As filed with the Securities and Exchange Commission on November 2, 1999 Securities Act File No.33-23493 U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-14 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [ ] Pre-Effective Amendment No. [ ] Post-Effective Amendment No. FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (Exact Name of Registrant as Specified in Charter) (800) 342-3863 (Area Code and Telephone Number) 777 Mariners Island Boulevard San Mateo, California 94404 (Addresses of Principal Executive Offices) (Zip Code) KAREN SKIDMORE, ESQ. 777 Mariners Island Boulevard San Mateo, California 94404 (Name and Address of Agent for Service) COPIES TO: JOAN E. BOROS, ESQ. Jorden Burt Boros Cicchetti Berenson & Johnson LLP 1025 Thomas Jefferson Street, N.W. Suite 400 East Washington, D.C. 20007 Approximate Date of Proposed Public Offering: As soon as practicable after this Registration Statement becomes effective under the Securities Act of 1933. It is proposed that this filing will become effective thirty days after the date of filing pursuant to Rule 488. The title of the securities being registered is shares of series of the Franklin Templeton Variable Insurance Products Trust. No filing fee is due in reliance on Section 24(f) of the Investment Company Act of 1940. IMPORTANT INFORMATION REGARDING TEMPLETON VARIABLE PRODUCTS SERIES FUND Franklin Large Cap Growth Investments Fund (previously the Franklin Growth Investments Fund) Franklin Small Cap Investments Fund Mutual Shares Investments Fund Templeton Asset Allocation Fund Templeton Bond Fund Templeton Developing Markets Fund Templeton International Fund Templeton Stock Fund Franklin S&P 500 Index Fund Franklin Strategic Income Investments Fund A special meeting of shareholders of the Templeton Variable Products Series Fund (the "TVP Trust") will be held at the offices of the TVP Trust located at 500 East Broward Blvd., Suite 2100, Fort Lauderdale, Florida, 33394-3091 on February [1], 2000 at __:00 a.m., Eastern Time. The combined proxy statement/prospectus discusses the reorganization of the TVP Trust with the Franklin Templeton Variable Insurance Products Trust (VIP Trust). Shareholders of the TVP Trust are being asked to vote on certain reorganization matters and shareholders of the VIP Trust are being asked to vote on other reorganization matters. As a contract owner, you will also receive a voting instruction card for each fund whose voting privileges are attributed to you. We request that you review the enclosed materials and send us the completed enclosed voting instruction card(s). WHAT WILL BE DECIDED AT THE MEETING? This meeting is critically important as you are being asked to consider and approve a reorganization to eliminate duplicate funds by combining each TVP Fund with a corresponding VIP Fund. Each TVP Fund is named below next to its corresponding VIP Fund: TVP FUNDS VIP FUNDS Franklin Large Cap Growth Franklin Large Cap Growth Investments Fund* Securities Fund** Franklin Small Cap Investments Franklin Small Cap Fund Fund Mutual Shares Investments Fund Mutual Shares Securities Fund Templeton Asset Allocation Fund Templeton Global Asset Allocation Fund Templeton Bond Fund Templeton Global Income Securities Fund Templeton Developing Markets Templeton Developing Markets Fund Equity Fund Templeton International Fund Templeton International Equity Fund Templeton Stock Fund Templeton Global Growth Fund Franklin S&P 500 Index Fund Franklin S&P 500 Index Fund (New) Franklin Strategic Income Franklin Strategic Income Investments Fund Securities Fund (New) *Previously named the Franklin Growth Investments Fund **Previously named the Capital Growth Fund If the reorganization is approved, the separate accounts of your insurance company will receive shares of the corresponding VIP Fund equal in value to the shares held in the TVP Funds. The TVP Trust and the VIP Trust issue class 1 and class 2 shares. The separate accounts of your insurance company holding class 1 shares of each TVP Fund will receive class 1 shares of the corresponding VIP Fund. Likewise, the separate accounts of your insurance company holding class 2 shares of each TVP Fund will receive class 2 shares of the corresponding VIP Fund. The reorganization will not affect your contract rights. After the reorganization, your contract values will depend on the performance of the combined funds instead of that of the current TVP Funds. WHY IS THE REORGANIZATION BEING PROPOSED? In 1992, the Franklin and Templeton organizations joined forces. Prior to this time, Franklin and Templeton had two separate trusts offering mutual funds dedicated to insurance companies, the TVP Trust and the VIP Trust. The TVP Trust and the VIP Trust include a number of substantially similar mutual funds generally having the same investment objectives and very similar investment policies and strategies. In most cases, the portfolio managers are also the same. The duplicate funds and related expenses have no clear benefits to shareholders. To eliminate this duplication, we are proposing the reorganization in which the TVP Funds will be combined with the VIP Funds. WHAT HAPPENS TO THE FUNDS AFTER THE REORGANIZATION? In the reorganization, each TVP Fund will be combined with the corresponding VIP Fund and become part of the VIP Trust. This combined fund will have most of the features of the larger corresponding fund except all combined fund will have the same fundamental investment restriction as the corresponding VIP Fund. This means that the combined fund will have the same investment objectives, policies and strategies of the larger corresponding fund. After the reorganization the TVP Trust will be dissolved. In addition, the combined fund will have the same investment adviser as the larger fund, except in the case of the combination of the TVP Templeton International Fund and the VIP Templeton International Equity Fund. The larger funds are as follows: LARGER FUNDS TRUST Franklin Large Cap Growth VIP Trust Securities Fund Franklin Small Cap Fund VIP Trust Mutual Shares Securities Fund VIP Trust Templeton Asset Allocation Fund TVP Trust Templeton Global Income Securities VIP Trust Fund Templeton Developing Markets Fund TVP Trust Templeton International Fund TVP Trust Templeton Global Growth Fund VIP Trust Franklin S&P 500 Index Fund TVP Trust Franklin Strategic Income TVP Trust Investments Fund HOW DO THE IMPORTANT FEATURES OF THE FUNDS COMPARE? The corresponding funds generally have the same investment objectives and very similar investment policies and strategies. As a result, the corresponding funds have substantially similar risk factors. In most cases, the portfolio managers are also the same. Thus, the important features of the TVP Funds compared to those of the corresponding VIP Funds are nearly identical. HOW CAN I VOTE ON THE REORGANIZATION? You will be able to give your insurance company voting instructions for those shares attributable to your contract as of the record date for the special meeting, November 30, 1999. A voting instruction card is, in essence, a ballot. While only insurance companies are the shareholders of the funds, these insurance companies will vote in accordance with your instructions. When you complete your voting instruction card, it tells your insurance company how to vote its proxy on important issues relating to the portion of your contract that is allocated to the TVP Trust. If you complete and sign the voting instruction card, the shares will be voted exactly as you instruct. If you simply sign the voting instruction card without otherwise completing it, it will be voted for the reorganization. If you do not return a voting instruction card at all, the shares will be voted in the same proportion as shares for which instructions have been received from other owners of registered variable annuity and variable life insurance contracts. The shareholders of each TVP Fund will vote separately on proposal 1 and have its own voting instruction. The shareholders of class 1 and class 2 shares of each fund will vote together as a single class, except that the shareholders of the class 1 and class 2 shares of the TVP Templeton Bond Fund will vote separately. The voting instructions for each TVP Funds will ask for the approval of the combination of that TVP Fund with the corresponding VIP Fund. BECAUSE EACH FUND HAS ITS OWN VOTING INSTRUCTIONS, YOU MAY RECEIVE MORE THAN ONE INSTRUCTION CARD. Please review the combined proxy statement/prospectus for more detailed information about the reorganization. Included with the combined proxy statement/ prospectus, are the prospectuses for the VIP Funds. Please note that the accompanying prospectuses may include VIP Funds and classes that are not available under your contract. Then, fill out your voting instruction card and return it. We want to know how you would like to vote and welcome your comments. If you have any questions, call 1-800/774-5001. NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TEMPLETON VARIABLE PRODUCTS SERIES FUND BROWARD FINANCIAL CENTRE 500 EAST BROWARD BOULEVARD SUITE 2100 FORT LAUDERDALE, FLORIDA 33394-3091 To Shareholders: NOTICE IS HEREBY GIVEN that a special meeting of shareholders of the Templeton Variable Products Series Fund (the "TVP Trust") will be held at Broward Financial Centre, 500 East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida 33394-3091, on February [1], 2000, at ___________ a.m. (Eastern Time) for the following purposes: (1) To approve an Agreement and Plan of Reorganization between the TVP Trust and Franklin Templeton Variable Insurance Products Trust ("VIP Trust"), which provides that: o The TVP Trust transfer all of its assets and liabilities to the VIP Trust; o The VIP Trust issue shares of the VIP Trust funds which correspond to the TVP Funds in exchange for the TVP Trust's assets and liabilities; o The TVP Trust distribute shares of the corresponding VIP Trust funds to shareholders of the TVP Trust; and o The TVP Trust will be dissolved. as described more fully in the combined proxy statement/prospectus. TVP FUNDS VIP FUNDS Franklin Large Cap Growth Franklin Large Cap Growth Investments Fund* Securities Fund** Franklin Small Cap Investments Franklin Small Cap Fund Fund Mutual Shares Investments Fund Mutual Shares Securities Fund Templeton Asset Allocation Fund Templeton Global Asset Allocation Fund Templeton Bond Fund Templeton Global Income Securities Fund Templeton Developing Markets Templeton Developing Markets Fund Equity Fund Templeton International Fund Templeton International Equity Fund Templeton Stock Fund Templeton Global Growth Fund Franklin S&P 500 Index Fund Franklin S&P 500 Index Fund (New) Franklin Strategic Income Franklin Strategic Income Investments Fund Securities Fund (New) *Previously named the Franklin Growth Investments Fund **Previously named the Capital Growth Fund Shareholders of each TVP Fund will vote separately on proposal 1 for each TVP Fund. (2) To transact such other business as may properly come before the special meeting or any adjournment thereof. THE BOARD OF TRUSTEES OF THE TVP TRUST UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE THE PROPOSED REORGANIZATION AS TO EACH TVP FUND. The Board of Trustees has fixed the close of business on November 30, 1999, as the record date for