 3 to indicate the relative degree of safety, as follows:
A-1: This designation indicates the degree of safety regarding timely payment is
very strong. A "plus" (+) designation indicates an even stronger likelihood of
timely payment.
A-2: Capacity for timely payment on issues with this designation is strong. The
relative degree of safety, however, is not as overwhelming as for issues
designated A-1.
A-3: Issues carrying this designation have a satisfactory capacity for timely
payment. They are, however, somewhat more vulnerable to the adverse effects of
changes in circumstances than obligations carrying the higher designations.
156
<PAGE>
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
(formerly Franklin Valuemark Funds)
File Nos. 33-23493 & 811-5583
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS
The following exhibits are incorporated by reference to the previously filed
documents indicated below, except as noted:
(a) Articles of Incorporation.
(i) Agreement and Declaration of Trust dated April 20, 1988
Filing: Post-Effective Amendment No. 16 to Registration
Statement on Form N-1A File No. 33-23493 Filing Date: August
19, 1995
(ii) Certificate of Amendment of Agreement and Declaration of
Trust dated October 21, 1988 Filing: Post-Effective Amendment
No. 16 to Registration Statement on Form N-1A File No.
33-23493 Filing Date: August 19, 1995
(iii) Certificate of Amendment of Agreement and Declaration of
Trust Filing: Post-Effective Amendment No.26 File No.
33-23493 Filing Date: November 30, 1998
(iv) Certificate of Amendment of Agreement and Declaration of
Trust of Franklin Valuemark Funds filed on July 1, 1999
(b) By-Laws.
(i) By-Laws
Filing: Post-Effective Amendment No. 16 to
Registration Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(ii) Certificate of Amendment of By-Laws dated May 16, 1995
Filing: Post-Effective Amendment No. 16 to Registration
Statement on Form N-1A
File No. 33-23493
Filing Date: August 19, 1995
(c) Instruments Defining Rights Of Security Holders
Not Applicable
1
<PAGE>
(d) Investment Advisory Contracts.
(i) Management Agreement between the Fund and Franklin
Advisers, Inc. dated January 24, 1989 Filing:
Post-Effective Amendment No. 16 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
August 19, 1995
(ii) Addendum to Investment Management Agreement dated March 14,
1989 Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A File No.
33-23493 Filing Date: August 19, 1995
(iii) Management Agreement between the Fund, on behalf of Pacific
Growth Fund, and Franklin Advisers, Inc. dated January 22,
1992 Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A File No.
33-23493 Filing Date: August 19, 1995
(iv) Sub-Advisory Agreement between Franklin Advisers, Inc. and
Templeton Investment Counsel, Inc. dated January 1, 1993
Filing: Post-Effective Amendment No. 16 to Registration
Statement of the Fund on Form N-1A File No. 33-23493 Filing
Date: August 19, 1995
(v) Management Agreement between the Fund on behalf of Franklin
Rising Dividends Fund, and Franklin Advisory Services, Inc.
dated July 1, 1996 Filing: Post-Effective Amendment No. 20
to Registration Statement of the Fund on Form N-1A File No.
33-23493 Filing Date: August 30, 1996
(vi) Investment Management Agreement between the Fund, on behalf
of the Templeton Global Growth, and Templeton, Galbraith &
Hansberger Ltd. dated March 15, 1994 Filing: Post-Effective
Amendment No. 16 to Registration Statement of the Fund on
Form N-1A File No. 33-23493 Filing Date: August 19, 1995
(vii) Sub-Advisory Agreement between Franklin Advisers, Inc. and
Templeton Investment Counsel, on behalf of Global Income
Fund dated August 1, 1994 Filing: Post-Effective Amendment
No. 16 to Registration Statement of the Fund on Form N-1A
File No. 33-23493 Filing Date: August 19, 1995
(viii) Investment Advisory Agreement between the Fund, on behalf
of Templeton Asset Strategy Fund, and Templeton Investment
Counsel, Inc, dated as of May 1, 2000
(ix) Investment Advisory Agreement between the Fund, on behalf
of Templeton Developing Markets Securities Fund, dated as
of May 1, 2000
(x) Investment Advisory Agreement between the Fund, on behalf
of International Smaller Companies Fund and Templeton
Investment Counsel, Inc. dated January
2
<PAGE>
18, 1996 Filing: Post-Effective Amendment No. 18 to
Registration Statement of the Fund on Form N-1A File
No. 33-23493 Filing Date: February 14, 1996
(xi) Management Agreement between the Fund, on behalf of Capital
Growth Fund and Franklin Advisers, Inc. dated January 18,
1996 Filing: Post-Effective Amendment No. 18 to
Registration Statement of the Fund on Form N-1A File No.
33-23493 Filing Date: February 14, 1996
(xii) Amendment to Management Agreement between the Fund and
Franklin Advisers, Inc. dated August 1, 1995 Filing:
Post-Effective Amendment No. 20 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
August 30, 1996
(xiii) Management Agreement between the Fund, on behalf of Mutual
Discovery Securities Fund and Mutual Shares Securities
Fund, and Franklin Mutual Advisers, Inc. dated October 18,
1996 Filing: Post-Effective Amendment No. 22 to
Registration Statement of the Fund on Form N-1A File No.
33-23493 Filing Date: February 28, 1997
(xiv) Management Agreement between the Fund, on behalf of Global
Health Care Securities Fund dated December 9, 1997 Filing:
Post-Effective Amendment No. 23 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
February 28, 1998
(xv) Management Agreement between the Fund, on behalf of Value
Securities Fund dated December 9, 1997 Filing:
Post-Effective Amendment No. 23 to Registration Statement
of Fund on Form N-1A File No. 33-23493 Filing Date:
February 28, 1998
(xvi) Investment Advisory Agreement between the Fund, on behalf
of Franklin Aggressive Growth Securities Fund, and Franklin
Advisers, Inc. dated July 15, 1999 Filing: Post-Effective
Amendment No. 30 to Registration Statement of the Fund on
Form N-1A File No. 33-23493 Filing Date: July 30, 1999
(xvii) Investment Advisory Agreement between the Fund, on behalf
of Franklin Strategic Income Fund, and Franklin Advisers,
Inc. dated as of May 1, 2000
(xviii) Sub-Advisory Agreement between Franklin Advisers, Inc., on
behalf of Franklin Strategic Income Fund, and Templeton
Investment Counsel, Inc. dated as of May 1, 2000
(xix) Investment Advisory Agreement between the Fund, on behalf
of Franklin S&P 500 Index Fund, and Franklin Advisers, Inc.
dated as of May 1, 2000
3
<PAGE>
(xx) Sub-Advisory Agreement between Franklin Advisers, Inc., on
behalf of Franklin S&P 500 Index Fund, and State Street
Global Advisors, a division of State Street Bank and Trust
Company dated as of May 1, 2000
(xxi) Investment Advisory Agreement between the Fund, on behalf
of Franklin Technology Securities Fund, and Franklin
Advisers, Inc. dated as of May 1, 2000
(e) Underwriting Contracts.
(i) Distribution Agreement between the Fund and
Franklin/Templeton Distributors, Inc. Filing: Post
Effective Amendment No.26 File No. 33-23493 Filing Date:
November 30, 1998
(f) Bonus Or Profit Sharing Contracts.
Not Applicable
(g) Custodian Agreements.
(i) Foreign Exchange Netting Agreement between Franklin
Valuemark Funds, on behalf of the International Equity
Fund, and Morgan Guaranty Trust Company of New York, dated
March 19, 1992 Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A File No.
33-23493 Filing Date: August 19, 1995
(ii) Foreign Exchange Netting Agreement between Franklin
Valuemark Funds, on behalf of the Pacific Growth Fund, and
Morgan Guaranty Trust Company of New York, dated March 19,
1992 Filing: Post-Effective Amendment No. 16 to
Registration Statement of the Fund on Form N-1A File No.
33-23493 Filing Date: August 19, 1995
(iii) Custody Agreement between the Fund, on behalf of the
Templeton Developing Markets Equity Fund and the Templeton
Global Growth Fund, and The Chase Manhattan Bank, N.A.
dated March 15, 1994 Filing: Post-Effective Amendment No.
16 to Registration Statement of the Fund on Form N-1A File
No. 33-23493 Filing Date: August 19, 1995
(iv) Master Custody Agreement between the Fund and the Bank of
New York, dated February 16, 1996 Filing: Post-Effective
Amendment No. 19 to Registration Statement of the Fund on
Form N-1A File No. 33-23493 Filing Date: April 24, 1996
(v) Terminal Link Agreement between the Fund and Bank of New
York dated February 16, 1996. Filing: Post-Effective
Amendment No. 19 to Registration Statement of the Fund
4
<PAGE>
on Form N-1A File No. 33-23493 Filing Date: April 24, 1996
(vi) Amendment to Global Custody Agreement between the Fund and
The Chase Manhattan Bank, N.A. dated April 1, 1996 Filing:
Post-Effective Amendment No. 23 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
April 29, 1997
(vii) Amendment to Master Custody Agreement between the Fund and
the Bank of New York, dated April 1, 1996 Filing:
Post-Effective Amendment No. 23 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
April 29, 1997
(viii) Letter Agreement between the Fund and the Bank of New York,
dated April 22, 1996 Filing: Post-Effective Amendment No.
19 to Registration Statement of the Fund on Form N-1A File
No. 33-23493 Filing Date: April 24, 1996
(ix) Custody Agreement between the Fund, on behalf of Mutual
Discovery Securities Fund and Mutual Shares Securities
Fund, and the State Street Bank and Trust Company dated
November 8, 1996 Filing: Post-Effective Amendment No. 23 to
Registration Statement of the Fund on Form N-1A File No.
33-23493 Filing Date: April 29, 1997
(x) Global Custody Agreement effective as of May 1, 2000
between The Chase Manhattan Bank, N.A. and Franklin
Templeton Variable Insurance Products Trust
(xi) Master Custody Agreement, Exhbit A, revised 4/24/00
(h) Other Material Contracts.
(i) Fund Administration Agreement between the Fund, on behalf
of International Smaller Companies Fund, and Franklin
Templeton Services, Inc., dated October 1, 1996 Filing:
Post-Effective Amendment No. 22 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
February 28, 1997
(ii) Fund Administration Agreement between the Fund, on behalf
of Templeton Asset Strategy Fund, and Franklin Templeton
Services, Inc. dated as of May 1, 2000
(iii) Fund Administration Agreement between the Fund, on behalf
of Mutual Discovery Securities Fund and Mutual Shares
Securities Fund, and Franklin Templeton Services, Inc.,
dated October 18, 1996 Filing: Post-Effective Amendment No.
22 to Registration Statement of the Fund on Form N-1A File
No. 33-23493
5
<PAGE>
Filing Date: February 28, 1997
(iv) Fund Administration Agreement between the Fund, on behalf
of Value Securities Fund Dated December 9, 1997 Filing:
Post-Effective Amendment No. 23 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
February 28, 1998
(v) Fund Administration Agreement between the Fund, on behalf
of Global Health Care Securities Fund, and Franklin
Templeton Services, Inc. dated December 9, 1997 Filing:
Post-Effective Amendment No. 23 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
February 28, 1998
(vi) Fund Administration Agreement between the Fund, on behalf
of Franklin Aggressive Growth Securities Fund, and Franklin
Templeton Services, Inc. dated July 15, 1999 Filing:
Post-Effective Amendment No. 30 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
July 30, 1999
(vii) Fund Administration Agreement between the Fund, on behalf
of Franklin Technology Securities Fund, and Franklin
Templeton Services, Inc. dated as of May 1, 2000
(viii) Fund Administration Agreement between the Fund, on behalf
of Franklin S&P 500 Index Fund and Franklin Templeton
Services, Inc. dated as of May 1, 2000
(ix) Fund Administration Agreement between the Fund, on behalf
of Franklin Strategic Income Securities Fund and Franklin
Templeton Services, Inc. dated as of May 1, 2000
(x) Fund Administration Agreement between the Fund, on behalf
of Franklin Small Cap Fund and Franklin Templeton Services,
Inc. dated as of May 1, 2000
(xi) Fund Administration Agreement between the Fund, on behalf
of Templeton Developing Markets Securities Fund and
Franklin Templeton Services, Inc. dated as of May 1, 2000
(xii) Fund Administration Agreement between the Fund, on behalf
of Templeton International Securities Fund and Franklin
Templeton Services, Inc. dated as of May 1, 2000
(i) Legal Opinion.
(i) Legal Opinion, Securities Act of 1933, dated February 5,
1999 Filing: Post Effective Amendment No. 27 to
Registration Statement of the Fund on Form N-1A File No.
33-23493 Filing Date: February 25, 1999
(j) Other Opinions.
(i) Consent of McGladrey and Pullen, LLP for inclusion of
report dated January 28, 1999 on the financial statements
of Templeton Asset Allocation Fund,
6
<PAGE>
Templeton Developing Markets Fund and Templeton
International Fund, all series of Templeton Variable
Products Series Fund, for the year ended December 31, 1998
This report is incorporated by reference to File No. N30-d.
File No. 811-05479 Filing Date: March 3, 1999
(ii) Consent of PricewaterhouseCoopers LLP to incorporation by
reference of the report dated January 28, 2000 except for
Note 7, as to which the date is February 8, 2000, on the
financial statements of Templeton Asset Allocation Fund,
Templeton Developing Markets Fund and Templeton
International Fund, each a series of Templeton Variable
Products Series Fund, for the year ended December 31, 1999
(iii) Consent of PricewaterhouseCoopers LLP to incorporation by
reference of the report dated January 28, 2000 except for
Note 8, as to which the date is February 8, 2000 on the
financial statements of Templeton Asset Allocation Fund a
series of Templeton Variable Products Series Fund, for the
year ended December 31, 1999
(iv) Consent of PricewaterhouseCoopers LLP to incorporation by
reference of the report dated January 28, 2000 except for
Note 8, as to which the date is February 8, 2000, of
Templeton Asset Allocation Fund, Templeton Developing
Markets Fund and Templeton International Fund, each a
series of Templeton Variable Products Series Fund, for the
year ended December 31, 1999.
(v) Consent of independent auditors of the Fund
(k) Omitted Financial Statements.
Not Applicable
(l) Initial Capital Agreement.
(i) Letter of Understanding dated April 11, 1995 Filing:
Post-Effective Amendment No. 16 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
August 19, 1995
(ii) Letter of Understanding dated September 12, 1995 Filing:
Post-Effective Amendment No. 17 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
October 27, 1996
(iii) Letter of Understanding dated April 4, 1996 Filing:
Post-Effective Amendment No. 19 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
April 24, 1996
(iv) Letter of Understanding dated October 21, 1996 Filing:
Post-Effective Amendment No. 21 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
October 31, 1996
7
<PAGE>
(v) Letter of Understanding dated April 23, 1998 Filing:
Post-Effective Amendment No. 24 to Registration Statement
of the Fund on Form N-1A File No. 33-23493 Filing Date:
April 30, 1998
(m) Rule 12b-1 Plan
(i) Class 2 Distribution Plan pursuant to Rule 12b-1for all
series of the Fund Filing: Post Effective Amendment No.26
File No. 33-23493 Filing Date November 30, 1998
(ii) Class 2 Distribution Plan for Franklin Aggressive Growth
Securities Fund Filing: Post Effective Amendment No.30 File
No. 33-23493 Filing Date July 30, 1999
(iii) Class 2 Distribution Plan pursuant to Rule 12b-1 for
Franklin S&P 500 Index Fund dated as of May 1, 2000
(iv) Class 3 Distribution Plan pursuant to Rule 12b-1 for
Franklin S&P 500 Index Fund dated as of May 1, 2000 Class 2
Distribution Plan pursuant to Rule 12b-1 for Franklin
Strategic Income Securities Fund dated as of May 1, 2000
Class 2 Distribution Plan pursuant to Rule 12b-1 for
Franklin Technology Securities Fund dated as of May 1, 2000
(o) Rule 18F-3Plan.
(i) Multiple Class Plan for all series of the Fund Filing: Post
Effective Amendment No.26 File No. 33-23493 Filing Date
November 30, 1998
(ii) Multiple Class Plan adopted on behalf of Franklin
Aggressive Growth Securities Fund Filing: Post-Effective
Amendment No. 30 to Registration Statement of the Fund on
Form N-1A File No. 33-23493 Filing Date: July 30, 1999
(iii) Multiple Class Plan adopted on behalf of Franklin S&P 500
Index Fund, Franklin Strategic Income Securities Fund and
Franklin Technology Securities Fund
(p) Power of Attorney
(i) Power of Attorney dated as of the 21st day of March, 2000
(q) Code of Ethics
(i) Code of Ethics of the Franklin Templeton Group
(ii) Code of Ethics of State Street Global Advisers
8
<PAGE>
Item 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None
Item 25. INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to Trustees, officers and controlling persons of
the Fund pursuant to the foregoing provisions, or otherwise, the Fund has been
advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Fund of expenses incurred or
paid by a Trustee, officer or controlling person of the Fund in the successful
defense of any action, suit or proceeding) is asserted by such Trustee, officer
or controlling person in connection with securities being registered, the Fund
will, unless in the opinion of its counsel the matter has been settled by
controlling precedent, submit to a court or appropriate jurisdiction the
question whether such indemnification is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF THE INVESTMENT ADVISER
(i) The officers and directors of the Fund's investment advisers also
serve as officers and/or directors or trustees for (1) the corporate parent of
Franklin Advisers, Inc., (" Advisers" ) the investment manager of 20 of the
Fund's series, Franklin Resources, Inc. (" Resources" ), and/or (2) other
investment companies in the Franklin Templeton Group of Funds. For additional
information, please see Part B and Schedules A and D of Form ADV of Advisers
(SEC File 801-26292), incorporated herein by reference, which sets forth the
officers and directors of Advisers and information as to any business,
profession, vocation or employment of a substantial nature engaged in by those
officers and directors during the past two years.
(ii) Templeton Investment Counsel, Inc.
Templeton Investment Counsel, Inc. (" TICI" ), an indirect, wholly owned
subsidiary of Resources, serves as adviser to the Templeton International
Securities Fund and Templeton International Smaller Companies Fund and as
sub-adviser to certain of the Funds, furnishing to Advisers in that capacity
portfolio management services and investment research. For additional
information please see Part B and Schedules A and D of Form ADV of TICI (SEC
File 801-15125), incorporated herein by reference, which set forth the officers
and directors of TICI and information as to any business, profession, vocation
of employment of a substantial nature engaged in by those officers and directors
during the past two years.
(iii) Templeton Global Advisers Limited, formerly known as Templeton
Galbraith and Hansberger Ltd.
Templeton Global Advisers Limited (" Templeton Nassau" ), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to Templeton Growth
Securities Fund. For additional information please see Part B and Schedules A
and D of Form ADV of Templeton Nassau (SEC File 801-42343), incorporated herein
by reference, which set forth the officers and directors of Templeton Nassau and
information as to any business, profession, vocation of employment of a
substantial nature engages in by those officers and directors during the past
two years.
(iv) Templeton Asset Management Ltd., formerly known as Templeton
Investment
9
<PAGE>
Management (Singapore) Pte Ltd.
Templeton Asset Management Ltd. (" Templeton Singapore" ), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to Templeton
Developing Markets Securities Fund. For information please see Part B and
Schedules A and D of Form ADV of Templeton Singapore (SEC File 801-46997),
incorporated herein by reference, which set forth the officers and directors of
Templeton Singapore and information as to any business, profession, vocation of
employment of a substantial nature engaged in by those officers and directors
during the past two years.
(v) Franklin Advisory Services, LLC, formerly Franklin Advisory
Services, Inc.
Franklin Advisory Services, LLC (" Franklin New Jersey" ), an indirect, wholly
owned subsidiary of Resources, serves as investment manager to Franklin Rising
Dividends Securities Fund and Franklin Value Securities Fund. For information
please see Part B and Schedules A and D of Form ADV of Franklin New Jersey (SEC
File 801-51967), incorporated herein by reference, which set forth the officers
and directors of Franklin New Jersey and information as to any business,
profession, vocation of employment of a substantial nature engaged in by those
officers and directors during the past two years.
(vi) Franklin Mutual Advisers, LLC, formerly Franklin Mutual Advisers,
Inc.
Franklin Mutual Advisers, LLC (" Mutual Advisers" ), an indirect, wholly owned
subsidiary of Resources, serves as investment manager to the Mutual Discovery
Securities Fund and Mutual Shares Securities Fund. For information please see
Part B and Schedules A and D of Form ADV of Mutual Advisers (SEC File
801-53068), incorporated herein by reference, which set forth the officers and
directors of Mutual Advisers and information as to any business, profession,
vocation of employment of a substantial nature engaged in by those officers and
directors during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc., (Distributors) also acts as
principal underwriter of shares of:
Franklin Asset Allocation Fund
Franklin California Tax-Free Income Fund, Inc.
Franklin California Tax-Free Trust
Franklin Custodian Funds, Inc.
Franklin Equity Fund
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Floating Rate Trust
Franklin Gold and Precious Metals Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Mutual Series Fund Inc.
Franklin Municipal Securities Trust
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
10
<PAGE>
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
Institutional Fiduciary Trust
Templeton Capital Accumulator Fund, Inc.
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund, Inc.
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
(b) The information required by this Item 27 with respect to each director and
officer of Distributors is incorporated by reference to Part B of this N-1A and
schedule A of Form BD filed by Distributors with the Securities and Exchange
Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889).
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by
Section 31(a) [15 U.S.C. 80a-30(a)] are kept by the Fund or its shareholder
services agent, Franklin Templeton Investors Services, Inc., both of whose
address is 777 Mariners Island Blvd., San Mateo, CA 94404.
ITEM 29. MANAGEMENT SERVICES
Not Applicable
ITEM 30. UNDERTAKINGS
Not Applicable
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment
Company Act of 1940, the Fund certifies that it meets all of the requirements
for effectiveness of this registration statement under rule 485(b) under the
Securities Act and has duly caused this Amendment to its Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized in the
City of San Mateo and the State of California, on the xx day of April, 2000.
FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS TRUST
(Fund)
/S/ KAREN L. SKIDMORE
------------------------------------
Karen L. Skidmore
Assistant Vice President and
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed below by the following persons in the capacities and
on the dates indicated:
CHARLES E. JOHNSON* Principal Executive Officer
- --------------------------- and Trustee
Charles E. Johnson Dated: April 28, 2000
MARTIN L. FLANAGAN* Principal Financial Officer
- --------------------------- Dated: April 28, 2000
Martin L. Flanagan
KIMBERLY MONASTERIO* Principal Accounting Officer
- --------------------- Dated: April 28, 2000
Kimberly Monasterio
FRANK H. ABBOTT III* Trustee
- --------------------------- Dated: April 28, 2000
Frank H. Abbott III
HARRIS J. ASHTON* Trustee
- ------------------ Dated: April 28, 2000
Harris J. Ashton
Trustee
- ------------------- Dated:
Robert S. James
S. JOSEPH FORTUNATO* Trustee
- --------------------------- Dated: April 28, 2000
S. Joseph Fortunato
ROBERT F. CARLSON* Trustee
- --------------------------- Dated: April 28, 2000
Robert F. Carlson
CHARLES B. JOHNSON* Trustee
- --------------------------- Dated: April 28, 2000
Charles B. Johnson
12
<PAGE>
RUPERT H. JOHNSON, JR.* Trustee
- --------------------------- Dated: April 28, 2000
Rupert H. Johnson, Jr.
FRANK W.T. LAHAYE* Trustee
- --------------------------- Dated: April 28, 2000
Frank W.T. LaHaye
GORDON S. MACKLIN* Trustee
- --------------------------- Dated: April 28, 2000
Gordon S. Macklin
/S/ KAREN L. SKIDMORE Assistant Vice President and
- --------------------------- Assistant Secretary
Karen L. Skidmore Dated April 28, 2000
(Pursuant to power of attorney)
13
<PAGE>
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
REGISTRATION STATEMENT
EXHIBITS INDEX
EXHIBIT NO DESCRIPTION LOCATION
EX-99.a(i) Agreement and Declaration of Trust *
dated April 20, 1988
EX-99.a(ii) Certificate of Amendment of Agreement and *
Declaration of Trust dated October 21, 1988
EX-99.a(iii) Certificate of Amendment of Agreement *
and Declaration of Trust
EX-99 a(iv) Certificate of Amendment of Agreement and Attached
Declaration of Trust of Franklin Valuemark Funds
filed on July 1, 1999
EX-99.b(i) By-Laws *
EX-99.b(ii) Certificate of Amendment of By-Laws dated *
May 16, 1995
EX-99.d(i) Management Agreement between *
the Fund and Franklin Advisers, Inc. dated
January 24, 1989
EX-99.d(ii) Addendum to Investment Management *
Agreement dated March 14, 1989
EX-99.d(iii) Management Agreement between the Fund, *
on behalf of International Equity and Pacific
Growth Fund, and Franklin Advisers, Inc. dated
January 22, 1992
EX-99.d(iv) Sub-Advisory Agreement between Franklin *
Advisers, Inc. and Templeton Investment
Counsel, Inc. dated January 1, 1993
EX-99.d(v) Management Agreement between the Fund on *
behalf of Franklin Rising Dividends Fund, and
Franklin Advisory Services, Inc. dated July 1,
1996
<PAGE>
EX-99.d(vi) Investment Management Agreement between *
the Fund, on behalf of the Templeton Global
Growth Fund, and Templeton, Galbraith &
Hansberger Ltd., dated March 15, 1994
EX-99.d(vii) Sub-Advisory Agreement between Franklin *
Advisers, Inc. and Templeton Investment
Counsel, on behalf of Global Income Fund dated
August 1, 1994
EX-99.d(viii) Investment Advisory Agreement between the Fund, Attached
on behalf of Templeton Asset Strategy Fund, and
Templeton Investment Counsel, Inc., dated as of
May 1, 2000
EX-99.d(ix) Investment Advisory Agreement between the Fund, Attached
on behalf of Templeton Developing Markets Securities
Fund, dated as of May 1, 2000
EX-99.d(x) Investment Management Agreement between *
The Fund, on behalf of International Smaller
Companies Fund and Templeton Investment
Counsel, Inc., dated January 18, 1996
EX-99.d(xi) Management Agreement between the Fund, *
on behalf of Capital Growth Fund and Franklin
Advisers, Inc. dated January 18, 1996
EX-99.d(xii) Amendment to Management Agreement between *
the Fund, and Franklin Advisers, Inc.dated August1, 1995
EX-99.d(xiii) Management Agreement between the Fund, *
on behalf of Mutual Discovery Securities Fund and
Mutual Shares Securities Fund, and Franklin Mutual
Advisers, Inc. dated October 18, 1996
EX-99.d(xiv) Management Agreement between the Fund, on behalf *
of Global Health Care Securities Fund dated
December 9, 1997
EX-99.d(xv) Management Agreement between the Fund, on *
behalf of Value Securities Fund dated
December 9, 1997
EX-99.d(xvi) Investment Advisory Agreement between the *
Fund, on behalf of Franklin Aggressive Growth Securities
Fund; and Franklin Advisers, Inc. dated July 15, 1999
2
<PAGE>
EX-99.d(xvii) Investment Advisory Agreement between the Fund, on Attached
behalf of Franklin Strategic Income Fund, and
Franklin Advisers, Inc. dated as of May 1, 2000
EX-99.d(xviii) Sub-Advisory Agreement between Franklin Attached
Advisers, Inc., on behalf of Franklin Strategic
Income Fund, and Templeton Investment Counsel,
dated May 1, 2000
EX-99.d(xix) Investment Advisory Agreement between the Fund, Attached
on behalf of Franklin S & P 500 Index Fund, and
Franklin Advisers, Inc. dated as of May 1, 2000
EX-99.d(xx) Sub-Advisory Agreement between Franklin
Advisers, Attached Inc., on behalf of
Franklin S & P 500 Index Fund, And State
Street Global Advisors, a division of State
Street Bank and Trust Company dated as of
May 1, 2000
EX-99.d(xxi) Investment Advisory Agreement between the Fund, Attached
on behalf of Franklin Technology Securities Fund,
and Franklin Advisers, Inc. dated as of May 1, 2000
EX-99.e(i) Distribution Agreement between the Fund and *
Franklin Templeton Distributors, Inc.
EX-99.g(i) Foreign Exchange Netting Agreement between *
Franklin Valuemark Funds, on behalf of the
International Equity Fund, and Morgan Guaranty
Trust Company of New York, dated March 19, 1992
EX-99.g(ii) Foreign Exchange Netting Agreement between *
Franklin Valuemark Funds, on behalf of the
Pacific Growth Fund, and Morgan Guaranty Trust
Company of New York, dated March 19, 1992
EX-99.g(iii) Custody Agreement between the Fund, on *
behalf of the Templeton Developing Markets
Equity Fund and the Templeton Global Growth
Fund, and The Chase Manhattan Bank, N.A. dated
March 15, 1994
EX-99.g(iv) Master Custody Agreement between the *
Fund and the Bank of New York, dated
February 16, 1996
EX-99.g(v) Terminal Link Agreement between the Fund *
and Bank of New York, dated February 16, 1996
3
<PAGE>
EX-99.g(vi) Amendment to Global Custody Agreement between *
the Fund and The Chase Manhattan Bank, N.A. dated
April 1, 1996
EX-99.g(vii) Amendment to Master Custody Agreement *
between the Fund and the Bank of New York,
dated April 1, 1996
EX-99.g(viii) Letter of Agreement between the Fund and the *
Bank of New York, dated April 22, 1996
EX-99.g(ix) Custody Agreement between the Fund, on *
behalf of Mutual Discovery Securities Fund
and Mutual Shares Securities Fund, and the
State Street Bank and Trust Company dated
November 8, 1996
EX-99.g(x) Global Custody Agreement effective as of Attached
May 1, 2000 between The Chase Manhattan
Bank, N.A. and Franklin Templeton Variable
Insurance Products Trust
EX-99.g(xi) Master Custody Agreement, Exhibit A, Attached
Revised 4/24/00
EX-99.h(i) Fund Administration Agreement between the Fund, *
on behalf of International Smaller Companies Fund,
and Franklin Templeton Services, Inc. dated
October 1, 1996
EX-99.h(ii) Fund Administration Agreement between the Fund, Attached
on behalf of Templeton Asset Strategy Fund, and
Franklin Templeton Services, Inc. dated as of May 1,
EX-99.h(iii) Fund Administration Agreement between the Fund, *
on behalf of Mutual Discovery Securities Fund,
and Mutual Shares Securities Fund and Franklin
Templeton Services, Inc. dated October 18, 1996
EX-99.h(iv) Fund Administration Agreement between the Fund, *
on behalf of Value Securities Fund.and Franklin
Templeton Services, Inc. dated December 9, 1997
EX-99.h(v) Fund Administration Agreement between the Fund, *
on behalf of Global Health Care Securities Fund,
and Franklin Templeton Services, Inc. dated
December 9, 1997
4
<PAGE>
EX-99.h(vi) Fund Administration Agreement between the Fund, *
on behalf of Franklin Aggressive Growth Securities
Fund and Franklin Templeton Services, Inc. dated
July 15, 1999
EX-99.h(vii) Fund Administration Agreement between the Fund, Attached
on behalf of Franklin Technology Securities Fund,
and Franklin Templeton Services, Inc. dated as of
May 1, 2000
EX-99.h(viii) Fund Administration Agreement between the Fund, Attached
on behalf of Franklin S & P 500 Index Fund and
Franklin Templeton Services Inc. dated as of
May 1, 2000
EX-99.h(ix) Fund Administration Agreement between the Fund, Attached
on behalf of Franklin Strategic Income Securities
Fund and Franklin Templeton Services, Inc. dated as
of May 1, 2000
EX-99.h(x) Fund Administration Agreement between the Fund, Attached
on behalf of Franklin Small Cap Fund and Franklin
Templeton Services, Inc. dated as of May 1, 2000
EX-99.h(xi) Fund Administration Agreement between the Fund, Attached
on behalf of Templeton Developing Markets Securities
Fund and Franklin Templeton Services, Inc. dated
as of May 1, 2000
EX-99.h(xii) Fund Administration Agreement between the Fund, Attached
on behalf of Templeton International Securities Fund
and Franklin Templeton Services, Inc. dated as of
May 1, 2000
EX-99.i(i) Legal Opinion Securities Act of 1933 *
dated February 5, 1999
EX-99.j(i) Consent of McGladry and Pullen, LLP for Attached
Inclusion of Report dated January 28, 1999
EX-99.j(ii) Consent of PricewaterhouseCoopers LLP Attached
EX-99.j(iii) Consent of PricewaterhouseCoopers LLP Attached
5
<PAGE>
EX-99.j(iv) Consent of PricewaterhouseCoopers LLP Attached
EX-99 j(v) Consent of Independent Auditors of the Trust Attached
EX-99.l(i) Letter of Understanding dated April 11, 1995 *
EX-99.l(ii) Letter of Understanding dated September 12, 1995 *
EX-99.l(iii) Letter of Understanding dated April 4, 1996 *
EX-99.l(iv) Letter of Understanding dated October 21, 1996 *
EX-99.l(v) Letter of Understanding dated April 23, 1998 *
EX-99 l(vi) Letter of Understanding dated April 28, 2000 Attached
EX-99 l(vii) Letter of Understanding dated April 28, 2000 Attached
EX-99 l(viii) Letter of Understanding dated April 28, 2000 Attached
EX-99.m(i) Class 2 Distribution Plan Pursuant to Rule 12b-1 *
for all series of the Fund
EX-99.m(ii) Class 2 Distribution Plan for Franklin Aggressive *
Growth Securities Fund
EX-99.m(iii) Class 2 Distribution Plan Pursuant to
Rule 12b-1 Attached for Franklin S&P 500
Index Fund dated as of May 1, 2000
EX-99.m(iv) Class 3 Distribution Plan Pursuant to
Rule 12b-1 Attached for Franklin S&P 500
Index Fund dated as of May 1, 2000
EX-99.m(v) Class 2 Distribution Plan Pursuant to Rule 12b-1 Attached
for Franklin Strategic Income Securities Fund
dated as of May 1, 2000
EX-99.m(vi) Class 2 Distribution Plan Pursuant to Rule 12b-1 Attached
for Franklin Technology Securities Fund dated as
of May 1, 2000
EX-99.o(i) Multiple Class Plan for all series of the Fund *
EX-99.o(ii) Multiple Class Plan for Franklin Aggressive Growth *
Securities Fund
6
<PAGE>
EX-99.o(iii) Multiple Class Plan for Franklin S&P 500 Index Attached
Fund, Franklin Strategic Income Securities Fund
And Franklin Technology Securities Fund
EX-99.p(i) Power of Attorney from Officers and Attached
Trustees of the Registrant
EX-99.q(i) Code of Ethics of Franklin Templeton Group Attached
EX-99 q(ii) Code of Ethics of State Street Global Advisors Attached
* Incorporated by reference to previous filings
7
EXHIBIT (a)iv
CERTIFICATE OF AMENDMENT
OF
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN VALUEMARK FUNDS
The undersigned certify that:
1. They constitute a majority of the Board of Trustees of Franklin
Valuemark Funds, a Massachusetts business trust (the "Trust").
2. They hereby adopt the following amendment to the Agreement and
Declaration of Trust, which deletes in its entirety the Section of the
Agreement and Declaration of Trust entitled "SECTION 1. NAME." of
Article I and replaces such Section of Article I with the following:
"SECTION 1. NAME. The Trust shall be known as the Franklin
Templeton Variable Insurance Products Trust and the Trustees shall
conduct the business of the Trust under that name or any other name as
they may from time to time determine."
3. This Amendment is made pursuant to Article VIII, Section 9, which
empowers the Trustees to amend the Agreement and Declaration of Trust
at any time by an instrument in writing signed by a majority of the
Trustees; and Article I, Section 1, which empowers the Trustees to
conduct the business of the Trust under any other name as they may from
time to time determine.
IN WITNESS WHEREOF, the Trustees named below have signed their names hereto this
18th day of May, 1999.
/S/ FRANK H. ABBOTT, III /S/ HARRIS J. ASHTON
- ----------------------------------- --------------------------------
Frank H. Abbott, III Harris J. Ashton
/S/ EDWARD J. BONACH /S/ ROBERT F. CARLSON
- ----------------------------------- --------------------------------
Edward J. Bonach Robert F. Carlson
/S/ S. JOSEPH FORTUNATO /S/ CHARLES B. JOHNSON
- ----------------------------------- --------------------------------
S. Joseph Fortunato Charles B. Johnson
/S/ CHARLES E. JOHNSON /S/ RUPERT H. JOHNSON, JR.
- ----------------------------------- --------------------------------
Charles E. Johnson Rupert H. Johnson, Jr.
/S/ FRANK W. T. LAHAYE /S/ GORDON S. MACKLIN
- ----------------------------------- --------------------------------
Frank W. T. LaHaye Gordon S. Macklin
EXHIBIT (d) viii
INVESTMENT ADVISORY AGREEMENT
AGREEMENT dated as of the 1st day of May, 2000, between FRANKLIN
TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust (the
"Trust"), on behalf of Templeton Asset Strategy Fund, a series of the Trust (the
"Fund"), and TEMPLETON INVESTMENT COUNSEL, INC., a Florida Corporation (the
"Adviser").
In consideration of the mutual agreements herein made, the Trust and
the Adviser understand and agree as follows:
(1) The Adviser agrees, during the life of this Agreement, to manage
the investment and reinvestment of the Fund's assets consistent with the
provisions of the Declaration of Trust of the Trust and the investment policies
adopted and declared by the Trust's Board of Trustees. In pursuance of the
foregoing, the Adviser shall make all determinations with respect to the
investment of the Fund's assets and the purchase and sale of its investment
securities, and shall take all such steps as may be necessary to implement those
determinations.
(2) The Adviser is not required to furnish any personnel, overhead
items or facilities for the Fund, including trading desk facilities or daily
pricing of the Fund's portfolio.
(3) The Adviser shall be responsible for selecting members of
securities exchanges, brokers and dealers (such members, brokers and dealers
being hereinafter referred to as "brokers") for the execution of the Fund's
portfolio transactions consistent with the Fund's brokerage policies and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
A. Purchase and sale orders will usually be placed with brokers which
are selected by the Adviser as able to achieve "best execution" of such orders.
"Best execution" shall mean prompt and reliable execution at the most favorable
security price, taking into account the other provisions hereinafter set forth.
The determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund (involving both price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the Adviser in
determining the overall reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the Adviser shall
take into account its past experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign securities held by
the Fund.
1
<PAGE>
C. The Adviser is authorized to allocate brokerage business to brokers
who have provided brokerage and research services, as such services are defined
in Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"), for
the Fund and/or other accounts, if any, for which the Adviser exercises
investment discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as
to transactions for which fixed minimum commission rates are not applicable, to
cause the Fund to pay a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting that
transaction, if the Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker, viewed in terms of either that particular
transaction or the Adviser's overall responsibilities with respect to the Trust
and the other accounts, if any, as to which it exercises investment discretion.
In reaching such determination, the Adviser will not be required to place or
attempt to place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good faith, the
Adviser shall be prepared to show that all commissions were allocated and paid
for purposes contemplated by the Trust's brokerage policy; that the research
services provide lawful and appropriate assistance to the Adviser in the
performance of its investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether commissions were within
a reasonable range shall be based on any available information as to the level
of commission known to be charged by other brokers on comparable transactions,
but there shall be taken into account the Trust's policies that (i) obtaining a
low commission is deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial to the Fund to obtain
a favorable price than to pay the lowest commission; and (ii) the quality,
comprehensiveness and frequency of research studies that are provided for the
Adviser are useful to the Adviser in performing its advisory services under this
Agreement. Research services provided by brokers to the Adviser are considered
to be in addition to, and not in lieu of, services required to be performed by
the Adviser under this Agreement. Research furnished by brokers through which
the Fund effects securities transactions may be used by the Adviser for any of
its accounts, and not all research may be used by the Adviser for the Fund. When
execution of portfolio transactions is allocated to brokers trading on exchanges
with fixed brokerage commission rates, account may be taken of various services
provided by the broker.
D. Purchases and sales of portfolio securities within the United States
other than on a securities exchange shall be executed with primary market makers
acting as principal, except where, in the judgment of the Adviser, better prices
and execution may be obtained on a commission basis or from other sources.
E. Sales of the Fund's shares (which shall be deemed to include also
shares of other registered investment companies which have either the same
adviser or an investment adviser affiliated with the Adviser) by a broker are
one factor among others to be taken into account in deciding to allocate
portfolio transactions (including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker shall furnish "best
execution," as defined in subparagraph A above, and that such allocation shall
be within the scope of the Trust's policies as stated above; provided further,
that in every allocation made to a broker in which the sale of Fund shares is
taken into account, there shall be no increase in the amount of the commissions
or other compensation
2
<PAGE>
paid to such broker beyond a reasonable commission or other compensation
determined, as set forth in subparagraph C above, on the basis of best execution
alone or best execution plus research services, without taking account of or
placing any value upon such sale of the Fund's shares.
(4) In addition to the investment management services provided pursuant
to paragraph (1) above, the Adviser agrees, during the life of this Agreement,
to furnish or provide for the Fund, at the Adviser's expenses, such
administrative services as are required to facilitate investment in the shares
of the Fund by an insurance company, on behalf of one or more of its separate
accounts, pursuant to a fund participation agreement among the Fund, Franklin
Templeton Distributors, Inc. and such insurance company. Such services may
include, but are not limited to, the following: maintaining books and records
required by applicable state or federal laws; assisting in processing purchase
and redemption transactions; transmitting to the Fund periodic reports necessary
to enable the Fund to comply with applicable laws; processing Fund
distributions; answering questions and handling correspondence from
contractowners about their accounts; providing information about the Fund;
acting as sole shareholder of record and nominee for shareholders; and similar
administrative, recordkeeping, and contractowner services.
(5) The Fund agrees to pay to the Adviser a monthly fee in dollars
based on a percentage of the Fund's average daily net assets, payable at the end
of each calendar month. This fee shall be calculated daily at the following
annual rates:
0.65% of the value of the Fund's net assets up to an including $200
million;
0.585% of the value of the Fund's net assets over $200 million up
to and including $1.3 billion;
0.52% of the value of the Fund's net assets over $1.3 billion.
The Adviser may waive in advance all or a portion of its fee provided
for hereunder and such waiver will be treated as a reduction in purchase price
of its services. The Adviser shall be contractually bound hereunder by the terms
of any publicly announced waiver of its fee or any limitation of the Fund's
expenses, as if such waiver or limitation were fully set forth herein.
Notwithstanding the foregoing, if the total expenses of the Fund (including the
fee to the Adviser) in any fiscal year of the Trust exceed any expense
limitation imposed by applicable State law, the Adviser shall reimburse the Fund
for such excess in the manner and to the extent required by applicable State
law. The term "total expenses," as used in this paragraph, does not include
interest, taxes, litigation expenses, distribution expenses, brokerage
commissions or other costs of acquiring or disposing of any of the Fund's
portfolio securities or any costs or expenses incurred or arising other than in
the ordinary and necessary course of the Fund's business. When the accrued
amount of such expenses exceeds this limit, the monthly payment of the Adviser's
fee will be reduced by the amount of such excess, subject to adjustment month by
month during the balance of the Trust's fiscal year if accrued expenses
thereafter fall below the limit.
(6) This Agreement shall become effective on May 1, 2000 and shall
continue in effect until April 30, 2002. If not sooner terminated, this
Agreement shall continue in effect for
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successive periods of 12 months each thereafter, provided that each such
continuance shall be specifically approved annually by the vote of a majority of
the Trust's Board of Trustees who are not parties to this Agreement or
"interested persons" (as defined in Investment Company Act of 1940 (the "1940
Act")) of any such party, cast in person at a meeting called for the purpose of
voting on such approval and either the vote of (a) a majority of the outstanding
voting securities of the Fund, as defined in the 1940 Act, or (b) a majority of
the Trust's Board of Trustees as a whole.
(7) Notwithstanding the foregoing, this Agreement may be terminated by
either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Trust
is approved by vote of a majority of the Trust's Board of Trustees in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(8) This Agreement will terminate automatically and immediately in the
event of its assignment (as defined in the 1940 Act).
(9) In the event this Agreement is terminated and the Adviser no longer
acts as Adviser to the Fund, the Adviser reserves the right to withdraw from the
Fund the use of the name "Templeton" or any name misleadingly implying a
continuing relationship between the Fund and the Adviser or any of its
affiliates.
(10) Except as may otherwise be provided by the 1940 Act, neither the
Adviser nor its officers, directors, employees or agents shall be subject to any
liability for any error of judgment, mistake of law, or any loss arising out of
any investment or other act or omission in the performance by the Adviser of its
duties under the Agreement or for any loss or damage resulting from the
imposition by any government of exchange control restrictions which might affect
the liquidity of the Trust's assets, or from acts or omissions of custodians, or
securities depositories, or from any war or political act of any foreign
government to which such assets might be exposed, or failure, on the part of the
custodian or otherwise, timely to collect payments, except for any liability,
loss or damage resulting from willful misfeasance, bad faith or gross on the
Adviser's part or by reason of disregard of the Adviser's duties under this
Agreement. It is hereby understood and acknowledged by the Trust that the value
of the investments made for the Fund may increase as well as decrease and are
not guaranteed by the Adviser. It is further understood and acknowledged by the
Trust that investment decisions made on behalf of the Fund by the Adviser are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Adviser will not always be profitable or prove to have been correct.
(11) It is understood that the services of Adviser are not deemed to be
exclusive, and nothing in this Agreement shall prevent the Adviser, or any
affiliate thereof, from providing similar services to other investment companies
and other clients, including clients which may invest in the same types of
securities as the Fund, or, in providing such services, from using information
furnished by others. When the Adviser determines to buy or sell the same
security for the Fund that the Adviser or one or more of its affiliates has
selected for clients of the Adviser or its affiliates, the
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orders for all such security transactions shall be placed for execution by
methods determined by the Adviser, with approval by the Trust's Board of
Trustees, to be impartial and fair.
(12) This Agreement shall be construed in accordance with the laws of
State of Florida, provided that nothing herein shall be construed as being
inconsistent with applicable Federal and state securities laws and any rules,
regulations and orders thereunder.
(13) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Adviser an
agent of the Trust.
(15) It is understood and expressly stipulated that neither the holders
of shares of the Fund nor any Trustee, officer, agent or employee of the Trust
shall be personally liable hereunder, nor shall any resort be had to other
private property for the satisfaction of any claim or obligation hereunder, but
the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
TEMPLETON ASSET STRATEGY FUND
/S/ DAVID P. GOSS
------------------------------
David P. Goss
Vice President &
Assistant Secretary
TEMPLETON INVESTMENT COUNSEL, INC.
/S/ MARTIN L. FLANAGAN
------------------------------
Martin L. Flanagan
Executive Vice President
5
EXHIBIT (d) ix
INVESTMENT ADVISORY AGREEMENT
AGREEMENT dated as of the 1st day of May, 2000, between FRANKLIN
TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust (the
"Trust"), on behalf of Templeton Developing Markets Securities Fund, a series of
the Trust (the "Fund"), and TEMPLETON ASSET MANAGEMENT LTD., a company organized
under the laws of Singapore (the "Adviser").
In consideration of the mutual agreements herein made, the Trust and
the Adviser understand and agree as follows:
(1) The Adviser agrees, during the life of this Agreement, to manage
the investment and reinvestment of the Fund's assets consistent with the
provisions of the Declaration of Trust of the Trust and the investment policies
adopted and declared by the Trust's Board of Trustees. In pursuance of the
foregoing, the Adviser shall make all determinations with respect to the
investment of the Fund's assets and the purchase and sale of its investment
securities, and shall take all such steps as may be necessary to implement those
determinations. It is understood that all acts of the Adviser in performing this
Agreement are performed by it outside the United States.
(2) The Adviser is not required to furnish any personnel, overhead
items or facilities for the Fund, including trading desk facilities or daily
pricing of the Fund's portfolio.
(3) The Adviser shall be responsible for selecting members of
securities exchanges, brokers and dealers (such members, brokers and dealers
being hereinafter referred to as "brokers") for the execution of the Fund's
portfolio transactions consistent with the Fund's brokerage policies and, when
applicable, the negotiation of commissions in connection therewith. All
decisions and placements shall be made in accordance with the following
principles:
A. Purchase and sale orders will usually be placed with brokers which
are selected by the Adviser as able to achieve "best execution" of such orders.
"Best execution" shall mean prompt and reliable execution at the most favorable
security price, taking into account the other provisions hereinafter set forth.
The determination of what may constitute best execution and price in the
execution of a securities transaction by a broker involves a number of
considerations, including, without limitation, the overall direct net economic
result to the Fund (involving both price paid or received and any commissions
and other costs paid), the efficiency with which the transaction is effected,
the ability to effect the transaction at all where a large block is involved,
availability of the broker to stand ready to execute possibly difficult
transactions in the future, and the financial strength and stability of the
broker. Such considerations are judgmental and are weighed by the Adviser in
determining the overall reasonableness of brokerage commissions.
B. In selecting brokers for portfolio transactions, the Adviser shall
take into account its past experience as to brokers qualified to achieve "best
execution," including brokers who specialize in any foreign securities held by
the Fund.
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C. The Adviser is authorized to allocate brokerage business to brokers
who have provided brokerage and research services, as such services are defined
in Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"), for
the Fund and/or other accounts, if any, for which the Adviser exercises
investment discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as
to transactions for which fixed minimum commission rates are not applicable, to
cause the Fund to pay a commission for effecting a securities transaction in
excess of the amount another broker would have charged for effecting that
transaction, if the Adviser determines in good faith that such amount of
commission is reasonable in relation to the value of the brokerage and research
services provided by such broker, viewed in terms of either that particular
transaction or the Adviser's overall responsibilities with respect to the Trust
and the other accounts, if any, as to which it exercises investment discretion.
In reaching such determination, the Adviser will not be required to place or
attempt to place a specific dollar value on the research or execution services
of a broker or on the portion of any commission reflecting either of said
services. In demonstrating that such determinations were made in good faith, the
Adviser shall be prepared to show that all commissions were allocated and paid
for purposes contemplated by the Trust's brokerage policy; that the research
services provide lawful and appropriate assistance to the Adviser in the
performance of its investment decision-making responsibilities; and that the
commissions paid were within a reasonable range. Whether commissions were within
a reasonable range shall be based on any available information as to the level
of commission known to be charged by other brokers on comparable transactions,
but there shall be taken into account the Trust's policies that (i) obtaining a
low commission is deemed secondary to obtaining a favorable securities price,
since it is recognized that usually it is more beneficial to the Fund to obtain
a favorable price than to pay the lowest commission; and (ii) the quality,
comprehensiveness and frequency of research studies that are provided for the
Adviser are useful to the Adviser in performing its advisory services under this
Agreement. Research services provided by brokers to the Adviser are considered
to be in addition to, and not in lieu of, services required to be performed by
the Adviser under this Agreement. Research furnished by brokers through which
the Fund effects securities transactions may be used by the Adviser for any of
its accounts, and not all research may be used by the Adviser for the Fund. When
execution of portfolio transactions is allocated to brokers trading on exchanges
with fixed brokerage commission rates, account may be taken of various services
provided by the broker.
D. Purchases and sales of portfolio securities within the United States
other than on a securities exchange shall be executed with primary market makers
acting as principal, except where, in the judgment of the Adviser, better prices
and execution may be obtained on a commission basis or from other sources.
E. Sales of the Fund's shares (which shall be deemed to include also
shares of other registered investment companies which have either the same
adviser or an investment adviser affiliated with the Adviser) by a broker are
one factor among others to be taken into account in deciding to allocate
portfolio transactions (including agency transactions, principal transactions,
purchases in underwritings or tenders in response to tender offers) for the
account of the Fund to that broker; provided that the broker shall furnish "best
execution," as defined in subparagraph A above, and that such allocation shall
be within the scope of the Trust's policies as stated above; provided further,
that in every allocation made to a broker in which the sale of Fund shares is
taken
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<PAGE>
into account, there shall be no increase in the amount of the commissions or
other compensation paid to such broker beyond a reasonable commission or other
compensation determined, as set forth in subparagraph C above, on the basis of
best execution alone or best execution plus research services, without taking
account of or placing any value upon such sale of the Fund's shares.
(4) In addition to the investment management services provided pursuant
to paragraph (1) above, the Adviser agrees, during the life of this Agreement,
to furnish or provide for the Fund, at the Adviser's expenses, such
administrative services as are required to facilitate investment in the shares
of the Fund by an insurance company, on behalf of one or more of its separate
accounts, pursuant to a fund participation agreement among the Fund, Franklin
Templeton Distributors, Inc. and such insurance company. Such services may
include, but are not limited to, the following: maintaining books and records
required by applicable state or federal laws; assisting in processing purchase
and redemption transactions; transmitting to the Fund periodic reports necessary
to enable the Fund to comply with applicable laws; processing Fund
distributions; answering questions and handling correspondence from
contractowners about their accounts; providing information about the Fund;
acting as sole shareholder of record and nominee for shareholders; and similar
administrative, recordkeeping, and contractowner services.
(5) The Fund agrees to pay to the Adviser a monthly fee in dollars at
an annual rate of 1.25% of the Fund's average daily net assets payable at the
end of each calendar month. The Adviser may waive in advance all or a portion of
its fee provided for hereunder and such waiver will be treated as a reduction in
purchase price of its services. The Adviser shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee or any
limitation of the Fund's expenses, as if such waiver or limitation were fully
set forth herein. Notwithstanding the foregoing, if the total expenses of the
Fund (including the fee to the Adviser) in any fiscal year of the Trust exceed
any expense limitation imposed by applicable State law, the Adviser shall
reimburse the Fund for such excess in the manner and to the extent required by
applicable State law. The term "total expenses," as used in this paragraph, does
not include interest, taxes, litigation expenses, distribution expenses,
brokerage commissions or other costs of acquiring or disposing of any of the
Fund's portfolio securities or any costs or expenses incurred or arising other
than in the ordinary and necessary course of the Fund's business. When the
accrued amount of such expenses exceeds this limit, the monthly payment of the
Adviser's fee will be reduced by the amount of such excess, subject to
adjustment month by month during the balance of the Trust's fiscal year if
accrued expenses thereafter fall below the limit.
(6) This Agreement shall become effective on May 1, 2000 and shall
continue in effect until April 30, 2002. If not sooner terminated, this
Agreement shall continue in effect for successive periods of 12 months each
thereafter, provided that each such continuance shall be specifically approved
annually by the vote of a majority of the Trust's Board of Trustees who are not
parties to this Agreement or "interested persons" (as defined in Investment
Company Act of 1940 (the "1940 Act")) of any such party, cast in person at a
meeting called for the purpose of voting on such approval and either the vote of
(a) a majority of the outstanding voting securities of the Fund, as defined in
the 1940 Act, or (b) a majority of the Trust's Board of Trustees as a whole.
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<PAGE>
(7) Notwithstanding the foregoing, this Agreement may be terminated by
either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party, provided that termination by the Trust
is approved by vote of a majority of the Trust's Board of Trustees in office at
the time or by vote of a majority of the outstanding voting securities of the
Fund (as defined by the 1940 Act).
(8) This Agreement will terminate automatically and immediately in the
event of its assignment (as defined in the 1940 Act).
(9) In the event this Agreement is terminated and the Adviser no longer
acts as Adviser to the Fund, the Adviser reserves the right to withdraw from the
Fund the use of the name "Templeton" or any name misleadingly implying a
continuing relationship between the Fund and the Adviser or any of its
affiliates.
(10) Except as may otherwise be provided by the 1940 Act, neither the
Adviser nor its officers, directors, employees or agents shall be subject to any
liability for any error of judgment, mistake of law, or any loss arising out of
any investment or other act or omission in the performance by the Adviser of its
duties under the Agreement or for any loss or damage resulting from the
imposition by any government of exchange control restrictions which might affect
the liquidity of the Trust's assets, or from acts or omissions of custodians, or
securities depositories, or from any war or political act of any foreign
government to which such assets might be exposed, or failure, on the part of the
custodian or otherwise, timely to collect payments, except for any liability,
loss or damage resulting from willful misfeasance, bad faith or gross on the
Adviser's part or by reason of disregard of the Adviser's duties under this
Agreement. It is hereby understood and acknowledged by the Trust that the value
of the investments made for the Fund may increase as well as decrease and are
not guaranteed by the Adviser. It is further understood and acknowledged by the
Trust that investment decisions made on behalf of the Fund by the Adviser are
subject to a variety of factors which may affect the values and income generated
by the Fund's portfolio securities, including general economic conditions,
market factors and currency exchange rates, and that investment decisions made
by the Adviser will not always be profitable or prove to have been correct.
(11) It is understood that the services of Adviser are not deemed to be
exclusive, and nothing in this Agreement shall prevent the Adviser, or any
affiliate thereof, from providing similar services to other investment companies
and other clients, including clients which may invest in the same types of
securities as the Fund, or, in providing such services, from using information
furnished by others. When the Adviser determines to buy or sell the same
security for the Fund that the Adviser or one or more of its affiliates has
selected for clients of the Adviser or its affiliates, the orders for all such
security transactions shall be placed for execution by methods determined by the
Adviser, with approval by the Trust's Board of Trustees, to be impartial and
fair.
(12) This Agreement shall be construed in accordance with the laws of
the Commonwealth of Massachusetts, provided that nothing herein shall be
construed as being inconsistent with applicable Federal and state securities
laws and any rules, regulations and orders thereunder.
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<PAGE>
(13) If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of this Agreement
shall not be affected thereby and, to this extent, the provisions of this
Agreement shall be deemed to be severable.
(14) Nothing herein shall be construed as constituting the Adviser an
agent of the Trust.
(15) It is understood and expressly stipulated that neither the holders
of shares of the Fund nor any Trustee, officer, agent or employee of the Trust
shall be personally liable hereunder, nor shall any resort be had to other
private property for the satisfaction of any claim or obligation hereunder, but
the Trust only shall be liable.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers and their respective corporate
seals to be hereunto duly affixed and attested.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
TEMPLETON DEVELOPING MARKETS SECURITIES FUND
/S/ DAVID P. GOSS
------------------------------
David P. Goss
Vice President
& Assistant Secretary
TEMPLETON ASSET MANAGEMENT LTD.
/S/ MARTIN L. FLANAGAN
------------------------------
Martin L. Flanagan
Director
EXHIBIT (d) xvii
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
on behalf of
FRANKLIN STRATEGIC INCOME SECURITIES FUND
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST, a Massachusetts business trust (the "Trust"), on
behalf of FRANKLIN STRATEGIC INCOME SECURITIES FUND (the "Fund"), a series of
the Trust, and FRANKLIN ADVISERS, INC., a California corporation, (the
"Adviser").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statements under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment adviser and to have an investment adviser perform
various management, statistical, research, investment advisory and other
services for the Fund; and,
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
investment advisory, counseling and supervisory services to investment companies
and other investment counseling clients, and desires to provide these services
to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Adviser
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the
Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The
Adviser undertakes to provide the services hereinafter set forth and to assume
the following obligations:
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A. INVESTMENT ADVISORY SERVICES.
(a) The Adviser shall manage the Fund's assets
subject to and in accordance with the investment objectives and policies of the
Fund and any directions which the Trust's Board of Trustees may issue from time
to time. In pursuance of the foregoing, the Adviser shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as may
be necessary to implement the same. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's investment
securities shall be exercised. The Adviser shall render or cause to be rendered
regular reports to the Trust, at regular meetings of its Board of Trustees and
at such other times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions made with respect to the investment of the Fund's
assets and the purchase and sale of its investment securities, (ii) the reasons
for such decisions and (iii) the extent to which those decisions have been
implemented.
(b) The Adviser, subject to and in accordance with
any directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Adviser to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical, quotations and other information to the Fund and the Adviser in
accordance with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees determines
that the Fund will benefit, directly or indirectly, by doing so, the Adviser may
place orders with a broker who charges a commission for that transaction which
is in excess of the amount of commission that another broker would have charged
for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of "brokerage and research services" (as
defined in Section 28(e) (3) of the Securities Exchange Act of 1934) provided by
that broker.
Accordingly, the Trust and the Adviser agree that the
Adviser shall select brokers for the execution of the Fund's transactions from
among:
(i) Those brokers and dealers who provide
quotations and other services to the Fund,
specifically including the quotations necessary to
determine the Fund's net assets, in such amount of
total brokerage as may reasonably be required in
light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its
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affiliates which the Adviser or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to
securities, actual or potential, of the Fund, or
which place the Adviser in a better position to
make decisions in connection with the management of
the Fund's assets and securities, whether or not
such data may also be useful to the Adviser and its
affiliates in managing other portfolios or advising
other clients, in such amount of total brokerage as
may reasonably be required. Provided that the
Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the
Fund may also be considered as a factor in the
selection of broker-dealers to execute the Fund's
portfolio transactions.
(c) When the Adviser has determined that the Fund
should tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules of
any securities exchange or association of which Distributors may be a member.
Neither the Adviser nor Distributors shall be obligated to make any additional
commitments of capital, expense or personnel beyond that already committed
(other than normal periodic fees or payments necessary to maintain its corporate
existence and membership in the National Association of Securities Dealers,
Inc.) as of the date of this Agreement. This Agreement shall not obligate the
Adviser or Distributors (i) to act pursuant to the foregoing requirement under
any circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the Trust on behalf of the Fund shall enter
into an agreement with the Adviser and/or Distributors to reimburse them for all
such expenses connected with attempting to collect such fees, including legal
fees and expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect such fees.
(d) The Adviser shall render regular reports to the
Trust, not more frequently than quarterly, of how much total brokerage business
has been placed by the Adviser, on behalf of the Fund, with brokers falling into
each of the categories referred to above and the manner in which the allocation
has been accomplished.
(e) The Adviser agrees that no investment decision
will be made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Adviser's paramount duty to obtain the
best net price and execution for the Fund.
(f) Decisions on proxy voting shall be made by the
Adviser unless the Board of Trustees determines otherwise. Pursuant to its
authority, Adviser shall have the power to vote, either in person or by proxy,
all securities in which the Fund may be invested from time to time, and shall
not be required to seek or take instructions from the Fund with respect thereto.
Adviser shall not be expected or required to take any action other than the
rendering of investment-related advice with respect to lawsuits involving
securities presently or formerly held
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in the Fund, or the issuers thereof, including actions involving bankruptcy.
Should Adviser undertake litigation against an issuer on behalf of the Fund, the
Fund agrees to pay its portion of any applicable legal fees associated with the
action or to forfeit any claim to any assets Adviser may recover and, in such
case, agrees to hold Adviser harmless for excluding the Fund from such action.
In the case of class action suits involving issuers held in the Fund, Adviser
may include information about the Fund for purposes of participating in any
settlements.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF
SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser,
its officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
D. AUTHORITY TO DELEGATE. The Adviser may, at its expense,
select and contract with one or more investment advisers registered under the
Investment Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the
services for a Fund for which it is responsible under this Agreement. The
Adviser will compensate any Sub-Adviser for its services to the Fund. The
Adviser may terminate the services of any Sub-Adviser at any time in its sole
discretion, and shall at such time assume the responsibilities of such
Sub-Adviser unless and until a successor Sub-Adviser is selected and the
requisite approval of a Fund's shareholders is obtained. The Adviser will
continue to have responsibility for all advisory services furnished by any
Sub-Adviser.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Adviser herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value
of the Fund's net assets;
E. Salaries and other compensations of executive officers of
the Trust who are not officers, directors, stockholders or employees of the
Adviser or its affiliates;
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F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the Trust's
legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Adviser or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable state
laws; including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues;
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums; and
O. The Fund's portion of the cost of any proxy voting service
used on its behalf.
4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in
cash to the Adviser based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services rendered
and obligations assumed by the Adviser, during the preceding month, on the first
business day of the month in each year.
A. For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as that Fund uses to
compute the value of its net assets in connection with the determination of the
net asset value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the following annual rates:
/bullet/ 0.425% of the value of net assets up to $500 million;
/bullet/ 0.325% of the value of net assets over $500 million up to and including
$1 billion;
/bullet/ 0.280% of the value of net assets over $1 billion up to and including
$1.5 billion;
/bullet/ 0.235% of the value of net assets over $1.5 billion up to and including
$6.5 billion;
5
<PAGE>
/bullet/ 0.215% of the value of net assets over $6.5 billion up to and including
$11.5 billion;
/bullet/ 0.200% of the value of net assets over $11.5 billion up to and
including $16.5 billion;
/bullet/ 0.190% of the value of net assets over $16.5 billion up to and
including $19 billion;
/bullet/ 0.180% of the value of net assets over $19 billion up to and including
$21.5 billion; and
/bullet/ 0.170% of the value of net assets over $21.5 billion.
B. The advisory fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Adviser may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Adviser shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund
hereunder are not to be deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Adviser or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Adviser or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Adviser or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be subject to liability to the Trust or
the Fund or to any shareholder of the Fund for any act or omission in the course
of, or connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Adviser agrees to
reimburse the Trust for any and all costs, expenses, and counsel and trustees'
fees reasonably incurred by the Trust in the preparation, printing and
distribution of proxy statements, amendments to its Registration Statement,
holdings of meetings of its shareholders or trustees, the conduct of factual
investigations, any legal or administrative proceedings (including any
applications for exemptions or determinations by the Securities and Exchange
Commission) which the Trust incurs as the result of action or inaction of the
Adviser or any of its affiliates or any of their
6
<PAGE>
officers, directors, employees or stockholders where the action or inaction
necessitating such expenditures (i) is directly or indirectly related to any
transactions or proposed transaction in the stock or control of the Adviser or
its affiliates (or litigation related to any pending or proposed or future
transaction in such shares or control) which shall have been undertaken without
the prior, express approval of the Trust's Board of Trustees; or, (ii) is within
the control of the Adviser or any of its affiliates or any of their officers,
directors, employees or stockholders. The Adviser shall not be obligated
pursuant to the provisions of this Subparagraph 6(B), to reimburse the Trust for
any expenditures related to the institution of an administrative proceeding or
civil litigation by the Trust or a shareholder seeking to recover all or a
portion of the proceeds derived by any stockholder of the Adviser or any of its
affiliates from the sale of his shares of the Adviser, or similar matters. So
long as this Agreement is in effect, the Adviser shall pay to the Trust the
amount due for expenses subject to this Subparagraph 6(B) within 30 days after a
bill or statement has been received by the Adviser therefor. This provision
shall not be deemed to be a waiver of any claim the Trust may have or may assert
against the Adviser or others for costs, expenses or damages heretofore incurred
by the Trust or for costs, expenses or damages the Trust may hereafter incur
which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to
protect any trustee or officer of the Trust, or director or officer of the
Adviser, from liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter for
periods not exceeding one (1) year so long as such continuation is approved at
least annually (i) by a vote of a majority of the outstanding voting securities
of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a
vote of a majority of the Trustees of the Trust who are not parties to the
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the
payment of any penalty either by vote of the Board of Trustees of the Trust or
by vote of a majority of the outstanding voting securities of the Fund on 60
days' written notice to the Adviser;
(ii) shall immediately terminate with respect to
the Fund in the event of its assignment; and
(iii) may be terminated by the Adviser on 60 days'
written notice to the Fund.
7
<PAGE>
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any office
of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the 1st day of May, 2000.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
FRANKLIN STRATEGIC INCOME SECURITIES FUND
/S/ DAVID P. GOSS
----------------------------
David P. Goss
Vice President
& Assistant Vice President
FRANKLIN ADVISERS, INC.
/S/ HARMON E. BURNS
----------------------------
Harmon E. Burns
Executive Vice President
8
EXHIBIT (d) xviii
SUBADVISORY AGREEMENT
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
(on behalf of the Franklin Strategic Income Securities Fund)
THIS SUBADVISORY AGREEMENT made as of the May 1, 2000 by and between
FRANKLIN ADVISERS, INC., a corporation organized and existing under the laws of
the State of California (hereinafter called "FAV"), and TEMPLETON INVESTMENT
COUNSEL, INC., a Florida corporation (hereinafter called "TICI").
W I T N E S S E T H
WHEREAS, FAV and TICI are each registered as an investment adviser
under the Investment Advisers Act of 1940 (the "Advisers Act"), and engaged in
the business of supplying investment advice, and investment management services,
as an independent contractor; and
WHEREAS, FAV has been retained to render investment advisory services
to Franklin Strategic Income Securities Fund (the "Fund"), a series of Franklin
Templeton Variable Insurance Products Trust (the "Trust"), an investment
management company registered with the U.S. Securities and Exchange Commission
(the "SEC") pursuant to the Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, FAV desires to retain TICI to render investment advisory,
research and related services to the Fund pursuant to the terms and provisions
of this Agreement, and TICI is interested in furnishing said services.
NOW, THEREFORE, in consideration of the covenants and the mutual
promises hereinafter set forth, the parties hereto, intending to be legally
bound hereby, mutually agree as follows:
1. FAV hereby retains TICI and TICI hereby accepts such engagement, to
furnish certain investment advisory services with respect to the assets of the
Fund, as more fully set forth herein.
(a) Subject to the overall policies, control, direction and
review of the Trust's Board of Trustees (the "Board") and to the instructions
and supervision of FAV, TICI will provide a continuous investment program for
the Fund, including allocation of the Fund's assets among the various securities
markets of the world and, investment research and advice with respect to
securities and investments and cash equivalents in the Fund. So long as the
Board and FAV determine, on no less frequently than an annual basis, to grant
the necessary delegated authority to TICI, and subject to paragraph (b) below,
TICI will determine what securities and other investments will be purchased,
retained or sold by the Fund, and will place all purchase and sale orders on
behalf of the Fund except that orders regarding U.S. domiciled securities and
money market instruments may also be placed on behalf of the Fund by FAV.
1
<PAGE>
(b) In performing these services, TICI shall adhere to the
Fund's investment objectives, policies and restrictions as contained in its
Prospectus and Statement of Additional Information, and in the Trust's
Declaration of Trust, and to the investment guidelines most recently established
by FAV and shall comply with the provisions of the 1940 Act and the rules and
regulations of the SEC thereunder in all material respects and with the
provisions of the United States Internal Revenue Code of 1986, as amended, which
are applicable to regulated investment companies.
(c) Unless otherwise instructed by FAV or the Board, and
subject to the provisions of this Agreement and to any guidelines or limitations
specified from time to time by FAV or by the Board, TICI shall report daily all
transactions effected by TICI on behalf of the Fund to FAV and to other entities
as reasonably directed by FAV or the Board.
(d) TICI shall provide the Board at least quarterly, in
advance of the regular meetings of the Board, a report of its activities
hereunder on behalf of the Fund and its proposed strategy for the next quarter,
all in such form and detail as requested by the Board. TICI shall also make an
investment officer available to attend such meetings of the Board as the Board
may reasonably request.
(e) In carrying out its duties hereunder, TICI shall comply
with all reasonable instructions of the Fund or FAV in connection therewith.
Such instructions may be given by letter, telex, telefax or telephone confirmed
by telex, by the Board or by any other person authorized by a resolution of the
Board, provided a certified copy of such resolution has been supplied to TICI.
2. In performing the services described above, TICI shall use its best
efforts to obtain for the Fund the most favorable price and execution available.
Subject to prior authorization of appropriate policies and procedures by the
Board, TICI may, to the extent authorized by law and in accordance with the
terms of the Fund's Prospectus and Statement of Additional Information, cause
the Fund to pay a broker who provides brokerage and research services an amount
of commission for effecting a portfolio investment transaction in excess of the
amount of commission another broker would have charged for effecting that
transaction, in recognition of the brokerage and research services provided by
the broker. To the extent authorized by applicable law, TICI shall not be deemed
to have acted unlawfully or to have breached any duty created by this Agreement
or otherwise solely by reason of such action.
3. (a) TICI shall, unless otherwise expressly provided and
authorized, have no authority to act for or represent FAV or the Fund in any
way, or in any way be deemed an agent for FAV or the Fund.
(b) It is understood that the services provided by TICI are
not to be deemed exclusive. FAV acknowledges that TICI may have investment
responsibilities, or render investment advice to, or perform other investment
advisory services, for individuals or entities, including other investment
companies registered pursuant to the 1940 Act, ("Clients") which may
2
<PAGE>
invest in the same type of securities as the Fund. FAV agrees that TICI may give
advice or exercise investment responsibility and take such other action with
respect to such Clients which may differ from advice given or the timing or
nature of action taken with respect to the Fund.
4. TICI agrees to use its best efforts in performing the services to be
provided by it pursuant to this Agreement.
5. FAV has furnished or will furnish to TICI as soon as available
copies properly certified or authenticated of each of the following documents:
(a) the Trust's Declaration of Trust, as filed with the
Secretary of State of the Commonwealth of Massachusetts on May 23, 1988, and any
other organizational documents and all amendments thereto or restatements
thereof;
(b) resolutions of the Trust's Board of Trustees authorizing
the appointment of TICI and approving this Agreement;
(c) the Trust's original Notification of Registration on Form
N-8A under the 1940 Act as filed with the SEC and all amendments thereto;
(d) the Trust's current Registration Statement on Form N-1A
under the Securities Act of 1933, as amended and under the 1940 Act as filed
with the SEC, and all amendments thereto, as it relates to the Fund;
(e) the Fund's most recent Prospectus and Statement of
Additional Information; and
(f) the Investment Advisory Agreement between the Fund and
FAV.
FAV will furnish TICI with copies of all amendments of or supplements to the
foregoing documents.
6. TICI will treat confidentially and as proprietary information of the
Fund all records and other information relative to the Fund and prior, present
or potential shareholders, and will not use such records and information for any
purpose other than performance of its responsibilities and duties hereunder,
except after prior notification to and approval in writing by the Fund, which
approval shall not be unreasonably withheld and may not be withheld where TICI
may be exposed to civil or criminal contempt proceedings for failure to comply
when requested to divulge such information by duly constituted authorities, or
when so requested by the Fund.
7. (a) FAV shall pay a monthly fee in cash to TICI of 25% of the
investment advisory fee paid to FAV by the Fund, which fee shall be payable on
the first business day of each month in each year as compensation for the
services rendered and obligations assumed by TICI during the preceding month.
The advisory fee under this Agreement shall be payable on the
3
<PAGE>
first business day of the first month following the effective date of this
Agreement, and shall be reduced by the amount of any advance payments made by
FAV relating to the previous month.
(b) FAV and TICI shall share equally in any voluntary
reduction or waiver by FAV of the management fee due FAV under the Investment
Advisory Agreement between FAV and the Fund.
(c) If this Agreement is terminated prior to the end of any
month, the monthly fee shall be prorated for the portion of any month in which
this Agreement is in effect which is not a complete month according to the
proportion which the number of calendar days in the month during which the
Agreement is in effect bears to the total number of calendar days in the month,
and shall be payable within 10 days after the date of termination.
8. Nothing herein contained shall be deemed to relieve or deprive the
Board of its responsibility for and control of the conduct of the affairs of the
Fund.
9. (a) In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of its obligations or duties hereunder on the
part of TICI, neither TICI nor any of its directors, officers, employees or
affiliates shall be subject to liability to FAV or the Fund or to any
shareholder of the Fund for any error of judgment or mistake of law or any other
act or omission in the course of, or connected with, rendering services
hereunder or for any losses that may be sustained in the purchase, holding or
sale of any security by the Fund.
(b) Notwithstanding paragraph 9(a), to the extent that FAV is
found by a court of competent jurisdiction, or the SEC or any other regulatory
agency to be liable to the Fund or any shareholder (a "liability"), for any acts
undertaken by TICI pursuant to authority delegated as described in Paragraph
1(a), TICI shall indemnify and save FAV and each of its affiliates, officers,
directors and employees (each a "Franklin Indemnified Party") harmless from,
against, for and in respect of all losses, damages, costs and expenses incurred
by a Franklin Indemnified Party with respect to such liability, together with
all legal and other expenses reasonably incurred by any such Franklin
Indemnified Party, in connection with such liability.
(c) No provision of this Agreement shall be construed to
protect any director or officer of FAV or TICI, from liability in violation of
Sections 17(h) or (i), respectively, of the 1940 Act.
10. During the term of this Agreement, TICI will pay all expenses
incurred by it in connection with its activities under this Agreement other than
the cost of securities (including brokerage commissions, if any) purchased for
the Fund. The Fund and FAV will be responsible for all of their respective
expenses and liabilities.
11. This Agreement shall be effective as of the date given above, and
shall continue in effect for two years. It is renewable annually thereafter for
successive periods not to exceed one year each (i) by a vote of the Board or by
the vote of a majority of the outstanding voting securities of the Fund, and
(ii) by the vote of a majority of the Trustees of the Trust who are not
4
<PAGE>
parties to this Agreement or interested persons thereof, cast in person at a
meeting called for the purpose of voting on such approval.
12. This Agreement may be terminated at any time, without payment of
any penalty, by the Board or by vote of a majority of the outstanding voting
securities of the Fund, upon sixty (60) days' written notice to FAV and TICI,
and by FAV or TICI upon sixty (60) days' written notice to the other party.
13. This Agreement shall terminate automatically in the event of any
transfer or assignment thereof, as defined in the 1940 Act, and in the event of
any act or event that terminates the Investment Advisory Agreement between FAV
and the Fund.
14. In compliance with the requirements of Rule 31a-3 under the 1940
Act, TICI hereby agrees that all records which it maintains for the Fund are the
property of the Fund and further agrees to surrender promptly to the Fund, or to
any third party at the Fund's direction, any of such records upon the Fund's
request. TICI further agrees to preserve for the periods prescribed by Rule
31a-2 under the 1940 Act the records required to be maintained by Rule 31a-1
under the 1940 Act.
15. This Agreement may not be materially amended, transferred,
assigned, sold or in any manner hypothecated or pledged without the affirmative
vote or written consent of the holders of a majority of the outstanding voting
securities of the Fund and may not be amended without the written consent of FAV
and TICI.
16. If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule, or otherwise, the remainder of this Agreement
shall not be affected thereby.
17. The terms "majority of the outstanding voting securities" of the
Fund and "interested persons" shall have the meanings as set forth in the 1940
Act.
18. This Agreement shall be interpreted in accordance with and governed
by the laws of the State of California of the United States of America.
19. TICI acknowledges that it has received notice of and accepts the
limitations of the Trust's liability as set forth in its Agreement and
Declaration of Trust. TICI agrees that the Trust's obligations hereunder shall
be limited to the assets of the Fund, and that TICI shall not seek satisfaction
of any such obligation from any shareholders of the Fund nor from any trustee,
officer, employee or agent of the Trust.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and attested by their duly authorized officers.