the determination of shareholders entitled to notice of, and to vote at, the special meeting. Each shareholder who does not expect to attend the special meeting in person is requested to date, fill in, sign and return promptly the enclosed Form of Proxy in the enclosed envelope, which needs no postage if mailed in the United States. Insurance company separate accounts that invest in the TVP Trust shares should complete the Form of Proxy. If a portion of your contract is allocated to the accounts of insurance companies that invest in the TVP Trust shares, you should complete and return the enclosed Voting Instructions Form in the enclosed envelope. Please review the enclosed combined proxy statement/prospectus for additional information regarding the reorganization. By Order of the Board of the Trustees, Barbara J. Green, Secretary December [13], 1999 YOUR PROMPT ATTENTION TO THE ENCLOSED FORM OF PROXY OR VOTING INSTRUCTIONS FORM WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION. IMPORTANT INFORMATION REGARDING FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST Templeton Global Asset Allocation Fund Templeton Developing Markets Equity Fund Templeton International Equity Fund A special meeting of shareholders of the Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund of the Franklin Templeton Variable Insurance Products Trust (the "VIP Trust") will be held at the offices of the VIP Trust located at 777 Mariners Island Boulevard, San Mateo, California 94404 on February [1], 2000 at __:00 a.m., pacific time. The combined proxy statement/prospectus discusses a reorganization of the VIP Trust and the Templeton Variable Products Series Fund (the "TVP Trust"). Shareholders of the TVP Trust are being asked to vote on certain reorganization matters and shareholders of the VIP Trust are being asked to vote on other reorganization matters. As a contract owner, you will also receive a voting instruction card for each fund whose voting privileges are attributed to you. We request that you review the enclosed materials and send us the completed enclosed voting instruction card(s). WHY IS THE REORGANIZATION BEING PROPOSED? In 1992, the Franklin and Templeton organizations joined forces. Prior to this time, Franklin and Templeton had two separate trusts offering mutual funds dedicated to insurance companies, the TVP Trust and the VIP Trust. The TVP Trust and the VIP Trust include a number of substantially similar mutual funds generally having the same investment objectives and very similar investment policies and strategies. In most cases, the portfolio managers are also the same. The duplicate funds and related expenses have no clear benefits to shareholders. To eliminate this duplication, we are proposing the reorganization in which the funds of the TVP Trust (TVP Funds) will be combined with the funds of the VIP Trust (VIP Funds). WHAT HAPPENS TO THE FUNDS AFTER THE REORGANIZATION? In the reorganization, each TVP Fund will be combined with the corresponding VIP Fund and become part of the VIP Trust. This combined fund will have most of the features of the larger corresponding fund. This means that the combined fund will have the same investment objectives, policies and strategies of the larger corresponding fund. In addition, the combined fund will have the same investment adviser as the larger fund, except in one case. The VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing Markets Equity Fund and the VIP Templeton International Equity Fund are smaller than the corresponding TVP Funds. To preserve the features of the three larger TVP Funds for the combined funds, the shareholders of the VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing Markets Equity Fund and the VIP Templeton International Equity Fund must vote to approve (1) new investment advisory agreements and (2) changes to these funds' fundamental investment restrictions to be more similar to those of the larger corresponding TVP Funds. WHAT WILL BE DECIDED AT THE MEETING? This meeting is critically important. Shareholders of the Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund are being asked to consider and approve (1) the adoption of proposed investment advisory agreement for each fund; (2) the amendment of certain fundamental investment restrictions for each fund; and (3) the elimination of certain fundamental investment restrictions for each fund. HOW CAN I VOTE ON THE PROPOSALS? You will be able to give your insurance company voting instructions for those shares attributable to your contract as of the record date for the special meeting, November 30, 1999. A voting instruction card is, in essence, a ballot. While only insurance companies are the shareholders of the funds, these insurance companies will vote in accordance with your instructions. When you complete your voting instruction card, it tells your insurance company how to vote its proxy on important issues relating to the portion of your contract that is allocated to the TVP Trust. If you complete and sign the voting instruction card, the shares will be voted exactly as you instruct. If you simply sign the voting instruction card without otherwise completing it, it will be voted for the reorganization. If you do not return a voting instruction card at all, the shares will be voted in the same proportion as shares for which instructions have been received from other owners of registered variable annuity and variable life insurance contracts. The shareholders of each VIP Fund will vote separately on proposal 2 and 4 and on each sub-proposal of proposal 4. Each VIP Fund will have its own voting instruction. The shareholders of class 1 and class 2 shares of each VIP Fund will vote together as a single class. BECAUSE EACH FUND HAS ITS OWN VOTING INSTRUCTIONS, YOU MAY RECEIVE MORE THAN ONE INSTRUCTION CARD. Please review the combined proxy statement/prospectus for more detailed information about the reorganization. Then, fill out your voting instruction card and return it. We want to know how you would like to vote and welcome your comments. If you have any questions, call 1-800/774-5001. NOTICE OF SPECIAL MEETING OF SHAREHOLDERS OF FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST Templeton Global Asset Allocation Fund Templeton Developing Markets Equity Fund Templeton International Equity Fund 777 MARINERS ISLAND BOULEVARD SAN MATEO, CALIFORNIA 94404 1-(800) 342-3863 To Shareholders: NOTICE IS HEREBY GIVEN that a special meeting of shareholders of the Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund of the Franklin Templeton Variable Insurance Products Trust (the "VIP Trust") will be held at the offices of the VIP Trust located at 777 Mariners Island Boulevard, San Mateo, California 94404 on February [1], 2000 at __:00 a.m., pacific time to vote on the following proposals: PROPOSAL 2. To approve the adoption of new investment advisory agreement for the Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund, as described more fully in the combined proxy statement/prospectus. PROPOSAL 3. To approve changes in the following fundamental investment restrictions for the Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund, as described more fully in the combined proxy statement/prospectus. (a) Modification of fundamental investment restriction regarding Diversification (b) Modification of fundamental investment restriction regarding Borrowing (c) Modification of fundamental investment restriction regarding Lending (d) Modification of fundamental investment restriction regarding Underwriting (e) Modification of fundamental investment restriction regarding Concentration (f) Modification of fundamental investment restriction regarding Senior Securities (g) Modification of fundamental investment restrictions regarding Real Estate and Commodities, which would combine these two separate fundamental restrictions PROPOSAL 4. To approve the elimination of certain fundamental investment restrictions for the Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund, as described more fully in the combined proxy statement/prospectus. OTHER BUSINESS To vote upon any other business which may legally presented at the meeting or any adjournment thereof. THE BOARD OF TRUSTEES OF THE VIP TRUST UNANIMOUSLY RECOMMENDS THAT YOU VOTE TO APPROVE THE PROPOSED PROPOSAL IN CONNECTION WITH THE REORGANIZATION AS TO EACH VIP FUND. The Board of Trustees has fixed the close of business on November 30, 1999, as the record date for the determination of shareholders entitled to notice of, and to vote at, the special meeting. Each shareholder who does not expect to attend the special meeting in person is requested to date, fill in, sign and return promptly the enclosed Form of Proxy in the enclosed envelope, which needs no postage if mailed in the United States. Insurance company separate accounts that invest in the VIP Trust shares should complete the Form of Proxy. If a portion of your contract is allocated to the accounts of insurance companies that invest in the VIP Trust shares, you should complete and return the enclosed Voting Instructions Form in the enclosed envelope. Please review the enclosed combined proxy statement/prospectus for additional information regarding the proposal in connection with the reorganization. By Order of the Board of the Trustees, Deborah R. Gatzek, Secretary December [13], 1999 YOUR PROMPT ATTENTION TO THE ENCLOSED FORM OF PROXY OR VOTING INSTRUCTIONS FORM WILL HELP TO AVOID THE EXPENSE OF FURTHER SOLICITATION. COMBINED PROXY STATEMENT/PROSPECTUS DATED DECEMBER [9], 1999 TEMPLETON VARIABLE PRODUCTS SERIES FUND FRANKLIN TEMPLETON VARIABLE INSURANCE 500 East Broward Boulevard, Suite 2100 PRODUCTS TRUST Fort Lauderdale, Florida 33394-3091 777 Mariners Island Boulevard 1-(800) 774-5001 San Mateo, California 94404 1-(800) 342-3863 We are proposing a reorganization of the Templeton Variable Products Series Fund (TVP Trust) and the Franklin Templeton Variable Insurance Products Trust (VIP Trust). In the reorganization, each TVP Fund will be combined with the corresponding VIP Fund and become part of the VIP Trust. After the reorganization the TVP Trust will be dissolved. As part of the reorganization, the VIP Trust will create two new funds. In addition, as part of the reorganization, three VIP Funds will adopt new investment advisory agreements and will change their fundamental investment restrictions. To complete the reorganization, we need the approval of: o All shareholders of the TVP Trust at a meeting on February [1], 2000 at [10:00] a.m., eastern time at the offices of the TVP Trust at the above address; and o The shareholders of the VIP Trust Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund at a meeting on February [1], 2000 at [10:00] a.m., pacific time at the offices of the VIP Trust at the above address. The corresponding funds of each Trust (TVP Funds and VIP Funds) are set forth below. TVP FUNDS VIP FUNDS Franklin Large Cap Growth Franklin Large Cap Growth Securities Investments Fund* Fund** Franklin Small Cap Investments Fund Franklin Small Cap Fund Mutual Shares Investments Fund Mutual Shares Securities Fund Templeton Asset Allocation Fund Templeton Global Asset Allocation Fund Templeton Bond Fund Templeton Global Income Securities Fund Templeton Developing Markets Fund Templeton Developing Markets Equity Fund Templeton International Fund Templeton International Equity Fund Templeton Stock Fund Templeton Global Growth Fund Franklin S&P 500 Index Fund Franklin S&P 500 Index Fund (New) Franklin Strategic Income Franklin Strategic Income Securities Investments Fund Fund (New) *Previously named the Franklin Growth Investments Fund **Previously named the Franklin Capital Growth Fund Currently, only separate accounts of insurance companies are the shareholders of the class 1 and class 2 shares of the Trusts. In addition, employee benefit plans are the shareholders of the class 3 shares of the TVP Franklin S&P 500 Index Fund. We expect to send this document to shareholders on or about December [13], 1999. The insurance companies must vote as instructed by owners of registered variable annuity and variable life insurance contracts whose contracts will be affected by the reorganization. Plan sponsors and participants may vote only if specified by the relevant employee benefit plan. On or about December [13], 1999, you will be sent this document to give your voting instruction to an insurance company or plan sponsor. This document gives you important information on the reorganization and the VIP Funds. You should keep this document for future reference. Additional information is contained in the statement of additional information dated December [9], 1999. It is incorporated by reference and is legally a part of this document. THE SECURITIES AND EXCHANGE COMMISSION (SEC) HAS NOT APPROVED OR DISAPPROVED THE SHARES OF THE VIP FUNDS AND HAS NOT PASSED ON THE ACCURACY OR THE ADEQUACY OF THIS DOCUMENT. ANYONE WHO TELLS YOU OTHERWISE IS COMMITTING A FEDERAL CRIME. You can obtain additional information about the reorganization and the VIP Funds in: o The VIP Trust's most recent annual report, dated December 31, 1998. o The VIP Trust's most recent semi-annual report, dated June 30, 1999. o The prospectuses for the VIP Funds which are attached as Exhibit. Please note that the accompanying prospectuses may include VIP Funds and classes that are not available under your contract. o The statement of additional information for this combined proxy statement/prospectus. o The VIP Trust's statement of additional information dated DECEMBER [9], 1999, which is incorporated by reference in the statement of additional information for this combined proxy statement/prospectus. You can obtain information about the TVP Funds from the prospectuses for the TVP Funds and from the statement of additional information for the TVP Funds. These documents are also on file with the SEC. The documents for the TVP Funds and the documents listed above are legally a part of this document. You can obtain them from us without charge by calling us at 1-800/342-3863 or writing us at 777 Mariners Island Boulevard, San Mateo, California 94404. They are also available from the SEC's public reference facilities at 450 Fifth Street, N.W., Washington, D.C. 20549, the SEC's regional offices or the SEC's website (http://www.sec.gov). You will have to pay the rates determined by the SEC. In addition, the TVP Trust and the VIP Trust are required to file reports and other information with the SEC. You can obtain these reports, proxy statements and other information at the SEC's public reference facilities, the SEC's regional offices or the SEC's website. SHARES OF THE VIP FUNDS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED BY, ANY BANK. THEY ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY. SHARES OF THE VIP FUNDS INVOLVE INVESTMENT RISKS, INCLUDING THE POSSIBLE LOSS OF PRINCIPAL. TABLE OF CONTENTS Summary......................................................................7 Why are we proposing the reorganization?...................................7 What is happening in the reorganization?...................................7 What happens to the funds after the reorganization?........................8 Who is eligible to vote?...................................................9 Why am I giving voting instructions?.......................................9 Can I revoke my voting instructions?......................................10 On what matters am I giving voting instructions?..........................11 What vote is required?....................................................12 How do the TVP and VIP Trustees recommend I vote?.........................12 How do the important features of the funds compare?.......................12 How do the expenses of the funds compare?.................................12 How does the performance of the funds compare?............................18 How will the reorganization affect me?....................................18 What happens after the reorganization if my insurance company currently invests in a TVP Fund?....................................................18 What happens after the reorganization if my insurance company currently invests in a VIP Fund?....................................................18 Will dividends be changed?................................................19 How are shares bought or sold?............................................19 What are the tax consequences?............................................19 Proposal 1: Combination of the TVP Funds with the VIP Funds................20 Comparison of the Risk Factors..............................................20 Are the risk factors for the corresponding TVP and VIP Funds the same?....20 What are the principal risk factors?......................................21 Comparison of the Investment Policies and Risks of the Funds................25 Are the investment objectives and policies for the corresponding TVP and VIP Funds the same?.......................................................25 What are the funds' investment objectives and policies?...................25 Comparison of the Management of the Funds...................................29 Is the management of the corresponding funds the same?....................29 Who are the funds' investment advisers?...................................29 Comparison of Fees and Expenses of the Funds................................32 Proposal 2: New Investment Advisory Agreements for the VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing Markets Equity Fund and VIP Templeton International Equity Fund.........................................34 Will the management change for the VIP Funds with new investment advisory agreements?.............................................................. 34 What are the terms of the existing and proposed contracts for the VIP Funds?................................................................... 34 What fees do the investment advisers receive from funds similar to the VIP Funds?............................................................... 39 Reasons For Proposals 1 and 2...............................................41 Why are we proposing the reorganization?..................................41 What factors did the TVP Trustees consider prior to recommending approval of reorganization?...........................................................41 What factors did the VIP Trustees consider?...............................44 Information about the Reorganization........................................46 How will the reorganization work?.........................................46 How will the shares be exchanged and distributed?.........................46 What will happen with the TVP Franklin S&P 500 Index Fund and the TVP Franklin Strategic Income Investments Fund?...............................46 Can the reorganization be delayed or terminated?..........................46 What are the tax consequences?............................................47 Who will pay the expenses?................................................47 How would the reorganization change the funds' statement of capital?......47 Proposals 3 & 4 -Changes to the Fundamental Investment Restrictions of the VIP Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund.....................................52 Why are we proposing amendments or eliminating certain fundamental investment restrictions?.............................................................52 Proposal 3: To Approve Amendments To Certain Of The Funds' Fundamental Investment Restrictions.....................................................54 Sub-Proposal 3a: To amend the funds' fundamental investment restriction regarding diversification of investments....................................54 What effect will the change in the current investment diversification restriction have on the Funds?..................... ........................54 Sub-Proposal 3b: To amend the funds' fundamental investment restriction regarding borrowing ........................................................54 What effect will the change in the current borrowing restriction have on a Fund?.......................................................................55 Sub-Proposal 3c: To amend the Funds' fundamental investment restriction regarding lending...........................................................55 What effect will standardization of the current lending restriction have on the funds?...............................................................56 Sub-Proposal 3d: To amend each fund's fundamental investment restriction regarding underwriting......................................................56 What effect will changing the current underwriting restriction have on the funds?......................................................................56 Sub-Proposal 3e: To amend the funds fundamental investment restrictions regarding investments in real estate and commodities........................57 What effect will combining and revising the real estate and commodities restrictions have on the funds?.............................................57 Sub-Proposal 3f: To amend each fund's fundamental investment restriction regarding issuing senior securities.........................................57 What effect will amending the restriction regarding issuing senior securities have on the funds?..............................................58 Sub-Proposal 3g: To amend each fund's fundamental investment restriction regarding concentration of the fund's investments in the same industry......58 What effect will amending the current restriction regarding industry concentration have on the funds?............................................59 Proposal 4: To Approve The Elimination Of Certain Of The Funds' Fundamental Investment Restrictions.....................................................59 Which fundamental investment restrictions is the Board recommending that the funds eliminate?........................................................59 Illiquid and Restricted Securities......................................59 Foreign Issuers.........................................................60 Control or Management...................................................60 Unseasoned Companies....................................................60 Securities on Margin....................................................61 Securities with Unlimited Liability.....................................61 Management Ownership of Securities......................................61 Tax Diversification for Variable