FRANKLIN ADVISERS, INC.
/S/ HARMON E. BURNS
-------------------------------------
Harmon E. Burns
Executive Vice President
TEMPLETON INVESTMENT COUNSEL, INC.
/S/ MARTIN L. FLANAGAN
-------------------------------------
Martin L. Flanagan
Executive Vice President
Franklin Strategic Income Securities Fund hereby acknowledges and agrees to the
provisions of paragraphs 9(a) and 10 of this Agreement.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
FRANKLIN STRATEGIC INCOME SECURITIES
FUND
/S/ DAVID P. GOSS
-------------------------------------
David P. Goss
Vice President
& Assistant Secretary
6
EXHIBIT (d) xix
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
on behalf of
FRANKLIN S&P 500 INDEX FUND
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST, a Massachusetts business trust (the "Trust"), on
behalf of FRANKLIN S&P 500 INDEX FUND (the "Fund"), a series of the Trust, and
FRANKLIN ADVISERS, INC., a California corporation, (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statements under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment adviser and to have an investment adviser perform
various management, statistical, research, investment advisory and other
services for the Fund; and,
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
investment advisory, counseling and supervisory services to investment companies
and other investment counseling clients, and desires to provide these services
to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Adviser
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the
Trust.
2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The
Adviser undertakes to provide the services hereinafter set forth and to assume
the following obligations:
1
<PAGE>
A. INVESTMENT ADVISORY SERVICES.
(a) The Adviser shall manage the Fund's assets
subject to and in accordance with the investment objectives and policies of the
Fund and any directions which the Trust's Board of Trustees may issue from time
to time. In pursuance of the foregoing, the Adviser shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as may
be necessary to implement the same. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's investment
securities shall be exercised. The Adviser shall render or cause to be rendered
regular reports to the Trust, at regular meetings of its Board of Trustees and
at such other times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions made with respect to the investment of the Fund's
assets and the purchase and sale of its investment securities, (ii) the reasons
for such decisions and (iii) the extent to which those decisions have been
implemented.
(b) The Adviser, subject to and in accordance with
any directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Adviser to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical, quotations and other information to the Fund and the Adviser in
accordance with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees determines
that the Fund will benefit, directly or indirectly, by doing so, the Adviser may
place orders with a broker who charges a commission for that transaction which
is in excess of the amount of commission that another broker would have charged
for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of "brokerage and research services" (as
defined in Section 28(e) (3) of the Securities Exchange Act of 1934) provided by
that broker.
Accordingly, the Trust and the Adviser agree that
the Adviser shall select brokers for the execution of the Fund's transactions
from among:
(i) Those brokers and dealers who provide
quotations and other services to the Fund,
specifically including the quotations necessary to
determine the Fund's net assets, in such amount of
total brokerage as may reasonably be required in
light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its
2
<PAGE>
affiliates which the Adviser or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to
securities, actual or potential, of the Fund, or
which place the Adviser in a better position to
make decisions in connection with the management of
the Fund's assets and securities, whether or not
such data may also be useful to the Adviser and its
affiliates in managing other portfolios or advising
other clients, in such amount of total brokerage as
may reasonably be required. Provided that the
Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the
Fund may also be considered as a factor in the
selection of broker-dealers to execute the Fund's
portfolio transactions.
(c) When the Adviser has determined that the Fund
should tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules of
any securities exchange or association of which Distributors may be a member.
Neither the Adviser nor Distributors shall be obligated to make any additional
commitments of capital, expense or personnel beyond that already committed
(other than normal periodic fees or payments necessary to maintain its corporate
existence and membership in the National Association of Securities Dealers,
Inc.) as of the date of this Agreement. This Agreement shall not obligate the
Adviser or Distributors (i) to act pursuant to the foregoing requirement under
any circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the Trust on behalf of the Fund shall enter
into an agreement with the Adviser and/or Distributors to reimburse them for all
such expenses connected with attempting to collect such fees, including legal
fees and expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect such fees.
(d) The Adviser shall render regular reports to the
Trust, not more frequently than quarterly, of how much total brokerage business
has been placed by the Adviser, on behalf of the Fund, with brokers falling into
each of the categories referred to above and the manner in which the allocation
has been accomplished.
(e) The Adviser agrees that no investment decision
will be made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Adviser's paramount duty to obtain the
best net price and execution for the Fund.
(f) Decisions on proxy voting shall be made by the
Adviser unless the Board of Trustees determines otherwise. Pursuant to its
authority, Adviser shall have the power to vote, either in person or by proxy,
all securities in which the Fund may be invested from time to time, and shall
not be required to seek or take instructions from the Fund with respect thereto.
Adviser shall not be expected or required to take any action other than the
rendering of investment-related advice with respect to lawsuits involving
securities presently or formerly held
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in the Fund, or the issuers thereof, including actions involving bankruptcy.
Should Adviser undertake litigation against an issuer on behalf of the Fund, the
Fund agrees to pay its portion of any applicable legal fees associated with the
action or to forfeit any claim to any assets Adviser may recover and, in such
case, agrees to hold Adviser harmless for excluding the Fund from such action.
In the case of class action suits involving issuers held in the Fund, Adviser
may include information about the Fund for purposes of participating in any
settlements.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF
SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser,
its officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
D. AUTHORITY TO DELEGATE. The Adviser may, at its expense,
select and contract with one or more investment advisers registered under the
Investment Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the
services for a Fund for which it is responsible under this Agreement. The
Adviser will compensate any Sub-Adviser for its services to the Fund. The
Adviser may terminate the services of any Sub-Adviser at any time in its sole
discretion, and shall at such time assume the responsibilities of such
Sub-Adviser unless and until a successor Sub-Adviser is selected and the
requisite approval of a Fund's shareholders is obtained. The Adviser will
continue to have responsibility for all advisory services furnished by any
Sub-Adviser.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Adviser herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value
of the Fund's net assets;
E. Salaries and other compensations of executive officers of
the Trust who are not officers, directors, stockholders or employees of the
Adviser or its affiliates;
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F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the Trust's
legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Adviser or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable state
laws; including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues;
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums; and
O. The Fund's portion of the cost of any proxy voting service
used on its behalf.
4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in
cash to the Adviser based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services rendered
and obligations assumed by the Adviser, during the preceding month, on the first
business day of the month in each year.
A. For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as that Fund uses to
compute the value of its net assets in connection with the determination of the
net asset value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the annual rate of 0.15% of
the value of the Fund's net assets.
B. The advisory fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith and to the extent necessary to
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comply with the limitations on expenses which may be borne by the Fund as set
forth in the laws, regulations and administrative interpretations of those
states in which the Fund's shares are registered. The Adviser may waive all or a
portion of its fees provided for hereunder and such waiver shall be treated as a
reduction in purchase price of its services. The Adviser shall be contractually
bound hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of the Fund's expenses, as if such waiver or limitation were full set
forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund
hereunder are not to be deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Adviser or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Adviser or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Adviser or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be subject to liability to the Trust or
the Fund or to any shareholder of the Fund for any act or omission in the course
of, or connected with, rendering services hereunder or for any losses that may
be sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Adviser agrees to
reimburse the Trust for any and all costs, expenses, and counsel and trustees'
fees reasonably incurred by the Trust in the preparation, printing and
distribution of proxy statements, amendments to its Registration Statement,
holdings of meetings of its shareholders or trustees, the conduct of factual
investigations, any legal or administrative proceedings (including any
applications for exemptions or determinations by the Securities and Exchange
Commission) which the Trust incurs as the result of action or inaction of the
Adviser or any of its affiliates or any of their officers, directors, employees
or stockholders where the action or inaction necessitating such expenditures (i)
is directly or indirectly related to any transactions or proposed transaction in
the stock or control of the Adviser or its affiliates (or litigation related to
any pending or proposed or future transaction in such shares or control) which
shall have been undertaken without the prior, express approval of the Trust's
Board of Trustees; or, (ii) is within the control of the Adviser or any of its
affiliates or any of their officers, directors, employees or stockholders. The
Adviser shall not be obligated pursuant to the provisions of this Subparagraph
6(B), to reimburse the Trust for any expenditures related to the institution of
an administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived
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by any stockholder of the Adviser or any of its affiliates from the sale of his
shares of the Adviser, or similar matters. So long as this Agreement is in
effect, the Adviser shall pay to the Trust the amount due for expenses subject
to this Subparagraph 6(B) within 30 days after a bill or statement has been
received by the Adviser therefor. This provision shall not be deemed to be a
waiver of any claim the Trust may have or may assert against the Adviser or
others for costs, expenses or damages heretofore incurred by the Trust or for
costs, expenses or damages the Trust may hereafter incur which are not
reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to
protect any trustee or officer of the Trust, or director or officer of the
Adviser, from liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter for
periods not exceeding one (1) year so long as such continuation is approved at
least annually (i) by a vote of a majority of the outstanding voting securities
of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a
vote of a majority of the Trustees of the Trust who are not parties to the
Agreement (other than as Trustees of the Trust), cast in person at a meeting
called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the
payment of any penalty either by vote of the Board of Trustees of the Trust or
by vote of a majority of the outstanding voting securities of the Fund on 60
days' written notice to the Adviser;
(ii) shall immediately terminate with respect to
the Fund in the event of its assignment; and
(iii) may be terminated by the Adviser on 60 days'
written notice to the Fund.
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any office
of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
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9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the 1st of May, 2000.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
FRANKLIN S&P 500 INDEX FUND
/S/ DAVID P. GOSS
--------------------------------
David P. Goss
Vice President &
Assistant Secretary
FRANKLIN ADVISERS, INC.
/S/ HARMON E. BURNS
--------------------------------
Harmon E. Burns
Executive Vice President
8
EXHIBIT (d) xx
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
ON BEHALF OF
FRANKLIN S&P 500 INDEX FUND
SUBADVISORY AGREEMENT
This Agreement is entered into as of May 1, 2000, by and between Franklin
Advisers, Inc., a California corporation (the "Manager"), and State Street
Global Advisors, a division of State Street Bank and Trust Company, a
Massachusetts trust company (the "Subadvisor")
WHEREAS, Franklin S&P 500 Index Fund (the "Fund") is a series of Franklin
Templeton Variable Insurance Products Trust (the "Trust"), an investment company
registered with the U.S. Securities and Exchange Commission ("SEC") pursuant to
the Investment Company Act of 1940 (the "1940 Act"); and
WHEREAS, Manager is registered as an investment adviser under the Investment
Advisers Act of 1940 (the "Advisers Act"), and Subadvisor is a "bank" as defined
in the Advisors Act and both are engaged in the business of supplying, among
other things, investment advice and investment management services to investment
companies and other investment counseling clients; and
WHEREAS, Manager has been retained to render investment advisory services to the
Fund pursuant to an Investment Advisory Agreement (the "Management Contract"),
and Manager desires to retain Subadvisor to render investment advisory, research
and related services to the Fund pursuant to this Agreement, and Subadvisor is
willing to provide such services; and
WHEREAS, the Trust's board of trustees (the "Board"), including a majority of
trustees who are not "interested persons" (as defined below) of any party to
this Agreement, have consented to such an arrangement.
NOW, THEREFORE, in consideration of the covenants and mutual promises contained
herein, the parties hereto, intending to be legally bound hereby, mutually agree
as follows:
I. APPOINTMENT OF SUBADVISOR; COMPENSATION
1.1 Appointment of Subadvisor.
Subject to and in accordance with the provisions hereof, Manager hereby appoints
Subadvisor as investment subadvisor to provide the various investment advisory
and other services to the Fund set forth herein and, subject to the restrictions
set forth herein, and hereby delegates to Subadvisor the authority vested in
Manager pursuant to the Management Contract to the extent necessary to enable
Subadvisor to perform its obligations under this Agreement. Subadvisor accepts
such appointment for the compensation herein provided and agrees to use its best
efforts in performing the services to be provided pursuant to this Agreement.
Manager shall continue to have responsibility for all services to be provided to
the Fund pursuant to the Management
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Contract and shall oversee and review the Subadvisor's performance of its duties
under this Agreement.
1.2 Scope of Investment Authority.
(a) Subadvisor is hereby authorized, on a discretionary basis, to manage
the investments and determine the composition of the assets of the
Fund, subject at all times to (i) the supervision and control of the
Board, (ii) the investment objectives, policies and limitations, as
contained in the Fund's current Prospectus and Statement of Additional
Information and other governing documents, including the Trust's
Declaration of Trust and By-laws, and (iii) such instructions, policies
and limitations relating to the Fund as the Board or Manager may from
time to time adopt and communicate in writing to Subadvisor.
Notwithstanding anything herein to the contrary, Subadvisor is not
authorized to take any action, including the purchase and sale of Fund
securities, in contravention of any restriction, limitation, objective,
policy or instruction described in the previous sentence.
(b) It is understood and agreed that, for so long as this Agreement shall
remain in effect, Subadvisor shall, subject to Section 1.2(a) hereof,
retain discretionary investment authority over the manner in which the
Fund's assets are invested, provided that the Board and Manager shall
at all times have the right to monitor the Fund's investment activities
and performance, require Subadvisor to make reports and give
explanations as to the manner in which the Fund's assets are being
invested, and, should either Manager or the Board become dissatisfied
with Subadvisor's performance in any way, terminate this Agreement in
accordance with the provisions of Section 8.2 hereof.
1.3 Independent Contractor.
Notwithstanding anything herein to the contrary, Subadvisor shall be an
independent contractor and will have no authority to act for or represent the
Trust, the Fund or Manager in any way or otherwise be deemed an agent of any of
them, except to the extent expressly authorized by this Agreement or in writing
by the Trust or Manager.
1.4 Compensation.
Subadvisor shall be compensated for the services it performs on behalf of the
Fund in accordance with the terms set forth in Appendix A to this Agreement.
II. SERVICES TO BE PERFORMED BY SUBADVISOR
2.1 Investment Advisory Services.
(a) In fulfilling its obligations to manage the assets of the Fund,
Subadvisor will:
(i) provide the Fund with such investment research, advice and
supervision as the Board and Manager may from time to time
consider necessary for the proper management of the assets of
the Fund;
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(ii) formulate and implement a continuous investment program for
the Fund;
(iii) take whatever steps are necessary to implement these
investment programs by the purchase and sale of securities and
other investments, including the selection of brokers or
dealers, the placing of orders for such purchases and sales in
accordance with the provisions of paragraph (b) below and the
affirming of such purchases and sales with counterparties and
clearing agents and ensuring that such purchases and sales are
properly settled and cleared in a timely manner;
(iv) provide to Manager, the Fund's custodian and/or to such other
entities as Manager shall request, such information and
reports with respect to the implementation of the Fund's
investment program as Manager shall request, including daily
reporting of all transactions effected by Subadvisor on behalf
of the Fund and daily reporting of pricing and all other
information sufficient to enable the Fund to comply with Rule
22c-1 under the 1940 Act. Subadvisor shall promptly forward to
Manager and the Fund's custodian copies of all brokerage or
dealer confirmations for each transaction effected for the
Fund and shall as soon as is practicable provide Manager and
the Fund's custodian with copies of the trade blotter for each
such transaction;
(v) provide the Board in advance of the Board's regular and
special meetings and at such other times as may be reasonably
requested by the Board, a report of its activities hereunder
on behalf of the Fund and its proposed strategy, and such
other periodic or special reports as the Board or Manager may
reasonably request, all in such form and detail as requested
by the Board, and make an investment officer available to
attend such meetings as the Board may request. Subadvisor
shall also provide the Board and Manager with copies of
Subadvisor's quarterly compliance reports prepared in
connection with Subadvisor's code of ethics adopted in
compliance with Rule 17j-1 of the 1940 Act promptly after such
reports are available; and
(vi) provide advice and assistance to Manager as to the
determination of the fair value of certain securities where
market quotations are not readily available for purposes of
calculating net asset value of the Fund in accordance with
valuation procedures and methods established by the Board.
(b) Subadvisor shall place all orders for the purchase and sale of
portfolio securities for the Fund's account with brokers, dealers,
futures commission merchants or banks selected by Subadvisor.
Subadvisor shall use its best efforts to obtain for the Fund the most
favorable net price and execution available. Subject to the policies
and procedures adopted by the Board, Subadvisor may, to the extent
authorized by law and in accordance with the Fund's Prospectus and
Statement of Additional Information, cause the Fund to pay a broker or
dealer who provides brokerage and research services (as defined in
Section 28(e) of the Securities Exchange Act of 1934) an amount of
commission for effecting a portfolio investment transaction in excess
of the amount of commission another broker or dealer would have charged
for effecting that transaction, in recognition of the brokerage and
research services provided by the broker or dealer. To the extent
authorized by applicable
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law, Subadvisor shall not be deemed to have acted unlawfully or to have
breached any duty created by this Agreement or otherwise solely by
reason of such action. The Board shall periodically review the
commissions paid by the Fund to determine if the commissions paid over
representative periods were reasonable in relation to the benefits to
the Fund. Subject to applicable law and the policies and procedures
adopted by the Board, Subadvisor may select brokers or dealers that are
affiliated with Subadvisor in executing purchases and sales of
securities for the Fund.
2.2 Administrative and Other Services.
(a) Facilities and Personnel.
Subadvisor will, at its expense, furnish (i) all necessary investment
and management facilities, including salaries of personnel required for
it to execute its duties faithfully under this Agreement, and (ii)
administrative facilities, including bookkeeping, clerical personnel
and equipment necessary for the efficient conduct of the investment
affairs of the Fund (excluding determination of net asset value and
shareholder accounting services).
(b) Maintenance of Books and Records.
Subadvisor agrees to maintain, in the form and for the period required
by Rules 31a-1 and 31a-2 under the 1940 Act, all accounts, books and
records with respect to the Fund as are required to be maintained
pursuant to the 1940 Act. Subadvisor agrees that such accounts, books
and records are the property of the Trust and will be surrendered to
the Trust or Manager (or any other party at the Trust's direction)
promptly upon request. Subadvisor agrees to provide copies of such
accounts, books and records to Manager and the Fund's accountants and
auditors promptly upon request. Subadvisor shall timely furnish to
Manager all information relating to Subadvisor's services under this
Agreement needed by Manager to keep the other books and records of the
Fund required by Rule 31a-1 under the 1940 Act. Subadvisor further
agrees to preserve for the periods prescribed by Rule 31a-2 under the
1940 Act any such records as are required to be maintained by it
pursuant to this Agreement.
(c) Provision of Certain Additional Information.
Subadvisor shall provide such information as is necessary to enable the
Trust and Manager to prepare and update the Trust's registration
statement (and any supplement thereto), the Fund's financial statements
and any other periodic financial reports or other documents required to
be filed with the SEC and any other regulatory entity. Subadvisor
understands that the Trust and Manager will rely on such information in
the preparation of the Trust's registration statement, the Fund's
financial statements and other reports and documents, and hereby
covenants that any such information provided by Subadvisor expressly
for use in such registration statements, financial statements and/or
other reports or documents shall be true and complete in all material
respects. Subadvisor agrees to provide such other information as the
Fund or Manager may reasonably request for use in the preparation of
other materials necessary or helpful for the underwriting and
distribution of the Fund's shares.
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(d) Exercise of Voting Rights for Investments.
Manager hereby delegates to Subadvisor discretionary authority to
determine the manner in which any voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's
investment securities shall be exercised. Subadvisor shall use its best
good faith judgment to exercise such rights in a manner which best
serves the interests of the Fund and its shareholders. Subadvisor shall
promptly notify Manager and the Fund's custodian of corporate actions
and shall notify Manager of Proxy votes in the event Subadvisor
exercises any such rights with respect to the Fund's investment
securities. Upon written notice to Subadvisor, the Board or Manager may
at any time withdraw the authority granted to Subadvisor pursuant to
this Section to perform any or all of the voting services contemplated
hereby.
III. EXPENSES
During the term of this Agreement, Subadvisor will pay all expenses incurred by
it in connection with its activities under this Agreement other than the cost of
securities (including brokerage commissions, if any) purchased for the Fund. The
Fund and Manager will be responsible for their respective expenses and
liabilities.
IV. COMPLIANCE WITH APPLICABLE LAWS AND GOVERNING DOCUMENTS;
CONFIDENTIALITY
4.1 Compliance with Applicable Laws and Governing Documents.
Subadvisor will comply with (i) all applicable state and federal laws and
regulations governing the performance of Subadvisor's duties hereunder, (ii) the
investment objective, policies and limitations, as provided in the Fund's
current Prospectus, Statement of Additional Information and other governing
documents, and (iii) such instructions, policies and limitations relating to the
Fund as the Board or Manager may from time to time adopt and communicate to
Subadvisor. Without limiting the generality of the foregoing, Subadvisor shall
ensure that (1) the Fund shall comply with Section 817(h) of the Internal
Revenue Code of 1986 and the regulations issued thereunder (the "Code"),
specifically Regulation Section 1.817-5, relating to the diversification
requirements for variable annuity, endowment, and life insurance contracts, and
any amendments or other modifications to such Section or regulations; (2)
Subadvisor's activities do not disqualify the Fund as a regulated investment
company under Subchapter M of the Code or any successor provision; and (3) any
and all applicable state insurance law restrictions on investments that operate
to limit or restrict the investments that the Fund may otherwise make and which
Manager has provided to Subadvisor in writing are complied with as well as any
changes thereto.
Subadvisor shall submit to all regulatory and administrative bodies having
jurisdiction over the services provided pursuant to this Agreement any
information, reports or other material which any such body by reason of this
Agreement may reasonably request or require pursuant to applicable laws and
regulations.
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Manager will provide Subadvisor with copies of (i) the Trust's Declaration of
Trust and By-laws, as currently in effect, (ii) the Fund's currently effective
Prospectus and Statement of Additional Information, and all updates thereto, as
set forth in the Trust's registration statement under the 1940 Act and the
Securities Act of 1933, as amended, (iii) any instructions, investment policies
or other restrictions adopted by the Board or Manager supplemental thereto, and
(iv) the Management Contract. Manager will provide Subadvisor with such further
documentation and information concerning the investment objectives, policies and
restrictions applicable to the Fund, and such other information relating to the
business affairs of the Fund as Subadvisor from time to time reasonably requests
in order to discharge its obligations hereunder. Manager shall provide or cause
to be provided timely information to Subadvisor regarding such matters as
inflows to and outflows from the Fund and the cash requirements of the Fund.
4.2 Confidentiality.
Subadvisor will treat confidentially and as proprietary information of the Fund
all records and other information relative to the Fund and prior, present and
potential shareholders, and will not use such records or information other than
in performance of its responsibilities and duties hereunder, except after prior
notification to and approval in writing by the Fund. The foregoing shall not be
applicable to any information that is publicly available when provided or which
thereafter becomes publicly available other than in contravention of this
Section or which is required to be disclosed by any regulatory authority in the
lawful and appropriate exercise of its jurisdiction, by judicial or
administrative process or otherwise by applicable law or regulation.
Subadvisor agrees not to disclose the existence of this Agreement or the
underlying business relationship without the prior written approval of Manager.
V. ACTIVITIES OF SUBADVISOR AND CONFLICTS OF INTEREST
It is understood that the services provided by Subadvisor are not to be deemed
exclusive. Manager acknowledges that Subadvisor may have investment
responsibilities, or render investment advice to, or perform other investment
advisory services, for individuals or entities, including other investment
companies registered pursuant to the 1940 Act ("Clients"), which may invest in
the same type of securities as the Fund, and Subadvisor is free to render
services to others so long as Subadvisor's services under this Agreement are not
impaired. Manager agrees that Subadvisor may give advice or exercise investment
responsibility and take such other action with respect to Clients which may
differ from advice given or the timing or nature of action taken with respect to
the Fund.
If purchases or sales of securities for the Fund or other Clients of Subadvisor
or its affiliates arise for consideration at or about the same time, Subadvisor
shall make transactions in such securities for the Fund and its other Clients in
a manner deemed equitable to all. It is agreed that, on occasions when
Subadvisor deems the purchase or sale of a security to be in the best interest
of the Fund as well as other Clients, it may, to the extent permitted by
applicable laws or regulations, but will not be obligated to, aggregate the
securities to be sold or purchased for the Fund and the other Clients in order
to obtain favorable execution and lower brokerage commissions or prices. In that
event, allocation of the securities purchased or sold, as well as the
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expenses incurred in the transaction, will be made by Subadvisor in the manner
that is most equitable and consistent with its fiduciary obligations to the Fund
and to such other Clients. In some cases these procedures may adversely affect
the size of the position obtainable for or disposed of by the Fund or have an
adverse effect on price.
It is understood that the trustees, officers, agents and shareholders of the
Trust are or may be interested in Subadvisor as directors, officers,
stockholders or otherwise; that directors, officers, agents and stockholders of
Subadvisor are or may be interested in the Trust as trustees, officers,
shareholders or otherwise; that Subadvisor may be interested in the Trust; and
that the existence of any such dual interest shall not affect the validity of
this Agreement or of any transactions hereunder except as otherwise provided in
the Trust's Declaration of Trust and the declaration of trust of Subadvisor,
respectively, or by specific provisions of applicable law.
No provision of this Agreement shall be construed to protect any director or
officer of Manager or Subadvisor from liability in violation of Sections 17(h)
and (i) of the 1940 Act.
VI. REPRESENTATIONS, WARRANTIES AND COVENANTS
6.1 Representations of Manager. Manager represents, warrants and agrees
that:
(a) Manager is a corporation organized under the laws of the State of
California;
(b) Manager is and shall remain duly registered as an "investment adviser"
under the Advisers Act;
(c) Manager has been duly appointed by the Board to provide investment
services to the Fund as contemplated by the Management Contract;
(d) the execution, delivery and performance of this Agreement are within
Manager's powers, have been and remain duly authorized by all necessary
corporate action and will not violate or constitute a default under any
applicable law or regulation or of any decree, order, judgment,
agreement or instrument binding on Manager;
(e) no consent (including, but not limited to, exchange control consents)
of any applicable governmental authority or body is necessary, except
for such consents as have been obtained and are in full force and
effect, and all conditions of which have been duly complied with; and
(f) this Agreement constitutes a legal, valid and binding obligation
enforceable against Manager.
6.2 Representations of Subadvisor. Subadvisor represents, warrants and
agrees that:
(a) Subadvisor is a Massachusetts trust company established pursuant to the
laws of the Commonwealth of Massachusetts;
(b) Subadvisor is registered as an "investment adviser" under the Advisers
Act or is not required to register as an "investment adviser"
thereunder;
(c) Subadvisor has filed a notice of exemption pursuant to Rule 4.14 under
the Commodity Exchange Act with the Commodities Futures Trading
Commission and the National Futures Association, or is not required to
file such exemption;
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(d) the execution, delivery and performance of this Agreement are within
Subadvisor's powers, have been and remain duly authorized by all
necessary corporate action and will not violate or constitute a default
under any applicable law or regulation or of any decree, order,
judgment, agreement or instrument binding on Subadvisor;
(e) no consent (including, but not limited to, exchange control consents)
of any applicable governmental authority or body is necessary, except
for such consents as have been obtained and are in full force and
effect, and all conditions of which have been duly complied with;
(f) this Agreement constitutes a legal, valid and binding obligation
enforceable against Subadvisor; and
(g) the total fee to be paid by Manager to Subadvisor pursuant to this
Agreement is not higher than the total fee, determined on a percentage
of assets basis and including the total fee payable after any reduction
or waiver of fees by Subadvisor or its affiliates (the "Total Fee"),
paid as of the effective date of this Agreement, and shall be no higher
than the Total Fee that may be paid in the future, by any investment
manager, registered investment company (or series thereof), separate
account or other entity to Subadvisor (and its affiliates) in
connection with the provision of investment management or subadvisory
investment management services by Subadvisor (and its affiliates) to
any registered investment company (or series thereof), separate account
or other investment vehicle which has (i) as its principal investment
strategy tracking or replicating the total return performance of the
S&P 500 Composite Stock Price Index, (ii) total net assets less than $1
billion dollars, and (iii) a substantially similar relationship with a
subadvisor (including non-investment management services) (each, an
"Equivalent Client").
(1) In the event Subadvisor (or any affiliate of Subadvisor)
enters into any arrangement with an Equivalent Client where
the Total Fee to be paid to Subadvisor (or its affiliates) by
such Equivalent Client is less than the fee payable to
Subadvisor under this Agreement (a "Lesser Fee"), Subadvisor
agrees to promptly notify Manager of such arrangement and
shall agree to promptly amend this Agreement so that the total
fees payable hereunder are at most equal to the Lesser Fee
payable to Subadvisor (or its affiliates) by any Equivalent
Client.
(2) To the extent that a delay occurs between (i) the date
Subadvisor (or any affiliate of Subadvisor) enters into any
arrangement with an Equivalent Client under which such
Equivalent Client is to pay a Lesser Fee, and (ii) the date
Subadvisor notifies Manager of such arrangement, then (iii)
Manager shall receive a corresponding credit against its Total
Fee based on the difference between the Lesser Fee and the
Total Fee paid by Manager during the period of the delay.
6.3 Covenants of Subadvisor.
(a) Notification Regarding Certain Events Affecting Subadvisor.
Subadvisor will promptly notify the Trust and Manager in writing of the
occurrence of any event that could have a material impact on the
performance of its obligations pursuant to this Agreement, including
without limitation: (i) the occurrence of any event which could
disqualify Subadvisor from serving as an investment adviser of a
registered investment
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company pursuant to Section 9(a) of the 1940 Act or otherwise; (ii) any
material change in Subadvisor's overall business activities that may
have a material adverse effect on Subadvisor's ability to perform under
its obligations under this Agreement; (iii) any event that would
constitute a change in control of Subadvisor; and (iv) the existence of
any pending or threatened audit, investigation, complaint, examination
or other inquiry (other than routine regulatory examinations or
inspections) relating to the Fund conducted by any state or federal
governmental regulatory authority.
(b) Code of Ethics.
Subadvisor will adopt a written code of ethics complying with the
requirements of Rule 17j-1 under the 1940 Act and will provide the
Trust and Manager with a copy of such code of ethics, evidence of its
adoption and copies of any supplemental policies and procedures
implemented to ensure compliance therewith. Subadvisor agrees that it
will promptly supply Manager with copies of any material changes to any
of the documents provided by Subadvisor pursuant to this Section.
(c) Insurance.
Subadvisor shall maintain for the duration hereof, with an insurer
acceptable to Manager, a blanket bond and professional liability
(errors and omissions) insurance in amounts reasonably acceptable to
Manager. Subadvisor agrees that such insurance shall be considered
primary and Subadvisor shall assure that such policies pay claims prior
to similar policies that may be maintained by Manager. In the event
Subadvisor fails to have in force such insurance, that failure will not
exclude Subadvisor's responsibility to pay up to the limit Subadvisor
would have had to pay had said insurance been in force.
(d) Year 2000 Compliance.
(i) WARRANTY AND DEFINITION. Subadvisor is taking reasonable
and comprehensive steps to ensure that its products and services (and
those of its third-party suppliers) ("Services") are Year 2000
Compliant. "Year 2000 Compliant" means that:
(aa) Such Services operate correctly with dates on or after
January 1, 2000;
(bb) Such Services accurately account for twentieth and
twenty-first century dates; and
(cc) All date-related data fields, user interfaces and data
interfaces include an indication of the century such that such Services
accurately recognize and accommodate the rollover to the Year 2000 (including
processing the fact that Year 2000 is a leap year) without normal operation
being impaired by the advent of the Year 2000.
At Manager's request, Subadvisor shall provide test scripts
sufficient to verify the Services' compliance with this Section.
(ii) BREACH OF YEAR 2000 WARRANTY: Upon a breach of this
subsection 6.3(d), and in addition to any other remedies available to
the Fund, Trust and Manager hereunder,
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Subadvisor shall provide correction(s) to the products and services to
make them Year 2000 Compliant within a commercially reasonable time
frame of receiving notice of such non-compliance. If Subadvisor is
unable to supply such correction(s) within such period, Manager may at
its option treat such failure as a material breach and terminate this
Agreement effective thirty (30) days after Subadvisor's receipt of
Manager's notice of non-compliance. Alternatively, in the event of any
breach of this subsection 6.3(d), Manager may elect immediately to
terminate this Agreement for Subadvisor's material breach without any
cure period.
VII. LIABILITY OF SUBADVISOR; INDEMNIFICATION
7.1 Liability of Subadvisor.
(a) Neither Subadvisor, nor any of its directors, officers or employees,
shall be liable to Manager, the Fund or the Trust for any loss
resulting from Subadvisor's acts or omissions as subadvisor to the
Fund, except to the extent any such losses result from (i) Subadvisor's
breach of its duties hereunder, or (ii) bad faith, willful misfeasance,
reckless disregard or gross negligence on the part of Subadvisor in the
performance of Subadvisor's duties and obligations under this
Agreement.
(b) Notwithstanding the foregoing, Subadvisor agrees to reimburse the
Trust, the Fund and Manager for any and all costs, expenses, and
counsel and trustees' fees reasonably incurred by the Trust, the Fund
and Manger in the preparation, printing and distribution of proxy
statements, amendments to the Trust's Registration Statement, holdings
of meetings of the Trust's shareholders or trustees, the conduct of
factual investigations, any legal or administrative proceedings
(including any applications for exemptions or determinations by the
SEC) which the Trust, the Fund or Manager incurs as the result of
action or inaction of the Subadvisor or any of its affiliates or any of
their officers, directors, employees or stockholders where the action
or inaction necessitating such expenditures (i) is directly or
indirectly related to any transactions or proposed transaction in the
stock or control of Subadvisor or its affiliates (or litigation related
to any pending or proposed or future transaction in such shares or
control) which shall have been undertaken without the prior, express
approval of the Trust's Board of Trustees; or, (ii) is within the
control of Subadvisor or any of its affiliates or any of their
officers, directors, employees or stockholders. So long as this
Agreement is in effect, the Subadvisor shall pay to the Trust and
Manager the amount due for expenses subject to this Section 7.1(b)
within 30 days after a bill or statement has been received by
Subadvisor therefor. This provision shall not be deemed to be a waiver
of any claim the Trust, the Fund or Manager may have or may assert
against Subadvisor or others for costs, expenses or damages heretofore
incurred by the Trust, the Fund or Manager or for costs, expenses or
damages the Trust, the Fund or Manager may hereafter incur which are
not reimbursable to it hereunder. The Trust, the Fund, Manager and
Subadvisor agree that Subadvisor's maximum liability under this Section
7.1(b) shall be no more than the greater of (i) $20,000, or (ii) 20% of
the total fee received by Subadvisor for its services hereunder for the
twelve month period immediately preceding such action or inaction.
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7.2 Indemnification.
(a) Subadvisor agrees to indemnify and hold the Trust, the Fund and Manager
harmless from any and all direct or indirect liabilities, losses or
damages (including reasonable attorneys fees) suffered by the Trust,
the Fund or Manager resulting from (i) Subadvisor's breach of its
duties hereunder, or (ii) bad faith, willful misfeasance, reckless
disregard or gross negligence on the part of Subadvisor in the
performance of Subadvisor's duties and obligations under this
Agreement, except to the extent such loss results from the Trust's, the
Fund's or Manager's own willful misfeasance, bad faith, reckless
disregard or negligence in the performance of their respective duties
and obligations under the Management Contract or this Agreement.
(b) Manager hereby agrees to indemnify and hold Subadvisor harmless from
any and all direct or indirect liabilities, losses or damages
(including reasonable attorneys fees) suffered by Subadvisor resulting
from (i) Manager's breach of its duties hereunder, or (ii) bad faith,
willful misfeasance, reckless disregard or gross negligence on the part
of Manager in the performance of Manager's duties and obligations under
this Agreement, except to the extent such loss results from
Subadvisor's own willful misfeasance, bad faith, reckless disregard or
negligence in the performance of Subadvisor's duties and obligations
under this Agreement.
VIII. DURATION, TERMINATION AND AMENDMENT OF AGREEMENT
8.1 Effective Date; Duration; Continuance.
(a) This Agreement shall become effective on May 1, 2000, provided that
this Agreement shall not take effect unless it has first been approved
(i) by a vote of a majority of those trustees of the Trust who are not
parties to this Agreement or "interested persons" (as defined in the
1940 Act) of any such party, and (ii) by vote of a majority of the
Fund's outstanding voting securities.
(b) Subject to prior termination pursuant to Section 8.2 below, this
Agreement shall continue in effect for two (2) years following the
effective date, and indefinitely thereafter, but only so long as the
continuance after such date shall be specifically approved at least
annually (i) by vote of the Board or by a vote of a majority of the
outstanding voting securities of the Fund, and (ii) by the vote of a
majority of the trustees of the Trust who are not "interested persons"
(as defined in the 1940 Act) of any party to this Agreement, cast in
person at a meeting called for the purpose of voting on such approval.
(c) If any continuance of this Agreement is not obtained, Subadvisor will
continue to act as the Fund's investment subadvisor pending the
required approval of the continuance of this Agreement or of a new
contract with Subadvisor or a different subadvisor or other definitive
action; provided, that the compensation received by Subadvisor during
such period is in compliance with Rule 15a-4 under the 1940 Act or any
successor provision.
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8.2 Termination and Assignment.
(a) Subject to earlier termination as provided pursuant to Section 6.3(d),
this Agreement may be terminated at any time, without the payment of
any penalty, by the Board or the vote of a majority of the outstanding
voting securities of the Fund upon sixty days' written notice to
Manager and Subadvisor, and by Manager or Subadvisor upon sixty days'
written notice to the Trust and the other party.
(b) This Agreement will terminate automatically, without the payment of any
penalty, in the event of its assignment (as defined in the 1940 Act),
or in the event the Management Contract is terminated for any reason.
(c) Notwithstanding the foregoing, this Agreement may be terminated by
Manager upon material breach by Subadvisor of any of the
representations and warranties set forth in this Agreement, if such
breach shall not have been cured within a 20 day period after notice of
such breach; or immediately if Subadvisor becomes unable to discharge
its duties and obligations under this Agreement.
8.3 Amendments.
This Agreement may not be amended without the prior written consent of each of
the parties hereto and unless such amendment is specifically approved (i) if
required by law, by the vote of a majority of the outstanding voting securities
of the Fund, and (ii) by the vote of a majority of the trustees of the Trust who
are not interested persons (as defined in the 1940 Act) of any person to this
Agreement cast in person at a meeting called for the purpose of voting on such
approval.
8.4 Definitions.
The terms "registered investment company," "vote of a majority of the
outstanding voting securities," "assignment," and "interested persons," when
used herein, shall have the respective meanings specified in the 1940 Act as now
in effect or as hereafter amended, and subject to such orders or no-action
letters as may be granted by the SEC.
IX. MISCELLANEOUS PROVISIONS
9.1 Notices and Instructions.
All notices required to be given pursuant to this Agreement shall be delivered
or mailed to the last known business address of the Trust, Manager or
Subadvisor, as the case may be, in person or by registered mail or a private
mail or delivery service providing the sender with notice of receipt. Notice
shall be deemed given on the date delivered or mailed in accordance with this
Section 9.1. Instructions may be given by letter, telex, telefax or telephone
confirmed by telex, by the Board or by any other person authorized by a
resolution of the Board, provided a certified copy of such resolution has been
supplied to Subadvisor.
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9.2 Entire Agreement.
This Agreement contains the entire understanding and agreement of the parties
with respect to the subject hereof.