Annuity Funds..........................61 Warrants................................................................62 Why are we recommending that the restrictions be eliminated?..............62 What are the risks, if any, in eliminating the restrictions?..............62 Voting Information and Principal Shareholders...............................62 How are votes solicited?..................................................62 What is a quorum?.........................................................63 How are votes counted?....................................................63 Can the meetings be adjourned?............................................63 How many shares are outstanding?..........................................63 Who are the shareholders?.................................................64 Annual Meetings and Special Meeting.......................................69 The Funds' Service Providers................................................70 Who provides administration services to the VIP Funds?....................70 Who distributes shares of the VIP Trust?..................................70 Who is the transfer agent of the VIP Trust?...............................71 Who is the custodian of the VIP Trust?....................................71 Who is the auditor?.......................................................71 Financial Statements........................................................72 SUMMARY This summary highlights some of the important information in this document. This summary may not contain all of the information that is important to you. To understand the reorganization, the related new investment advisory agreements and revised fundamental investment restrictions, you should read this entire document and the exhibits. WHY ARE WE PROPOSING THE REORGANIZATION? In 1992, the Franklin and Templeton organizations joined forces. Prior to this time, Franklin and Templeton had two separate trusts offering mutual funds dedicated to insurance companies, the TVP Trust and the VIP Trust. The TVP Trust and the VIP Trust include a number of substantially similar mutual funds generally having the same investment objectives and very similar investment policies and strategies. In most cases, the portfolio managers are also the same. The duplicate funds and related expenses have no clear benefits to shareholders. To eliminate this duplication, we are proposing the reorganization. WHAT IS HAPPENING IN THE REORGANIZATION? The reorganization will be completed through two principal steps - creating two new funds for the VIP Trust and eliminating duplicate funds. In connection with the reorganization, certain VIP Funds will adopt new investment advisory agreements and will amend or eliminate some of their fundamental investment restrictions. To eliminate the duplicate funds, we propose that: o The TVP Trust transfer all of its assets and liabilities to the VIP Trust; o The VIP Trust issue shares of the VIP Funds which correspond to the TVP Funds in exchange for the TVP Trust's assets and liabilities; o The TVP Trust distribute shares of the corresponding VIP Funds to shareholders of the TVP Trust; and o The TVP Trust be dissolved. The corresponding funds of the TVP Trust and VIP Trust are set forth below. TVP FUNDS VIP FUNDS Franklin Large Cap Growth Investments Fund* Franklin Large Cap Growth Securities Fund** Franklin Small Cap Investments Fund Franklin Small Cap Fund Mutual Shares Investments Fund Mutual Shares Securities Fund Templeton Asset Allocation Fund Templeton Global Asset Allocation Fund Templeton Bond Fund Templeton Global Income Securities Fund Templeton Developing Markets Fund Templeton Developing Markets Equity Fund Templeton International Fund Templeton International Equity Fund Templeton Stock Fund Templeton Global Growth Fund Franklin S&P 500 Index Fund Franklin S&P 500 Index Fund (New) Franklin Strategic Income Investments Fund Franklin Strategic Income Securities Fund (New) *Previously named the Franklin Growth Investments Fund **Previously named the Franklin Capital Growth Fund The VIP Trust will create the Franklin S&P 500 Index Fund and Franklin Strategic Income Securities Fund. The advisory agreements, which will be identical to the corresponding TVP Funds' agreements other than the signatory, will have been approved prior to the reorganization. We expect the reorganization to be completed around May 1, 2000. In some cases, the reorganization may be delayed. WHAT HAPPENS TO THE FUNDS AFTER THE REORGANIZATION? In the reorganization, each TVP Fund will be combined with the corresponding VIP Fund and become part of the VIP Trust. After the reorganization, the TVP Trust will be dissolved. Each combined fund will have most of the features of the larger corresponding fund (see chart below). However, all combined funds will have the same fundamental investment restrictions as the corresponding VIP Fund. We are asking the shareholders of the smaller VIP Funds to approve changes to these VIP Funds' fundamental investment restrictions to make them more like the larger corresponding TVP Funds. This means that the combined fund will have the same investment objectives, policies and strategies of the larger corresponding fund. In addition, the combined fund will have the same investment adviser as the larger fund except for the combined fund of the TVP Templeton International Fund and VIP Templeton International Equity Fund. The larger funds are as follows: LARGER FUNDS TRUST Franklin Large Cap Growth Securities Fund VIP Trust Franklin Small Cap Fund VIP Trust Franklin S&P 500 Index Fund VIP Trust Franklin Strategic Income Investments VIP Trust Fund Mutual Shares Securities Fund VIP Trust Templeton Asset Allocation Fund TVP Trust Templeton Developing Markets Fund TVP Trust Templeton Global Growth Fund VIP Trust Templeton Global Income Securities Fund VIP Trust Templeton International Fund TVP Trust The VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing Markets Equity Fund and the VIP Templeton International Equity Fund are smaller than the corresponding TVP Funds. To preserve the features of the three larger TVP Funds for the combined funds, the shareholders of the VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing Markets Equity Fund and the VIP Templeton International Equity Fund must vote to approve (1) new investment advisory agreements, and (2) changes to these funds' fundamental investment restrictions to be more similar to those of the larger corresponding TVP Funds. The new investment advisory agreements will be nearly the same as those currently in effect for these VIP Funds, except that (1) the VIP Templeton Developing Markets Equity Fund and the VIP Templeton International Equity Fund's investment advisory agreements will no longer provide for fund administration service1; and (2) the investment adviser for the VIP Templeton International Equity Fund will be Templeton Global Advisors Limited. The potential impact on total operating expenses for the combined funds as a result of the new investment advisory agreements is set forth below: TOTAL EXPENSES HIGHER OR TOTAL EXPENSES HIGHER OR COMBINATION LOWER THAN THE TVP FUND LOWER THAN THE VIP FUND Asset Allocation Very Slightly Higher Lower Developing Markets Lower Moderately Higher International Lower Lower The slightly higher total fees for the combined Asset Allocation Fund over those of the TVP Templeton Asset Allocation Fund are due to the change in the basis on which fund administration services fees are calculated. The fund administration services fees for the TVP Fund are currently based on the TVP Trust's assets while those of the combined fund will be based on the combined fund's assets. For the combined Developing Markets Fund, the increase is due to the additional fund administration services fees that will be paid by the combined fund. For the VIP Templeton Developing Markets Equity Fund, the fund administration services fee is currently paid by the investment adviser out of its fund management fee. The fund administration services fee will be paid separately by the combined fund. While the total fund operating expenses of the Asset Allocation and Developing Markets combined funds may potentially be higher than those of current TVP Templeton Asset Allocation Fund or the VIP Templeton Developing Markets Equity Fund, we believe that the reorganization will provide other benefits from the combinations. WHO IS ELIGIBLE TO VOTE? In order to complete the reorganization, we need the approval of: o All shareholders of record as of the close of business on November 30, 1999 of the TVP Trust; and o The shareholders of record as of the close of business on November 30, 1999 of the VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing Markets Equity Fund and VIP Templeton International Equity Fund. All shares of each fund will generally vote together as a single class. The Investment Company Act of 1940 ("1940 Act") requires classes to vote separately in those cases where only the shareholders of a class will be affected by a proposal. Shareholders of class 1 and class 2 shares of the TVP Templeton Bond Fund will be asked to vote separately on approval of the combination of this Fund with the corresponding VIP Fund and the class 2 shareholders will vote to approve the change in the rule 12b-1 fee. For all other TVP Funds, all classes of shareholders will vote together as a single class. Each share is entitled to one vote. Shareholders may vote by executing a proxy card. In this case, the proxy holders will vote the shares represented by the proxy card as marked on the proxy card. If the proxy card is signed but the voting portion is not completed, the proxy holders will vote the shares for the proposals. WHY AM I GIVING VOTING INSTRUCTIONS? Currently, only separate accounts of insurance companies are the shareholders of the class 1 and class 2 shares of the Trusts. In addition, employee benefit plans are the shareholders of the class 3 shares of the TVP Franklin S&P 500 Index Fund. The insurance companies must vote as instructed by owners of registered variable annuity and variable life insurance contracts whose contracts will be affected by the reorganization. Plan sponsors and participants may vote only if specified by the relevant employee benefit plan. If your contract is allocated to an option investing in the TVP Trust or the VIP Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund or Templeton International Equity Fund as of November 30, 1999, you will be able to give voting instructions. If you complete and sign the voting instruction card, the shares related to your contract or plan benefits will be voted exactly as you instruct. If you simply sign the voting instruction card without otherwise completing it, these shares will be voted for the proposals. If you do not return a voting instruction card at all, these shares will be voted in the same proportion as shares for which the insurance company has received instructions. Each fund will vote separately on the proposals and have its own voting instruction. The voting instructions for each TVP Fund will ask for the approval of the combination of that TVP Fund with the corresponding VIP Fund. The voting instructions for each voting VIP Fund will ask for the approval (1) to adopt the proposed investment