9.3 Captions.
The headings in the sections of this Agreement are inserted for convenience of
reference only and shall not constitute a part of the Agreement.
9.4 Severability.
If any provision of this Agreement shall be held or made invalid by court
decision, statute, rule or otherwise, this Agreement shall be construed, insofar
as is possible, as if such portion had never been contained herein.
9.5 Governing Law.
The provisions of this Agreement shall be construed and interpreted in
accordance with the laws of the State of California (without giving effect to
the choice of law provisions thereof), or any of the applicable provisions of
the 1940 Act. To the extent that the laws of the State of California, or any of
the provisions in this Agreement, conflict with applicable provisions of the
1940 Act, the latter shall control.
9.6 Counterparts.
This Agreement may be executed in one or more counterparts, each of which shall
be deemed an original, all of which shall together constitute one and the same
instrument.
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9.7 Limitation of Liability.
Subadvisor acknowledges that it has received notice of and accepts the
limitations on the Trust's liability as set forth in its Agreement and
Declaration of Trust. Subadvisor agrees that the Trust's obligations hereunder,
if any, shall be limited to the assets of the Fund, and that Subadvisor shall
not seek satisfaction of any such obligation from any shareholders of the Fund
or from any trustee, officer, employee or agent of the Trust.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
by their duly authorized officers as of the date first above written.
FRANKLIN ADVISERS, INC.
/S/ HARMON E. BURNS
----------------------------------
Harmon E. Burns
Executive Vice President
STATE STREET GLOBAL ADVISORS,
a division of State Street Bank and Trust Company
By:_____________________________
Name:
Title:
Franklin S&P 500 Index Fund hereby acknowledges and agrees to the provisions of
Section 3 and Section 7.1 of this Agreement.
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST on behalf of
FRANKLIN S&P 500 INDEX FUND
/S/ DAVID P. GOSS
----------------------------------
David P. Goss
Vice President &
Assistant Secretary
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APPENDIX A
Pursuant to Section 1.4 of the Agreement, Manager shall pay a monthly
subadvisory fee in cash to Subadvisor based upon a percentage of the value of
the Fund's net assets, calculated as set forth below, which fee shall be payable
on the first business day of the month in each year as compensation for the
services rendered and obligations assumed by Subadvisor during the preceding
month. The fee shall be payable on the first business day of the first month
following the effective date of the Agreement.
For purposes of calculating such fee, the value of the net assets of the Fund
shall be determined in the same manner as that the Fund uses to compute the
value of its net assets in connection with the determination of the net asset
value of its shares, all as set forth more fully in the Fund's currently
effective Prospectus and Statement of Additional Information. The rate of the
subadvisory fee payable by Manager shall be calculated daily at the following
annual rates:
0.05% of the value of its net assets up to and including $50,000,000; and
0.04% of the value of its net assets over $50,000,000 up to and including
$100,000,000; and
0.02% of the value of its net assets over $100,000,000.
If the Agreement is terminated prior to the end of any month, the monthly
subadvisory fee shall be prorated for the portion of the month the Agreement is
in effect and shall be payable promptly after the date of the termination.
Subadvisor agrees to look exclusively to Manager, and not to any assets of the
Trust or the Fund, for the payment of Subadvisor's fees arising under the
Agreement.
15
EXHIBIT (d) xxi
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
on behalf of
FRANKLIN TECHNOLOGY SECURITIES FUND
INVESTMENT ADVISORY AGREEMENT
THIS INVESTMENT ADVISORY AGREEMENT made between FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust (the "Trust"),
on behalf of FRANKLIN TECHNOLOGY SECURITIES FUND (the "Fund"), a series of the
Trust, and FRANKLIN ADVISERS, INC., a California corporation (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an
investment company registered under the Investment Company Act of 1940 (the
"1940 Act") for the purpose of investing and reinvesting its assets in
securities, as set forth in its Agreement and Declaration of Trust, its By-Laws
and its Registration Statement under the 1940 Act and the Securities Act of
1933, all as heretofore and hereafter amended and supplemented; and the Trust
desires to avail itself of the services, information, advice, assistance and
facilities of an investment adviser and to have an investment adviser perform
various management, statistical, research, investment advisory and other
services for the Fund; and,
WHEREAS, the Adviser is registered as an investment adviser under the
Investment Advisers Act of 1940, is engaged in the business of rendering
investment advisory, counseling and supervisory services to investment companies
and other investment counseling clients, and desires to provide these services
to the Fund.
NOW THEREFORE, in consideration of the terms and conditions hereinafter
set forth, it is mutually agreed as follows:
1. EMPLOYMENT OF THE ADVISER. The Trust hereby employs the Adviser to
manage the investment and reinvestment of the Fund's assets and to administer
its affairs, subject to the direction of the Board of Trustees and the officers
of the Trust, for the period and on the terms hereinafter set forth. The Adviser
hereby accepts such employment and agrees during such period to render the
services and to assume the obligations herein set forth for the compensation
herein provided. The Adviser shall for all purposes herein be deemed to be an
independent contractor and shall, except as expressly provided or authorized
(whether herein or otherwise), have no authority to act for or represent the
Fund or the Trust in any way or otherwise be deemed an agent of the Fund or the
Trust.
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2. OBLIGATIONS OF AND SERVICES TO BE PROVIDED BY THE ADVISER. The
Adviser undertakes to provide the services hereinafter set forth and to assume
the following obligations:
A. INVESTMENT ADVISORY SERVICES.
(a) The Adviser shall manage the Fund's assets
subject to and in accordance with the investment objectives and policies of the
Fund and any directions which the Trust's Board of Trustees may issue from time
to time. In pursuance of the foregoing, the Adviser shall make all
determinations with respect to the investment of the Fund's assets and the
purchase and sale of its investment securities, and shall take such steps as may
be necessary to implement the same. Such determinations and services shall
include determining the manner in which any voting rights, rights to consent to
corporate action and any other rights pertaining to the Fund's investment
securities shall be exercised. The Adviser shall render or cause to be rendered
regular reports to the Trust, at regular meetings of its Board of Trustees and
at such other times as may be reasonably requested by the Trust's Board of
Trustees, of (i) the decisions made with respect to the investment of the Fund's
assets and the purchase and sale of its investment securities, (ii) the reasons
for such decisions, and (iii) the extent to which those decisions have been
implemented.
(b) The Adviser, subject to and in accordance with
any directions which the Trust's Board of Trustees may issue from time to time,
shall place, in the name of the Fund, orders for the execution of the Fund's
securities transactions. When placing such orders, the Adviser shall seek to
obtain the best net price and execution for the Fund, but this requirement shall
not be deemed to obligate the Adviser to place any order solely on the basis of
obtaining the lowest commission rate if the other standards set forth in this
section have been satisfied. The parties recognize that there are likely to be
many cases in which different brokers are equally able to provide such best
price and execution and that, in selecting among such brokers with respect to
particular trades, it is desirable to choose those brokers who furnish research,
statistical, quotations and other information to the Fund and the Adviser in
accordance with the standards set forth below. Moreover, to the extent that it
continues to be lawful to do so and so long as the Board of Trustees determines
that the Fund will benefit, directly or indirectly, by doing so, the Adviser may
place orders with a broker who charges a commission for that transaction which
is in excess of the amount of commission that another broker would have charged
for effecting that transaction, provided that the excess commission is
reasonable in relation to the value of "brokerage and research services" (as
defined in Section 28(e)(3) of the Securities Exchange Act of 1934) provided by
that broker.
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<PAGE>
Accordingly, the Trust and the Adviser agree that
the Adviser shall select brokers for the execution of the Fund's transactions
from among:
(i) Those brokers and dealers who provide
quotations and other services to the Fund,
specifically including the quotations necessary to
determine the Fund's net assets, in such amount of
total brokerage as may reasonably be required in
light of such services; and
(ii) Those brokers and dealers who supply research,
statistical and other data to the Adviser or its
affiliates which the Adviser or its affiliates may
lawfully and appropriately use in their investment
advisory capacities, which relate directly to
securities, actual or potential, of the Fund, or
which place the Adviser in a better position to
make decisions in connection with the management of
the Fund's assets and securities, whether or not
such data may also be useful to the Adviser and its
affiliates in managing other portfolios or advising
other clients, in such amount of total brokerage as
may reasonably be required. Provided that the
Trust's officers are satisfied that the best
execution is obtained, the sale of shares of the
Fund may also be considered as a factor in the
selection of broker-dealers to execute the Fund's
portfolio transactions.
(c) When the Adviser has determined that the Fund
should tender securities pursuant to a "tender offer solicitation,"
Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as
the "tendering dealer" so long as it is legally permitted to act in such
capacity under the federal securities laws and rules thereunder and the rules of
any securities exchange or association of which Distributors may be a member.
Neither the Adviser nor Distributors shall be obligated to make any additional
commitments of capital, expense or personnel beyond that already committed
(other than normal periodic fees or payments necessary to maintain its corporate
existence and membership in the National Association of Securities Dealers,
Inc.) as of the date of this Agreement. This Agreement shall not obligate the
Adviser or Distributors (i) to act pursuant to the foregoing requirement under
any circumstances in which they might reasonably believe that liability might be
imposed upon them as a result of so acting, or (ii) to institute legal or other
proceedings to collect fees which may be considered to be due from others to it
as a result of such a tender, unless the Trust on behalf of the Fund shall enter
into an agreement with the Adviser and/or Distributors to reimburse them for all
such expenses connected with attempting to collect such fees, including legal
fees and expenses and that portion of the compensation due to their employees
which is attributable to the time involved in attempting to collect such fees.
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<PAGE>
(d) The Adviser shall render regular reports to the
Trust, not more frequently than quarterly, of how much total brokerage business
has been placed by the Adviser, on behalf of the Fund, with brokers falling into
each of the categories referred to above and the manner in which the allocation
has been accomplished.
(e) The Adviser agrees that no investment decision
will be made or influenced by a desire to provide brokerage for allocation in
accordance with the foregoing, and that the right to make such allocation of
brokerage shall not interfere with the Adviser's paramount duty to obtain the
best net price and execution for the Fund.
(f) Decisions on proxy voting shall be made by the
Adviser unless the Board of Trustees determines otherwise. Pursuant to its
authority, Adviser shall have the power to vote, either in person or by proxy,
all securities in which the Fund may be invested from time to time, and shall
not be required to seek or take instructions from the Fund with respect thereto.
Adviser shall not be expected or required to take any action other than the
rendering of investment-related advice with respect to lawsuits involving
securities presently or formerly held in the Fund, or the issuers thereof,
including actions involving bankruptcy. Should Adviser undertake litigation
against an issuer on behalf of the Fund, the Fund agrees to pay its portion of
any applicable legal fees associated with the action or to forfeit any claim to
any assets Adviser may recover and, in such case, agrees to hold Adviser
harmless for excluding the Fund from such action. In the case of class action
suits involving issuers held in the Fund, Adviser may include information about
the Fund for purposes of participating in any settlements.
B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF
SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser,
its officers and employees will make available and provide accounting and
statistical information required by the Fund in the preparation of registration
statements, reports and other documents required by federal and state securities
laws and with such information as the Fund may reasonably request for use in the
preparation of such documents or of other materials necessary or helpful for the
underwriting and distribution of the Fund's shares.
C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its
officers and employees available to the Board of Trustees and officers of the
Trust for consultation and discussions regarding the administration and
management of the Fund and its investment activities.
D. DELEGATION OF SERVICES. The Adviser may, at its expense,
select and contract with one or more investment advisers registered under the
Investment
4
<PAGE>
Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the services for
the Fund for which it is responsible under this Agreement. The Adviser will
compensate any Sub-Adviser for its services to the Fund. The Adviser may
terminate the services of any Sub-Adviser at any time in its sole discretion,
and shall at such time assume the responsibilities of such Sub-Adviser unless
and until a successor Sub-Adviser is selected and the requisite approval of the
Fund's shareholders is obtained. The Adviser will continue to have
responsibility for all advisory services furnished by any Sub-Adviser.
3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of
its own expenses other than those expressly assumed by the Adviser herein, which
expenses payable by the Fund shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend
disbursing agent and shareholder record-keeping services, including the expenses
of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value
of the Fund's net assets;
E. Salaries and other compensations of executive officers of
the Trust who are not officers, directors, stockholders or employees of the
Adviser or its affiliates;
F. Taxes levied against the Fund;
G. Brokerage fees and commissions in connection with the
purchase and sale of securities for the Fund;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and
shareholders of the Fund, reports to the Fund's shareholders, the filing of
reports with regulatory bodies and the maintenance of the Fund's and the Trust's
legal existence;
J. Legal fees, including the legal fees related to the
registration and continued qualification of the Fund's shares for sale;
5
<PAGE>
K. Trustees' fees and expenses to trustees who are not
directors, officers, employees or stockholders of the Adviser or any of its
affiliates;
L. Costs and expense of registering and maintaining the
registration of the Fund and its shares under federal and any applicable state
laws; including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues;
N. The Fund's pro rata portion of fidelity bond, errors and
omissions, and trustees and officer liability insurance premiums; and
O. The Fund's portion of the cost of any proxy voting service
used on its behalf.
4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in
cash to the Adviser based upon a percentage of the value of the Fund's net
assets, calculated as set forth below, as compensation for the services rendered
and obligations assumed by the Adviser, during the preceding month, on the first
business day of the month in each year.
A. For purposes of calculating such fee, the value of the net
assets of the Fund shall be determined in the same manner as that Fund uses to
compute the value of its net assets in connection with the determination of the
net asset value of its shares, all as set forth more fully in the Fund's current
prospectus and statement of additional information. The rate of the management
fee payable by the Fund shall be calculated daily at the following annual rates:
0.550% of the value of its net assets up to and including
$500,000,000; and
0.450% of the value of its net assets over $500,000,000 up to
and including $1,000,000,000; and
0.400% of the value of its net assets over $1,000,000,000 up
to and including $1,500,000,000; and
0.350% of the value of its net assets over $1,500,000,000 up
to and including $6,500,000,000; and
0.325% of the value of its net assets over $6,500,000,000 up
to and including $11,500,000,000; and
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<PAGE>
0.300% of the value of its net assets over $11,500,000,000 up
to and including $16,500,000,000; and
0.290% of the value of its net assets over $16,500,000,000 up
to and including $19,000,000,000; and
0.280% of the value of its net assets over $19,000,000,000 up
to and including $21,500,000,000; and
0.270% of the value of its net assets over $21,500,000,000.
B. The advisory fee payable by the Fund shall be reduced or
eliminated to the extent that Distributors has actually received cash payments
of tender offer solicitation fees less certain costs and expenses incurred in
connection therewith and to the extent necessary to comply with the limitations
on expenses which may be borne by the Fund as set forth in the laws, regulations
and administrative interpretations of those states in which the Fund's shares
are registered. The Adviser may waive all or a portion of its fees provided for
hereunder and such waiver shall be treated as a reduction in purchase price of
its services. The Adviser shall be contractually bound hereunder by the terms of
any publicly announced waiver of its fee, or any limitation of the Fund's
expenses, as if such waiver or limitation were full set forth herein.
C. If this Agreement is terminated prior to the end of any
month, the accrued advisory fee shall be paid to the date of termination.
5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund
hereunder are not to be deemed exclusive, and the Adviser and any of its
affiliates shall be free to render similar services to others. Subject to and in
accordance with the Agreement and Declaration of Trust and By-Laws of the Trust
and Section 10(a) of the 1940 Act, it is understood that trustees, officers,
agents and shareholders of the Trust are or may be interested in the Adviser or
its affiliates as directors, officers, agents or stockholders; that directors,
officers, agents or stockholders of the Adviser or its affiliates are or may be
interested in the Trust as trustees, officers, agents, shareholders or
otherwise; that the Adviser or its affiliates may be interested in the Fund as
shareholders or otherwise; and that the effect of any such interests shall be
governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. LIABILITIES OF THE ADVISER.
A. In the absence of willful misfeasance, bad faith, gross
negligence, or reckless disregard of obligations or duties hereunder on the part
of the Adviser, the Adviser shall not be subject to liability to the Trust or
the Fund or
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to any shareholder of the Fund for any act or omission in the course of, or
connected with, rendering services hereunder or for any losses that may be
sustained in the purchase, holding or sale of any security by the Fund.
B. Notwithstanding the foregoing, the Adviser agrees to
reimburse the Trust for any and all costs, expenses, and counsel and trustees'
fees reasonably incurred by the Trust in the preparation, printing and
distribution of proxy statements, amendments to its Registration Statement,
holdings of meetings of its shareholders or trustees, the conduct of factual
investigations, any legal or administrative proceedings (including any
applications for exemptions or determinations by the Securities and Exchange
Commission) which the Trust incurs as the result of action or inaction of the
Adviser or any of its affiliates or any of their officers, directors, employees
or stockholders where the action or inaction necessitating such expenditures (i)
is directly or indirectly related to any transactions or proposed transaction in
the stock or control of the Adviser or its affiliates (or litigation related to
any pending or proposed or future transaction in such shares or control) which
shall have been undertaken without the prior, express approval of the Trust's
Board of Trustees; or, (ii) is within the control of the Adviser or any of its
affiliates or any of their officers, directors, employees or stockholders. The
Adviser shall not be obligated pursuant to the provisions of this Subparagraph
6.B., to reimburse the Trust for any expenditures related to the institution of
an administrative proceeding or civil litigation by the Trust or a shareholder
seeking to recover all or a portion of the proceeds derived by any stockholder
of the Adviser or any of its affiliates from the sale of his shares of the
Adviser, or similar matters. So long as this Agreement is in effect, the Adviser
shall pay to the Trust the amount due for expenses subject to this Subparagraph
6.B. within thirty (30) days after a bill or statement has been received by the
Adviser therefor. This provision shall not be deemed to be a waiver of any claim
the Trust may have or may assert against the Adviser or others for costs,
expenses or damages heretofore incurred by the Trust or for costs, expenses or
damages the Trust may hereafter incur which are not reimbursable to it
hereunder.
C. No provision of this Agreement shall be construed to
protect any trustee or officer of the Trust, or director or officer of the
Adviser, from liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. RENEWAL AND TERMINATION.
A. This Agreement shall become effective on the date written
below and shall continue in effect for two (2) years thereafter, unless sooner
terminated as hereinafter provided and shall continue in effect thereafter for
periods not exceeding one (1) year so long as such continuation is approved at
least annually (i) by a vote of a majority of the outstanding voting securities
of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a
vote of a majority of
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the Trustees of the Trust who are not parties to the Agreement (other than as
Trustees of the Trust), cast in person at a meeting called for the purpose of
voting on the Agreement.
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B. This Agreement:
(i) may at any time be terminated without the
payment of any penalty either by vote of the Board of Trustees of the Trust or
by vote of a majority of the outstanding voting securities of the Fund on sixty
(60) days' written notice to the Adviser;
(ii) shall immediately terminate with respect to
the Fund in the event of its assignment; and
(iii) may be terminated by the Adviser on sixty
(60) days' written notice to the Fund.
C. As used in this Paragraph the terms "assignment,"
"interested person" and "vote of a majority of the outstanding voting
securities" shall have the meanings set forth for any such terms in the 1940
Act.
D. Any notice under this Agreement shall be given in writing
addressed and delivered, or mailed post-paid, to the other party at any office
of such party.
8. SEVERABILITY. If any provision of this Agreement shall be held or
made invalid by a court decision, statute, rule or otherwise, the remainder of
this Agreement shall not be affected thereby.
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9. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed
and effective on the 1st day of May 2000.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
FRANKLIN TECHNOLOGY SECURITIES FUND
/S/ DAVID P. GOSS
-------------------------------
David P. Goss
Vice President
& Assistant Secretary
FRANKLIN ADVISERS, INC.
/S/ HARMON E. BURNS
-------------------------------
Harmon E. Burns
Executive Vice President
11
EXHIBIT (g) x
This GLOBAL CUSTODY AGREEMENT is effective as of May 1, 2000 and is between THE
CHASE MANHATTAN BANK, N.A. (the "Bank") and FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST (the "Customer") on behalf of certain of its series, as
listed in Schedule B.
1. CUSTOMER ACCOUNTS.
The Bank agrees to establish and maintain the following accounts
("Accounts"):
(a) A custody account in the name of the Customer ("Custody Account")
for any and all stocks, shares, bonds, debentures, notes, mortgages or other
obligations for the payment of money, bullion, coin and any certificates,
receipts, warrants or other instruments representing rights to receive, purchase
or subscribe for the same or evidencing or representing any other rights or
interests therein and other similar property whether certificated or
uncertificated as may be received by the Bank or its Subcustodian (as defined in
Section 3) for the account of the Customer ("Securities"); and
(b) A deposit account in the name of the Customer ("Deposit Account")
for any and all cash in any currency received by the Bank or its Subcustodian
for the account of the Customer, which cash shall not be subject to withdrawal
by draft or check.
The Customer warrants its authority to: 1) deposit the cash and
Securities ("Assets") received in the Accounts and 2) give Instructions (as
defined in Section 11) ("Instructions") concerning the Accounts. The Bank may
deliver securities of the same class in place of those deposited in the Custody
Account.
Upon written agreement between the Bank and the Customer, additional
Accounts may be established and separately accounted for as additional Accounts
under the terms of this Agreement.
2. MAINTENANCE OF SECURITIES AND CASH AT BANK AND SUBCUSTODIAN LOCATIONS.
Unless Instructions specifically require another location acceptable to
the Bank:
(a) Securities will be held in the country or other jurisdiction in
which the principal trading market for such Securities is located, where such
Securities are to be presented for payment or where such Securities are
acquired: and
(b) Cash will be credited to an account in a country or other
jurisdiction in which such cash may be legally deposited or is the legal
currency for the payment of public or private debts.
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Cash may be held pursuant to Instructions in either interest or
non-interest bearing accounts as may be available for the particular currency.
To the extent Instructions are issued and the Bank can comply with such
Instructions, the Bank is authorized to maintain cash balances on deposit for
the Customer with itself or one of its affiliates at such reasonable rates of
interest as may from time to time be paid on such accounts, or in non-interest
bearing accounts as the Customer may direct, if acceptable to the Bank.
If the Customer wishes to have any of its Assets held in the custody of
an institution other than the established Subcustodians or their securities
depositories, such arrangement must be authorized by a written agreement, signed
by the Bank and the Customer.
3. SUBCUSTODIANS AND SECURITIES DEPOSITORIES.
The Bank may act under this Agreement through the subcustodians listed
in Schedule A of this Agreement with which the Bank has entered into
subcustodian agreements ("Subcustodians). The Customer authorizes the Bank to
hold Assets in the Accounts in accounts which the Bank has established with one
or more of its branches or Subcustodians. The Bank and Subcustodians are
authorized to hold any of the Securities in their account with any securities
depository in which they participate.
The Bank reserves the right to add new, replace or remove
Subcustodians. The Customer will be given reasonable notice by the Bank of any
amendment to Schedule A. Upon request by the Customer, the Bank will identify
the name, address and principal place of business of any Subcustodian of the
Customer's Assets and the name and address of the governmental agency or other
regulatory authority that supervises or regulates such Subcustodian.
The terms Subcustodian and securities depositories as used in this
Agreement shall mean a branch of a qualified U.S. bank, an eligible foreign
custodian or an eligible foreign securities depository, which are further
defined as follows:
(a) "qualified U.S. Bank" shall mean a qualified U.S. bank as defined
in Rule 17f-5 under the Investment Company Act (the "Act"):
(b) "eligible foreign custodian" shall mean (i) a banking institution
or trust company incorporated or organized under the laws of a country other
than the United States that is regulated as such by that country's government or
an agency thereof and that has shareholders' equity in excess of $200 million in
U.S. currency (or a foreign currency equivalent thereof), (ii) a majority owned
direct or indirect subsidiary of a qualified U.S. bank or bank holding company
that is incorporated or organized under the laws of a country other than the
United States and that has shareholders' equity in excess of $100 million in
U.S. currency (or a foreign currency equivalent thereof), (iii) a banking
institution or trust company incorporated or organized under the laws of a
country other than the United States or a majority owned direct or indirect
subsidiary of a qualified U.S. bank or
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bank holding company that is incorporated or organized under the laws of a
country other than the United States which has such other qualifications as
shall be specified in Instructions and approved by the Bank, or (iv) any other
entity that shall have been so qualified by exemptive rule or other appropriate
action of the SEC: and
(c) "eligible foreign securities depository" shall mean a securities
depository or clearing agency, incorporated or organized under the laws of a
country other than the United States, which operates (i) the central system for
handling securities or equivalent book-entries in that country or (ii) a
transnational system for the central handling of securities or equivalent
book-entries.
The Customer represents that its Board of Trustees has approved each of
the Subcustodians listed in Schedule A of this Agreement and the terms of the
subcustody agreements between the Bank and each Subcustodian, and further
represents that its Board has determined that the use of each Subcustodian and
the terms of each subcustody agreement are consistent with the best interests of
the Customer's fund(s) and its (their) shareholders. The Bank will supply the
Customer with any amendment to Schedule A for approval. The Customer has
supplied or will supply the Bank with certified copies of its Board of Trustees
resolution(s) with respect to the foregoing prior to placing Assets with any
Subcustodian so approved.
4. USE OF SUBCUSTODIAN.
(a) The Bank will identify Assets on its books as belonging to the
Customer.
(b) A Subcustodian will hold Assets together with assets belonging to
other customers of the Bank in accounts identified on such Subcustodian's books
as special custody accounts for the exclusive benefit of customers of the Bank.
(c) Any Assets in the Accounts held by a Subcustodian will be subject
only to the Instructions of the Bank or its agent. Any Securities held in a
securities depository for the account of a Subcustodian will be subject only to
the Instructions of such Subcustodian.
(d) Any agreement the Bank enters into with a Subcustodian for holding
its customer's assets shall provide that such assets will not be subject to any
right, charge, security interest, lien or claim of any kind in favor of such
Subcustodian except for safe custody or administration, and that the beneficial
ownership of such assets will be freely transferable without the payment of
money or value other than for safe custody or administration. The foregoing
shall not apply to the extent of any special agreement or arrangement made by
the Customer with any particular Subcustodian.
5. DEPOSIT ACCOUNT TRANSACTIONS.
(a) The Bank or its Subcustodians will make payments from the Deposit
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Account upon receipt of Instructions which include all information required by
the Bank.
(b) In the event that any payment to be made under this Section 5
exceeds the funds available in the Deposit Account, the Bank, in its discretion,
may advance the Customer such excess amount which shall be deemed a loan payable
on demand, bearing interest at the rate customarily charged by the Bank on
similar loans.
(c) If the Bank credits the Deposit Account on a payable date, or at
any time prior to actual collection and reconciliation to the Deposit Account,
with interest, dividends, redemptions or any other amount due, the Customer will
promptly return any such amount upon oral or written notification: (i) that such
amount has not been received in the ordinary course of business or (ii) that
such amount was incorrectly credited. If the Customer does not promptly return
any amount upon such notification, the Bank shall be entitled, upon oral or
written notification to the Customer to reverse such credit by debiting the
Deposit Account for the amount previously credited. The Bank or its Subcustodian
shall have no duty or obligation to institute legal proceedings, file a claim or
a proof of claim in any insolvency proceeding or take any other action with
respect to the collection of such amount, but may act for the Customer upon
Instructions after consultation with the Customer.
6. CUSTODY ACCOUNT TRANSACTIONS.
(a) Securities will be transferred, exchanged or delivered by the Bank
or its Subcustodian upon receipt by the Bank of Instructions which include all
information required by the Bank. Settlement and payment for Securities received
for, and delivery of Securities out of, the Custody Account may be made in
accordance with the customary or established securities trading or securities
processing practices and procedures in the jurisdiction or market in which the
transaction occurs, including, without limitation, delivery of Securities to a
purchaser, dealer or their agents against a receipt with the expectation of
receiving later payment and free delivery. Delivery of Securities out of the
Custody Account may also be made in any manner specifically required by
Instructions acceptable to the Bank.
(b) The Bank, in its discretion, may credit or debit the Accounts on a
contractual settlement date with cash or Securities with respect to any sale,
exchange or purchase of Securities. Otherwise, such transaction will be credited
or debited to the Accounts on the date cash or Securities are actually received
by the Bank and reconciled to the Accounts.
(i) The Bank may reverse credits or debits made to the
Accounts in its discretion if the related transaction fails to settle within a
reasonable period, determined by the Bank in its discretion, after the
contractual settlement date for the related transaction.
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(ii) If any Securities delivered pursuant to this Section 6
are returned by the recipient thereof, the Bank may reverse the credits and
debits of the particular transaction at any time.
7. ACTIONS OF THE BANK.
The Bank shall follow Instructions received regarding Assets held in
the Accounts. However, until it receives Instructions to the contrary, the Bank
will perform the following functions.
(a) Present for payment any Securities which are called, redeemed or
retired or otherwise become payable and all coupons and other income items which
call for payment upon presentation, to the extent that the Bank or Subcustodian
is actually aware of such opportunities.
(b) Execute in the name of the Customer such ownership and other
certificates as may be required to obtain payments in respect of Securities.
(c) Exchange interim receipts or temporary Securities for definitive
Securities.
(d) Appoint brokers and agents for any transaction involving the
Securities, including, without limitation, affiliates of the Bank or any
Subcustodian.
(e) Issue statements to the Customer, at times mutually agreed upon,
identifying the Assets in the Accounts.
The Bank will send the Customer an advice or notification of any
transfers of Assets to or from the Accounts. Such statements, advices or
notifications shall indicate the identity of the entity having custody of the
Assets. Unless the Customer sends the Bank a written exception or objection to
any Bank statement within sixty days of receipt, the Customer shall be deemed to
have approved such statement. In such event, or where the Customer has otherwise
approved any such statement, the Bank shall, to the extent permitted by law, be
released, relieved and discharged with respect to all matters set forth in such
statement or reasonably implied therefrom as though it had been settled by the
decree of a court of competent jurisdiction in an action where the Customer and
all persons having or claiming an interest in the Customer or the Customer's
Accounts were parties.
All collections of funds or other property paid or distributed in
respect of Securities in the Custody Account shall be made at the risk of the
Customer. The Bank shall have no liability for any loss occasioned by delay in
the actual receipt of notice by the Bank or by its Subcustodians of any payment,
redemption or other transaction regarding Securities in the Custody Account in
respect of which the Bank has agreed to take any action under this Agreement.
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8. CORPORATE ACCOUNTS; PROXIES.
Whenever the Bank receives information concerning the Securities which
requires discretionary action by the beneficial owner of the Securities (other
than a proxy), such as subscription rights, bonus issues, stock repurchase plans
and rights offerings, or legal notices or other material intended to be
transmitted to securities holders ("Corporate Actions"), the Bank will give the
Customer notice of such Corporate Actions to the extent that the Bank's central
corporate actions department has actual knowledge of a Corporate Action in time
to notify its customers.
When a rights entitlement or a fractional interest resulting from a
rights issue, stock dividend, stock split or similar Corporate Action is
received which bears an expiration date, the Bank will endeavor to obtain
Instructions from the Customer or its Authorized Person, as defined in Section
10, but if Instructions are not received in time for the Bank to take timely
action, or actual notice of such Corporate Action was received too late to seek
Instructions, the Bank is authorized to sell such rights entitlement or
fractional interest and to credit the Deposit Account with the proceeds or take
any other action it deems, in good faith, to be appropriate in which case it
shall be held harmless for any such action.
The Bank will deliver proxies to the Customer or its designed agent
pursuant to special arrangements which may have been agreed to in writing. Such
proxies shall be executed in the appropriate nominee name relating to Securities
in the Custody Account registered in the name of such nominee but without
indicating the manner in which such proxies are to be voted, and where bearer
Securities are involved, proxies will be delivered in accordance with
Instructions.
9. NOMINEES.
Securities which are ordinarily held in registered form may be
registered in a nominee name of the Bank, Subcustodian or securities depository,
as the case may be. The Bank may, without notice to the Customer, cause any such
Securities to cease to be registered in the name of any such nominee and to be
registered in the name of the Customer. In the event that any Securities
registered in a nominee name are called for partial redemption by the issuer,
the Bank may allot the called portion to the respective beneficial holders of
such class of security in any manner the Bank deems to be fair and equitable.
The Customer agrees to hold the Bank, Subcustodians, and their respective
nominees harmless from any liability arising directly or indirectly from their
status as a mere record holder of Securities in the Custody Account.
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10. AUTHORIZED PERSONS.
As used in this Agreement the term "Authorized Person" means employees
or agents including investment managers as have been designated by written
notice from the Customer or its designated agent to act on behalf of the
Customer under this Agreement. Such persons shall continue to be Authorized
Persons until such time as the Bank receives Instructions from the Customer or
its designated agent that any such employee or agent is no longer an Authorized
Person.
11. INSTRUCTIONS.
The term "Instructions" means Instructions of any Authorized Person
received by the Bank, via telephone, telex, TWX, facsimile transmission, bank
wire or other teleprocess or electronic instruction or trade information system
acceptable to the Bank which the Bank believes in good faith to have been given
by Authorized Persons or which are transmitted with proper testing or
authentication pursuant to terms and conditions which the Bank may specify.
Unless otherwise expressly provided, all Instructions shall continue in full
force and effect until cancelled or superseded.
Any Instructions delivered to the Bank by telephone shall promptly
thereafter be confirmed in writing by an Authorized Person (which confirmation
may bear the facsimile signature of such Person), but the Customer will hold the
Bank harmless for the failure of an Authorized Person to send such confirmation
in writing, the failure of such confirmation to conform to the telephone
Instructions received or the Bank's failure to produce such confirmation at any
subsequent time. Either Party may electronically record any Instructions given
by telephone, and any other telephone discussions with respect to the Custody
Account. The Customer shall be responsible for safeguarding any testkeys,
identification codes or other security devices which the Bank shall make
available to the Customer or its Authorized Persons.
Account transactions made pursuant to Sections 5 and 6 of this
Agreement may be made only for the purposes listed below. Instructions must
specify the purpose for which any transaction is to be made and the Customer
shall be solely responsible to assure that Instructions are in accord with any
limitations or restrictions applicable to the Customer by law or as may be set
forth in its prospectus.
(a) In connection with the purchase or sale of Securities at prices as
confirmed by Instructions.
(b) When Securities are called, redeemed or retired, or otherwise
become payable.
(c) In exchange for or upon conversion into other securities alone or
other securities and cash pursuant to any plan or merger, consolidation,
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reorganization, recapitalization or readjustment.
(d) Upon conversion of Securities pursuant to their terms into other
securities.
(e) Upon exercise of subscription, purchase or other similar rights
represented by Securities.
(f) For the payment of interest, taxes, management or supervisory fees,
distributions or operating expenses.
(g) In connection with any borrowings by the Customer requiring a
pledge of Securities, but only against receipt of amounts borrowed.
(h) In connection with any loans, but only against receipt of adequate
collateral as specified in Instructions which shall reflect any restrictions
applicable to the Customer.
(i) For the purpose of redeeming shares of the capital stock of the
Customer and the delivery to, or the crediting to the account of the Bank, its
Subcustodian or the Customer's transfer agent, such shares to be purchased or
redeemed.
(j) For the purpose of redeeming in kind shares of the Customer against
delivery of the shares to be redeemed to the Bank, its Subcustodian or the
Customer's transfer agent.
(k) For delivery in accordance with the provisions of any agreement
among the Customer, the Bank and a broker-dealer registered under the Securities
Exchange Act of 1934 (the "Exchange Act") and a member of the National
Association of Securities Dealers, Inc, relating to compliance with the rules of
The Options Clearing Corporation and of any registered national securities
exchange, or of any similar organization or organizations, regarding escrow or
other arrangements in connection with transactions by the Customer.
(l) For release of Securities to designated brokers under covered call
options, provided, however, that such Securities shall be released only upon
payment to the Bank of monies for the premium due and a receipt for the
Securities which are to be held in escrow. Upon exercise of the option, or at
expiration, the Bank will receive the Securities previously deposited from
brokers. The Bank will act strictly in accordance with Instructions in the
delivery of Securities to be held in escrow and will have no responsibility or
liability for any such Securities which are not returned promptly when due other
than to make proper request for such return.
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(m) For spot or forward foreign exchange transactions to facilitate
security trading, receipt of income from Securities or related transactions.
(n) For other proper purposes as may be specified in Instructions
issued by an officer of the Customer which shall include a statement of the
purpose for which the delivery or payment is to be made, the amount of the
payment or specific Securities to be delivered, the name of the person or
persons to whom delivery or payment is to be made, and a certification that the
purpose is a proper purpose under the instruments governing the Customer.
(o) Upon the termination of this Agreement as set forth in Section
14(i).
Should the California Department of Insurance (the "Department")
succeed to control of the Trust's assets in the event of the insolvency of the
Trust, the Custodian shall, upon notice of such succession in writing to the
Custodian by the Department, recognize the Department's succession to the
Trust's rights and obligations under this Agreement and, accordingly, will cease
to accept Instructions from Authorized Persons of the Trust and shall accept
Instructions hereunder from those persons identified to the Custodian in writing
by the Department as Authorized Persons of the Department. Custodian shall be
without liability for following Instructions from the Department, consistent
with this Agreement and specifically paragraph 12 below.
12. STANDARD OF CARE; LIABILITIES.
(a) The Bank shall be responsible for the performance of only such
duties as are set forth in this Agreement or expressly contained in Instructions
which are consistent with the provisions of this Agreement.
(i) The Bank will use reasonable care with respect to its
obligations under this Agreement and the safekeeping of Assets. The Bank shall
be liable to the Customer for any loss which shall occur as the result of the
failure of a Subcustodian to exercise reasonable care with respect to the
safekeeping of such Assets to the same extent that the Bank would be liable to
the Customer if the Bank were holding such Assets in New York. In the event of
any loss to the Customer by reason of the failure of the Bank or its
Subcustodian to utilize reasonable care, the Bank shall be liable to the
Customer only to the extent of the Customers direct damages, to be determined
based on the market value of the property which is the subject of the loss at
the date of discovery of such loss and without reference to any special
conditions or circumstances.
(ii) The Bank will not be responsible of any act, omission,
default or for the solvency of any broker or agent which it or a Subcustodian
appoints unless such appointment was made negligently or in bad faith.
(iii) The Bank shall be indemnified by and without liability
to the Customer for any action taken or omitted by the Bank whether pursuant to
Instructions or
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otherwise within the scope of this Agreement if such act or omission was in good
faith without negligence. In performing its obligations under this Agreement,
the Bank may rely on the genuineness of any document which it believes in good
faith to have been validly executed.
(iv) The Customer agrees to pay for and hold the Bank harmless
from any liability or loss resulting from the imposition or assessment of any
taxes or other governmental charges, and any related expenses with respect to
income from or Assets in the Accounts.
(v) The Bank shall be entitled to rely and may act upon the
advice of counsel (who may be counsel for the Customer) on all matters, and
shall be without liability for any action reasonably taken or omitted pursuant
to such advice.
(vi) The Bank need not maintain any insurance for the benefit
of the Customer.
(vii) Without limiting the foregoing, the Bank shall not be
liable for any loss which results from: 1) the general risk of investing or 2)
investing or holding Assets in a particular country including, but not limited
to, losses resulting from nationalization, expropriation or other governmental
actions; regulation of the banking or securities industry; currency
restrictions, devaluations or fluctuations; and market conditions which prevent
the orderly execution of securities transactions or affect the value of Assets.
(viii) Neither party shall be liable to the other for any loss
due to forces beyond their control including, but not limited to strikes or work
stoppages, acts of war or terrorism, insurrection, revolution, nuclear fusion,
fission or radiation, or acts of God.
(b) Consistent with and without limiting the first paragraph of this
Section 12, it is specifically acknowledged that the Bank shall have no duty or
responsibility to:
(i) Question Instructions or make any suggestions to the
Customer or an Authorized Person regarding such Instructions;
(ii) supervise or make recommendations with respect to
investments or the retention of Securities;
(iii) advise the Customer or an Authorized Person regarding
any default in the payment of principal or income of any security other than as
provided in Section 5(c) of this Agreement;
iv) evaluate or report to the Customer or an Authorized Person
regarding the financial condition of any broker. agent or other party to which
Securities are delivered or payments are made pursuant to this Agreement; or
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v) review or reconcile trade confirmations received from
brokers. The Customer or its Authorized Persons issuing Instructions shall bear
any responsibility to review such confirmations against Instructions issued to
and statements issued by the Bank.
(c) The Customer authorizes the Bank to act under this Agreement
notwithstanding that the Bank or any of its divisions or affiliates may have a
material interest in a transaction, or circumstances are such that the Bank may
have a potential conflict of duty or interest including the fact that the Bank
or any of its affiliates may provide brokerage services to other customers, act
as financial advisor to the issuer of Securities, act as a lender to the issuer
of Securities, act in the same transaction as agent for more than one customer
have a material interest in the issue of Securities, or earn profits from any of
the activities listed herein.
(d) The Bank hereby warrants to the Customer that in its opinion, after
due inquiry, the established procedures to be followed by each of its branches,
each branch of a qualified U.S. bank, each eligible foreign custodian and each
eligible foreign securities depository holding the Customer's Securities
pursuant to this Agreement afford protection for such Securities at least equal
to that afforded by the Bank's established procedures with respect to similar
securities held by the Bank and its securities depositories in New York.
13. FEES AND EXPENSES.
The Customer agrees to pay the Bank for its services under this
Agreement such amount as may be agreed upon in writing, together with the Bank's
reasonable out-of-pocket or incidental expenses, including, but not limited to
legal fees. The Bank shall have a lien on and is authorized to charge any
Accounts of the Customer for any amount owing to the Bank under any provision of
this Agreement.
14. MISCELLANEOUS.
(a) Foreign Exchange Transactions. To facilitate the administration of
the Customers trading and investment activity, the Bank is authorized to enter
into spot or forward foreign exchange contracts with the Customer or an
Authorized Person for the Customer and may also provide foreign exchange through
its subsidiaries, affiliates or Subcustodians. Instructions, including standing
Instructions, may be issued with respect to such contracts but the Bank may
establish rules or limitations concerning any foreign exchange facility made
available. In all cases where the Bank, its subsidiaries, affiliates or
Subcustodians enter into a foreign exchange contract related to Accounts, the
terms and conditions of the then current foreign exchange contract of the Bank,
its subsidiary, affiliate or Subcustodian and, to the extent not inconsistent,
this Agreement, shall apply to such transaction.
11
<PAGE>
(b) Certification of Residency, etc. The Customer certifies that it is
a resident of the United States and agrees to notify the Bank of any changes in
residency. The Bank may rely upon this certification or the certification of
such other facts as may be required to administer the Bank's obligations under
this Agreement. The Customer will indemnify the Bank against all losses,
liability, claims or demands arising directly or indirectly from any such
certifications.
(c) Access to Records. The Bank shall allow the Customers independent
public accountants reasonable access to the records of the Bank relating to the
Assets as is required in connection with their examination of books and records
pertaining to the Customer's affairs. Subject to restrictions under applicable
law, the Bank shall also obtain an undertaking to permit the Customer's
independent public accountants reasonable access to the records of any
Subcustodian which has physical possession of any Assets as may be required in
connection with the examination of the Customers books and records. Upon
reasonable request from the Customer, the Bank shall furnish the Customer such
reports (or portions thereof) of the Bank's system of internal accounting
controls applicable to the Bank's duties under this Agreement. The Bank shall
endeavor to obtain and furnish the Customer with such similar reports as it may
reasonably request with respect to each Subcustodian and securities depository
holding the Customer's assets.
(d) Governing Law; Successors and Assigns. This Agreement shall be
governed by the laws of the State of New York and shall not be assignable by
either party, but shall bind the successors in interest of the Customer and the
Bank.
(e) Entire Agreement; Applicable Riders. Customer represents that the
Assets deposited in the Accounts are (check one):
[ ] employee benefit plan or other assets subject to the Employee
Retirement Income Security Act of 1974; as amended ("ERlSA");
[X] mutual fund assets subject to Securities and Exchange Commission
("SEC") rules and regulations; or
[ ] neither of the above.
This Agreement consists exclusively of this document together with
Schedule A and the following rider(s) [check applicable rider(s)]:
[ ] ERISA
[X] MUTUAL FUND
[ ] SPECIAL TERMS AND CONDITIONS
12
<PAGE>
There are no other provisions of this Agreement and this Agreement
supersedes any other agreements, whether written or oral, between the parties.
Any amendment to this Agreement must be in writing, executed by both parties.
(f) Severability. In the event that one or more provisions of this
Agreement are held invalid, illegal or unenforceable in any respect on the basis
of any particular circumstances or in any jurisdiction, the validity, legality
and enforceability of any such provision and the remaining provisions, under
other circumstances or in other jurisdictions will not in any way be affected or
impaired.
(g) Waiver. Except as otherwise provided in this Agreement, no failure
or delay on the part of either party in exercising any power or right under this
Agreement operates as a waiver, nor does any single or partial exercise of any
power or right preclude any other or further exercise thereof, or the exercise
of any other power or right. No waiver by a party of any provision of this
Agreement, or waiver of any breach or default, is effective unless in writing
and signed by the party against whom the waiver is to be enforced.
(h) Notices. All notices under this Agreement shall be effective when
actually received. Any notices or other communications which may be required
under this Agreement are to be sent to the parties at the following addresses or
such other addresses as may subsequently be given to the other party in writing;
Bank: The Chase Manhattan Bank, N.A.
4 Chase MetroTech Center, 18th Floor
Brooklyn, NY 11245
Attention: Global Securities Services
Customer: Franklin Templeton Variable Insurance Products Trust
777 Mariners Island Blvd.
San Mateo, California 94404
Attention: Kimberley H. Monasterio
Fund Accounting Administration
with a copy to:
Templeton Group of Funds
Broward Financial Center
500 East Broward, Suite 2100
Ft. Lauderdale, Florida 33394-3091
Attention: Jim Baio
Fund Accounting
13
<PAGE>
(i) Termination. This Agreement may be terminated by the Customer or
the Bank by giving sixty days written notice to the other, provided that such
notice to the Bank shall specify the names of the persons to whom the Bank shall
deliver the Assets in the Accounts. If notice of termination is given by the
Bank, the Customer shall, within sixty days following receipt of the notice,
deliver to the Bank Instructions specifying the names of the persons to whom the
Bank shall deliver the Assets. In either case the Bank will deliver the Assets
to the persons so specified, after deducting any amounts which the Bank
determines in good faith to be owed to it under Section 13. If within sixty days
following receipt of a notice of termination by the Bank, the Bank does not
receive Instructions from the Customer specifying the names of the persons to
whom the Bank shall deliver the Assets, the Bank, at its election, and
consistent with the requirements of the Investment Company Act of 1940, may
deliver the Assets to a bank or trust company doing business in the State of New
York to be held and disposed of pursuant to the provisions of this Agreement, or
to Authorized Persons, or may continue to hold the Assets until Instructions are
provided to the Bank.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
By:______________________________
Title:___________________________
THE CHASE MANHATTAN BANK, N.A.
By:______________________________
Title:___________________________
14
<PAGE>
Mutual Fund Rider to Global Custody Agreement
Between The Chase Manhattan Bank. N.A. and
Franklin Templeton Variable Insurance Products Trust
effective as of May 1, 2000
Customer represents that the Assets being placed in the Bank's custody
are subject to the Act, as the same may be amended from time to time.
Except to the extent that the Bank has specifically agreed to comply
with a condition of a rule, regulation or interpretation promulgated by or under
the authority of the Securities and Exchange Commission or the Exemptive Order
applicable to accounts of this nature issued to the Bank (investment Company Act
of 1940, Release No. 12053, November 20, 1981), as amended, or unless the Bank
has otherwise specifically agreed, the Customer shall be solely responsible to
assure that the maintenance of Assets under this Agreement complies with such
rules, regulations, interpretations or exemptive order promulgated by or under
the authority of the Securities and Exchange Commission.
15
<PAGE>
SCHEDULE A
<PAGE>
SCHEDULE B
REGISTERED INVESTMENT COMPANY SERIES
- ----------------------------- ------
Franklin Templeton Variable Templeton Asset Strategy Fund
Insurance Products Trust Templeton Developing Markets Securities Fund
Templeton Global Income Securities Fund
Templeton Growth Securities Fund
Templeton International Securities Fund
Templeton International Smaller
Companies Fund
Templeton Pacific Growth Securities Fund
EXHIBIT (g) xi
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective Series
for which the Custodian shall serve under the Master Custody Agreement dated as
of February 16, 1996.
<TABLE>
<CAPTION>
- --------------------------------------------- -------------------------------- -----------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- --------------------------------------------- -------------------------------- -----------------------------------------------------
<S> <C> <C>
Adjustable Rate Securities Portfolios Delaware Business Trust U.S. Government Adjustable Rate Mortgage Portfolio
Franklin Asset Allocation Fund Delaware Business Trust
Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Trust Franklin California Insured Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin Custodian Funds, Inc. Maryland Corporation Growth Series
Utilities Series
Dynatech Series
Income Series
U.S. Government Securities Series
Franklin Equity Fund California Corporation
Franklin Federal Money Fund California Corporation
Franklin Federal Tax- Free Income Fund California Corporation
- --------------------------------------------- -------------------------------- -----------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------- -------------------------------- -----------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- --------------------------------------------- -------------------------------- -----------------------------------------------------
<S> <C> <C>
Franklin Gold & Precious Metals Fund Delaware Business Trust
Franklin High Income Trust Delaware Business Trust AGE High Income Fund
Franklin Investors Securities Trust Massachusetts Business Trust Franklin Global Government Income Fund
Franklin Short-Intermediate U.S. Govt Securities Fund
Franklin Convertible Securities Fund
Franklin Adjustable U.S. Government Securities Fund
Franklin Equity Income Fund
Franklin Bond Fund
Franklin Managed Trust Delaware Business Trust Franklin Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Business Trust Franklin California High Yield Municipal Fund
Franklin Tennessee Municipal Bond Fund
Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Shares Fund
Mutual Beacon Fund
Mutual Qualified Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
- --------------------------------------------- -------------------------------- -----------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------- -------------------------------- -----------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- --------------------------------------------- -------------------------------- -----------------------------------------------------
<S> <C> <C>
Franklin New York Tax-Free Income Fund Delaware Business Trust
Franklin New York Tax-Free Trust Massachusetts Business Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Intermediate-Term Tax-Free
Income Fund
Franklin New York Insured Tax-Free Income Fund
Franklin Real Estate Securities Trust Delaware Business Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Business Trust
Franklin Strategic Series Delaware Business Trust Franklin California Growth Fund
Franklin Strategic Income Fund
Franklin MidCap Growth Fund
Franklin Global Utilities Fund
Franklin Small Cap Growth Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Blue Chip Fund
Franklin Biotechnology Discovery Fund
Franklin U.S. Long-Short Fund
Franklin Large Cap Growth Fund
Franklin Aggressive Growth Fund
Franklin Small Cap Growth Fund II
Franklin Technology Fund
Franklin Tax-Exempt Money Fund California Corporation
- --------------------------------------------- -------------------------------- -----------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------- -------------------------------- -----------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- --------------------------------------------- -------------------------------- -----------------------------------------------------
<S> <C> <C>
Franklin Tax-Free Trust Massachusetts Business Trust Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Puerto Rico Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Texas Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
Franklin Alabama Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free Income
Fund
Franklin Arizona Insured Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income fund
- --------------------------------------------- -------------------------------- -----------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------- -------------------------------- -----------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- --------------------------------------------- -------------------------------- -----------------------------------------------------
<S> <C> <C>
Franklin Templeton Fund Allocator Series Delaware Business Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Global Trust Delaware Business Trust Franklin Templeton Global Currency Fund
Franklin Templeton Hard Currency Fund
Franklin Templeton International Trust Delaware Business Trust Templeton Pacific Growth Fund
Templeton Foreign Smaller Companies Fund
Franklin Templeton Money Fund Trust Delaware Business Trust Franklin Templeton Money Fund
Franklin Value Investors Trust Massachusetts Business Trust Franklin Balance Sheet Investment Fund
Franklin MicroCap Value Fund
Franklin Value Fund
Franklin Large Cap Value Fund
Franklin Templeton Variable Insurance Massachusetts Business Trust Franklin Money Market Fund
Products Trust Franklin Growth and Income Fund
Franklin Natural Resources Securities Fund
Franklin Real Estate Fund
Franklin Global Communications Securities Fund
Franklin High Income Fund
Templeton Global Income Securities Fund
Franklin Income Securities Fund
Franklin U.S. Government Fund
Franklin Zero Coupon Fund - 2000
Franklin Zero Coupon Fund - 2005
Franklin Zero Coupon Fund - 2010
Franklin Rising Dividends Securities Fund
- --------------------------------------------- -------------------------------- -----------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------- -------------------------------- -----------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES ---(IF APPLICABLE)
- --------------------------------------------- -------------------------------- -----------------------------------------------------
<S> <C> <C>
Franklin Templeton Variable Insurance Massachusetts Business Trust Templeton Pacific Growth Securities Fund
Products Trust (cont.) Templeton International Securities Fund
Templeton Developing Markets Securities Fund
Templeton Growth Securities Fund
Templeton Asset Strategy Fund
Franklin Small Cap Fund
Franklin Large Cap Growth Securities Fund
Templeton International Smaller Companies Fund
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Franklin Global Health Care Securities Fund
Franklin Value Securities Fund
Franklin Aggressive Growth Securities Fund
Franklin S&P 500 Index Fund
Franklin Strategic Income Securities Fund
Franklin Technology Securities Fund
- --------------------------------------------- -------------------------------- -----------------------------------------------------
Institutional Fiduciary Trust Massachusetts Business Trust Money Market Portfolio
Franklin U.S. Government Securities Money Market
Portfolio
Franklin Cash Reserves Fund
The Money Market Portfolios Delaware Business Trust The Money Market Portfolio
The U.S. Government Securities Money Market Portfolio
Templeton Variable Products Series Fund Franklin Growth Investments Fund
Mutual Shares Investments Fund
Mutual Discovery Investments Fund
Franklin Small Cap Investments Fund
- --------------------------------------------- -------------------------------- -----------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------- -------------------------------- -----------------------------------------------------
INVESTMENT COMPANY ORGANIZATION SERIES---(IF APPLICABLE)
- --------------------------------------------- -------------------------------- -----------------------------------------------------
<S> <C> <C>
Franklin Floating Rate Master Trust Delaware Business Trust Franklin Floating Rate Master Series
CLOSED END FUNDS:
Franklin Multi-Income Trust Massachusetts Business Trust
Franklin Universal Trust Massachusetts Business Trust
Franklin Floating Rate Trust Delaware Business Trust
- --------------------------------------------- -------------------------------- -----------------------------------------------------
</TABLE>
EXHIBIT (h) ii
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of May 1, 2000 between FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust ("the
Investment Company"), on behalf of its series TEMPLETON ASSET STRATEGY FUND (the
"Fund") and FRANKLIN TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment
on behalf of the Fund;
(d) supervising preparation of periodic reports to
Shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
Shareholders when asked to do so by the Fund's shareholder servicing agent or
other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the Investment Company
Act of 1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or regulations,
and maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code and provisions of the Code applicable to insurance
company separate accounts, and other applicable tax laws and regulations;
1
<PAGE>
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives, policies and
restrictions; and the Code of Ethics and other policies adopted by the
Investment Company's Board of Trustees ("Board") or by the Adviser and
applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.15% of the first $200
million of the average daily net assets of the Fund during the month preceding
each payment; reduced as follows: on such net assets in excess of $200 million
up to $700 million, a monthly fee equal on an annual basis to 0.135%; on such
net assets in excess of $700 million up to $1.2 billion, a monthly fee equal on
an annual basis to 0.10%; and on such net assets in excess of $1.2 billion, a
monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved by
the vote of a majority of the Board of the Investment Company in office at the
time or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with, rendering
services hereunder.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
TEMPLETON ASSET STRATEGY FUND
By:___________________________________
David P. Goss
Vice President &
Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
By:___________________________________
Harmon E. Burns
Executive Vice President
3
EXHIBIT (h) vii
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of May 1, 2000, between FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust ("the
Investment Company"), on behalf of its series FRANKLIN TECHNOLOGY SECURITIES
FUND (the "Fund") and FRANKLIN TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment
on behalf of the Fund;
(d) supervising preparation of periodic reports to Fund
shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
Fund shareholders when asked to do so by the Fund's shareholder servicing agent
or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the Investment Company
Act of 1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or regulations,
and maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue
1
<PAGE>
Code and provisions of the Code applicable to insurance company separate
accounts, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives, policies and
restrictions; and the Code of Ethics and other policies adopted by the
Investment Company's Board of Trustees ("Board") or by the Adviser and
applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without
limitation, NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.25% of the average
daily net assets of the Fund during the month preceding each payment.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved by
the vote of a majority of the Board of the Investment Company in office at the
time or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with, rendering
services hereunder.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
FRANKLIN TECHNOLOGY SECURITIES FUND
/S/ DAVID P. GOSS
---------------------------------------
David P. Goss
Vice President & Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
/S/ HARMON E. BURNS
---------------------------------------
Harmon E. Burns
Executive Vice President
3
EXHIBIT (h)viii
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of May 1, 2000 between FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust ("the
Investment Company"), on behalf of its series FRANKLIN S&P 500 INDEX FUND (the
"Fund") and FRANKLIN TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment
on behalf of the Fund;
(d) supervising preparation of periodic reports to Fund
shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
Fund shareholders when asked to do so by the Fund's shareholder servicing agent
or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the Investment Company
Act of 1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or regulations,
and maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue
1
<PAGE>
Code and provisions of the Code applicable to insurance company separate
accounts, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives, policies and
restrictions; and the Code of Ethics and other policies adopted by the
Investment Company's Board of Trustees ("Board") or by the Adviser and
applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without
limitation, NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.25% of the average
daily net assets of the Fund during the month preceding each payment.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved by
the vote of a majority of the Board of the Investment Company in office at the
time or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with, rendering
services hereunder.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
FRANKLIN S&P 500 INDEX FUND
/S/ DAVID P. GOSS
-------------------------------
David P. Goss
Vice President
& Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
/S/ HARMON E. BURNS
-------------------------------
Harmon E. Burns
Executive Vice President
3
EXHIBIT (h)ix
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of May 1, 2000 between FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust ("the
Investment Company"), on behalf of its series FRANKLIN STRATEGIC INCOME
SECURITIES FUND (the "Fund") and FRANKLIN TEMPLETON SERVICES, INC. (the
"Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment
on behalf of the Fund;
(d) supervising preparation of periodic reports to Fund
shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
Fund shareholders when asked to do so by the Fund's shareholder servicing agent
or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the Investment Company
Act of 1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or regulations,
and maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue
4
<PAGE>
Code and provisions of the Code applicable to insurance company separate
accounts, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives, policies and
restrictions; and the Code of Ethics and other policies adopted by the
Investment Company's Board of Trustees ("Board") or by the Adviser and
applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without
limitation, NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.20% of the average
daily net assets of the Fund during the month preceding each payment.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved by
the vote of a majority of the Board of the Investment Company in office at the
time or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with, rendering
services hereunder.
5
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
FRANKLIN STRATEGIC INCOME SECURITIES FUND
/S/ DAVID P. GOSS
----------------------------------
David P. Goss
Vice President
& Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
/S/ HARMON E. BURNS
----------------------------------
Harmon E. Burns
Executive Vice President
6
EXHIBIT (h)x
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of May 1, 2000 between FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust ("the
Investment Company"), on behalf of its series FRANKLIN SMALL CAP FUND (the
"Fund") and FRANKLIN TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment
on behalf of the Fund;
(d) supervising preparation of periodic reports to
Shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
Shareholders when asked to do so by the Fund's shareholder servicing agent or
other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the Investment Company
Act of 1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or regulations,
and maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code and provisions of the Code applicable to insurance
company separate accounts, and other applicable tax laws and regulations;
1
<PAGE>
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives, policies and
restrictions; and the Code of Ethics and other policies adopted by the
Investment Company's Board of Trustees ("Board") or by the Adviser and
applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.15% of the first $200
million of the average daily net assets of the Fund during the month preceding
each payment; reduced as follows: on such net assets in excess of $200 million
up to $700 million, a monthly fee equal on an annual basis to 0.135%; on such
net assets in excess of $700 million up to $1.2 billion, a monthly fee equal on
an annual basis to 0.10%; and on such net assets in excess of $1.2 billion, a
monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved by
the vote of a majority of the Board of the Investment Company in office at the
time or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with, rendering
services hereunder.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
FRANKLIN SMALL CAP FUND
/S/ DAVID P. GOSS
--------------------
David P. Goss
Vice President &
Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
/S/ HARMON E. BURNS
------------------------
Harmon E. Burns
Executive Vice President
3
EXHIBIT (h)xi
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of May 1, 2000 between FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust ("the
Investment Company"), on behalf of its series TEMPLETON DEVELOPING MARKETS
SECURITIES FUND (the "Fund") and FRANKLIN TEMPLETON SERVICES, INC. (the
"Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment
on behalf of the Fund;
(d) supervising preparation of periodic reports to
Shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
Shareholders when asked to do so by the Fund's shareholder servicing agent or
other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the Investment Company
Act of 1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or regulations,
and maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code and provisions of the Code applicable to insurance
company separate accounts, and other applicable tax laws and regulations;
1
<PAGE>
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives, policies and
restrictions; and the Code of Ethics and other policies adopted by the
Investment Company's Board of Trustees ("Board") or by the Adviser and
applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.15% of the first $200
million of the average daily net assets of the Fund during the month preceding
each payment; reduced as follows: on such net assets in excess of $200 million
up to $700 million, a monthly fee equal on an annual basis to 0.135%; on such
net assets in excess of $700 million up to $1.2 billion, a monthly fee equal on
an annual basis to 0.10%; and on such net assets in excess of $1.2 billion, a
monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved by
the vote of a majority of the Board of the Investment Company in office at the
time or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with, rendering
services hereunder.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
TEMPLETON DEVELOPING MARKETS SECURITIES FUND
/S/ DAVID P. GOSS
-------------------------------------
David P. Goss
Vice President & Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
/S/ HARMON E. BURNS
-------------------------
Harmon E. Burns
Executive Vice President
3
EXHIBIT (h)xii
FUND ADMINISTRATION AGREEMENT
AGREEMENT dated as of May 1, 2000 between FRANKLIN TEMPLETON
VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust ("the
Investment Company"), on behalf of its series TEMPLETON INTERNATIONAL SECURITIES
FUND (the "Fund") and FRANKLIN TEMPLETON SERVICES, INC. (the "Administrator").
In consideration of the mutual agreements herein made, the
parties hereby agree as follows:
(1) The Administrator agrees, during the life of this Agreement, to
provide the following services to the Fund:
(a) providing office space, telephone, office equipment and
supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless
these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment
on behalf of the Fund;
(d) supervising preparation of periodic reports to
Shareholders, notices of dividends, capital gains distributions and tax credits;
and attending to routine correspondence and other communications with individual
Shareholders when asked to do so by the Fund's shareholder servicing agent or
other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment
portfolio, including collecting quotations from pricing services engaged by the
Fund; providing fund accounting services, including preparing and supervising
publication of daily net asset value quotations, periodic earnings reports and
other financial data;
(f) monitoring relationships with organizations serving the
Fund, including custodians, transfer agents, public accounting firms, law firms,
printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping
requirements under the federal securities laws, including the Investment Company
Act of 1940 ("1940 Act"), and the rules and regulations thereunder, supervising
compliance with recordkeeping requirements imposed by state laws or regulations,
and maintaining books and records for the Fund (other than those maintained by
the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's
income tax returns, and monitoring the Fund's compliance with subchapter M of
the Internal Revenue Code and provisions of the Code applicable to insurance
company separate accounts, and other applicable tax laws and regulations;
1
<PAGE>
(i) monitoring the Fund's compliance with: 1940 Act and other
federal securities laws, and rules and regulations thereunder; state and foreign
laws and regulations applicable to the operation of investment companies funding
variable insurance products; the Fund's investment objectives, policies and
restrictions; and the Code of Ethics and other policies adopted by the
Investment Company's Board of Trustees ("Board") or by the Adviser and
applicable to the Fund;
(j) providing executive, clerical and secretarial personnel
needed to carry out the above responsibilities; and
(k) preparing regulatory reports, including without limitation
NSARs, proxy statements and U.S. and foreign ownership reports.
Nothing in this Agreement shall obligate the Investment Company or the Fund to
pay any compensation to the officers of the Investment Company. Nothing in this
Agreement shall obligate the Administrator to pay for the services of third
parties, including attorneys, auditors, printers, pricing services or others,
engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Fund agrees to pay to the Administrator as compensation for
such services a monthly fee equal on an annual basis to 0.15% of the first $200
million of the average daily net assets of the Fund during the month preceding
each payment; reduced as follows: on such net assets in excess of $200 million
up to $700 million, a monthly fee equal on an annual basis to 0.135%; on such
net assets in excess of $700 million up to $1.2 billion, a monthly fee equal on
an annual basis to 0.10%; and on such net assets in excess of $1.2 billion, a
monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees
provided for hereunder and such waiver shall be treated as a reduction in the
purchase price of its services. The Administrator shall be contractually bound
hereunder by the terms of any publicly announced waiver of its fee, or any
limitation of each affected Fund's expenses, as if such waiver or limitation
were fully set forth herein.
(3) This Agreement shall remain in full force and effect through for
one year after its execution and thereafter from year to year to the extent
continuance is approved annually by the Board of the Investment Company.
(4) This Agreement may be terminated by the Investment Company at any
time on sixty (60) days' written notice without payment of penalty, provided
that such termination by the Investment Company shall be directed or approved by
the vote of a majority of the Board of the Investment Company in office at the
time or by the vote of a majority of the outstanding voting securities of the
Investment Company (as defined by the 1940 Act); and shall automatically and
immediately terminate in the event of its assignment (as defined by the 1940
Act).
(5) In the absence of willful misfeasance, bad faith or gross
negligence on the part of the Administrator, or of reckless disregard of its
duties and obligations hereunder, the Administrator shall not be subject to
liability for any act or omission in the course of, or connected with, rendering
services hereunder.
2
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be duly executed by their duly authorized officers.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST on behalf of
TEMPLETON INTERNATIONAL SECURITIES FUND
/S/ DAVID P. GOSS
--------------------
David P. Goss
Vice President &
Assistant Secretary
FRANKLIN TEMPLETON SERVICES, INC.
/S/ HARMON E. BURNS
------------------------
Harmon E. Burns
Executive Vice President
3
EXHIBIT (j)i
CONSENT OF INDEPENDENT AUDITORS
We hereby consent to the inclusion of our report dated January 28, 1999 on the
financial statements for the year ended December 31, 1998 and financial
highlights for the four years in the period then ended of Templeton Asset
Allocation Fund and Templeton Developing Markets Fund, each a series of
Templeton Variable Products Series Fund, and of the periods since inception to
December 31, 1998 of Templeton International Fund, a series of Templeton
Variable Products Series Fund, attached as an exhibit in the Post-Effective
Amendment to the Registration Statement of Franklin Templeton Variable Insurance
Products Trust on Form N-1A (File No. 33-23493 and 811-5583) as filed with the
Securities and Exchange Commission.
/s/McGladrey and Pullen, LLP
New York, New York
April 24, 2000
EXHIBIT (j)ii
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 32
to the Registration Statement of Franklin Templeton Variable Insurance Products
Trust on Form N-1A, File No. 33-23493 of our report dated January 28, 2000
except for Note 7, as to which the date is February 8, 2000, on our audit of the
financial statements and financial highlights of Templeton Developing Markets
Fund and Templeton International Fund, each a series of Templeton Variable
Products Series Fund, which report is included in the Annual Report to
Shareholders for the year ended December 31, 1999 filed with the Securities and
Exchange Commission pursuant to section 30(d) of the Investment Company Act of
1940, which is incorporated by reference in the Registration Statement. We also
consent to the reference to our firm under the captions "Financial Highlights"
and "Auditor."
/s/PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
April 28, 2000
EXHIBIT (j)iii
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 32
to the Registration Statement of Franklin Templeton Variable Insurance Products
Trust on Form N-1A, File No. 33-23493 of our report dated January 28, 2000
except for Note 8, as to which the date is February 8, 2000, on our audit of the
financial statements and financial highlights of Templeton Asset Allocation Fund
a series of Templeton Variable Products Series Fund, which report is included in
the Annual Report to Shareholders for the year ended December 31, 1999 filed
with the Securities and Exchange Commission pursuant to section 30(d) of the
Investment Company Act of 1940, which is incorporated by reference in the
Registration Statement. We also consent to the reference to our firm under the
captions "Financial Highlights" and "Auditor."
/s/PricewaterhouseCoopers LLP
Fort Lauderdale, Florida
April 28, 2000
EXHBIT (j)iv
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 32
to the Registration Statement of Franklin Templeton Variable Insurance Products
Trust on Form N-1A, File No. 33-23493 of our report dated January 28, 2000
except for Note 8, as to which the date is February 8, 2000, on our audit of the
financial statements and financial highlights of Templeton Asset Allocation
Fund, Templeton Developing Markets Fund and Templeton International Fund, each a
series of Templeton Variable Products Series Fund, which report is included in
the Annual Report to Shareholders for the year ended December 31, 1999 filed
with the Securities and Exchange Commission pursuant to section 30(d) of the
Investment Company Act of 1940, which is incorporated by reference in the
Registration Statement. We also consent to the reference to our firm under the
captions "Financial Highlights" and "Auditor."
/s/PricewaterhouseCoopers LLP
San Francisco, California
April 28, 2000
EXHIBIT (j)v
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Post-Effective Amendment No. 32
to the Registration Statement of Franklin Templeton Variable Insurance Products
Trust on Form N-1A, File No. 33-23493 of our report dated February 2, 2000
except for Note 13, as to which the date is February 8, 2000, on our audit of
the financial statements and financial highlights of Franklin Templeton Variable
Insurance Products Trust, which report is included in the Annual Report to
Shareholders for the year ended December 31, 1999 filed with the Securities and
Exchange Commission pursuant to section 30(d) of the Investment Company Act of
1940, which is incorporated by reference in the Registration Statement. We also
consent to the reference to our firm under the captions "Financial Highlights"
and "Auditor."
/s/PricewaterhouseCoopers LLP
San Francisco, California
April 28, 2000
Exhibit l(vi)
April 28, 2000
Franklin Templeton Variable Insurance Products Trust
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to acquire the initial share of beneficial interest (the
"Share") of the Franklin Strategic Income Securities Fund (the "Fund"), a series
of Franklin Templeton Variable Insurance Products Trust (the "Trust"), at the
purchase price of the net asset value per share. We will purchase the Share in a
private offering prior to the effectiveness of the Form N-1A registration
statement filed by the Trust on behalf of the Fund under the Securities Act of
1933. The Share is being purchased as the initial advance in connection with the
operations of the Fund.
We consent to the filing of this Investment Letter as an exhibit to the
Form N-1A registration statement of the Trust.
Sincerely,
TEMPLETON FUNDS ANNUITY COMPANY
By: /S/ KAREN L. SKIDMORE
---------------------------
Karen L. Skidmore
Vice President & Secretary
Exhibit l(vii)
April 28, 2000
Franklin Templeton Variable Insurance Products Trust
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to acquire the initial share of beneficial interest (the
"Share") of the Franklin Technology Securities Fund (the "Fund"), a series of
Franklin Templeton Variable Insurance Products Trust (the "Trust"), at the
purchase price of the net asset value per share. We will purchase the Share in a
private offering prior to the effectiveness of the Form N-1A registration
statement filed by the Trust on behalf of the Fund under the Securities Act of
1933. The Share is being purchased as the initial advance in connection with the
operations of the Fund.
We consent to the filing of this Investment Letter as an exhibit to the
Form N-1A registration statement of the Trust.
Sincerely,
TEMPLETON FUNDS ANNUITY COMPANY
By: /S/ KAREN L. SKIDMORE
---------------------------
Karen L. Skidmore
Vice President & Secretary
Exhibit l(viii)
April 28, 2000
Franklin Templeton Variable Insurance Products Trust
777 Mariners Island Blvd.
San Mateo, CA 94404
Gentlemen:
We propose to acquire the initial share of beneficial interest (the
"Share") of the Franklin S&P 500 Index Fund (the "Fund"), a series of Franklin
Templeton Variable Insurance Products Trust (the "Trust"), at the purchase price
of the net asset value per share. We will purchase the Share in a private
offering prior to the effectiveness of the Form N-1A registration statement
filed by the Trust on behalf of the Fund under the Securities Act of 1933. The
Share is being purchased as the initial advance in connection with the
operations of the Fund.
We consent to the filing of this Investment Letter as an exhibit to the
Form N-1A registration statement of the Trust.
Sincerely,
TEMPLETON FUNDS ANNUITY COMPANY
By: /S/ KAREN L. SKIDMORE
---------------------------
Karen L. Skidmore
Vice President & Secretary
EXHIBIT (m)iii
CLASS 2 DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
II. Fund: FRANKLIN S&P 500 INDEX FUND
PREAMBLE TO CLASS 2 DISTRIBUTION PLAN
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST ("Investment Company") is
an open-end management investment company organized as a Massachusetts business
trust, which offers the shares of beneficial interest of its series (the "Fund")
to certain life insurance companies ("Insurance Companies") for allocation to
certain of their separate accounts established for the purpose of funding
variable annuity contracts and variable life insurance policies (collectively,
"Variable Contracts").
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Act") by the Investment
Company for the Class 2 (the "Class") shares of the Fund named above, which Plan
shall take effect on the date Class 2 shares of the Fund are first offered (the
"Effective Date of the Plan"). The Plan has been approved by a majority of the
Board of Trustees of the Investment Company (the "Board"), including a majority
of the Board members who are not interested persons of the Investment Company
and who have no direct or indirect financial interest in the operation of the
Plan (the "non-interested Board members"), cast in person at a meeting called
for the purpose of voting on such Plan.
The Board's approval included a determination that in the exercise of their
reasonable business judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its Class 2
shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay Franklin/Templeton Distributors, Inc. ("Distributors"),
the Insurance Companies or others for activities primarily intended to sell
Class 2 shares or Variable Contracts offering Class 2 shares. Payments made
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and related expenses, advertisements, education of contract owners or dealers
and their representatives, and other distribution-related expenses, including a
prorated portion of Distributors' or the Insurance Companies' overhead expenses
attributable to the distribution of these Variable Contracts.
Payments made under the Plan may also be used to pay Insurance Companies,
dealers or others for, among other things, service fees as defined under NASD
rules, furnishing personal services or such other enhanced services as a Fund or
a Variable Contract may require, or maintaining customer accounts and records.
Agreements for the payment of fees to the Insurance Companies
1
<PAGE>
or others shall be in a form which has been approved from time to time by the
Board, including the non-interested Board members.
2. The maximum amount which may be paid by the Fund shall be 0.25% per annum of
the average daily net assets represented by shares of the Fund's Class 2. These
payments shall be made quarterly by the Fund to Distributors, the Insurance
Companies or others. Expenses in excess of these maximum annual rates that
otherwise qualify for payment shall not be carried forward into successive
annual periods.
3. In no event shall the aggregate asset-based sales charges exceed the amount
permitted to be paid pursuant to the Rules of Conduct of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it, to the Insurance Companies and
to others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with the payments
made under the Plan in order to enable the Board to make an informed
determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year with
respect to the Fund only so long as such continuance is specifically approved at
least annually by a vote of the Board, including the non-interested Board
members, cast in person at a meeting called for the purpose of voting on the
Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated with respect to the Class 2 shares of the Fund at any time, without
penalty, by vote of a majority of the outstanding Class 2 shares of the Fund or
by vote of a majority of the non-interested Board members, on not more than
sixty (60) days' written notice, or by Distributors on not more than sixty (60)
days' written notice, and shall terminate automatically in the event of any act
that constitutes an assignment of the Investment Advisory Agreement between the
Investment Company on behalf of the Fund and the Fund's Adviser.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent by the Fund pursuant to
Paragraph 2 hereof without approval by a majority of the Fund's outstanding
Class 2 shares.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Investment Company's non-interested Board members shall be committed to the
discretion of such non-interested Board members.
2
<PAGE>
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Investment Company, on behalf of the Class 2 shares of the Fund, and
Distributors as evidenced by their execution hereof.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
/S/ DAVID P. GOSS
----------------------
David P. Goss
Vice President
& Assistant Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
/S/ HARMON E. BURNS
------------------------
Harmon E. Burns
Executive Vice President
Dated: May 1, 2000
3
EXHIBIT (m)iv
CLASS 3 DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
II. Fund: FRANKLIN S&P 500 INDEX FUND
PREAMBLE TO CLASS 3 DISTRIBUTION PLAN
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST ("Investment Company") is
an open-end management investment company organized as a Massachusetts business
trust, which offers the shares of beneficial interest of its series, including
the Franklin S&P 500 Index Fund (the "Fund"), to certain life insurance
companies ("Insurance Companies") for allocation to certain of their separate
accounts established for the purpose of funding variable annuity contracts and
variable life insurance policies (collectively, "Variable Contracts") and shares
of the Fund to employee benefit, pension and other plans meeting the
requirements for qualification under section 401(k) of the Internal Revenue Code
("401(k) Plans").
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Act") by the Investment
Company for the Class 3 (the "Class") shares of the Fund named above, which Plan
shall take effect on the date Class 3 shares of the Fund are first offered (the
"Effective Date of the Plan"). The Plan has been approved by a majority of the
Board of Trustees of the Investment Company (the "Board"), including a majority
of the Board members who are not interested persons of the Investment Company
and who have no direct or indirect financial interest in the operation of the
Plan (the "non-interested Board members"), cast in person at a meeting called
for the purpose of voting on such Plan.
The Board's approval included a determination that in the exercise of their
reasonable business judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its Class 3
shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay Distributors, the Insurance Companies or others for
activities primarily intended to sell Class 3 shares or Variable Contracts
offering Class 3 shares. Payments made under the Plan may be used for, among
other things, the printing of prospectuses and reports used for sales purposes,
preparing and distributing sales literature and related expenses,
advertisements, education of contract owners or dealers and their
representatives, and other distribution-related expenses, including a prorated
portion of Distributors' or the Insurance Companies' overhead expenses
attributable to the distribution of these Variable Contracts. Payments made
under the Plan may also be used to pay Insurance Companies, dealers, 401(k) Plan
record keeping and servicing agents, or others for, among other things, service
fees as defined under NASD rules, furnishing personal services or such other
enhanced services as the Fund or a Variable Contract may require, or maintaining
customer accounts and records. Agreements for the payment of fees to the
Insurance Companies or others shall be in a form
1
<PAGE>
which has been approved from time to time by the Board, including the
non-interested Board members.