advisory agreement for that VIP Fund; (2) to amend certain fundamental investment restrictions; and (3) to eliminate certain fundamental investment restrictions. BECAUSE EACH FUND WILL HAVE ITS OWN VOTING INSTRUCTION CARD, YOU MAY RECEIVE MORE THAN ONE INSTRUCTION CARD. Included with the combined proxy statement/ prospectus, are the prospectuses for the VIP Funds. Please note that the accompanying prospectuses may include VIP Funds and classes that are not available under your contract. CAN I REVOKE MY VOTING INSTRUCTIONS? You may revoke your voting instruction at any time before the proxy is voted by: 1. delivering a written revocation to the secretary of the TVP Trust or VIP Trust; 2. forwarding to the TVP Trust or the VIP Trust a later-dated voting instruction that is received by the TVP Trust or the VIP Trust at or prior to its meeting; or 3. attending the TVP Trust or the VIP Trust meeting and giving new voting instructions in person. ON WHAT MATTERS AM I GIVING VOTING INSTRUCTIONS? Shareholders of each TVP Fund must separately vote to approve the reorganization the TVP Fund with the VIP Fund. In addition, the shareholders of the VIP Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund must separately vote to approve (1) the proposed investment advisory agreement for that VIP Fund; (2) the amendment of certain fundamental investment restrictions; and (3) the elimination of certain fundamental investment restrictions. No vote is required from the shareholders of the VIP Funds for the combination of the corresponding funds. We have set forth the proposals below. <TABLE> <CAPTION> PROPOSAL 1 PROPOSAL 2 PROPOSAL 3(A)-(G) PROPOSAL 4 FUND REORGANIZATION BY ADOPTING AMENDING CERTAIN ELIMINATING COMBINING WITH NEW INVESTMENT FUNDAMENTAL CERTAIN THE CORRESPONDING ADVISORY INVESTMENT FUNDAMENTAL VIP FUNDS AGREEMENT RESTRICTIONS INVESTMENT <S> <C> <C> <C> <C> RESTRICTIONS TVP Franklin Large Cap Growth X N/A N/A N/A Investments Fund TVP Franklin Small Cap X N/A N/A N/A Investments Fund TVP Mutual Shares Investments Fund X N/A N/A N/A TVP Templeton Asset Allocation X N/A N/A N/A Fund TVP Templeton Bond Fund X N/A N/A N/A TVP Templeton Developing Markets X N/A N/A N/A Fund TVP Templeton International Fund X N/A N/A N/A TVP Templeton Stock Fund X N/A N/A N/A TVP Franklin S&P 500 Index Fund X N/A N/A N/A TVP Franklin Strategic Income X N/A N/A N/A Investments Fund VIP Templeton Global Asset N/A X X X Allocation Fund VIP Templeton Developing Markets N/A X X X Equity Fund VIP Templeton International N/A X X X Equity Fund </TABLE> WHAT VOTE IS REQUIRED? A separate vote on proposals 1, 2 and 4 and a separate vote for each sub-proposal of proposal 3 is required. For each, a "for" vote of the holders of a "1940 Act majority" of the outstanding shares of these funds is necessary. A 1940 Act majority means the "for" vote of the lesser of (1) a majority of the fund's outstanding shares, or (2) 67% or more of the fund's shares represented at the meeting if more than 50% of the outstanding shares are represented. If we do not receive approval of the reorganization of any particular TVP Fund, the reorganization will not be completed for that TVP Fund. In such case, we will consider what further action is appropriate for that TVP Fund. If we do not receive approval of the new investment advisory agreement for any VIP Fund, we will complete the reorganization. The old investment advisory agreement will continue in effect for the combined funds. If we do not receive approval of the proposals regarding the fundamental investment restrictions, the current VIP Fund's fundamental investment restrictions will continue to apply. HOW DO THE TVP AND VIP TRUSTEES RECOMMEND I VOTE? The trustees of the TVP Trust and VIP Trust concluded at meetings in October that the reorganization should be approved and suggest that you vote "for" all the proposals regarding the various components of the reorganization. In addition, if any other proposals are properly presented at the meeting for the TVP Trust and the VIP Trust, the trustees of the TVP Trust and VIP Trust suggest that you instruct your insurance company to grant the proxy holders the authority to vote in their discretion. The trustees of the TVP Trust and the VIP Trust are not currently aware of any other business to be presented. HOW DO THE IMPORTANT FEATURES OF THE FUNDS COMPARE? The corresponding funds generally have the same investment objectives and very similar investment policies and strategies. As a result, the corresponding funds have substantially similar risk factors. In most cases, the portfolio managers are also the same. Thus, the important features of the TVP Funds compared to those of the corresponding VIP Funds are nearly identical. We compare the funds' risk factors, investment objectives and policies, fees and investment advisers below. The corresponding funds have slightly different fundamental investment restrictions. These differences, however, do not materially impact the manner in which the corresponding funds are managed. We are asking the shareholders of the VIP Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund to approve certain amendments to and elimination of some of these funds' fundamental investment restrictions. These are described in proposal 3 and proposal 4 and will make these funds' fundamental investment restrictions more like those of the corresponding TVP Funds. Additional information about the VIP Funds' current fundamental investment restrictions is contained in the statement of additional information for the VIP Funds. HOW DO THE EXPENSES OF THE FUNDS COMPARE? The expenses of the TVP Funds and VIP Funds are compared in the tables below, which also set forth the estimated expenses of the combined funds. Generally, the larger of the corresponding funds has lower total expenses, except for the TVP Templeton Developing Markets Fund. After the combination, the combined funds are expected to have lower or the same total annual operating expenses of the individual funds except that: (1) the combined Asset Allocation Fund will have immaterially higher expenses than the TVP Templeton Asset Allocation Fund; and (2) the combined Developing Markets Fund will have moderately higher expenses than the VIP Templeton Developing Markets Equity Fund. Each fund has two classes of shares available to insurance companies, class 1 and class 2. Each class is identical, except that class 2 has a distribution plan or "rule 12b-1" plan and the class 2 shareholders pay an additional distribution fee. The following tables show the actual fees and expenses that you may pay for buying and holding the class 1 and class 2 shares of the TVP Funds and VIP Funds, as well as the estimated fees and expenses if the funds are combined. The estimated fees and expenses are based upon the funds' expenses as of December 31, 1998. The combined fund fees and expenses reflect the fees that would apply if the new investment advisory agreements for the VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing Markets Equity Fund, VIP Templeton International Equity Fund and VIP Franklin Small Cap Fund are adopted. If these investment advisory agreements are adopted, for each of these VIP Funds except the VIP Templeton Global Asset Allocation Fund, new fund administration agreements will also be adopted. The fees for these agreements are also included in the combined fund fees and expenses. The funds do not charge any shareholder transaction expenses for the class 1 and class 2 shares. THESE TABLES DO NOT REFLECT THE CHARGES AND FEES ASSESSED BY THE INSURANCE COMPANY UNDER YOUR CONTRACT. Examples showing the amount of these expenses based upon a $10,000 investment in the funds and a 5% annual return and redemption at the end of each time period are contained in Exhibit __. <TABLE> <CAPTION> FEES OF THE CLASS 1 SHARES Fiscal Year Ended December 31, 1998 ------------------------------------------------------------------------------------------------------------------------------ Management and Fund Other Expenses Total Annual Fund Administration Fee Operating Expenses ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- TVP VIP Fund Pro TVP Fund VIP Fund Pro TVP Fund VIP Fund Pro Fund forma, forma, forma, Combined Combined Combined --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Franklin Large Cap Growth 0.70% 0.75% 0.75% 2.21%3 0.02% 0.02% 2.91% 0.77% 0.77% Investments Fund1 Franklin Large Cap Growth Securities Fund --------------------------------------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------------------------------------- Franklin Small Cap Investments 0.85% 0.75% 0.80%4 0.16%3 0.02% 0.02%4 1.01% 0.77% 0.82%4 Fund2 Franklin Small Cap Fund -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Mutual Shares Investments Fund 0.70% 0.74% 0.74% 2.17% 0.03% 0.03% 2.87 0.77% 0.77% Mutual Shares Securities Fund -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Templeton Asset Allocation Fund 0.70% 0.80% 0.73% 0.08% 0.04% 0.06% 0.78% 0.84% 0.79% Templeton Global Asset Allocation Fund -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Templeton Bond Fund 0.60% 0.57% 0.56% 0.13% 0.06% 0.06% 0.73% 0.63% 0.62% Templeton Global Income Securities Fund -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Templeton Developing Markets 1.35% 1.25% 1.39% 0.31% 0.16% 0.17% 1.66% 1.41% 1.56% Fund Templeton Developing Markets Equity Fund -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Templeton International Fund 0.79% 0.80% 0.75% 0.07% 0.08% 0.08% 0.86% 0.88% 0.83% Templeton International Equity Fund -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Templeton Stock Fund 0.80% 0.83% 0.79% 0.09% 0.05% 0.06% 0.89% 0.88% 0.85% Templeton Global Growth Fund -------------------------------------------------------------------------------------------------------------------------------- -------------------------------------------------------------------------------------------------------------------------------- Franklin S&P 500 Index Fund5 0.25% n/a 0.25% 0.28% n/a 0.28% 0.53% n/a 0.53% Franklin S&P 500 Index Fund (New) ------------------------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------------------------------------------------------------------- Franklin Strategic Income 0.63% n/a 0.63% 0.32% n/a 0.32% 0.95% n/a 0.95% Investments Fund6 Franklin Strategic Income Securities Fund (New) </TABLE> <TABLE> <CAPTION> ------------------------------------------------------------------------------------------------------------------------------- FEES OF THE CLASS 2 SHARES Fiscal Year Ended December 31, 1998 ----------------------------------------------------------------------------------------------------------------------------------- MANAGEMENT AND FUND DISTRIBUTION FEE OTHER EXPENSES TOTAL ANNUAL FUND ADMINISTRATION FEE OPERATING EXPENSE ----------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- TVP FUND VIP PRO TVP FUND VIP PRO TVP FUND VIP PRO TVP VIP PRO FUND FORMA, FUND1 FORMA, FUND FORMA, FUND FUND FORMA, COMBINED COMBINED COMBINED COMBINED ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> Franklin Large Cap Growth N/A 0.75% 0.75% N/A 0.25% 0.25% N/A 0.02% 0.02% N/A 1.02% 1.02% Investments Fund2 Franklin Large Cap Growth Securities Fund ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Franklin