2. The maximum amount which may be paid by the Fund shall be 0.25% per annum of
the average daily net assets represented by shares of the Fund's Class 3. These
payments shall be made quarterly by the Fund to Distributors, the Insurance
Companies or others. Expenses in excess of these maximum annual rates that
otherwise qualify for payment shall not be carried forward into successive
annual periods.
3. In no event shall the aggregate asset-based sales charges exceed the amount
permitted to be paid pursuant to the Rules of Conduct of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it, to the Insurance Companies and
to others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with the payments
made under the Plan in order to enable the Board to make an informed
determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year with
respect to the Fund only so long as such continuance is specifically approved at
least annually by a vote of the Board, including the non-interested Board
members, cast in person at a meeting called for the purpose of voting on the
Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated with respect to the Class 3 shares of any Fund at any time, without
penalty, by vote of a majority of the outstanding Class 3 shares of the Fund or
by vote of a majority of the non-interested Board members, on not more than
sixty (60) days' written notice, or by Distributors on not more than sixty (60)
days' written notice, and shall terminate automatically in the event of any act
that constitutes an assignment of the Management Agreement between the
Investment Company on behalf of the Fund and the Fund's Adviser.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent by any Fund pursuant to
Paragraph 2 hereof without approval by a majority of the Fund's outstanding
Class 3 shares.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Investment Company's non-interested Board members shall be committed to the
discretion of such non-interested Board members.
2
<PAGE>
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Investment Company, on behalf of the Class 3 shares of the Fund, and
Distributors as evidenced by their execution hereof.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
/S/ DAVID P. GOSS
---------------------------
David P. Goss
Vice President
& Assistant Vice President
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
/S/ HARMON E. BURNS
------------------------
Harmon E. Burns
Executive Vice President
Date: May 1, 2000
3
EXHIBIT (m)v
CLASS 2 DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
II. Fund: FRANKLIN STRATEGIC INCOME SECURITIES FUND
PREAMBLE TO CLASS 2 DISTRIBUTION PLAN
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST ("Investment Company") is
an open-end management investment company organized as a Massachusetts business
trust, which offers the shares of beneficial interest of its series (the "Fund")
to certain life insurance companies ("Insurance Companies") for allocation to
certain of their separate accounts established for the purpose of funding
variable annuity contracts and variable life insurance policies (collectively,
"Variable Contracts").
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Act") by the Investment
Company for the Class 2 (the "Class") shares of the Fund named above, which Plan
shall take effect on the date Class 2 shares of the Fund are first offered (the
"Effective Date of the Plan"). The Plan has been approved by a majority of the
Board of Trustees of the Investment Company (the "Board"), including a majority
of the Board members who are not interested persons of the Investment Company
and who have no direct or indirect financial interest in the operation of the
Plan (the "non-interested Board members"), cast in person at a meeting called
for the purpose of voting on such Plan.
The Board's approval included a determination that in the exercise of their
reasonable business judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its Class 2
shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay Franklin/Templeton Distributors, Inc. ("Distributors"),
the Insurance Companies or others for activities primarily intended to sell
Class 2 shares or Variable Contracts offering Class 2 shares. Payments made
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and related expenses, advertisements, education of contract owners or dealers
and their representatives, and other distribution-related expenses, including a
prorated portion of Distributors' or the Insurance Companies' overhead expenses
attributable to the distribution of these Variable Contracts.
Payments made under the Plan may also be used to pay Insurance Companies,
dealers or others for, among other things, service fees as defined under NASD
rules, furnishing personal services or such other enhanced services as a Fund or
a Variable Contract may require, or maintaining customer accounts and records.
Agreements for the payment of fees to the Insurance Companies
<PAGE>
or others shall be in a form which has been approved from time to time by the
Board, including the non-interested Board members.
2. The maximum amount which may be paid by the Fund shall be 0.25% per annum of
the average daily net assets represented by shares of the Fund's Class 2. These
payments shall be made quarterly by the Fund to Distributors, the Insurance
Companies or others. Expenses in excess of these maximum annual rates that
otherwise qualify for payment shall not be carried forward into successive
annual periods.
3. In no event shall the aggregate asset-based sales charges exceed the amount
permitted to be paid pursuant to the Rules of Conduct of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it, to the Insurance Companies and
to others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with the payments
made under the Plan in order to enable the Board to make an informed
determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year with
respect to the Fund only so long as such continuance is specifically approved at
least annually by a vote of the Board, including the non-interested Board
members, cast in person at a meeting called for the purpose of voting on the
Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated with respect to the Class 2 shares of the Fund at any time, without
penalty, by vote of a majority of the outstanding Class 2 shares of the Fund or
by vote of a majority of the non-interested Board members, on not more than
sixty (60) days' written notice, or by Distributors on not more than sixty (60)
days' written notice, and shall terminate automatically in the event of any act
that constitutes an assignment of the Investment Advisory Agreement between the
Investment Company on behalf of the Fund and the Fund's Adviser.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent by the Fund pursuant to
Paragraph 2 hereof without approval by a majority of the Fund's outstanding
Class 2 shares.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Investment Company's non-interested Board members shall be committed to the
discretion of such non-interested Board members.
2
<PAGE>
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Investment Company, on behalf of the Class 2 shares of the Fund, and
Distributors as evidenced by their execution hereof.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
/S/ DAVID P. GOSS
----------------------
David P. Goss
Vice President
& Assistant Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
/S/ HARMON E. BURNS
------------------------
Harmon E. Burns
Executive Vice President
Dated: May 1, 2000
3
EXHIBIT (m)vi
CLASS 2 DISTRIBUTION PLAN
I. Investment Company: FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
II. Fund: FRANKLIN TECHNOLOGY SECURITIES FUND
PREAMBLE TO CLASS 2 DISTRIBUTION PLAN
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST ("Investment Company") is
an open-end management investment company organized as a Massachusetts business
trust, which offers the shares of beneficial interest of its series (the "Fund")
to certain life insurance companies ("Insurance Companies") for allocation to
certain of their separate accounts established for the purpose of funding
variable annuity contracts and variable life insurance policies (collectively,
"Variable Contracts").
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule
12b-1 under the Investment Company Act of 1940 (the "Act") by the Investment
Company for the Class 2 (the "Class") shares of the Fund named above, which Plan
shall take effect on the date Class 2 shares of the Fund are first offered (the
"Effective Date of the Plan"). The Plan has been approved by a majority of the
Board of Trustees of the Investment Company (the "Board"), including a majority
of the Board members who are not interested persons of the Investment Company
and who have no direct or indirect financial interest in the operation of the
Plan (the "non-interested Board members"), cast in person at a meeting called
for the purpose of voting on such Plan.
The Board's approval included a determination that in the exercise of their
reasonable business judgment and in light of their fiduciary duties, there is a
reasonable likelihood that the Plan will benefit the Fund and its Class 2
shareholders.
DISTRIBUTION PLAN
1. The Fund shall pay Franklin/Templeton Distributors, Inc. ("Distributors"),
the Insurance Companies or others for activities primarily intended to sell
Class 2 shares or Variable Contracts offering Class 2 shares. Payments made
under the Plan may be used for, among other things, the printing of prospectuses
and reports used for sales purposes, preparing and distributing sales literature
and related expenses, advertisements, education of contract owners or dealers
and their representatives, and other distribution-related expenses, including a
prorated portion of Distributors' or the Insurance Companies' overhead expenses
attributable to the distribution of these Variable Contracts.
Payments made under the Plan may also be used to pay Insurance Companies,
dealers or others for, among other things, service fees as defined under NASD
rules, furnishing personal services or such other enhanced services as a Fund or
a Variable Contract may require, or maintaining customer accounts and records.
Agreements for the payment of fees to the Insurance Companies
1
<PAGE>
or others shall be in a form which has been approved from time to time by the
Board, including the non-interested Board members.
2. The maximum amount which may be paid by the Fund shall be 0.35% per annum of
the average daily net assets represented by shares of the Fund's Class 2. These
payments shall be made quarterly by the Fund to Distributors, the Insurance
Companies or others. Expenses in excess of these maximum annual rates that
otherwise qualify for payment shall not be carried forward into successive
annual periods.
3. In no event shall the aggregate asset-based sales charges exceed the amount
permitted to be paid pursuant to the Rules of Conduct of the National
Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly
basis, a written report of the monies paid to it, to the Insurance Companies and
to others under the Plan, and shall furnish the Board with such other
information as the Board may reasonably request in connection with the payments
made under the Plan in order to enable the Board to make an informed
determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year with
respect to the Fund only so long as such continuance is specifically approved at
least annually by a vote of the Board, including the non-interested Board
members, cast in person at a meeting called for the purpose of voting on the
Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be
terminated with respect to the Class 2 shares of the Fund at any time, without
penalty, by vote of a majority of the outstanding Class 2 shares of the Fund or
by vote of a majority of the non-interested Board members, on not more than
sixty (60) days' written notice, or by Distributors on not more than sixty (60)
days' written notice, and shall terminate automatically in the event of any act
that constitutes an assignment of the Investment Advisory Agreement between the
Investment Company on behalf of the Fund and the Fund's Adviser.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be
amended to increase materially the amount to be spent by the Fund pursuant to
Paragraph 2 hereof without approval by a majority of the Fund's outstanding
Class 2 shares.
8. All material amendments to the Plan, or any agreements entered into pursuant
to this Plan, shall be approved by a vote of the non-interested Board members
cast in person at a meeting called for the purpose of voting on any such
amendment.
9. So long as the Plan is in effect, the selection and nomination of the
Investment Company's non-interested Board members shall be committed to the
discretion of such non-interested Board members.
2
<PAGE>
This Plan and the terms and provisions thereof are hereby accepted and agreed to
by the Investment Company, on behalf of the Class 2 shares of the Fund, and
Distributors as evidenced by their execution hereof.
FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST
/S/ DAVID P. GOSS
--------------------------------------
David P. Goss
Vice President
& Assistant Vice President
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
/S/ HARMON E. BURNS
--------------------------------------
Harmon E. Burns
Executive Vice President
Dated: May 1, 2000
3
EXHIBIT (o) iii
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
on behalf of
FRANKLIN S&P 500 INDEX FUND
FRANKLIN STRATEGIC INCOME SECURITIES FUND
FRANKLIN TECHNOLOGY SECURITIES FUND
MULTIPLE CLASS PLAN
This Multiple Class Plan (the "Plan") has been adopted by a majority of
the Board of Trustees of Franklin Templeton Variable Insurance Products Trust
(the "Investment Company") on behalf of each series named above (each, a
"Multi-Class Fund"). The Board has determined that the Plan is in the best
interests of each class of each Fund and of the Investment Company as a whole.
The Plan sets forth the provisions relating to the establishment of multiple
classes of shares ("Shares") of the Multi-Class Funds.
1. Each Multi-Class Fund with the exception of Franklin S&P 500 Index
Fund shall offer two classes of shares, to be known as Class 1 and Class 2
Shares. The Franklin S&P 500 Index Fund shall offer three classes of shares, to
be known as Class 1, Class 2 and Class 3 Shares.
2. All Shares shall be sold solely to certain life insurance company
("Insurance Company") variable accounts for the purpose of funding certain
variable annuity and variable life insurance contracts ("Variable Contracts")
and to such other investors as are determined to be eligible to purchase Shares.
In addition, Class 3 Shares may be sold to employee benefit, pension or other
plans meeting the requirements for qualification under section 401(k) of the
Internal Revenue Code ("401(k) Plans"). None of the Classes of Shares shall be
subject to any front-end or deferred sales charges.
3. The Distribution Plans adopted by the Investment Company pursuant to
Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Rule 12b-1
Plans") associated with the Class 2 and Class 3 Shares may be used to pay
Franklin/Templeton Distributors, Inc. ("Distributors"), the Insurance Companies
or others to assist in the promotion and distribution of Class 2 and Class 3
Shares or Variable Contracts offering Class 2 Shares and Class 3 Shares.
Payments made under the Plans may be used for, among other things, the printing
of prospectuses and reports used for sales purposes, preparing and distributing
sales literature and related expenses, advertisements, education of contract
owners or dealers and their representatives, and other distribution-related
expenses, including a prorated portion of Distributors' or the Insurance
Companies' overhead expenses attributable to the distribution of these Variable
Contracts or Shares of the Funds. Payments made under the Plans may also be used
to pay Insurance Companies, dealers, and with respect to Class 3 Shares, 401(k)
Plan record keeping and servicing agents, or others for, among other things,
furnishing personal services and maintaining customer accounts and records, or
as service fees as defined under NASD rules. Agreements for the payment of fees
to the Insurance Companies or others shall be in a form which has been approved
from time to time by the Board, including the non-interested Board members. In
addition,
1
<PAGE>
payments made under the Plan may be used to pay recordkeeping and
sub-shareholder servicing expenses incurred by administrators or related persons
of 401(k) plans.
The Investment Company has not adopted any Rule 12b-1 Plan for Class 1
shares.
4. Currently, the differences between Class 1, Class 2, and Class 3
Shares are that the Class 2 and 3 Shares, but not the Class 1 Shares have a Rule
12b-1 Plan, only the Franklin S&P 500 Fund offers the Class 3 Shares, only the
Class 3 Shares are sold to 401(k) Plans, and the expenses differ among the
Classes.
5. Currently, there are no conversion features associated with the
Class 1, Class 2, and Class 3 Shares.
6. Shares of a class may be exchangeable for Shares of the same or
different classes of another series of the Investment Company or of another
underlying investment company according to the terms and conditions related to
transfer privileges set forth in the Variable Contract prospectuses and
documents governing the 401(k) Plans, as they may be amended from time to time.
7. Each Class will vote separately with respect to any Rule 12b-1 Plan
related to that Class.
8. On an ongoing basis, the Investment Company's Board members,
pursuant to their fiduciary responsibilities under the 1940 Act and otherwise,
will monitor the Multi-Class Funds for the existence of any material conflicts
between the interests of the various classes of shares. The Board members,
including a majority of the Board members who are not interested persons of the
Investment Company as defined by the Act, shall take such action as is
reasonably necessary to eliminate any such conflict that may develop. The
investment advisers of each Multi-Class Fund and Distributors shall be
responsible for alerting the Board to any material conflicts that arise.
9. All material amendments to this Plan must be approved by a majority
of the Investment Company's Board members, including a majority of the Board
members who are not interested persons of the Investment Company as defined by
the Act.
10. I, Deborah R. Gatzek, Secretary of Franklin Templeton Variable
Insurance Products Trust, do hereby certify that this Multiple Class Plan was
adopted by the Board of Trustees of the Investment Company on May 1, 2000.
/S/ DEBORAH R. GATZEK
--------------------------------
Deborah R. Gatzek
Secretary
2
EXHIBIT p(i)
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN TEMPLETON VARIABLE
INSURANCE PRODUCTS TRUST (the "Registrant") hereby appoint MURRAY SIMPSON,
BARBARA GREEN, MARK H. PLAFKER, DEBORAH R. GATZEK, KAREN L. SKIDMORE, JOAN BOROS
AND DAVID GOSS (with full power to each of them to act alone) his/her
attorney-in-fact and agent, in all capacities, to execute, deliver and file in
the names of the undersigned, any and all instruments that said attorneys and
agents may deem necessary or advisable to enable the Registrant to comply with
or register any security issued by the Registrant under the Securities act of
1933, as amended, included but not limited to, any registration statements,
including any and all pre- and post-effective amendments thereto; and the filing
of any registration statement (including any amendment thereto) of an investment
company under the Investment Company Act of 1940 and the rules and regulations
thereunder; and any other documents to be filed with the U.S. Securities and
Exchange Commission; and any and all documents required to be filed with respect
thereto with any other regulatory authority. Each of the undersigned grants to
each of said attorneys, full authority to do every act necessary to be done in
order to effectuate the same as fully, to all intents and purposes as he/she
could do if personally present, thereby ratifying all that said
attorneys-in-fact and agents, may lawfully do or cause to be done by virtue
hereof.
This power of attorney may be executed in one or more counterparts, each of
which shall be deemed to be an original, and all of which together shall be
deemed to be a single document.
The undersigned Officers and Trustees hereby execute this Power of Attorney
as of the 21st day of March, 2000.
- --------------------------------- -----------------------------------
/s/ Charles E. Johnson, /s/ Frank H. Abbott, III, Trustee
Principal Executive Officer
and Trustee
- --------------------------------- -----------------------------------
/s/ Harris J. Ashton, Trustee /s/ Robert F. Carlson, Trustee
- --------------------------------- -----------------------------------
/s/ S. Joseph Fortunato, Trustee Robert S. James, Trustee
- --------------------------------- -----------------------------------
/s/ Charles B. Johnson, Trustee /s/Rupert H. Johnson, Jr., Trustee
- --------------------------------- -----------------------------------
/s/ Frank W.T. LaHaye, Trustee /s/ Gordon S. Macklin, Trustee
- --------------------------------- -----------------------------------
/s/ Martin L. Flanagan, /s/ Kimberley Monasterio,
Principal Financial Officer Principal Acccounting Officer
EXHIBIT (q) i
THE FRANKLIN TEMPLETON GROUP
CODE OF ETHICS
AND
POLICY STATEMENT ON INSIDER TRADING
TABLE OF CONTENTS
<TABLE>
<CAPTION>
<S> <C> <C>
THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS.......................................1
PART 1 - STATEMENT OF PRINCIPLES..................................................1
PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE.............................2
PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS...........................3
PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS......10
PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS...........................13
PART 6 - PRE-CLEARANCE REQUIREMENTS..............................................17
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE....................................22
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON GROUP INSIDER TRADING POLICY....23
APPENDIX A: COMPLIANCE PROCEDURES, DEFINITIONS, AND OTHER ITEMS..................24
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER.....................25
II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS..............................31
III. SECURITIES EXEMPT FROM THE PROHIBITED, REPORTING,
AND PRE-CLEARANCE PROVISIONS .............................................32
IV. LEGAL REQUIREMENT..........................................................33
APPENDIX B: FORMS AND SCHEDULES..................................................34
ACKNOWLEDGMENT FORM..............................................................35
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK
TELEPHONE & FAX NUMBERS.............................................36
SCHEDULE B: SECURITIES TRANSACTION REPORT........................................37
SCHEDULE C: INITIAL, ANNUAL & UPDATED DISCLOSURE OF ACCESS PERSONS
SECURITIES HOLDINGS ................................................39
SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT OPENING..........................40
SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST..............41
SCHEDULE F: INITIAL, ANNUAL & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS.........42
SCHEDULE G: INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY.........43
SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES
ISSUED IN PRIVATE
PLACEMENTS.......................................................................45
APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES
OF FRANKLIN RESOURCES, INC. - FEBRUARY 2000.....................................47
THE FRANKLIN TEMPLETON GROUP POLICY STATEMENT ON INSIDER TRADING..................1
A. LEGAL REQUIREMENT...........................................................1
B. WHO IS AN INSIDER?..........................................................2
C. WHAT IS MATERIAL INFORMATION?...............................................2
D. WHAT IS NON-PUBLIC INFORMATION?.............................................2
E. BASIS FOR LIABILITY.........................................................3
F. PENALTIES FOR INSIDER TRADING...............................................3
G. INSIDER TRADING PROCEDURES..................................................4
</TABLE>
<PAGE>
THE FRANKLIN TEMPLETON GROUP CODE OF ETHICS
Franklin Resources, Inc. and all of its subsidiaries, and the funds in the
Franklin Templeton Group of Funds (the "Funds") (collectively, the "Franklin
Templeton Group") will follow this Code of Ethics (the "Code") and Policy
Statement on Insider Trading (the "Insider Trading Policy"). Additionally, the
subsidiaries listed in Appendix C of this Code, together with Franklin
Resources, Inc., the Funds, the Fund's investment advisers and principal
underwriter, have adopted the Code and Insider Trading Policy.
PART 1 - STATEMENT OF PRINCIPLES
The Franklin Templeton Group's policy is that the interests of shareholders
and clients are paramount and come before the interests of any director, officer
or employee of the Franklin Templeton Group.1
Personal investing activities of ALL directors, officers and employees of
the Franklin Templeton Group should be conducted in a manner to avoid actual OR
potential conflicts of interest with the Franklin Templeton Group, Fund
shareholders, and other clients of any Franklin Templeton adviser.
Directors, officers and employees of the Franklin Templeton Group shall use
their positions with the Franklin Templeton Group, and any investment
opportunities they learn of because of their positions with the Franklin
Templeton Group, in a manner consistent with their fiduciary duties for the
benefit of Fund shareholders, and clients.
PART 2 - PURPOSES, AND CONSEQUENCES OF NON-COMPLIANCE
It is important that you read and understand this document, because its
overall purpose is to help all of us comply with the law and to preserve and
protect the outstanding reputation of the Franklin Templeton Group. This
document was adopted to comply with Securities and Exchange Commission rules
under the Investment Company Act of 1940 ("1940 Act"), the Investment Advisers
Act of 1940 ("Advisers Act"), the Insider Trading and Securities Fraud
Enforcement Act of 1988 ("ITSFEA"), industry practice and the recommendations
contained in the ICI's REPORT OF THE ADVISORY GROUP ON PERSONAL INVESTING. Any
violation of the Code or Insider Trading Policy, including engaging in a
prohibited transaction or failing to file required reports, may result in
disciplinary action, and, when appropriate, termination of employment and/or
referral to appropriate governmental agencies.
PART 3 - COMPLIANCE REQUIREMENTS FOR ALL ACCESS PERSONS
3.1 WHO IS COVERED BY THE CODE AND HOW DOES IT WORK?
The principles contained in the Code must be observed by ALL directors,
officers and employees2 of the Franklin Templeton Group. However, there are
different categories of restrictions on personal investing activities. The
category in which you have been placed generally depends on your job function,
although unique circumstances may result in you being placed in a different
category.
The Code covers the following categories of employees who are described below:
(1) ACCESS PERSONS: Access Persons are those employees who have "ACCESS TO
INFORMATION" concerning recommendations made to a Fund or client with
regard to the purchase or sale of a security. Examples of "ACCESS TO
INFORMATION" would include having access to trading systems, portfolio
accounting systems, research data bases or settlement information. Access
Persons would typically include employees, including Management Trainees,
in the following departments:
o fund accounting;
o investment operations;
o information services & technology;
o product management;
o legal and legal compliance
o and anyone else designated by the Director of Compliance
In addition, you are an Access Person if you are any of the following:
o an officer or and directors of funds;
<PAGE>
o an officer or director of an investment advisor or broker-dealer
subsidiary in the Franklin Templeton Group;
o a person that controls those entities; and
o any Franklin Resources' Proprietary Account ("Proprietary Account")3
(2) PORTFOLIO PERSONS: Portfolio Persons are a subset of Access Persons and are
those employees of the Franklin Templeton Group, who, in connection with
his or her regular functions or duties, makes or participates in the
decision to purchase or sell a security by a Fund in the Franklin Templeton
Group, or any other client or if his or her functions relate to the making
of any recommendations about those purchases or sales. Portfolio Persons
include:
o portfolio managers;
o research analysts;
o traders;
o employees serving in equivalent capacities (such as Management Trainees);
o employees supervising the activities of Portfolio Persons; and o anyone
else designated by the Director of Compliance
(3) NON-ACCESS PERSONS: If you are an employee in the Franklin Templeton Group
AND you do not fit into any of the above categories, you are a Non-Access
Person. Because you do not normally receive confidential information about
Fund portfolios, you are subject only to the prohibited transaction
provisions described in 3.4 of this Code and the Franklin Resources, Inc.'s
Standards of Business Conduct contained in the Employee Handbook.
Please contact the Legal Compliance Department if you are unsure as to what
category you fall in or whether you should be considered to be an Access Person
or Portfolio Person.
The Code works by prohibiting some transactions and requiring pre-clearance
and reporting of most others. NON-ACCESS PERSONS do not have to pre-clear their
security transactions, and, in most cases, do not have to report their
transactions. "INDEPENDENT DIRECTORS" need not report any securities transaction
unless you knew, or should have known that, during the 15-day period before or
after the transaction, the security was purchased or sold or considered for
purchase or sale by a Fund or Franklin Resources for a Fund. (See Section 5.2.B
below.) HOWEVER, PERSONAL INVESTING ACTIVITIES OF ALL EMPLOYEES AND INDEPENDENT
DIRECTORS ARE TO BE CONDUCTED IN COMPLIANCE WITH THE PROHIBITED TRANSACTIONS
PROVISIONS CONTAINED IN 3.4 BELOW. If you have any questions regarding your
personal securities activity, contact the Legal Compliance Department.
3.2 WHAT ACCOUNTS AND TRANSACTIONS ARE COVERED?
The Code covers all of your personal securities accounts and transactions,
as well as transactions by any of Franklin Resource's Proprietary Accounts. It
also covers all securities and accounts in which you have "beneficial
ownership." 4 A transaction by or for the account of your spouse, or any other
family member living in your home is considered to be the same as a transaction
by you. Also, a transaction for any account in which you have any economic
interest (other than the account of an unrelated client for which advisory fees
are received) and have or share investment control is generally considered the
same as a transaction by you. For example, if you invest in a corporation that
invests in securities and you have or share control over its investments, that
corporation's securities transactions are considered yours.
<PAGE>
However, you are not deemed to have a pecuniary interest in any securities
held by a partnership, corporation, trust or similar entity unless you control,
or share control of such entity, or have, or share control over its investments.
For example, securities transactions of a trust or foundation in which you do
not have an economic interest (i.e., you are not the trustor or beneficiary) but
of which you are a trustee are not considered yours unless you have voting or
investment control of its assets. Accordingly, each time the words "you" or
"your" are used in this document, they apply not only to your personal
transactions and accounts, but also to all transactions and accounts in which
you have any direct or indirect beneficial interest. If it is not clear whether
a particular account or transaction is covered, ask a Preclearance Officer for
guidance.
3.3 WHAT SECURITIES ARE EXEMPT FROM THE CODE OF ETHICS?
You do not need to pre-clear OR report transactions of the following
securities:
(1) securities that are direct obligations of the U. S. Government (i.e.,
issued or guaranteed by the U.S. Government, such as Treasury bills, notes
and bonds, including U.S. Savings Bonds and derivatives thereof);
(2) high quality short-term instruments, including but not limited to bankers'
acceptances, bank certificates of deposit, commercial paper and repurchase
agreements;
(3) shares of registered open-end investment companies ("mutual funds"); and
(4) commodity futures, currencies, currency forwards and derivatives thereof.
Such transactions are also exempt from: (i) the prohibited transaction
provisions contained in Part 3.4 such as front-running; (ii) the additional
compliance requirements applicable to portfolio persons contained in Part 4; and
(iii) the applicable reporting requirements contained in Part 5.
3.4 PROHIBITED TRANSACTIONS FOR ALL ACCESS PERSONS
A. "INTENT" IS IMPORTANT
Certain transactions described below have been determined by the courts and
the SEC to be prohibited by law. The Code reiterates that these types of
transactions are a violation of the Statement of Principals and are prohibited.
Preclearance, which is a cornerstone of our compliance efforts, cannot detect
transactions which are dependent upon INTENT, or which by their nature, occur
before any order has been placed for a fund or client. A Preclearance Officer,
who is there to assist you with compliance with the Code, CANNOT guarantee any
transaction or transactions comply with the Code or the law. The fact that your
transaction receives preclearance, shows evidence of good faith, but depending
upon all the facts, may not provide a full and complete defense to any
accusation of violation of the Code or of the law. For example, if you executed
a transaction for which you received approval, or if the transaction was exempt
from preclearance (e.g., a transaction for 100 shares or less), would not
preclude a subsequent finding that front-running or scalping occurred because
such activity are dependent upon your intent. Intent cannot be detected during
preclearance, but only after a review of all the facts.
<PAGE>
In the final analysis, compliance remains the responsibility of EACH
individual effecting personal securities transactions.
B. FRONT-RUNNING: TRADING AHEAD OF A FUND OR CLIENT
You cannot front-run any trade of a Fund or client. The term "front-run"
means knowingly trading before a contemplated transaction by a Fund or client of
any Franklin Templeton adviser, whether or not your trade and the Fund's or
client's trade take place in the same market. Thus, you may not:
(1) purchase a security if you intend, or know of Franklin Templeton Group's
intention, to purchase that security or a related security on behalf of a
Fund or client, or
(2) sell a security if you intend, or know of Franklin Templeton Group's
intention, to sell that security or a related security on behalf of a Fund
or client.
C. SCALPING.
You cannot purchase a security (or its economic equivalent) with the
intention of recommending that the security be purchased for a Fund, or client,
or sell short a security (or its economic equivalent) with the intention of
recommending that the security be sold for a Fund or client. Scalping is
prohibited whether or not you realize a profit from such transaction.
D. TRADING PARALLEL TO A FUND OR CLIENT
You cannot buy a security if you know that the same or a related security
is being bought contemporaneously by a Fund or client, or sell a security if you
know that the same or a related security is being sold contemporaneously by a
Fund or client.
E. TRADING AGAINST A FUND OR CLIENT
You cannot:
(1) buy a security if you know that a Fund or client is selling the same or a
related security, or has sold the security, until seven (7) calendar days
after the Fund's or client's order has either been executed or withdrawn,
or
(2) sell a security if you know that a Fund or client is buying the same or a
related security, or has bought the security until seven (7) calendar days
after the Fund's or client's order has either been executed or withdrawn.
Refer to Section I.A., "Pre-Clearance Standards," of Appendix A of the Code
for more details regarding the preclearance of personal securities transactions.
F. USING PROPRIETARY INFORMATION FOR PERSONAL TRANSACTIONS
You cannot buy or sell a security based on Proprietary Information 5
without disclosing the information and receiving written authorization. If you
wish to purchase or sell a security about which you obtained such information,
you must report all of the information you obtained regarding the security to
the Appropriate Analyst(s)6, or to the Director of Compliance for dissemination
to the Appropriate Analyst(s).
<PAGE>
You will be permitted to purchase or sell such security if the Appropriate
Analyst(s) confirms to the Preclearance Desk that there is no intention to
engage in a transaction regarding the security within seven (7) calendar days on
behalf of an Associated Client7 and you subsequently preclear such security in
accordance with Part 6 below.
G. CERTAIN TRANSACTIONS IN SECURITIES OF FRANKLIN RESOURCES, INC., AND
AFFILIATED CLOSED-END FUNDS, AND REAL ESTATE INVESTMENT TRUSTS
If you are an employee of Franklin Resources, Inc. or any of its
affiliates, including the Franklin Templeton Group, you cannot effect a short
sale of the securities, including "short sales against the box" of Franklin
Resources, Inc., or any of the Franklin or Templeton closed-end funds, Franklin
real estate investment trusts or any other security issued by Franklin
Resources, Inc. or its affiliates. This prohibition would also apply to
effecting economically equivalent transactions, including, but not limited to
sales of any option to buy (i.e., a call option) or purchases of any option to
sell (i.e., a put option) and "swap" transactions or other derivatives. Officers
and directors of the Franklin Templeton Group who may be covered by Section 16
of the Securities Exchange Act of 1934, are reminded that their obligations
under that section are in addition to their obligations under this Code.
PART 4 - ADDITIONAL COMPLIANCE REQUIREMENTS APPLICABLE TO PORTFOLIO PERSONS8
4.1 REQUIREMENT TO DISCLOSE INTEREST AND METHOD OF DISCLOSURE
As a Portfolio Person, you must promptly disclose your direct or indirect
beneficial interest in a security whenever you learn that the security is under
consideration for purchase or sale by an Associated Client in the Franklin
Templeton Group and you;
(1) Have or share investment control of the Associated Client;
(2) Make any recommendation or participate in the determination of which
recommendation shall be made on behalf of the Associated Client; or
(3) Have functions or duties that relate to the determination of which
recommendation shall be made to the Associated Client.
In such instances, you must initially disclose that beneficial interest
orally to the primary portfolio manager (or other Appropriate Analyst) of the
Associated Client(s) considering the security, the Director of Research and
Trading or the Director of Compliance. Following that oral disclosure, you must
send a written acknowledgment of that interest on Schedule E (or on a form
containing substantially similar information) to the primary portfolio manager
(or other Appropriate Analyst), with a copy to the Legal Compliance Department.
4.2 SHORT SALES OF SECURITIES
You cannot sell short ANY security held by your Associated Clients,
including "short sales against the box". Additionally, Portfolio Persons
associated with the Templeton Group of Funds and clients cannot sell short any
security on the Templeton "Bargain List". This prohibition would also apply to
effecting economically equivalent transactions, including, but not limited to,
sales of uncovered call options, purchases of put options while not owning the
underlying security and short sales of bonds that are convertible into equity
positions.
<PAGE>
4.3 SHORT SWING TRADING
Portfolio Persons cannot profit from the purchase and sale or sale and
purchase within sixty calendar days of any security, including derivatives.
Portfolio Persons are responsible for transactions that may occur in margin and
option accounts and all such transactions must comply with this restriction.9
This restriction does NOT apply to:
(1) trading within a shorter period if you do not realize a profit and if
you do not violate any other provisions of this Code; AND
(2) profiting on the purchase and sale or sale and purchase within sixty
calendar days of the following securities:
o securities that are direct obligations of the U.S. Government,
such as Treasury bills, notes and bonds, and U.S. Savings Bonds
and derivatives thereof;
o high quality short-term instruments ("money market instruments")
including but not limited to (i) bankers' acceptances, (ii) U.S.
bank certificates of deposit; (iii) commercial paper; and (iv)
repurchase agreements;
o shares of registered open-end investment companies; and
o commodity futures, currencies, currency forwards and derivatives
thereof.
Calculation of profits during the 60 calendar day holding period generally
will be based on "last-in, first-out" ("LIFO"). Portfolio Persons may elect to
calculate their 60 calendar day profits on either a LIFO or FIFO ("first-in,
first-out") basis when there has not been any activity in such security by their
Associated Clients during the previous 60 calendar days.
4.4 SERVICE AS A DIRECTOR
As a Portfolio Person, you cannot serve as a director, trustee, or in a
similar capacity for any company (excluding not-for-profit companies, charitable
groups, and eleemosynary organizations) unless you receive approval from the
Chief Executive Officer of the principal investment adviser to the Fund(s) of
which you are a Portfolio Person and he/she determines that your service is
consistent with the interests of the Fund(s) and its shareholders.
4.5 SECURITIES SOLD IN A PUBLIC OFFERING
Portfolio Persons cannot buy securities in any initial public offering, or
a secondary offering by an issuer, INCLUDING initial public offerings of
securities made by closed-end funds and real estate investment trusts advised by
the Franklin Templeton Group. Purchases of open-end mutual funds are excluded
from this prohibition.
4.6 INTERESTS IN PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS
Portfolio Persons cannot acquire limited partnership interests or other
securities in private placements unless they:
<PAGE>
(1) complete the Private Placement Checklist (Schedule H);
(2) provide supporting documentation (e.g., a copy of the offering
memorandum); and
(3) obtain approval of the appropriate Chief Investment Officer; and
(4) submit all documents to the Legal Compliance Department Approval will
only be granted after the Director of Compliance consults with an
executive officer of Franklin Resources, Inc.
PART 5 - REPORTING REQUIREMENTS FOR ALL ACCESS PERSONS
5.1 REPORTING OF BENEFICIAL OWNERSHIP AND SECURITIES TRANSACTIONS
Compliance with the following personal securities transaction reporting
procedures is essential to enable us to meet our responsibilities to Funds and
other clients and to comply with regulatory requirements. You are expected to
comply with both the letter and spirit of these requirements, including
completing and filing all reports required under the Code in a timely manner.
5.2 INITIAL HOLDINGS AND BROKERAGE ACCOUNT REPORTS
A. ALL ACCESS PERSONS (EXCEPT INDEPENDENT DIRECTORS) Every employee (new or
transfer) of the Franklin Templeton Group who becomes an Access Person, must
file:
(1) An Acknowledgement Form;
(2) Schedule C: Initial, Annual & Updated Disclosure of Securities Holdings;
and
(3) Schedule F: Initial, Annual & Updated Disclosure of Securities Accounts
The Acknowledgement Form, Schedule C and Schedule F MUST be completed and
returned to the Legal Compliance Department within 10 CALENDAR DAYS of the date
the employee becomes an access person.
5.3 QUARTERLY TRANSACTION REPORTS
A. ALL ACCESS PERSONS (EXCEPT INDEPENDENT DIRECTORS)
You MUST report ALL securities transactions by; (i) providing the Legal
Compliance Department with copies of ALL broker's confirmations and statements
within 10 calendar days after the end of the calendar quarter (which may be sent
under separate cover by the broker) showing ALL transactions and holdings in
securities AND (ii) certifying by January 30th of each year that you have
disclosed all such brokerage accounts on Schedule F to the Legal Compliance
Department. The brokerage statements and confirmations must include all
transactions in securities in which you have, or by reason of the transaction
acquire any direct or indirect beneficial ownership, including transactions in a
discretionary account and transactions for any account in which you have any
economic interest AND have or share investment control. Also, if you acquire
securities by any other method which is not being reported to the Legal
Compliance
<PAGE>
Department by a duplicate confirmation statement at or near the time of the
acquisition, you must report that acquisition to the Legal Compliance Department
on Schedule B within 10 calendar days after you are notified of the acquisition.
Such acquisitions include, among other things, securities acquired by gift,
inheritance, vesting,10 stock splits, merger or reorganization of the issuer of
the security.
You must file these documents with the Legal Compliance Department not
later than 10 calendar days after the end of each quarter, but you need not show
or report transactions for any account over which you had no direct or indirect
influence or control.11 Failure to timely report transactions is a violation of
Rule 17j-1 as well as the Code, and may be reported to the Fund's Board of
Directors and may also result, among other things, in denial of future personal
security transaction requests.
B. INDEPENDENT DIRECTORS
If you are a director of the Franklin Templeton Group but you are not an
"interested person" of the Fund, you are not required to file transaction
reports unless you knew or should have known that, during the 15-day period
before or after a transaction, the security was purchased or sold, or considered
for purchase or sale, by a Fund or by Franklin Resources on behalf of a Fund.
5.4 ANNUAL REPORTS - ALL ACCESS PERSONS
A. SECURITIES ACCOUNTS REPORTS (EXCEPT INDEPENDENT DIRECTORS)
As an access person, you must file a report of all personal securities
accounts on Schedule F, with the Legal Compliance Department, annually by
January 30th. You must report the name and description of each securities
account in which you have a direct or indirect beneficial interest, including
securities accounts of a spouse and minor children. You must also report any
account in which you have any economic interest AND have or share investment
control (e.g., trusts, foundations, etc.) other than an account for a Fund in,
or a client of, the Franklin Templeton Group.
B. SECURITIES HOLDINGS REPORTS (EXCEPT INDEPENDENT DIRECTORS)
You must file a report of personal securities holdings on Schedule C, with
the Legal Compliance Department, by January 30th of each year. This report
should include ALL of your securities holdings, including any security acquired
by a transaction, gift, inheritance, vesting, merger or reorganization of the
issuer of the security, in which you have any direct or indirect beneficial
ownership, including securities holdings in a discretionary account and for any
account in which you have any economic interest AND have or share investment
control. Your securities holding information must be current as of a date no
more than 30 days before the report is submitted. You may attach copies of
year-end brokerage statements to the Schedule C in lieu of listing each security
position on the schedule.
C. CERTIFICATION OF COMPLIANCE WITH THE CODE OF ETHICS (INCLUDING INDEPENDENT
DIRECTORS)
All access persons, including independent directors, will be asked to
certify that they will comply with the FRANKLIN TEMPLETON GROUP'S CODE OF ETHICS
AND POLICY STATEMENT ON INSIDER TRADING by filing the Acknowledgment Form with
the Legal Compliance Department within 10 business days of receipt of the Code.
Thereafter, you will be asked to certify that you have complied with the Code
during the preceding year by filing a similar Acknowledgment Form by January 30
of each year.
<PAGE>
5.5 BROKERAGE ACCOUNTS AND CONFIRMATIONS OF SECURITIES TRANSACTIONS (EXCEPT
INDEPENDENT DIRECTORS)
If you are an access person , in the Franklin Templeton Group, before or at
a time contemporaneous with opening a brokerage account with a registered
broker-dealer, or a bank, or placing an initial order for the purchase or sale
of securities with that broker-dealer or bank, you must:
(1) notify the Legal Compliance Department, in writing, by completing Schedule
D or by providing substantially similar information; and
(2) notify the institution with which the account is opened, in writing, of
your association with the Franklin Templeton Group.
The Compliance Department will request the institution in writing to send
to it duplicate copies of confirmations and statements for all transactions
effected in the account simultaneously with their mailing to you.
If you have an existing account on the effective date of this Code or upon
becoming an access person, you must comply within 10 days with conditions (1)
and (2) above.
PART 6 - PRE-CLEARANCE REQUIREMENTS
6.1 PRIOR APPROVAL OF SECURITIES TRANSACTIONS
A. LENGTH OF APPROVAL
Unless you are covered by Paragraph D below, you cannot buy or sell any
security, without first contacting a Preclearance Officer by fax, phone, or
e-mail and obtaining his or her approval. A clearance is good until the close of
the business day following the day clearance is granted but may be extended in
special circumstances, shortened or rescinded, as explained in Appendix A.
B. SECURITIES NOT REQUIRING PRECLEARANCE
The securities enumerated below do not require preclearance under the Code.
However, all other provisions of the Code apply, including, but not limited to:
(i) the prohibited transaction provisions contained in Part 3.4 such as
front-running; (ii) the additional compliance requirements applicable to
portfolio persons contained in Part 4, (iii) the applicable reporting
requirements contained in Part 5; and (iv) insider trading prohibitions.
You need NOT pre-clear transactions in the following securities:
(1) MUTUAL FUNDS. Transactions in shares of any registered open-end mutual
fund;
(2) FRANKLIN RESOURCES, INC., AND ITS AFFILIATES. Purchases and sales of
securities of Franklin Resources, Inc., closed-end funds of the Franklin
Templeton Group, or real estate investment trusts advised by Franklin
Properties Inc., as these securities cannot be purchased on behalf of our
advisory clients.12
(3) SMALL QUANTITIES. Transactions that do not result in purchases or sales of
<PAGE>
more than 100 shares of any one security, regardless of where it is traded,
in any 30 day period. HOWEVER, YOU MAY NOT EXECUTE ANY TRANSACTION,
REGARDLESS OF QUANTITY, IF YOU LEARN THAT THE FUNDS ARE ACTIVE IN THE
SECURITY. IT WILL BE PRESUMED THAT YOU HAVE KNOWLEDGE OF FUND ACTIVITY IN
THE SECURITY IF, AMONG OTHER THINGS, YOU ARE DENIED APPROVAL TO GO FORWARD
WITH A TRANSACTION REQUEST. Transactions made pursuant to dividend
reinvestment plans ("DRIPs") do not require preclearance regardless of
quantity or Fund activity.
(4) GOVERNMENT OBLIGATIONS. Transactions in securities issued or guaranteed by
the governments of the United States, Canada, the United Kingdom, France,
Germany, Switzerland, Italy and Japan, or their agencies or
instrumentalities, or derivatives thereof;
(5) PAYROLL DEDUCTION PLANS. Securities purchased by an employee's spouse
pursuant to a payroll deduction program, provided the Compliance Department
has been previously notified in writing by the access person that the
spouse will be participating in the payroll deduction program.
(6) EMPLOYER STOCK OPTION PROGRAMS. Transactions involving the exercise and/or
purchase by an access person or an access person's spouse of securities
pursuant to a program sponsored by a corporation employing the access
person or spouse.
(7) PRO RATA DISTRIBUTIONS. Purchases effected by the exercise of rights issued
pro rata to all holders of a class of securities or the sale of rights so
received.
(8) TENDER OFFERS. Transactions in securities pursuant to a bona fide tender
offer made for any and all such securities to all similarly situated
shareholders in conjunction with mergers, acquisitions, reorganizations
and/or similar corporate actions. However, tenders pursuant to offers for
less than all outstanding securities of a class of securities of an issuer
must be precleared.
(9) NOT ELIGIBLE FOR FUNDS AND CLIENTS. Transactions in any securities that are
prohibited investments for all Funds and clients advised by the entity
employing the access person.
(10) NO INVESTMENT CONTROL. Transactions effected for an account or entity over
which you do not have or share investment control (i.e., an account where
someone else exercises complete investment control).
(11) NO BENEFICIAL OWNERSHIP. Transactions in which you do not acquire or
dispose of direct or indirect beneficial ownership (i.e., an account where
in you have no financial interest).
Although an access person's securities transaction may be exempt from
pre-clearing, such transactions must comply with the prohibited transaction
provisions of Section 3.4 above. Additionally, you may not trade any securities
as to which you have "inside information" (see attached THE FRANKLIN TEMPLETON
GROUP POLICY STATEMENT ON INSIDER Trading). If you have any questions, contact a
Preclearance Officer before engaging in the transaction. If you have any doubt
whether you have or might acquire direct or indirect beneficial ownership or
have or share investment control over an account or entity in a particular
transaction, or whether a transaction involves a security covered by the Code,
you should consult with a Preclearance Officer before engaging in the
transaction.
<PAGE>
C. DISCRETIONARY ACCOUNTS
You need not pre-clear transactions in any discretionary account for which
a registered broker-dealer, a registered investment adviser, or other investment
manager acting in a similar fiduciary capacity, which is not affiliated with the
Franklin Templeton Group, exercises sole investment discretion, if the following
conditions are met:13
(1) The terms of each account relationship ("Agreement") must be in writing and
filed with a Preclearance Officer prior to any transactions.
(2) Any amendment to each Agreement must be filed with aPreclearance Officer
prior to its effective date.
(3) The Portfolio Person certifies to the Compliance Department at the time
such account relationship commences, and annually thereafter, as contained
in Schedule G of the Code that such Portfolio Person does not have direct
or indirect influence or control over the account, other than the right to
terminate the account.
(4) Additionally, any discretionary account that you open or maintain with a
registered broker-dealer, a registered investment adviser, or other
investment manager acting in a similar fiduciary capacity must provide
duplicate copies of confirmations and statements for all transactions
effected in the account simultaneously with their delivery to you., If your
discretionary account acquires securities which are not reported to a
Preclearance Officer by a duplicate confirmation, such transaction must be
reported to a Preclearance Officer on Schedule B within 10 days after you
are notified of the acquisition.14
However, if you make ANY request that the discretionary account manager
enter into or refrain from a specific transaction or class of transactions, you
must first consult with aPreclearance Officer and obtain approval prior to
making such request.
D. DIRECTORS WHO ARE NOT ADVISORY PERSONS OR ADVISORY REPRESENTATIVES
You need not pre-clear any securities if:
(1) You are a director of a Fund in the Franklin Templeton Group and a
director of the fund's advisor;
(2) You are not an "advisory person"15 of a Fund in the Franklin Templeton
Group; and
(3) You are not an employee of any Fund,
or
(1) You are a director of a Fund in the Franklin Templeton Group;
(2) You are not an "advisory representative"16 of Franklin Resources or
any subsidiary; and
(3) You are not an employee of any Fund,
<PAGE>
unless you know or should know that, during the 15-day period before the
transaction, the security was purchased or sold, or considered for purchase or
sale, by a Fund or by Franklin Resources on behalf of a Fund or other client.
Directors qualifying under this paragraph are required to comply with all
applicable provisions of the Code including reporting their initial holdings and
brokerage accounts in accordance with 5.2, personal securities transactions and
accounts in accordance with 5.3 and 5.5, and annual reports in accordance with
5.4 of the Code.
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE
The Code is designed to assure compliance with applicable law and to
maintain shareholder confidence in the Franklin Templeton Group.
In adopting this Code, it is the intention of the Boards of
Directors/Trustees, to attempt to achieve 100% compliance with all requirements
of the Code - but it is recognized that this may not be possible. Incidental
failures to comply with the Code are not necessarily a violation of the law or
the Franklin Templeton Group's Statement of Principles. Such isolated or
inadvertent violations of the Code not resulting in a violation of law or the
Statement of Principles will be referred to the Director of Compliance and/or
management personnel, and disciplinary action commensurate with the violation,
if warranted, will be imposed.
However, if you violate any of the enumerated prohibited transactions
contained in Parts 3 and 4 of the Code, you will be expected to give up ANY
profits realized from these transactions to Franklin Resources for the benefit
of the affected Funds or other clients. If Franklin Resources cannot determine
which Fund(s) or client(s) were affected, the proceeds will be donated to a
charity chosen by Franklin Resources. Failure to disgorge profits when requested
may result in additional disciplinary action, including termination of
employment.
Further, a pattern of violations that individually do not violate the law
or Statement of Principles, but which taken together demonstrate a lack of
respect for the Code of Ethics, may result in disciplinary action including
termination of employment. A violation of the Code resulting in a violation of
the law will be severely sanctioned, with disciplinary action including, but not
limited to, referral of the matter to the board of directors of the affected
Fund, termination of employment or referral of the matter to the appropriate
regulatory agency for civil and/or criminal investigation.
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON GROUP INSIDER TRADING POLICY
The Code of Ethics is primarily concerned with transactions in securities
held or to be acquired by any of the Funds or Franklin Resources' clients,
regardless of whether those transactions are based on inside information or
actually harm a Fund or a client.
The Insider Trading Policy (attached to this document) deals with the
problem of insider trading in securities that could result in harm to a Fund, a
client, or members of the public, and applies to all directors, officers and
employees of any entity in the Franklin Templeton Group. Although the
requirements of the Code and the Insider Trading Policy are similar, you must
comply with both.
<PAGE>
APPENDIX A: COMPLIANCE PROCEDURES, DEFINITIONS, AND OTHER ITEMS
This appendix sets forth the additional responsibilities and obligations of
Compliance Officers, and the Legal/Administration and Legal/Compliance
Departments, under the Franklin Templeton Group Code of Ethics and Policy
Statement on Insider Trading.
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER
A. PRE-CLEARANCE STANDARDS
1. GENERAL PRINCIPLES
The Director of Compliance, or a Preclearance Officer, shall only permit an
access person to go forward with a proposed security17 transaction if he or she
determines that, considering all of the facts and circumstances, the transaction
does not violate the provisions of Rule 17j-1, or of this Code and there is no
likelihood of harm to a client.
2. ASSOCIATED CLIENTS
Unless there are special circumstances that make it appropriate to
disapprove a personal securities transaction request, a Preclearance Officer
shall consider only those securities transactions of the "Associated Clients" of
the access person, including open and executed orders and recommendations, in
determining whether to approve such a request. "Associated Clients" are those
Funds or clients whose trading information would be available to the access
person during the course of his or her regular functions or duties. Currently,
there are three groups of Associated Clients: (i) the Franklin Mutual Series
Funds and clients advised by Franklin Mutual Advisers, LLC ("Mutual Clients");
(ii) the Franklin Group of Funds and the clients advised by the various Franklin
investment advisers ("Franklin Clients"); and (iii) the Templeton Group of Funds
and the clients advised by the various Templeton investment advisers ("Templeton
Clients"). Thus, persons who have access to the trading information of Mutual
Clients generally will be precleared solely against the securities transactions
of the Mutual Clients, including open and executed orders and recommendations.
Similarly, persons who have access to the trading information of Franklin
Clients or Templeton Clients generally will be precleared solely against the
securities transactions of Franklin Clients or Templeton Clients, as
appropriate.
Certain officers of Franklin Resources, as well as legal, compliance, fund
accounting, investment operations and other personnel who generally have access
to trading information of the funds and clients of the Franklin Templeton Group
during the course of their regular functions and duties, will have their
personal securities transactions precleared against executed transactions, open
orders and recommendations of the entire Franklin Templeton Group.
3. SPECIFIC STANDARDS
(a) SECURITIES TRANSACTIONS BY FUNDS OR CLIENTS
No clearance shall be given for any transaction in any security on any day
during which an Associated Client of the access person has executed a buy or
sell order in that security, until seven (7) calendar days after the order has
been executed. Notwithstanding a transaction in the previous seven days,
<PAGE>
clearance may be granted to sell if the security has been disposed of by all
Associated Clients.
(b) SECURITIES UNDER CONSIDERATION
OPEN ORDERS
No clearance shall be given for any transaction in any security on any day
which an Associated Client of the access person has a pending buy or sell order
for such security, until seven (7) calendar days after the order has been
executed.
RECOMMENDATIONS
No clearance shall be given for any transaction in any security on any day
on which a recommendation for such security was made by a Portfolio Person,
until seven (7) calendar days after the recommendation was made and no orders
have subsequently been executed or are pending.
(c) PRIVATE PLACEMENTS
In considering requests by Portfolio Personnel for approval of limited
partnerships and other private placement securities transactions, the Director
of Compliance shall consult with an executive officer of Franklin Resources,
Inc. In deciding whether to approve the transaction, the Director of Compliance
and the executive officer shall take into account, among other factors, whether
the investment opportunity should be reserved for a Fund or other client, and
whether the investment opportunity is being offered to the Portfolio Person by
virtue of his or her position with the Franklin Templeton Group. If the
Portfolio Person receives clearance for the transaction, an investment in the
same issuer may only be made for a Fund or client if an executive officer of
Franklin Resources, Inc., who has been informed of the Portfolio Person's
pre-existing investment and who has no interest in the issuer, approves the
transaction.
(d) DURATION OF CLEARANCE
If a Preclearance Officer approves a proposed securities transaction, the
order for the transaction must be placed and effected by the close of the next
business day following the day approval was granted. The Director of Compliance
may, in his or her discretion, extend the clearance period up to seven calendar
days, beginning on the date of the approval, for a securities transaction of any
access person who demonstrates that special circumstances make the extended
clearance period necessary and appropriate.18 The Director of Compliance may, in
his or her discretion, after consultation with a member of senior management for
Franklin Resources, Inc., renew the approval for a particular transaction for up
to an additional seven calendar days upon a similar showing of special
circumstances by the access person. The Director of Compliance may shorten or
rescind any approval or renewal of approval under this paragraph if he or she
determines it is appropriate to do so.
B. WAIVERS BY THE DIRECTOR OF COMPLIANCE
The Director of Compliance may, in his or her discretion, after
consultation with an executive officer of Franklin Resources, Inc., waive
compliance by any access person with the provisions of the Code, if he or she
finds that such a waiver:
<PAGE>
(1) is necessary to alleviate undue hardship or in view of unforeseen
circumstances or is otherwise appropriate under all the relevant facts
and circumstances;
(2) will not be inconsistent with the purposes and objectives of the Code;
(3) will not adversely affect the interests of advisory clients of the
Franklin Templeton Group, the interests of the Franklin Templeton
Group or its affiliates; and
(4) will not result in a transaction or conduct that would violate
provisions of applicable laws or regulations.
Any waiver shall be in writing, shall contain a statement of the basis for
it, and a copy shall be promptly sent by the Director of Compliance to the
General Counsel of Franklin Resources, Inc.
C. CONTINUING RESPONSIBILITIES OF THE LEGAL COMPLIANCE DEPARTMENT
A Preclearance Officer shall make a record of all requests for
pre-clearance regarding the purchase or sale of a security, including the date
of the request, the name of the access person, the details of the proposed
transaction, and whether the request was approved or denied. APreclearance
Officer shall keep a record of any waivers given, including the reasons for each
exception and a description of any potentially conflicting Fund or client
transactions.
A Preclearance Officer shall also collect the signed initial
acknowledgments of receipt and the annual acknowledgments from each access
person of receipt of a copy of the Code and Insider Trading Policy, as well as
reports, as applicable, on Schedules B, C, D, E and F of the Code. In addition,
a Preclearance Officer shall request copies of all confirmations, and other
information with respect to an account opened and maintained with the
broker-dealer by any access person of the Franklin Templeton Group. A
Preclearance Officer shall preserve those acknowledgments and reports, the
records of consultations and waivers, and the confirmations, and other
information for the period required by applicable regulation.
A Preclearance Officer shall review brokerage transaction confirmations,
account statements, Schedules B, C, D, E, F and Private Placement Checklists of
Access Persons for compliance with the Code. The reviews shall include, but are
not limited to;
(1) Comparison of brokerage confirmations, Schedule Bs, and/or brokerage
statements to preclearance request worksheets or, if a private
placement, the Private Placement Checklist;
(2) Comparison of brokerage statements and/or Schedule Fs to current
securities holding information;
(3) Comparison of Schedule C to current securities account information;
(4) Conducting periodic "back-testing" of access person transactions,
Schedule Es and/or Schedule Gs in comparison to fund and client
transactions;
<PAGE>
A Preclearance Officer shall evidence review by initialing and dating the
appropriate document. Any apparent violations of the Code detected by a
Preclearance Officer during his or her review shall be promptly brought to the
attention of the Director of Compliance.
D. PERIODIC RESPONSIBILITIES OF THE LEGAL COMPLIANCE DEPARTMENT
The Legal Compliance Department shall consult with the General Counsel and
the Human Resources Department, as the case may be, to assure that:
(1) Adequate reviews and audits are conducted to monitor compliance with
the reporting, pre-clearance, prohibited transaction and other
requirements of the Code.
(2) Adequate reviews and audits are conducted to monitor compliance with
the reporting, pre-clearance, prohibited transaction and other
requirements of the Code.
(3) All access persons and new employees of the Franklin Templeton Group
are adequately informed and receive appropriate education and training
as to their duties and obligations under the Code.
(4) There are adequate educational, informational and monitoring efforts
to ensure that reasonable steps are taken to prevent and detect
unlawful insider trading by access persons and to control access to
inside information.
(5) Written compliance reports are submitted to the Board of Directors of
Franklin Resources, Inc., and the Board of each relevant Fund at least
annually. Such reports will describe any issues arising under the Code
or procedures since the last report, including, but not limited to,
information about material violations of the Code or procedures and
sanctions imposed in response to the material violations.
(6) The Legal Compliance Department will certify at least annually to the
Fund's board of directors that the Franklin Templeton Group has
adopted procedures reasonably necessary to prevent Access Persons from
violating the Code, and
(7) Appropriate records are kept for the periods required by law.
E. APPROVAL BY FUND'S BOARD OF DIRECTORS
(1) Basis for Approval
The Board of Directors/Trustees must base its approval of the Code on
a determination that the Code contains provisions reasonably necessary to
prevent access persons from engaging in any conduct prohibited by rule
17j-1.
(2) New Funds
At the time a new fund is organized, the Legal Compliance Department will
provide the Fund's board of directors, a certification that the investment
adviser and principal underwriter have adopted procedures reasonably necessary
<PAGE>
to prevent Access Persons from violating the Code. Such certification will state
that the Code contains provisions reasonably necessary to prevent Access Persons
from violating the Code.
(3) Material Changes to the Code of Ethics
The Legal Compliance Department will provide the Fund's board of directors
a written description of all material changes to the Code no later than six
months after adoption of the material change by the Franklin Templeton Group.
II. COMPILATION OF DEFINITIONS OF IMPORTANT TERMS
For purposes of the Code of Ethics and Insider Trading Policy, the terms
below have the following meanings:
1934 ACT - The Securities Exchange Act of 1934, as amended.
1940 ACT - The Investment Company Act of 1940, as amended.
ACCESS PERSON - Each director, trustee, general partner or officer, and any
other person that directly or indirectly controls (within the meaning of
Section 2(a)(9) of the 1940 Act) the Franklin Templeton Group or a person,
including an Advisory Representative, who has access to information
concerning recommendations made to a Fund or client with regard to the
purchase or sale of a security.
ADVISORY REPRESENTATIVE - Any officer or director of Franklin Resources; any
employee who makes any recommendation, who participates in the
determination of which recommendation shall be made, or whose functions or
duties relate to the determination of which recommendation shall be made;
any employee who, in connection with his or her duties, obtains any
information concerning which securities are being recommended prior to the
effective dissemination of such recommendations or of the information
concerning such recommendations; and any of the following persons who
obtain information concerning securities recommendations being made by
Franklin Resources prior to the effective dissemination of such
recommendations or of the information concerning such recommendations: (i)
any person in a control relationship to Franklin Resources, (ii) any
affiliated person of such controlling person, and (iii) any affiliated
person of such affiliated person.
AFFILIATED PERSON - same meaning as Section 2(a)(3) of the Investment Company
Act of 1940. An "affiliated person" of an investment company includes
directors, officers, employees, and the investment adviser. In addition, it
includes any person owning 5% of the company's voting securities, any
person in which the investment company owns 5% or more of the voting
securities, and any person directly or indirectly controlling, controlled
by, or under common control with the company.
APPROPRIATE ANALYST - With respect to any access person, any securities analyst
or portfolio manager making investment recommendations or investing funds
on behalf of an Associated Client and who may be reasonably expected to
recommend or consider the purchase or sale of a security.
ASSOCIATED CLIENT - A Fund or client whose trading information would be
available to the access person during the course of his or her regular
functions or duties.
<PAGE>
BENEFICIAL OWNERSHIP - Has the same meaning as in Rule 16a-1(a)(2) under the
1934 Act. Generally, a person has a beneficial ownership in a security if
he or she, directly or indirectly, through any contract, arrangement,
understanding, relationship or otherwise, has or shares a direct or
indirect pecuniary interest in the security. There is a presumption of a
pecuniary interest in a security held or acquired by a member of a person's
immediate family sharing the same household.
FUNDS - Investment companies in the Franklin Templeton Group of Funds.
HELD OR TO BE ACQUIRED - A security is "held or to be acquired" if within the
most recent 15 days it (i) is or has been held by a Fund, or (ii) is being
or has been considered by a Fund or its investment adviser for purchase by
the Fund.
PORTFOLIO PERSON - Any employee of the Franklin Templeton Group, who, in
connection with his or her regular functions or duties, makes or
participates in the decision to purchase or sell a security by a Fund in
the Franklin Templeton Group, or any other client or if his or her
functions relate to the making of any recommendations about those purchases
or sales. Portfolio Persons include portfolio managers, research analysts,
traders, persons serving in equivalent capacities (such as Management
Trainees), persons supervising the activities of Portfolio Persons, and
anyone else designated by the Director of Compliance
PROPRIETARY ACCOUNTS - Any corporate account or other account including, but not
limited to, a limited partnership, a corporate hedge fund, a limited
liability company or any other pooled investment vehicle in which Franklin
Resources or its affiliates, owns 5 percent or more of the outstanding
capital or is entitled to 25% or more of the profits or losses in the
account (excluding any asset based investment management fees based on
average periodic net assets in accounts). SECURITY - Any stock, note, bond,
evidence of indebtedness, participation or interest in any profit-sharing
plan or limited or general partnership, investment contract, certificate of
deposit for a security, fractional undivided interest in oil or gas or
other mineral rights, any put, call, straddle, option, or privilege on any
security (including a certificate of deposit), guarantee of, or warrant or
right to subscribe for or purchase any of the foregoing, and in general any
interest or instrument commonly known as a security, except commodity
futures, currency and currency forwards. For the purpose of this Code,
"security" does not include: (1) Direct obligations of the Government of
the United States; (2) Bankers' acceptances, bank certificates of deposit,
commercial paper and high quality short-term debt instruments, including
repurchase agreements; and (3) Shares issued by open-end funds.
SEE Section III of Appendix A for a summary of different requirements for
different types of securities.
III. SECURITIES EXEMPT FROM THE PROHIBITED , REPORTING, AND PRE-CLEARANCE
PROVISIONS
A. PROHIBITED TRANSACTIONS
Securities that are EXEMPT from the prohibited transaction provisions of
Section 3.4 include:
<PAGE>
(1) securities that are direct obligations of the U.S. Government, such as
Treasury bills, notes and bonds, and U.S. Savings Bonds and
derivatives thereof;
(2) high quality short-term instruments ("money market instruments")
including but not limited to (i) bankers' acceptances, (ii) U.S. bank
certificates of deposit; (iii) commercial paper; and (iv) repurchase
agreements;
(3) shares of registered open-end investment companies;
(4) commodity futures, currencies, currency forwards and derivatives
thereof;
(5) securities that are prohibited investments for all Funds and clients
advised by the entity employing the access person; and
(6) transactions in securities issued or guaranteed by the governments or
their agencies or instrumentalities of Canada, the United Kingdom,
France, Germany, Switzerland, Italy and Japan and derivatives thereof.
B. REPORTING AND PRECLEARANCE
Securities that are EXEMPT from both the reporting requirements of Section
5 and preclearance requirements of Section 6 of the Code include:
(1) securities that are direct obligations of the U.S. Government, such as
Treasury bills, notes and bonds, and U.S. Savings Bonds and
derivatives thereof;
(2) high quality short-term instruments ("money market instruments")
including but not limited to (i) bankers' acceptances, (ii) U.S. bank
certificates of deposit; (iii) commercial paper; and (iv) repurchase
agreements;
(3) shares of registered open-end investment companies; and
(4) commodity futures, currencies, currency forwards and derivatives
thereof.
IV. LEGAL REQUIREMENT
Rule 17j-1 under the Investment Company Act of 1940 ("1940 Act") makes it
unlawful for any affiliated person of the Franklin Templeton Group in connection
with the purchase or sale of a security, including any option to purchase or
sell, and any security convertible into or exchangeable for, any security that
is "held or to be acquired" by a Fund in the Franklin Templeton Group:
A. To employ any device, scheme or artifice to defraud a Fund;
B. To make to a Fund any untrue statement of a material fact or omit to state
to a Fund a material fact necessary in order to make the statements made,
in light of the circumstances under which they are made, not misleading;
C. To engage in any act, practice, or course of business which operates or
would operate as a fraud or deceit upon a Fund; or
<PAGE>
D. To engage in any manipulative practice with respect to a Fund.
A security is "held or to be acquired" if within the most recent 15 days it
(i) is or has been held by a Fund, or (ii) is being or has been considered by a
Fund or its investment adviser for purchase by the Fund. .
APPENDIX B: FORMS AND SCHEDULES
ACKNOWLEDGMENT FORM
CODE OF ETHICS AND POLICY STATEMENT ON INSIDER TRADING
To: DIRECTOR OF COMPLIANCE, LEGAL COMPLIANCE DEPARTMENT
I hereby acknowledge receipt of a copy of the Franklin Templeton Group's CODE OF
ETHICS AND POLICY STATEMENT ON INSIDER TRADING, AMENDED AND RESTATED, FEBRUARY
2000, which I have read and understand. I will comply fully with all provisions
of the Code and the Insider Trading Policy to the extent they apply to me during
the period of my employment. Additionally, I authorize any broker-dealer, bank
or investment adviser with whom I have securities accounts and accounts in which
I have beneficial ownership, to provide brokerage confirmations and statements
as required for compliance with the Code. I further understand and acknowledge
that any violation of the Code or Insider Trading Policy, including engaging in
a prohibited transaction or failure to file reports as required (see Schedules
B, C, D, E, F and G), may subject me to disciplinary action, including
termination of employment.
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SIGNATURE:
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PRINT NAME:
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TITLE:
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DEPARTMENT:
---------------------------------------------------------------------------
LOCATION:
---------------------------------------------------------------------------
DATE ACKNOWLEDGMENT WAS SIGNED:
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RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS - FLOOR 2.
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS AND PRECLEARANCE DESK TELEPHONE & FAX
NUMBERS 19
LEGAL OFFICER
MURRAY SIMPSON
EXECUTIVE VICE PRESIDENT & GENERAL COUNSEL
FRANKLIN RESOURCES, INC.
<PAGE>
901 MARINERS ISLAND BLVD.
7TH FLOOR
SAN MATEO, CA 94404
(650) 525 -7331
COMPLIANCE OFFICERS
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Director of Compliance PRECLEARANCE OFFICERS
James M. Davis Stephanie Harwood
Franklin Resources, Inc. Wally Enrico
2000 Alameda de las Pulgas, Suite Legal Compliance Department
200F 2000 Alameda de las Pulgas,
San Mateo, CA 94403 Suite 200E
(650) 312-2832 San Mateo, CA 94403
(650) 312-3693 (telephone) (650)
312-5646 (facsimile) Preclear, Legal
(internal e-mail address)
[email protected] (external e-mail
address)
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SCHEDULE B: SECURITIES TRANSACTION REPORT
This report of personal securities transactions NOT reported by duplicate
confirmations and brokerage statements pursuant to Section 5.3 of the Code is
required pursuant to Rule 204-2(a) of the Investment Advisers Act of 1940 or
Rule 17j-1(c) of the Investment Company Act of 1940. The report must be
completed and submitted to the Compliance Department no later than 10 calendar
days after the end of the calendar quarter.. Refer to Section 5.3 of the Code of
Ethics for further instructions.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Trade Buy, sell Security Description, including Type of Quantity or Price Broker-Dealer Date Preclearance
Date or Other interest rate and maturity Security Principal or Bank obtained from
(if appropriate) (Stock, Amount Compliance Dept.
Bond, Option,
etc.)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE REPORT OR RECORDING OF ANY TRANSACTION ABOVE SHALL NOT BE CONSTRUED AS AN
ADMISSION THAT I HAVE ANY DIRECT OR INDIRECT OWNERSHIP IN THE SECURITIES.
<S> <C> <C> <C>
- ------------------------------ ------------------------- ------------------- -------------------
(PRINT NAME) (SIGNATURE) (DATE) (QUARTER ENDING)
</TABLE>
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE C: INITIAL, ANNUAL & UPDATED DISCLOSURE OF ACCESS PERSONS SECURITIES
HOLDINGS This report shall set forth the security name or description and
security class of each security holding in which you have a direct or indirect
beneficial interest, including holdings by a spouse, minor children, trusts,
foundations, and any account for which trading authority has been delegated to
you, other than authority to trade for a Fund in or a client of the Franklin
Templeton Group.. In lieu of listing each security position below, you may
instead attach copies of brokerage statements, sign below and return Schedule C
and brokerage statements to the Legal Compliance Department within 10 days if an
initial report or by January 30th of each year if an annual report. Refer to
Sections 5.2.A and 5.4.A of the Code for additional filing instructions.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------
Security Description Type of Security Quantity or
including interest rate (Stocks, Bond Principal Name of Broker- Account
and maturity (if appropriate) Option, etc.) Amount Dealer or Bank Number
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
[ ] I DID NOT HAVE ANY PERSONAL SECURITIES HOLDINGS FOR YEAR ENDED _____________
[ ] I HAVE ATTACHED STATEMENTS CONTAINING ALL MY PERSONAL SECURITIES HOLDINGS FOR THE
YEAR ENDED ______
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS
AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST,
INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS,
AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED
PARTY.
- ----------------------- ------------------- ------------------ --------------- ------------
PRINT NAME SIGNATURE DATE YEAR ENDED
</TABLE>
* Securities that are EXEMPT from being reported on Schedule C include: (i)
securities that are direct obligations of the U.S. Government, such as Treasury
bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof; (ii)
high quality short-term instruments ("money market instruments") including but
not limited to bankers' acceptances, U.S. bank certificates of deposit;
commercial paper; and repurchase agreements; (iii) shares of registered open-end
investment companies; and (iv) commodity futures, currencies, currency forwards
and derivatives thereof.
<PAGE>
SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT OPENING
DATE: __________________________________
TO: Preclearance Desk
Legal Compliance Department
2000 Alameda de las Pulgas, Suite 200E
San Mateo, CA 94403
(650) 312-3693
FAX: (650) 312-5646
FROM: NAME: ____________________________
DEPARTMENT:_______________________
LOCATION:_________________________
EXTENSION:________________________
ARE YOU A REG. REPRESENTATIVE? YES[ ] NO[ ]
ARE YOU AN ACCESS PERSON? YES[ ] NO[ ]
This is to advise you that I will be opening or have opened a securities account
with the following firm:
PLEASE FILL OUT COMPLETELY TO EXPEDITE PROCESSING
NAME ON ACCOUNT: ____________________________________________________________
(If other than employee, please state relationship i.e.,
spouse, son, daughter, trust, etc.)
ACCT # OR SSN #:_____________________________________________________________
NAME OF FIRM:________________________________________________________________
ATTN:________________________________________________________________________
ADDRESS OF FIRM:_____________________________________________________________
CITY/STATE/ZIP:______________________________________________________________
* All Franklin registered representatives and Access Persons, PRIOR TO OPENING A
BROKERAGE ACCOUNT OR PLACING AN INITIAL ORDER, are required to notify the Legal
Compliance Department and the executing broker-dealer in writing. This includes
accounts in which the registered representative or access person has or will
have a financial interest (e.g., a spouse's account) or discretionary authority
(e.g., a trust account for a minor child).
Upon receipt of the NOTIFICATION OF SECURITIES ACCOUNT OPENING form, the Legal
Compliance Department will contact the broker-dealer identified above and
request that it receive duplicate confirmations and statements of your brokerage
account.
SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST If you have
any beneficial ownership in a security and you recommend to the Appropriate
Analyst that the security be considered for purchase or sale by an Associated
Client, or if you carry out a purchase or sale of that security for an
Associated Client, you must disclose your beneficial ownership to the Legal
Compliance Department and the Appropriate Analyst in writing on Schedule E (or
an equivalent form containing similar information) before the purchase or sale,
or before or simultaneously with the recommendation.
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Method of Primary
Ownership Acquisition Date and Method Learned Portfolio Manager
Type (Direct Year (Purch/Gift/ that Security Under or Appropriate Name of Person Date of Verbal
Security Description or Indirect) Acquired Other) Consideration by Funds Analyst Notified Notification
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------ --------------------------- ------------------
(PRINT NAME) (SIGNATURE) (DATE)
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE F: INITIAL, ANNUAL & UPDATED DISCLOSURE OF SECURITIES ACCOUNTS
This report shall set forth the name and description of each securities
account in which you have a direct or indirect beneficial interest, including
securities accounts of a spouse, minor children, trusts, foundations, and any
account for which trading authority has been delegated to you, other than
authority to trade for a Fund in, or a client of, the Franklin Templeton Group.
In lieu of listing each securities account below, you may instead attach copies
of the brokerage statements, sign below and return Schedule F and brokerage
statements to the Compliance Department.
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
NAME(S) ON ACCOUNT NAME OF BROKERAGE FIRM, ADDRESS OF BROKERAGE FIRM, BANK OR ACCOUNT NAME OF ACCOUNT
(REGISTRATION SHOWN ON BANK OR INVESTMENT INVEST. ADVISER NUMBER EXECUTIVE/REPRESENTATIVE
STATEMENT) ADVISER (STREET, CITY , STATE AND ZIP CODE)
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS IN
WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITY
ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR
WHICH TRADING AUTHORITY HAS BEEN DELEGATED TO ME.
- ---------------------- -------------------- ------------------- -----------
PRINT NAME SIGNATURE DATE YEAR ENDED
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE G: INITIAL AND ANNUAL CERTIFICATION OF DISCRETIONARY AUTHORITY
This report shall set forth the account name or description in which you have a
direct or indirect beneficial interest, including holdings by a spouse, minor
children, trusts, foundations, and as to which trading authority has been
delegated by you to an unaffiliated registered broker-dealer, registered
investment adviser, or other investment manager acting in a similar fiduciary
capacity, who exercises sole investment discretion.
<PAGE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
TYPE OF OWNERSHIP
NAME/DESCRIPTION OF BROKERAGE FIRM, DIRECT OWNERSHIP ACCOUNT NUMBER
NAME(S) AS SHOWN ON ACCOUNT OR BANK, INVESTMENT ADVISER OR INVESTMENT (DO) (IF APPLICABLE)
INVESTMENT INDIRECT
OWNERSHIP (IO)
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
TO THE BEST OF MY KNOWLEDGE I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS
AND/OR INVESTMENTS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST,
INCLUDING SECURITY ACCOUNTS OF A SPOUSE, MINOR CHILDREN, TRUSTS, FOUNDATIONS,
AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED AN UNAFFILIATED
PARTY. FURTHER, I CERTIFY THAT I DO NOT HAVE ANY DIRECT OR INDIRECT INFLUENCE OR
CONTROL OVER THE ACCOUNTS LISTED ABOVE.
- -------------------- ------------------- ----------------- ------------------
PRINT NAME SIGNATURE DATE YEAR ENDED
RETURN TO: LEGAL COMPLIANCE DEPARTMENT, 2000 ALAMEDA DE LAS PULGAS, SUITE 200E,
SAN MATEO, CA 94403
SCHEDULE H: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES ISSUED IN
PRIVATE PLACEMENTS
GENERAL INSTRUCTIONS: In considering requests by Access Persons for approval of
limited partnerships and other private placement securities transactions, the
Director of Compliance shall consult with an executive officer of Franklin
Resources, Inc. In deciding whether to approve the transaction, the Director of
Compliance and the executive officer shall take into account, among other
factors, whether the investment opportunity should be reserved for a Fund or
other client, and whether the investment opportunity is being offered to the
access person by virtue of his or her position with the Franklin Templeton
Group. IF THE ACCESS PERSON RECEIVES CLEARANCE FOR THE TRANSACTION, AN
INVESTMENT IN THE SAME ISSUER MAY ONLY BE MADE FOR A FUND OR CLIENT IF AN
<PAGE>
EXECUTIVE OFFICER OF FRANKLIN RESOURCES, INC., WHO HAS BEEN INFORMED OF THE
ACCESS PERSON'S PRE-EXISTING INVESTMENT AND WHO HAS NO INTEREST IN THE ISSUER,
APPROVES THE TRANSACTION.
IN ORDER TO PROCESS YOUR REQUEST, PLEASE PROVIDE THE FOLLOWING INFORMATION:
1) Name/Description of proposed investment: [ ]
2) Proposed Investment Amount: [ ]
3) Please attach pages of the offering memorandum (or other documents)
summarizing the investment opportunity, including:
a) Name of the partnership/hedge fund/issuer;
b) Name of the general partner, location & telephone number;
c) Summary of the offering; including the total amount the offering/issuer;
d) Percentage your investment will represent of the total offering;
e) Plan of distribution; and
f) Investment objective and strategy,
PLEASE RESPOND TO THE FOLLOWING QUESTIONS:
4) Was this investment opportunity presented to you in your capacity as a
portfolio manager, trader or research analyst? If no, please explain the
relationship, if any, you have to the issuer or principals of the issuer.
5) Is this investment opportunity suitable for any fund/client that you
advise? If yes, why isn't the investment being made on behalf of the
fund/client? If no, why isn't the investment opportunity suitable for the
fund/clients?
6) Do any of the fund/clients that you advise presently hold securities of the
issuer of this proposed investment (e.g., common stock, preferred stock,
corporate debt, loan participations, partnership interests, etc)? If yes,
please provide the names of the funds/clients and security description.