Small Cap Investments 0.85% 0.75% 0.80%4 0.25% 0.25% 0.25% 0.16%5 0.02% 0.02%4 1.26% 1.02% 1.07%4 Fund3 Franklin Small Cap Fund ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Mutual Shares Investments Fund 0.70% 0.74% 0.74% 0.25% 0.25% 0.25% 2.17% 0.03% 0.03% 3.12% 1.02% 1.02% Mutual Shares Securities Fund ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Templeton Asset Allocation 0.70% 0.80% 0.73% 0.25% 0.25% 0.25% 0.08% 0.04% 0.06% 1.03% 1.09% 1.04% Fund Templeton Global Asset Allocation Fund ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Templeton Bond Fund 0.60% 0.57% 0.56% 0.15% 0.25% 0.25% 0.13% 0.06% 0.06% 0.88% 0.88% 0.87% Templeton Global Income Securities Fund ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Templeton Developing Markets 1.35% 1.25% 1.39% 0.25% 0.25% 0.25% 0.31% 0.16% 0.17% 1.91% 1.66% 1.81% Fund Templeton Developing Markets Equity Fund ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Templeton International Fund 0.79% 0.80% 0.75% 0.25% 0.25% 0.25% 0.07% 0.08% 0.08% 1.11% 1.13% 1.08% Templeton International Equity Fund ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Templeton Stock Fund 0.80% 0.83% 0.79% 0.25% 0.25% 0.25% 0.09% 0.05% 0.06% 1.14% 1.13% 1.10% Templeton Global Growth Fund ----------------------------------------------------------------------------------------------------------------------------------- ---------------------------------------------------------------------------------------------------------------------------------- Franklin S&P 500 Index Fund6 0.25% n/a 0.25% 0.25% 0.00% 0.25% 0.28% n/a 0.28% 0.78% n/a 0.78% Franklin S&P 500 Index Fund (New) ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- Franklin Strategic Income N/A N/A n/a n/a n/a n/a n/a n/a n/a n/a n/a n/a Investments Fund7 Franklin Strategic Income Securities Fund (New) ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> In addition, the TVP Franklin S&P 500 Index Fund has a third class of shares available to employee benefit plans. Class 3 is identical to class 1 and class 2, except that class 2 and class 3 have their own distribution plans or "rule 12b-1" plans. Also, class 3 bears its own registration expenses under state and federal securities laws and transfer agency (shareholder account maintenance) expenses. The following table shows the actual fees and expenses that you may pay for buying and holding the class 3 shares of the TVP Franklin S&P 500 Index Fund. THESE TABLES DO NOT REFLECT ANY CHARGES AND FEES ASSESSED UNDER YOUR EMPLOYEE BENEFIT PLAN. The fees and expenses will be the same after the reorganization because the VIP Franklin S&P 500 Index Fund will have the same agreements as the TVP Fund. Examples showing the amount of these expenses based upon a $10,000 investment in the funds and a 5% annual return and redemption at the end of each time period are contained in Exhibit __. Franklin S&P 500 Index Fund class 3 Shareholder Fees (fees paid directly from your investment) Maximum sales charge (load) as a percentage of offering price Load imposed on purchases 0.00% Maximum deferred sales charge (load) 0.00%1 Annual Fund Operating Expenses Management fees 0.15% Distribution and service (12b-1) fees 0.25% Other expenses 0.60% Total annual fund operating expenses 1.00% Fee waiver/expense reductions (0.20%)2 Net expenses 0.80% 1. Shares acquired through an exchange from another Franklin Templeton fund may be subject to a contingent deferred sales charge in certain circumstances. Please see the prospectus for class 3 shares of the Franklin S&P 500 Index Fund. 2. The investment adviser has agreed in advance to assume certain fund expenses, and the investment adviser and fund administrator have agreed in advance to waive or limit their fees as necessary so that the total annual fund operating expenses do not exceed 0.80% for class 3. The investment adviser and the fund administrator are contractually obligated to continue this arrangement through year 2000. HOW DOES THE PERFORMANCE OF THE FUNDS COMPARE? Due to the substantial similarities in investment objectives and policies, over time the corresponding funds could be expected to perform similarly, though not identically. Differences in performance between corresponding funds are generally due to differences in asset sizes and cash flow. The performance of the larger corresponding fund is generally better. The performance of the funds is compared in Exhibit __. HOW WILL THE REORGANIZATION AFFECT ME? We anticipate that the reorganization and the increase in net assets for the combined funds will result in operating efficiencies that will benefit you as well as the shareholders. We also believe that the reorganization has the following additional benefits: o COST SAVINGS. The combined funds have a potential to decrease their operating expenses by spreading fixed costs over a larger pool of assets and by efficiencies in portfolio management. o PORTFOLIO MANAGEMENT. For the newer and smaller funds, an increase in net assets may also afford greater flexibility and diversification in pursuing their investment objectives. o MORE FUNDS. The VIP Trust offers eighteen more funds than the TVP Trust. Your insurance company may choose to make these additional VIP Funds available under your contract. The reorganization will not affect your contract rights. You will not experience any change in the value of your contract immediately following the reorganization. WHAT HAPPENS AFTER THE REORGANIZATION IF MY INSURANCE COMPANY CURRENTLY INVESTS IN A TVP FUND? The only change will be the funds in which your insurance company invests. Your insurance company will keep the same separate account. Your contract values will be allocated to the same separate account and that separate account will invest in the corresponding VIP Fund after the reorganization. Thus, after the reorganization your contract values will depend on the performance of the corresponding VIP Funds as combined with the TVP Funds rather than those of the current TVP Funds. WHAT HAPPENS AFTER THE REORGANIZATION IF MY INSURANCE COMPANY CURRENTLY INVESTS IN A VIP FUND? After the reorganization, the VIP Funds will acquire the assets and liabilities of the TVP Funds. No shares of the VIP Trust are being exchanged. If approved by shareholders, the VIP Templeton Global Asset Allocation Fund, the VIP Templeton International Equity Fund and VIP Templeton Developing Markets Equity Fund will adopt new investment advisory agreements. These will be nearly the same as those currently in effect for the corresponding TVP Funds, except that for the VIP Templeton International Equity Fund, Templeton Global Advisors Limited will serve as the investment adviser. In addition, if approved by shareholders, these VIP Funds will adopt changes to their fundamental investment restrictions which will make them more like the larger corresponding TVP Funds. Apart from the reorganization, the shareholders of the VIP Franklin Small Cap Fund are being asked to approve a new investment advisory agreement in a separate proxy statement. WILL DIVIDENDS BE CHANGED? No. The TVP Funds and VIP Funds declare and pay dividends and distributions at the same intervals. These dividends and distributions will continue to be reinvested by your insurance company in additional shares of the VIP Funds. HOW ARE SHARES BOUGHT OR SOLD? Shares of the TVP Trust and the VIP Trust are only sold to insurance companies and, in some cases, to employee benefit plans that are qualified plans under the federal tax law. The VIP Trust will continue to sell its shares on a continuous basis at net asset value only to insurance companies and these qualified plans. The reorganization will have no impact on your right to reallocate among your insurance company's separate account options, as permitted under your contract. WHAT ARE THE TAX CONSEQUENCES? In the opinion of Jorden Burt Boros Cicchetti Berenson & Johnson LLP, special counsel to the TVP Trust and the VIP Trust, based on certain assumptions and representations, it is not expected that shareholders will recognize any gain or loss for federal income tax purposes as a result of the exchange of their TVP Trust shares for the VIP Trust shares or that the VIP Funds will recognize any gain or loss upon receipt of the corresponding TVP Funds' assets. PROPOSAL 1: COMBINATION OF THE TVP FUNDS WITH THE VIP FUNDS COMPARISON OF THE RISK FACTORS Investing in the TVP Funds and VIP Funds involves risks. These risks relate to the underlying investments of the TVP Funds and VIP Funds. These risks may cause the value of shares of a fund to increase or decrease based on movements in the value of these underlying investments. ARE THE RISK FACTORS FOR THE CORRESPONDING TVP AND VIP FUNDS THE SAME? Yes. The risk factors are essentially the same due to the substantial similarities of the investment objectives and policies between the corresponding TVP and VIP Funds. The risks of each VIP Fund are described in greater detail in the accompanying VIP Fund prospectuses included as Exhibit __. The risks for VIP Franklin S&P 500 Index Fund and the VIP Franklin Strategic Income Securities Fund will be the same as those of the corresponding TVP Funds because the VIP Trust will adopt all features of the corresponding TVP Funds. WHAT ARE THE PRINCIPAL RISK FACTORS? We have identified the principal risk factors of each TVP Fund and each corresponding VIP Fund in the table below. We describe each of these risks after the table. <TABLE> <CAPTION> ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> Indebt- Mortgage Reorgan- Fund Deri- edness Securities izing of vative and Lower- and Asset dis- Securities Diver- Foreign Illiquid Partici-Index Interest Rated Backed stressed Credit sification Securities Securities pations Tracking Rate Securities Securities Companies Stocks ----------------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------------------- TVP Franklin Large Cap Growth X Investments Fund VIP Franklin Large Cap Growth X Securities Fund TVP Franklin Small Cap X Investments Fund VIP Franklin Small Cap Fund X TVP Mutual Shares Investments X X X X X X X X Fund VIP Mutual Shares Securities Fund X X X X X X X X TVP Templeton Asset Allocation X X X X X X Fund VIP Templeton Global Asset X X X X X Allocation Fund TVP Templeton Bond Fund X X X X X VIP Templeton Global Income X X X X X Securities Fund TVP Templeton Developing Markets X X X X Fund VIP Templeton Developing Markets X X X X Equity Fund TVP Templeton International Fund X X X X VIP Templeton International X X X X Equity Fund TVP Templeton Stock Fund X X X X VIP Templeton Global Growth Fund X X X X TVP Franklin S&P 500 Index Fund X X X X VIP Franklin S&P 500 Index Fund X X X X TVP Franklin Strategic Income X X X X X X X X Investments Fund VIP Franklin Strategic Income X X X X X X X X Securities Fund ---------------------------------------------------------------------------------------------------------------------------------- </TABLE> We have described each of the principal risk factors identified above for the TVP and VIP Funds below. Most of the risks apply to more than one fund. Please refer to the above table to see if the risk applies to a particular fund. CREDIT. This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the security's value and, thus, impact the value of fund shares. DERIVATIVE SECURITIES. Derivative investments, such as forward currency exchange contracts, stock index futures and stock index options are financial instruments whose performance depends, at least in part, on the performance of an underlying asset such as stock prices indices, or currency exchange rates. They are used to help manage interest rate and currency risks, increase liquidity, or invest in a particular stock, bond or index in a more efficient way. Their successful use will depend on the manager's ability to predict market movements. Losses from their use can be greater than if they had not been used. Risks include potential loss to the fund due to the derivative securities failure to correlate well with the indexes or securities for which they are acting as a substitute, the imposition of controls by a government on the exchange of foreign currencies, delivery failure, default by the other party or inability to close out a position because the trading market becomes illiquid. DIVERSIFICATION. If a fund is non-diversified under the federal securities laws it may invest a greater portion of its assets in one issuer and have a smaller number of issuers than a diversified fund. Therefore, the fund may be more sensitive to economic, business, political or other changes affecting similar issuers or securities. The fund will, however, meet tax diversification requirements. FOREIGN SECURITIES. Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. CURRENCY. Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because the investment is worth fewer dollars. Currency markets generally are not as regulated as securities markets. COUNTRY. General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic, and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes that U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY. Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. ILLIQUID SECURITIES. Illiquid securities are securities with a limited trading market. There is a possible risk that the securities cannot be readily sold or can only be resold at a price significantly lower than their value. INDEBTEDNESS AND PARTICIPATIONS. The purchase of debt securities of reorganizing or distressed companies always involves a risk as to the creditworthiness of the issuer and the possibility that the investment may be lost. There are no established markets for indebtedness, making them less liquid than other securities, and purchasers of participations, such as the fund, must rely on the financial institution issuing the participation to assert any rights against the borrower with respect to the underlying indebtedness. In addition, the fund takes on the risk as to the creditworthiness of the bank or other financial intermediary issuer, as well as of the issuer of the underlying indebtedness. INDEX TRACKING. The S&P 500 fund's ability to track the S&P 500 Index may be affected by transaction costs and fund expenses, cash flows, and changes in the composition of the index. In addition, the fund's performance may not precisely track the performance of the S&P 500 Index if the securities the manager has selected do not precisely track the index. If securities the fund owns underperforms those in the index, the fund's performance will be lower than the index. Unlike an unmanaged index, the fund pays operating expenses that may prevent the fund from precisely tracking the index's performance. Cash inflows from investors buying shares could create large balances of cash, while cash outflows from investors selling shares may require ready reserves of cash. Either situation would likely cause the fund's performance to deviate from the "fully invested" index. INTEREST RATE. Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. A sub-category of interest rate risk is REINVESTMENT RISK, which is the risk that interest rates will be lower when the fund seeks to reinvest interest payments, or the proceeds from a matured debt security, resulting in less income received by the fund. LOWER-RATED SECURITIES. Junk bonds generally have more risk than higher-rated securities, and can be considered speculative. Companies issuing high yield debt securities are not as strong financially, and are more likely to encounter financial difficulties and be more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates. If an issuer stops paying interest and/or principal, payments may never resume. The fund may lose its entire investment in bonds that may be, or are, in default. The prices of high yield debt securities fluctuate more than higher quality securities. Prices are especially sensitive to developments affecting the company's business and to rating changes, and typically rise and fall in response to factors that affect the company's stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, market activity, large sustained sales, a high-profile default, or other factors. High yield securities generally are less liquid than higher-quality bonds, and infrequent trades can make accurate pricing more difficult. At times, it may be difficult to sell these securities promptly at an acceptable price, which may limit the fund's ability to sell these securities. MORTGAGE SECURITIES AND ASSET BACKED SECURITIES. Ginnie Maes, and other mortgage- and asset-backed securities, differ from conventional debt securities because principal is paid back over the life of the security rather than at maturity. The fund may receive unscheduled prepayments of principal due to voluntary prepayments, refinancing or foreclosure on the underlying mortgage or other loans. During periods of declining interest rates, principal prepayments generally increase. The fund may be forced to reinvest returned principal at lower interest rates, and there may be less potential for capital appreciation. In periods of rising interest rates, prepayments can decline, thus extending the security's maturity which may in turn cause the security's price to fall. Credit enhancements, if any, may be inadequate in the event of default. REORGANIZING OR DISTRESSED COMPANIES. The Mutual Shares Securities Fund's bargain-driven focus may result in the fund choosing securities that are not widely followed by other investors, including companies reporting poor earnings, companies whose share prices have declined sharply, turnarounds, cyclical companies, or companies emerging from bankruptcy, which may have higher risk. There can be no assurance that any merger or other restructuring, or tender or exchange offer proposed at the time the fund invests in a reorganizing or distressed company will be completed on the terms contemplated, and therefore, benefit the fund. SMALLER COMPANIES. While smaller companies, and to a lesser extent mid-size companies, may offer greater opportunities for capital growth than larger, more established companies, they also have more risk. Historically, smaller company securities have been more volatile in price and have fluctuated independently from larger company securities, especially over the shorter-term. Smaller or relatively new companies can be particularly sensitive to changing economic conditions, their growth prospects are less certain, their securities are less liquid, and they can be considered speculative. These companies may suffer significant losses, and technology and biotechnology industry stocks, in particular, can be subject to abrupt or erratic price movements. STOCKS. While this may not be the case in foreign markets, in the U.S., stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies or industries, or the securities markets as a whole. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. Because the stocks the fund holds fluctuate in price with market conditions, the value of your investment in the fund will go up and down. This means you could lose money over short or event extended periods. COMPARISON OF THE INVESTMENT POLICIES AND RISKS OF THE FUNDS To help you understand the impact of the reorganization, we have compared the important features of the funds. ARE THE INVESTMENT OBJECTIVES AND POLICIES FOR THE CORRESPONDING TVP AND VIP FUNDS THE SAME? The investment objectives and policies of all pairs of corresponding funds are substantially similar. In each case, the VIP Fund invests primarily in the same types of securities as the corresponding TVP Fund because of the similarities in their investment policies and strategies. However, there are some differences. These occur with the (1) TVP Templeton Asset Allocation Fund and the VIP Templeton Global Asset Allocation Fund, and (2) TVP Templeton Bond Fund and VIP Templeton Global Income Securities Fund. The TVP Templeton Asset Allocation Fund and the VIP Templeton Global Asset Allocation Fund have two noteworthy differences in their stated policies. First, the VIP Fund may invest up to 25% of its assets in higher yielding, medium and lower-rated debt securities, while the TVP Fund may only invest 15% of its assets in these securities. Second, the VIP Fund is restricted from investing in securities where the issuer has failed to make a payment that is due. The TVP Templeton Bond Fund and the VIP Templeton Global Income Securities Fund also have two noteworthy differences in their stated policies. First, the VIP Fund may only invest up to 30% of its assets in higher yielding, medium and lower-rated debt securities, while the TVP Fund's investment in these securities is not limited. Second, the VIP Fund is restricted from investing in securities where the issuer has failed to make a payment that is due. Each of the corresponding funds has adopted slightly different fundamental investment restrictions. These differences, however, do not materially impact the manner in which the corresponding funds are managed. We are asking the shareholders of the VIP Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund to approve certain changes to and eliminations of some of these funds' fundamental investment restrictions. These changes are described in proposal 3 and proposal 4. These changes will make these funds' fundamental investment restrictions more like those of the corresponding TVP Funds. Additional information about the VIP Funds' current fundamental investment restrictions is contained in the statement of additional information for the VIP Funds. We believe that these differences are minor and/or are of no practical significance as the portfolio managers invest for the pairs of corresponding funds in a similar manner. WHAT ARE THE FUNDS' INVESTMENT OBJECTIVES AND POLICIES? VIP FRANKLIN LARGE CAP GROWTH TVP FRANKLIN LARGE CAP GROWTH SECURITIES FUND INVESTMENTS FUND OBJECTIVE - Capital appreciation. POLICIES - Under normal market Same conditions, the fund will invest at least 65% of its assets in equity securities of U.S. large cap growth companies ($8.5 billion or more), focusing on those companies that are expected to have revenue growth in excess of the economy as a whole either through above-average industry expansion or market share gains. VIP FRANKLIN SMALL CAP FUND TVP FRANKLIN SMALL CAP INVESTMENTS FUND OBJECTIVE - Long-term capital growth. Same POLICIES - Under normal market conditions, the fund will invest at least 65% of its assets in equity securities of U.S. small capitalization growth companies. VIP MUTUAL SHARES SECURITIES FUND