7) Do you presently have or will you have any managerial role with the
company/issuer as a result of your investment? If yes, please explain in
detail your responsibilities, including any compensation you will receive.
8) Will you have any investment control or input to the investment decision
making process?
<PAGE>
9) If applicable, will you receive reports of portfolio holdings? If yes, when
and how frequently will these be provided?
Reminder: Personal securities transactions that do not generate brokerage
confirmations must be reported to the Legal Compliance Department on Schedule B
within 10 calendar days after you are notified.
---------------------------------------
Name of Access Person
--------------------------------------- ----------------
Access Person Signature Date
Approved by:
--------------------------------------- ----------------
Chief Investment Officer Signature Date
- --------------------------------------------------------------------------------
Legal Compliance Use Only
- --------------------------------------------------------------------------------
Date Received: ________________________________________
Date Entered in Lotus Notes: ______________________________________
Date Forwarded FRI Executive Officer: _________________________________
Precleared: [ ] [ ] (attach E-Mail) Date: __________________________
Date Entered in APII: __________________________
- --------------------------------------------------------------------------------
<PAGE>
APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES OF
FRANKLIN RESOURCES, INC. - FEBRUARY 2000
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Franklin Advisers, Inc. IA Templeton Management Limited IA
(Canada)
- ------------------------------------------------------------------------------------------
Franklin Advisory Services, LLC. IA Templeton Franklin Investment IA/BD
Services, Inc.
- ------------------------------------------------------------------------------------------
Franklin Investment Advisory IA Templeton Investment Counsel, Inc. IA
Services, Inc.
- ------------------------------------------------------------------------------------------
Franklin Management, Inc. IA Templeton Asset Management, Ltd. IA/FIA
- ------------------------------------------------------------------------------------------
Franklin Mutual Advisers, LLC IA Templeton Investment Management Co. FIA
Ltd. (Japan)
- ------------------------------------------------------------------------------------------
Franklin Properties, Inc. REA Closed Joint-Stock Company FIA
Templeton (Russia)
- ------------------------------------------------------------------------------------------
Franklin Templeton Distributors, IA/BD Templeton Unit Trust Management FBD
Inc. Ltd. (UK)
- ------------------------------------------------------------------------------------------
Franklin Asset Management IA Orion Fund Management Ltd. FIA
(Proprietary) Ltd.
- ------------------------------------------------------------------------------------------
Templeton (Switzerland), Inc. FBD Templeton Global Advisors Ltd. IA
(Bahamas)
- ------------------------------------------------------------------------------------------
Templeton Franklin Investment FBD Templeton Asset Management (India) FIA/FBD
Services (Asia) Ltd. Pvt. Ltd.
- ------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Templeton Investment Management IA/FIA Templeton Italia SIM S.p.A. (Italy) FBD
Limited (UK)
- ------------------------------------------------------------------------------------------
Templeton Global Strategic Services FBD Templeton Global Strategic Services FBD
S.A. (Luxembourg) (Deutschland) GmbH (Germany)
- ------------------------------------------------------------------------------------------
Templeton Investment Management FIA Templeton Funds Annuity Company INS
(Australia) Ltd.
- ------------------------------------------------------------------------------------------
Franklin Templeton Investment TA
Services, Inc.
- ------------------------------------------------------------------------------------------
Franklin Templeton Services, Inc. BM
- ------------------------------------------------------------------------------------------
</TABLE>
Codes:
IA: US registered investment adviser
BD: US registered broker-dealer
FIA: Foreign equivalent investment adviser
FBD: Foreign equivalent broker-dealer
TA: US registered transfer agent
BM: Business manager to the funds
REA: Real estate adviser
INS: Insurance company
THE FRANKLIN TEMPLETON GROUP POLICY STATEMENT ON INSIDER TRADING
A. LEGAL REQUIREMENT
Pursuant to the Insider Trading and Securities Fraud Enforcement Act of
1988, it is the policy of the Franklin Templeton Group to forbid any officer,
director, employee, consultant acting in a similar capacity, or other person
associated with the Franklin Templeton Group from trading, either personally or
on behalf of clients, including all client assets managed by the entities in the
Franklin Templeton Group, on material non-public information or communicating
material non-public information to others in violation of the law. This conduct
is frequently referred to as "insider trading." The Franklin Templeton Group's
Policy Statement on Insider Trading applies to every officer, director, employee
<PAGE>
or other person associated with the Franklin Templeton Group and extends to
activities within and outside their duties with the Franklin Templeton Group.
Every officer, director and employee must read and retain this policy statement.
Any questions regarding the Franklin Templeton Group's Policy Statement on
Insider Trading or the Compliance Procedures should be referred to the Legal
Department.
The term "insider trading" is not defined in the federal securities laws,
but generally is used to refer to the use of material non-public information to
trade in securities (whether or not one is an "insider") or to communications of
material non-public information to others.
While the law concerning insider trading is not static, it is generally
understood that the law prohibits:
(1) trading by an insider, while in possession of material non-public
information; or
(2) trading by a non-insider, while in possession of material non-public
information, where the information either was disclosed to the
non-insider in violation of an insider's duty to keep it confidential
or was misappropriated; or
(3) communicating material non-public information to others.
The elements of insider trading and the penalties for such unlawful conduct
are discussed below. If, after reviewing this policy statement, you have any
questions, you should consult the Legal Department.
POLICY STATEMENT ON INSIDER TRADING
B. WHO IS AN INSIDER?
The concept of "insider" is broad. It includes officers, directors and
employees of a company. In addition, a person can be a "temporary insider" if he
or she enters into a special confidential relationship in the conduct of a
company's affairs and as a result is given access to information solely for the
company's purposes. A temporary insider can include, among others, a company's
outside attorneys, accountants, consultants, bank lending officers, and the
employees of such organizations. In addition, an investment adviser may become a
temporary insider of a company it advises or for which it performs other
services. According to the U.S. Supreme Court, the company must expect the
outsider to keep the disclosed non-public information confidential and the
relationship must at least imply such a duty before the outsider will be
considered an insider.
C. WHAT IS MATERIAL INFORMATION?
Trading on inside information is not a basis for liability unless the
information is material. "Material information" generally is defined as
information for which there is a substantial likelihood that a reasonable
investor would consider it important in making his or her investment decisions,
or information that is reasonably certain to have a substantial effect on the
<PAGE>
price of the company's securities. Information that officers, directors and
employees should consider material includes, but is not limited to: dividend
changes, earnings estimates, changes in previously released earnings estimates,
significant merger or acquisition proposals or agreements, major litigation,
liquidation problems, and extraordinary management developments.
Material information does not have to relate to a company's business. For
example, in CARPENTER V. U.S., 108 U.S. 316 (1987), the Supreme Court considered
as material certain information about the contents of a forthcoming newspaper
column that was expected to affect the market price of a security. In that case,
a WALL STREET JOURNAL reporter was found criminally liable for disclosing to
others the dates that reports on various companies would appear in the WALL
STREET JOURNAL and whether those reports would be favorable or not.
D. WHAT IS NON-PUBLIC INFORMATION?
Information is non-public until it has been effectively communicated to the
marketplace. One must be able to point to some fact to show that the information
is generally public. For example, information found in a report filed with the
Securities and Exchange Commission ("SEC"), or appearing in Dow Jones, Reuters
Economic Services, THE WALL STREET JOURNAL or other publications of general
circulation would be considered public.
E. BASIS FOR LIABILITY
1. FIDUCIARY DUTY THEORY
In 1980, the Supreme Court found that there is no general duty to disclose
before trading on material non-public information, but that such a duty arises
only where there is a fiduciary relationship. That is, there must be a
relationship between the parties to the transaction such that one party has a
right to expect that the other party will not disclose any material non-public
information or refrain from trading. CHIARELLA V. U.S., 445 U.S. 22 (1980).
In DIRKS V. SEC, 463 U.S. 646 (1983), the Supreme Court stated alternate
theories under which non-insiders can acquire the fiduciary duties of insiders.
They can enter into a confidential relationship with the company through which
they gain information (E.G., attorneys, accountants), or they can acquire a
fiduciary duty to the company's shareholders as "tippees" if they are aware or
should have been aware that they have been given confidential information by an
insider who has violated his fiduciary duty to the company's shareholders.
However, in the "tippee" situation, a breach of duty occurs only if the
insider personally benefits, directly or indirectly, from the disclosure. The
benefit does not have to be pecuniary but can be a gift, a reputational benefit
that will translate into future earnings, or even evidence of a relationship
that suggests a quid pro quo.
2. MISAPPROPRIATION THEORY
Another basis for insider trading liability is the "misappropriation"
theory, under which liability is established when trading occurs on material
non-public information that was stolen or misappropriated from any other person.
In U.S. V. CARPENTER, SUPRA, the Court found, in 1987, a columnist defrauded THE
WALL STREET JOURNAL when he stole information from the WALL STREET JOURNAL and
used it for trading in the securities markets. It should be noted that the
misappropriation theory can be used to reach a variety of individuals not
previously thought to be encompassed under the fiduciary duty theory.
<PAGE>
F. PENALTIES FOR INSIDER TRADING
Penalties for trading on or communicating material non-public information
are severe, both for individuals involved in such unlawful conduct and their
employers. A person can be subject to some or all of the penalties below even if
he or she does not personally benefit from the violation. Penalties include:
o civil injunctions;
o treble damages;
o disgorgement of profits;
o jail sentences;
o fines for the person who committed the violation of up to three times
the profit gained or loss avoided, whether or not the person actually
benefited; and
o fines for the employer or other controlling person of up to the greater
of $1,000,000 or three times the amount of the profit gained or loss
avoided.
In addition, any violation of this policy statement can result in serious
sanctions by the Franklin Templeton Group, including dismissal of any person
involved.
G. INSIDER TRADING PROCEDURES
Each access person, Compliance Officer, the Risk Management Department, and
the Legal Department, as the case may be, shall comply with the following
procedures.
1. IDENTIFYING INSIDE INFORMATION
Before trading for yourself or others, including investment companies or
private accounts managed by the Franklin Templeton Group, in the securities of a
company about which you may have potential inside information, ask yourself the
following questions:
o Is the information material?
o Is this information that an investor would consider important in
making his or her investment decisions?
o Is this information that would substantially affect the market price
of the securities if generally disclosed?
o Is the information non-public?
o To whom has this information been provided?
o Has the information been effectively communicated to the marketplace
(e.g., published in REUTERS, THE WALL STREET JOURNAL or other
publications of general circulation)?
If, after consideration of these questions, you believe that the information may
be material and non-public, or if you have questions as to whether the
information is material and non-public, you should take the following steps:
<PAGE>
(i) Report the matter immediately to the designated Compliance Officer, or
if he or she is not available, to the Legal Department.
(ii) Do not purchase or sell the securities on behalf of yourself or others,
including investment companies or private accounts managed by the
Franklin Templeton Group.
(iii) Do not communicate the information inside or outside the Franklin
Templeton Group, other than to the Compliance Officer or the Legal
Department.
(iv) The Compliance Officer shall immediately contact the Legal Department
for advice concerning any possible material, non-public information.
(v) After the Legal Department has reviewed the issue and consulted with
the Compliance Officer, you will be instructed either to continue the
prohibitions against trading and communication noted in (ii) and (iii),
or you will be allowed to trade and communicate the information.
(vi) In the event the information in your possession is determined by the
Legal Department or the Compliance Officer to be material and
non-public, it may not be communicated to anyone, including persons
within the Franklin Templeton Group, except as provided in (i) above.
In addition, care should be taken so that the information is secure.
For example, files containing the information should be sealed and
access to computer files containing material non-public information
should be restricted to the extent practicable.
2. RESTRICTING ACCESS TO OTHER SENSITIVE INFORMATION
All Franklin Templeton Group personnel also are reminded of the need to be
careful to protect from disclosure other types of sensitive information that
they may obtain or have access to as a result of their employment or association
with the Franklin Templeton Group.
(I) GENERAL ACCESS CONTROL PROCEDURES
The Franklin Templeton Group has established a process by which access to
company files that may contain sensitive or non-public information such as the
Bargain List and the Source of Funds List is carefully limited. Since most of
the Franklin Templeton Group files which contain sensitive information are
stored in computers, personal identification numbers, passwords and/or code
access numbers are distributed to Franklin Templeton Group computer access
persons only. This activity is monitored on an ongoing basis. In addition,
access to certain areas likely to contain sensitive information is normally
restricted by access codes.
- ------------------
1 "Director" includes trustee.
<PAGE>
2 The term "employee or employees" includes management trainees, as well as
regular employees of the Franklin Templeton Group.
3 SEE Appendix A. II., for definition of "Proprietary Accounts."
4 Generally, a person has "beneficial ownership" in a security if he or she,
directly or indirectly, through any contract, arrangement, understanding,
relationship or otherwise, has or shares a direct or indirect pecuniary
interest in the security. There is a presumption of a pecuniary interest in
a security held or acquired by a member of a person's immediate family
sharing the same household.
5 Proprietary Information: Information that is obtained or developed during
the ordinary course of employment with the Franklin Templeton Group,
whether by you or someone else, and is not available to persons outside the
Franklin Templeton Group. Examples of such Proprietary Information include,
among other things, internal research reports, research materials supplied
to the Franklin Templeton Group by vendors and broker-dealers not generally
available to the public, minutes of departmental/research meetings and
conference calls, and communications with company officers (including
confidentiality agreements). Examples of non-Proprietary Information
include mass media publications (e.g., The Wall Street Journal, Forbes, and
Fortune), certain specialized publications available to the public (e.g.,
Morningstar, Value Line, Standard and Poors), and research reports
available to the general public.
6 The Director of Compliance is designated on Schedule A. The "Appropriate
Analyst" means any securities analyst or portfolio manager, other than you,
making recommendations or investing funds on behalf of any associated
client, who may be reasonably expected to recommend or consider the
purchase or sale of the security in question.
7 Associated Client: A Fund or client whose trading information would be
available to the access person during the course of his or her regular
functions or duties.
8 You are a "Portfolio Person" if you are an employee of the Franklin
Templeton Group, and, in connection with your regular functions or duties,
make or participate in the decision to purchase or sell a security by a
Fund in the Franklin Templeton Group, or any other client or if your
functions relate to the making of any recommendations about those purchases
or sales. Portfolio Persons include portfolio managers, research analysts,
traders, persons serving in equivalent capacities (such as Management
Trainees), persons supervising the activities of Portfolio Persons, and
anyone else so designated by the Compliance Officer.
9 This restriction applies equally to transactions occurring in margin and
option accounts which may not be due to direct actions by the Portfolio
Person. For example, a stock held less than 60 days that is sold to meet a
margin call or the underlying stock of a covered call option held less than
60 days that is called away, would be a violation of this restriction if
these transactions resulted in a profit for the Portfolio Person.
10 You are not required to separately report the vesting of shares or options
of Franklin Resources, Inc., received pursuant to a deferred compensation
plan as such information is already maintained.
<PAGE>
11 See Sections 3.2 and 4.6 of the Code. Also, confirmations and statements of
transactions in open-end mutual funds, including mutual funds sponsored by
the Franklin Templeton Group are not required. See Section 3.3 above for a
list of other securities that need not be reported. If you have any
beneficial ownership in a discretionary account, transactions in that
account are treated as yours and must be reported by the manager of that
account (see Section 6.1.C below).
12 Officers, directors and certain other key management personnel who perform
significant policy-making functions of Franklin Resources, Inc., the
closed-end funds, and/or real estate investment trusts may have ownership
reporting requirements in addition to these reporting requirements. Contact
the Legal Compliance Department for additional information. SEE also the
"Insider Trading Policy" attached.
13 Please note that these conditions apply to any discretionary account in
existence prior to the effective date of this Code or prior to your
becoming an access person. Also, the conditions apply to transactions in
any discretionary account, including pre-existing accounts, in which you
have any direct or indirect beneficial ownership, even if it is not in your
name.
14 Any pre-existing agreement must be promptly amended to comply with this
condition. The required reports may be made in the form of an account
statement if they are filed by the applicable deadline.
15 An "advisory person" of a registered investment company or an investment
adviser is any employee, who in connection with his or her regular
functions or duties, makes, participates in, or obtains information
regarding the purchase or sale of a security by an advisory client , or
whose functions relate to the making of any recommendations with respect to
such purchases or sales. Advisory person also includes any natural person
in a control relationship to such company or investment adviser who obtains
information concerning recommendations made to such company with regard to
the purchase or sale of a security.
16 Generally, an "advisory representative" is any person who makes any
recommendation, who participates in the determination of which
recommendation shall be made, or whose functions or duties relate to the
determination of which recommendation shall be made, or who, in connection
with his duties, obtains any information concerning which securities are
being recommended prior to the effective dissemination of such
recommendations or of the information concerning such recommendations. See
Section II of Appendix A for the legal definition of "Advisory
Representative."
17 Security includes any option to purchase or sell, and any security that is
exchangeable for or convertible into, any security that is held or to be
acquired by a fund.
18 Special circumstances include but are not limited to, for example,
differences in time zones, delays due to travel, and the unusual size of
proposed trades or limit orders. Limit orders must expire within the
applicable clearance period.
19 As of February 2000
CODE OF ETHICS
March, 2000
<PAGE>
CODE OF ETHICS - TABLE OF CONTENTS
Statement of General Principles................................... 1
Applicability of Code to Employees of Non-US Offices.............. 1
What is the Code of Ethics........................................ 2
Section 1 - Definitions........................................... 2
Section 2 - Exempted Transactions................................. 6
Section 3 - Prohibitions
A. Prohibited Purchases and Sales:
Portfolio Managers................................ 6
Investment Persons and Reporting Associates....... 8
Approved Lists.................................... 9
B. Additional Prohibited Activities.................. 9
Section 4 - Preclearance
A. Preclearance of Securities Transactions...........13
B. Short-term Trading................................13
Section 5 - Reporting.............................................14
Section 6 - Annual Certification..................................15
Section 7 - Exemptive Relief......................................15
Section 8 - Violations and Sanctions..............................15
Section 9 - Issues Forum..........................................16
<PAGE>
CODE OF ETHICS
STATE STREET GLOBAL ADVISORS
("SSGA")
Statement of General Principles
In addition to any particular duties or restrictions set forth in the
SSgA Code of Ethics (the "Code"), every employee of the Adviser must
adhere to the following general principles:
I. Since our clients have entrusted us with their assets, we must,
at all times, place the interests of these clients first. These
clients include shareholders in mutual funds which we advise,
participants in the State Street Bank and Trust Company
collective investment vehicles and those clients for whom we
manage discretionary accounts.
II. Transactions executed for the employee's personal account must
be conducted in a manner consistent with this Code and in such a
manner as to avoid any actual or perceived conflict of interest
or any abuse of the employee's position of trust and
responsibility.
III. Employees are encouraged to make investment decisions regarding
their personal accounts with a long term view. Short-term
trading is strongly discouraged.
IV. Employees must not take inappropriate advantage of their
position.
Applicability of Code to Employees of Non-US Offices
Employees of the Adviser's Non-US offices are subject to the terms of
the Code. In addition, however, such employees remain subject to any
local laws and regulations affecting personal investments, investments
on behalf of customers and other activities governed by the Code. It is
the responsibility of each employee to adhere to such regulations. In
the event of any inconsistency between local law or regulation and the
terms of this Code, the employee must adhere to the highest applicable
standard.
<PAGE>
What is the Code of Ethics?
The Code of Ethics, hereafter referred to as the "Code", is the policy
statement that State Street Global Advisors has adopted which primarily
governs personal securities transactions of its employees. It is
designed to ensure that employees conduct their personal securities
transactions in a manner which does not create an actual or potential
conflict of interest to the bank's business or fiduciary
responsibilities. In addition, the Code establishes standards that
prohibit the trading in or recommending of securities based upon
material, non-public information or the tipping of such information to
others.
The SSgA Risk Management and Compliance Department oversees overall
compliance with the Code. Failure to comply with the Code could result
in company imposed sanctions, and possible criminal and civil
liability, depending on the circumstances.
SECTION 1 - DEFINITIONS
A. "Access Person" or " Investment Personnel" as defined by SEC Rule
17j-1 means "any Portfolio Manager, Investment Person or Reporting
Associate of State Street Global Advisors or of such other divisions
as determined by the Adviser from time to time, and any other
employee of the Adviser designated as an Access Person by the
Compliance Officer by virtue of his or her stature within the
organization."
The following Access Person levels have been established by the SSgA
Boston office. The levels reflect the minimum requirements of the
Code of Ethics. The local Compliance Officer, at his or her
discretion, can impose higher standards in their local environment.
1. "Portfolio Manager" (Level 1) means "the persons identified by
the Adviser, as the portfolio manager or back-up portfolio
manager of a Fund."
2. "Investment Person" (Level 2) means "any director, officer or
employee of the Adviser who, in connection with his or her
regular functions or duties, makes, participates in, or obtains
information regarding the purchase or sale of a Security by a
Fund prior to or
-2-
<PAGE>
contemporaneous with such purchase or sale, or whose functions
relate to the making of any recommendations with respect to such
purchase or sale."
3. "Reporting Associate" (Level 3) means "any director, officer or
employee of the Adviser who, in connection with his or her
regular functions or duties, obtains information regarding the
purchases or sales of Securities made by a Fund, either prior to
or subsequent to any such purchases or sales."
4. "Level 4 Person" (Level 4) means any individual who has no
contact with information regarding purchases or sales of
Securities made by a Fund in his or her regular functions or
duties. However, such individual is subject to the Statement of
General Principles and the antifraud provisions (Section 3B(1))
of the Code.
B. "Adviser" means "State Street Global Advisors" and any other
investment advisory division of State Street Bank and Trust Company,
"State Street Global Advisors, Inc." and any subsidiary thereof,
"State Street Brokerage" and "State Street Banque, S.A." and such
other entities as from time to time designated by the Compliance
Officer.
C. "Associated Portfolio" means with respect to an Access Person any
Portfolio in the fund group for which such person acts as a
Portfolio Manager, Investment Person or Reporting Associate (e.g.,
accounts for which the Access Person is Portfolio Manager,
designated Back-up Portfolio Manager).
D. "Beneficial Ownership" shall be interpreted in the same manner as it
would be in determining whether a person is subject to the
provisions of Section 16 of the Securities Exchange Act of 1934 and
the rules and regulations thereunder, except that the determination
of direct or indirect Beneficial Ownership shall apply to all
Securities which an Access Person has or acquires other than those
Securities which are acquired through dividend reinvestment.
Beneficial Ownership generally extends to accounts in the name of:
o the Access Person;
o the Access Person's spouse;
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o the Access Person's minor children;
o the Access Person's adult children living in the Access
Person's home; and
o any other relative whose investments the Access Person
directs (regardless of whether he or she resides in the
Access Person's home).
Beneficial Ownership also includes accounts of another person or
entity if by reason of any contract, understanding, relationship,
agreement or other arrangement the Access Person obtains therefrom
benefits substantially equivalent to those of ownership. Access
Persons should contact the local Compliance Officer regarding any
questions they may have concerning Beneficial Ownership.
E. "Compliance Officer" shall mean "the person identified by the State
Street Global Advisors division of the Adviser, from time to time,
as the local Compliance Officer of SSgA."
F. "Control" means the power to exercise a controlling influence over
an account.
G. "Fund" or "Funds" means "any mutual fund, bank collective fund,
common trust fund, separate account or other type of account advised
or sub-advised by the Adviser."
H. "Portfolio" means "any investment portfolio of a Fund."
I. "Purchase or sale of a Security" includes, among other things, the
writing of an option to purchase or sell a Security.
J. "Security" shall have the meaning set forth in Section 2(a)(36) of
the 1940 Act. This definition of "Security" includes, but is not
limited to: any note, stock, treasury stock, bond, debenture,
evidence of indebtedness, certificate of interest or participation
in any profit-sharing agreement, any put, call, straddle, option or
privilege on any Security or on any group or index of Securities, or
any put, call, straddle, option or privilege entered into on a
national securities exchange relating to foreign currency.
Further, for the purpose of this Code, "Security" shall include any
commodities contracts as defined in Section 2(a)(1)(A) of the
Commodity Exchange Act. This definition includes but is not limited
to futures contracts on equity indexes.
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"Security" shall NOT include securities issued by the government of
the United States, or, with respect to Access Persons employed in
the Non-US offices, the government of the country in which such
office is located, bankers' acceptances, bank certificates of
deposit, commercial paper and shares of registered open-end
investment companies (e.g., open-end mutual funds, or the equivalent
such as SICAVs). Any question as to whether a particular investment
constitutes a "Security" should be referred to the local Compliance
Officer.
K. "Seven Day Blackout"
o Portfolio Manager - The Code prohibits a portfolio manager from
buying or selling a security within seven calendar days after it
is traded in a portfolio he or she manages.
o Access Person - who has access to the fundamental research in his
or her area, is also restricted from buying or selling a security
that is added to, removed from, or has had a rating change to an
approved stock list. (See Section 3 - "Approved Lists" for
additional detail.)
L. "Short-term Trading" means buying and selling or selling and buying
the same security within a 60 day period.
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SECTION 2 - EXEMPTED TRANSACTIONS
The prohibitions of Section 3A of this Code shall not apply to:
A. Purchases or sales effected in any account over which the Access
Person has no direct or indirect influence or control (e.g.,
assignment of management discretion in writing to another party). If
management authority is ceded to a person in the same household
(spouse, dependent children or other individual living in the same
household as the Access Person, then preclearance requirements still
have to be met.)
B. Purchases or sales which receive the prior approval of counsel to
the Adviser or the Compliance Officer.
C. Purchases or sales by an Access Person other than a Portfolio
Manager which are categorized as DE MINIMIS through the Preclearance
Procedure described in Section 3A(1).
D. Acquisition of a Security due to dividend reinvestment or similar
automatic periodic investment process or through the exercise of
rights, warrants or tender offers. However, these transactions
should be reported by Level 1-3 Access Persons in their quarterly
reporting once acknowledgement of the transaction is received.
SECTION 3 - PROHIBITIONS
A. PROHIBITED PURCHASES AND SALES
PORTFOLIO MANAGERS: (LEVEL 1) ACCESS PERSONS
1. Portfolio Manager shall not, for his or her own personal account
(or for an account in which he or she has Beneficial Ownership1):
a. purchase a Security that is being purchased or sold or is
being considered for purchase or sale in any Associated
Portfolio; or
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1 Please see Section 1D of the Code for definition of "Beneficial Ownership."
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b. sell a Security that is being purchased or sold or is being
considered for purchase or sale in any Associated Portfolio.2
A Security is "being considered for purchase or sale" when a
recommendation to purchase or sell a Security has been made and
communicated and, with respect to the person making the
recommendation, when such person seriously considers making such
a recommendation.
Here is an example of this prohibition:
THIS MORNING, Access Person "A" overhears Portfolio Manager "B"
planning to purchase shares of XYZ for the stock Fund which he
manages. "A" hastily purchases shares of XYZ for her personal
account. Portfolio Manager "B" places the buy order for the stock
in THE AFTERNOON. "A" would be front-running the Fund, and would
be subjected to sanctions and criminal penalties.
2. No Portfolio Manager shall, for his or her own personal account
(or for an account in which he or she has Beneficial Ownership):
a. sell any Security until seven (7) full calendar days have
elapsed since the most recent purchase or sale of that
Security by any Associated Portfolio; or
b. purchase any Security until seven (7) full calendar days have
elapsed since the most recent purchase or sale of that
Security from any Associated Portfolio.3
Here is an example of this prohibition:
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2 This "front-running" prevention rule is designed to prevent personal gain
based upon the investment activities or recommended investment activities of any
of the Associated Portfolios.
3 This black-out requirement is designed to prevent personal gain based upon the
investment activities of any of the Associated Portfolios. A Portfolio Manager
may not trade the same security as an Associated Portfolio until seven full
calendar days have elapsed since the Portfolio trade (the seven days do not
include the day of the Portfolio trade).
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Yesterday, Portfolio Manager "A" sold 100 shares of XYZ from the
Fund which he manages. Today, back-up Portfolio Manager "B", who
manages a different Fund within the same investment group,
decides to purchase 50 shares of XYZ for his own personal
account. Because trading occurred within 7 days of the most
recent fund transaction it is a direct violation of the black-out
requirement, therefore, subjecting the manager to sanctions.
INVESTMENT PERSONS AND REPORTING ASSOCIATES:
(LEVEL 2 & 3) ACCESS PERSONS
1. No Access Person (other than Portfolio Managers) shall, for his
or her own personal account or for an account in which he or she
has Beneficial Ownership4):
a. purchase a Security that is being purchased or sold or is
being considered for purchase or sale in any Fund unless the
transaction is considered DE MINIMIS as noted above in Section
2C Exempted Transactions; or
b. sell a Security that is being purchased or sold or is being
considered for purchase or sale in any Fund unless the
transaction is considered DE MINIMIS as noted above in Section
2C Exempted Transactions.5
A Security is "being considered for purchase or sale" when a
recommendation to purchase or sell a Security has been made and
communicated and, with respect to the person making the
recommendation, when such person seriously considers making such
a recommendation.
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4 Please see Section 1D of the Code for definition of "Beneficial Ownership."
5 This "front-running" prevention rule is designed to prevent personal gain
based upon the investment activities or recommended investment activities of any
of the Associated Portfolios.
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Approved Lists
Personal securities transactions in a security that is added to
or removed from an approved stock list are prohibited for a
period of seven days after the addition, removal or change in
rating of the security. The same seven day restriction applies
following any change to the short or long term investment rating.
Furthermore, the Access Person is restricted from sharing this
information with others who do not have the same access levels.
(Currently, this list is maintained by the Global Fundamental
Research Group. There may be other lists or groups that this
restriction applies. See your local Compliance Officer for
additional information.)
B. ADDITIONAL PROHIBITED ACTIVITIES
1. Neither an employee of the Adviser nor any Access Person shall,
in connection with the purchase or sale (directly or indirectly)
by the Adviser, of a Security held or to be acquired by a Fund:
a. employ any device, scheme or artifice to defraud a Fund;
b. make any material misstatement to a Fund or omit any material
fact in any statement to a Fund where such omission would tend
to make the statement misleading;
c. engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon a Fund; or
d. engage in any manipulative practice with respect to a Fund.
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The above prohibited activities shall at all times include, but
shall not be limited to, the following:
(i) purchasing or selling securities on the basis of
material6 non-public7 information;
(ii) purchasing or selling, knowingly, directly or
indirectly, securities in such a way as to compete
personally in the market with a Fund, or acting
personally in such a way as to injure a Fund's
transactions;
(iii) using knowledge of securities transactions by a Fund,
including securities being considered for purchase or
sale, to profit personally, directly or indirectly, by
the market effect of such transactions.
(iv) engaging in short selling and options trading of State
Street securities (except to the extent such options
are issued by the Corporation as part of an employee's
compensation.)
2. Each of the following activities by an Access Person or
Investment Personnel Level 1-4 shall be prohibited:
a. purchasing Securities in an initial public offering unless:
(i) the Access Person has a right to purchase the Security
due to the Access Person's pre-existing status as a
policy holder or depositor
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6 Material Information: information the dissemination of which would have a
substantial impact on the market price of the company's securities, or is likely
to be considered important by reasonable investors in determining whether to
trade in such securities. Examples of the type of information that might be
"material" would include the following: earnings estimates or changes in
previously released earnings estimates, merger or acquisition proposals, major
litigation, significant contracts, dividend changes, extraordinary management
developments.
7 Non-public Information: information that has not been generally disclosed to
the investing public. Information found in a report filed with a local
regulatory agency, such as the SEC, or appearing in publications of wide
circulation would be considered public.
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with respect to such Security or as a shareholder of a
related company; or,
(ii) the right to purchase is awarded by lottery or other
non-discretionary method by the issuer.
b. participation in a private offering (e.g., offerings of
securities not registered with a local regulatory agency, such
as the SEC, stocks of privately held companies, private
placements and non-publicly traded limited partnerships)
without prior written consent from an SSgA Compliance Officer
by use of the form attached here as Appendix E;
c. participation in a private offering and failing to disclose
any subsequent conflicts of interests to the Compliance
Officer. An example of this would be a portfolio manager
purchasing a private offering (with approval as detailed in
2(b) above) and then causing a portfolio which he or she
manages to purchase the same private offering without
disclosing this conflict of interest.
d. using any derivative, or using any evasive tactic, to avoid
the restrictions of this Code;
e. serving as a director of the following without prior written
consent of State Street Global Advisors' Area Executive AND
notice to the Compliance Officer:
o a publicly traded company other than State Street Corporation
or its subsidiaries or its affiliates; or
o any company the Securities of which are owned by a Fund,
f. accepting or receiving, either directly or indirectly, from
any organization or employee thereof with which we conduct a
business relationship (e.g.,
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customers or vendors) a gratuity or anything of value in
excess of one hundred (US $100) dollars per individual per
calendar year. A gratuity includes a gift of any type.
The purpose of this gratuity restriction is to allow only proper
and customary business amenities. Amenities considered
permissible include the following:
o occasional meals, social gatherings or meetings conducted for
business purposes; or
o gifts in the nature of promotional materials, such as a pen,
calendar, umbrella or the like, which are inscribed with the
giver's name or a business message.
Amenities considered NOT to be permissible include, but are not
limited to, the following:
o transportation expenditures, such as airfare or rental car; or
o hotel or other lodging accommodation expenditures
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SECTION 4 - PRECLEARANCE
A. PRECLEARANCE OF SECURITIES TRANSACTIONS
In order to monitor this Section 4A, Adviser requires each Access
Person to comply with the Personal Securities Transaction
Preclearance Procedure8 attached hereto as Appendix C.
o Preclearance must be obtained after 10:00 a.m. EST (or at such
local time as is designated by each Non-US office) of the day
on which the Access Person proposes to trade.
o Such preclearance is good until midnight of the day it is
granted in the location of the primary exchange where the
security is traded. It is also allowable to order a market
trade electronically up to this time deadline. Any order not
executed on the day of preclearance must be re-submitted for
preclearance before being executed on a subsequent day (e.g.,
"good-'til-canceled" or "limit" orders must receive
preclearance every day that the order is open).
o Preclearance of any registered open-end investment company is
not required.
o The Lotus Notes preclearance process must be used in sites
where available consistent with policies established from time
to time by Risk Management and Compliance.
B. SHORT-TERM TRADING
In order to monitor short-term trading activity, each Access Person is
required to identify on Appendix C whether he or she has traded in the
proposed security within the past 60 days. Short -term trades will be
monitored and reported to management to ensure that Access Persons are
adhering to SSgA's long- term investment philosophy generally.
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8 See Appendix F for additional information on preclearance.
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SECTION 5 - REPORTING
A. Every Access Person who is identified and notified by the Compliance
Officer as having to comply with this Section shall:
1. upon such notification, provide the Compliance Officer with
disclosure of all personal Securities holdings as described in
Appendix A within 10 calendar days of employment and annually)
thereafter, except that the requirement of this Section 5A(1)
shall only apply to Portfolio Managers and Investment Persons
(Access Person Level 1 and 2); and
2. report to the Compliance Officer the information described in
Section 5C with respect to transactions in any Security9 in which
such Access Person has, or by reason of such transaction
acquires, any direct or indirect Beneficial Ownership in the
Security.
B. Quarterly reports required under this Section shall be made not
later than nine (9) days after the end of each calendar quarter
(calendar quarters are March 31, June 30, September 30 and December
31).
Access Persons will be reminded quarterly of this obligation by a
notice, but IT IS INCUMBENT UPON EACH ACCESS PERSON TO REPORT TO THE
COMPLIANCE OFFICER WITHIN THE NINE-DAY (9-DAY) REPORTING PERIOD
WHETHER HE OR SHE DID OR DID NOT EFFECT SUCH TRANSACTIONS.
C. Access Persons are required to notify any brokers, dealers,
investment advisers, banks and other financial institutions with
whom they have their securities trading accounts to forward
duplicate confirms of any and all of their trades and periodic
account statements containing trading activity to the Compliance
Officer and may use the form letter attached as Appendix B to notify
such financial institutions.
D. Any such report may contain a statement that the report shall not be
construed as an admission by the person making such report that he
or she has any direct or indirect Beneficial Ownership in the
Security to which the report relates.
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9 See definition of "Security" and "Beneficial Ownership" for additional
information.
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E. Access Persons transacting in Securities, as defined in Section 1J.
of the Code, contained in self directed pension brokerage accounts,
self managed brokerage accounts (SMBA) or 401(k) retirement accounts
are included in any reporting or preclearance requirements.
F. Investment in the State Street Stock Fund through the State Street
401k plan do not require regular preclearance or reporting. Although
transactions in the State Street Stock Fund do not need to be
reported, as they are not defined as a Security, employees trading
in the State Street Stock Fund should be aware that these
transactions are subject to the insider trading restrictions
contained in the Code of Ethics and State Street's Standard of
Conduct.
G. Access Persons are prohibited from engaging in short selling and
options trading of State Street securities (except to the extent
such options are issued by the Corporation as part of an employee's
compensation).
H. State Street options granted in conjunction with an employee's
compensation do not need to be precleared or reported if exercised
at first opportunity as dictated by Global Human Resources. Options
exercised on any other date are subject to preclearance and
reporting requirements.
SECTION 6 - ANNUAL CERTIFICATION
All Access Persons and Non Access Persons must certify annually that he
or she has read, understands and recognizes that he or she is subject
to the Code. In addition, all Access Persons and Non Access Persons
must certify annually that he or she has complied with the Code and has
disclosed and reported all personal securities transactions required to
be disclosed or reported.
SECTION 7 - EXEMPTIVE RELIEF
An Access Person who believes that aspects of the Code impose a
particular hardship or unfairness upon them with respect to a
particular transaction or situation, without conferring a corresponding
benefit toward the goals of the Code, may appeal to the Compliance
Officer for relief from Code provision(s) relating to a particular
transaction or ongoing activity or reporting requirement.
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If relief is granted, the Compliance Officer may impose alternative
controls or requirements. Any relief granted in this regard shall apply
only to the Access Person who had sought relief and no other Access
Person may rely on such individual relief unless specifically
authorized by their local Compliance Officer. If circumstances warrant,
the Compliance Officer may submit the anonymous request to the Code of
Ethics Committee for input.
SECTION 8 - VIOLATIONS AND SANCTIONS
The Code of Ethics Committee is presented with the facts and
circumstances of a violation on an anonymous basis by the Compliance
Officer on a quarterly basis. The Code of Ethics Committee is charged
with reviewing violations of the Code and imposing sanctions by a
majority vote.
Upon discovering a violation of this Code, its policies or procedures,
the directors of a Fund, the Adviser, or the Committee may impose such
sanctions as it deems appropriate, including, among other things, the
following:
o a letter of censure to the violator;
o a monetary fine levied on the violator;
o suspension of the employment of the violator;
o termination of the employment of the violator;
o civil referral to the SEC or other civil regulatory authorities
determined by the Board of the Fund, the Adviser or other
appropriate entity; or
o criminal referral -- determined by the Board of the Fund, the
Adviser or other appropriate entity.
The Access Person is given an opportunity to appeal a Committee decision if
he/she is believes there are extenuating facts and circumstances of which
the Committee and Compliance were unaware.
SECTION 9 - ISSUES FORUM
If you have a concern or question, you can voice this concern, i.e., issue or
personal complaint on an anonymous basis by submitting it in writing to:
State Street Global Advisors
Attention: Compliance Officer
P.O. Box 9185
Boston, MA 02209
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