TVP MUTUAL SHARES INVESTMENTS FUND OBJECTIVE - Capital appreciation. Secondarily it seeks income. POLICIES - Under normal market Same conditions, the fund will invest at least 65% of its assets in equity securities of companies which the manager believes are available at a market price less than their actual value based on certain recognized or objective criteria (intrinsic value). VIP TEMPLETON GLOBAL ASSET TVP TEMPLETON ASSET ALLOCATION FUND ALLOCATION FUND OBJECTIVE - High total return. POLICIES - Under normal market Same conditions, the fund will invest in equity securities of companies in any nation, debt securities of companies and governments of any nation, and in money market instruments. VIP TEMPLETON GLOBAL INCOME TVP TEMPLETON BOND FUND SECURITIES FUND OBJECTIVE - High current income. Capital appreciation is a secondary consideration. Same POLICIES - Under normal market conditions, the fund will invest at least 65% of its assets in debt securities of governments and their political subdivisions and agencies, supranational organizations and companies located anywhere in the world, including emerging markets. VIP TEMPLETON DEVELOPING MARKETS TVP TEMPLETON DEVELOPING MARKETS EQUITY FUND FUND OBJECTIVE - Long-term capital appreciation. Same POLICIES - Under normal market conditions, the fund will invest at least 65% of its total assets in emerging market equity securities. VIP TEMPLETON INTERNATIONAL EQUITY TVP TEMPLETON INTERNATIONAL FUND FUND OBJECTIVE - Long-term capital OBJECTIVE - Long-term capital growth. growth. POLICIES - Under normal market POLICIES - Under normal market conditions, the fund will invest at conditions, the fund will invest at least 65% of its assets in equity least 65% of its assets in equity securities that trade in non-U.S. securities of companies located markets, including emerging markets, outside the U.S., including and that are issued by companies emerging markets. that have their principal activities outside the U.S. VIP TEMPLETON GLOBAL GROWTH FUND TVP TEMPLETON STOCK FUND OBJECTIVE - Long-term capital growth. Same POLICIES - Under normal market conditions, the fund will invest at least 65% of its assets in equity securities of companies throughout the world, including the U.S. and emerging markets. VIP FRANKLIN S&P 500 INDEX FUND TVP FRANKLIN S&P 500 INDEX FUND ------------------------------- ------------------------------- This is a new fund. The investment OBJECTIVE - To match the objectives and policies will be performance of the Standard & identical to the TVP Franklin S&P Poor's 500 Composite Stock Price Index Fund. Index ("S&P 500 Index") before the deduction of expenses. POLICIES - Under normal market conditions, the fund uses an investment "indexing" strategy designed to track the performance of the S&P 500 Index. VIP FRANKLIN STRATEGIC INCOME TVP FRANKLIN STRATEGIC INCOME SECURITIES FUND INVESTMENTS FUND This is a new fund. The investment OBJECTIVE - To earn a high level of objectives and policies will be current income. Its secondary goal identical to the TVP Franklin is long-term capital appreciation. Strategic Income Investments Fund. POLICIES - Under normal market conditions, the fund will invest at least 65% of its total assets in U.S. and non-U.S. debt securities. COMPARISON OF THE MANAGEMENT OF THE FUNDS IS THE MANAGEMENT OF THE CORRESPONDING FUNDS THE SAME? Almost. The investment adviser responsible for the day-to-day management of the corresponding funds is the same, with two exceptions: (1) TVP Templeton Stock Fund and the VIP Templeton Global Growth Fund, and (2) TVP Templeton International Fund and VIP Templeton International Equity Fund. The investment adviser to the TVP Templeton Stock Fund is Templeton Investment Counsel, Inc. and the investment adviser to the VIP Templeton Global Growth Fund is Templeton Global Advisors Limited. When these two funds are combined, the investment adviser will be Templeton Global Advisors Limited. In connection with the combination of the TVP Templeton International Fund and VIP Templeton International Equity Fund, we are proposing that Templeton Global Advisor Limited act as the investment adviser to the combined fund. Templeton Investment Counsel, Inc. and Templeton Global Advisors Limited are "sister" Templeton companies in the Franklin Templeton organization. Each has access to substantially similar resources, including a global network of research and support offices and services, as well as computer and communication systems. In general, Franklin Templeton managers employ a similar "bottomup" long-term value approach to stock selection. In addition, the portfolio managers are the same for all pairs of the corresponding funds, except in three pairs: (1) the TVP Templeton Asset Allocation Fund and the VIP Templeton Global Asset Allocation Fund; (2) the TVP Templeton International Fund and the VIP Templeton International Equity Fund; and (3) the TVP Templeton Stock Fund and the VIP Templeton Global Growth Fund. Information about the portfolio managers for these three pairs of corresponding funds and the combined funds is contained in Exhibit __. WHO ARE THE FUNDS' INVESTMENT ADVISERS? The following table names the investment adviser and sub-adviser to each TVP Fund and its corresponding VIP Fund. In addition, the following table names the investment adviser after the reorganization. CURRENT CURRENT COMBINED COMBINED INVESTMENT SUB-ADVISER FUND FUND ADVISER INVESTMENT SUB-ADVISER ADVISER TVP Franklin Large Cap Franklin None N/A N/A Growth Investments Fund Advisers, Inc. VIP Franklin Large Cap Franklin None Franklin None Growth Securities Fund Advisers, Advisers, Inc. Inc. CURRENT CURRENT COMBINED COMBINED INVESTMENT SUB-ADVISER FUND FUND ADVISER INVESTMENT SUB-ADVISER ADVISER TVP Franklin Small Cap Fund Franklin None N/A N/A Advisers, Inc. VIP Franklin Small Cap Fund Franklin None Franklin None Advisers, Advisers, Inc. Inc. CURRENT CURRENT COMBINED COMBINED INVESTMENT SUB-ADVISER FUND FUND ADVISER INVESTMENT SUB-ADVISER ADVISER TVP Mutual Shares Fund Franklin None N/A N/A Mutual Advisers, LLC VIP Mutual Shares Franklin None Franklin None Securities Fund Mutual Mutual Advisers, Advisers, LLC LLC CURRENT CURRENT COMBINED COMBINED INVESTMENT SUB-ADVISER FUND FUND ADVISER INVESTMENT SUB-ADVISER ADVISER TVP Templeton Asset Templeton None Templeton None Allocation Fund Investment Investment Counsel, Counsel, Inc. Inc. VIP Templeton Global Asset Templeton Templeton N/A N/A Allocation Fund Global Investment Advisors Counsel, Limited Inc. CURRENT CURRENT COMBINED COMBINED INVESTMENT SUB-ADVISER FUND FUND ADVISER INVESTMENT SUB-ADVISER ADVISER TVP Templeton Bond Fund Templeton None N/A N/A Investment Counsel, Inc. VIP Templeton Global Franklin Templeton Franklin Templeton Income Securities Fund Advisers, Investment Advisers, Investment Inc. Counsel, Inc. Counsel, Inc. Inc. CURRENT CURRENT COMBINED COMBINED INVESTMENT SUB-ADVISER FUND FUND ADVISER INVESTMENT SUB-ADVISER ADVISER TVP Templeton Developing Templeton None Templeton None Markets Fund Asset Asset Management Management Ltd. Ltd. VIP Templeton Developing Templeton None N/A N/A Markets Equity Fund Asset Management Ltd. CURRENT CURRENT COMBINED COMBINED INVESTMENT SUB-ADVISER FUND FUND ADVISER INVESTMENT SUB-ADVISER ADVISER TVP Templeton Templeton None Templeton None International Fund Investment Global Counsel, Advisors Inc. Limited VIP Templeton Franklin Templeton N/A N/A International Equity Fund Advisers, Investment Inc. Counsel, Inc. CURRENT CURRENT COMBINED COMBINED INVESTMENT SUB-ADVISER FUND FUND ADVISER INVESTMENT SUB-ADVISER ADVISER TVP Templeton Stock Fund Templeton None N/A N/A Investment Counsel, Inc. VIP Templeton Global Templeton None Templeton None Growth Fund Global Global Advisors Advisors Limited Limited CURRENT CURRENT COMBINED COMBINED INVESTMENT SUB-ADVISER FUND FUND ADVISER INVESTMENT SUB-ADVISER ADVISER TVP Franklin S&P 500 Index Franklin State Franklin State Fund Advisers, Street Advisers, Street Inc. Global Inc. Global Advisors Advisors VIP Franklin S&P 500 Index Franklin State N/A N/A Fund (New) Advisers, Street Inc. Global Advisors CURRENT CURRENT COMBINED COMBINED INVESTMENT SUB-ADVISER FUND FUND ADVISER INVESTMENT SUB-ADVISER ADVISER TVP Franklin Strategic Franklin Templeton Franklin Templeton Income Investments Fund Advisers, Investment Advisers, Investment Inc. Counsel, Inc. Counsel, Inc. Inc. VIP Franklin Strategic Franklin Templeton N/A N/A Income Securities Fund Advisers, Investment (New) Inc. Counsel, Inc. COMPARISON OF FEES AND EXPENSES OF THE FUNDS The fees and expenses of the TVP Funds and the VIP Funds include the management fees, other fees and expenses, and distribution fees for the class 2 shares. We have detailed the fees and expenses of the TVP Funds and VIP Funds on pages __. Set forth below is a narrative of the fees and expenses of the funds. MANAGEMENT AND FUND ADMINISTRATION FEES. Management fees are paid to the investment advisers of the funds. For all the VIP Funds, except the VIP Templeton Global Asset Allocation Fund, each fund's investment adviser also provides services related to the day-to-day operations of the fund. Each investment adviser contracts with an affiliate to provide fund administration services. The TVP Funds and the VIP Global Asset Allocation Fund contract directly with an affiliate to provide fund administration services. These services include preparing and maintaining books, records and tax and financial reports, and monitoring compliance with regulatory requirements. The fees for fund administration services for the TVP Funds are based on the amount of the TVP Trust's assets, while those for the VIP Fund are based on each VIP Fund's assets. After the combination, this fee will be based upon each VIP Fund's assets. As a result of this change, the combined Asset Allocation fund has only slightly higher total annual operating expenses than those of the TVP Templeton Asset Allocation Fund. We are proposing that the policies and the investment advisers of the larger corresponding funds survive after the reorganization, except for the combination of the TVP Templeton International Fund and the VIP Templeton International Equity Fund. To do this, we propose that the VIP Templeton Developing Markets Equity Fund and VIP Templeton Global Asset Allocation Fund replace their advisory agreements with those in effect for the TVP Templeton Developing Markets Fund and TVP Templeton Asset Allocation Fund. For the combined fund of the TVP Templeton International Fund and the VIP Templeton International Equity Fund, we are proposing that Templeton Global Advisors Limited serve as the investment adviser. In other respects, each of the investment advisory agreements will be identical to those of the corresponding TVP Fund. After the combination of these funds, no investment adviser will provide fund administration services. OTHER FEES AND EXPENSES. Other expenses of the funds include custody fees, transfer agency costs, legal and accounting fees and printing costs. The reorganization should potentially result in a decrease in some of these expenses due to the operating efficiencies arising from the larger asset base. These operating efficiencies relate primarily to fixed expenses, such as costs of printing and fees for professional services such as legal and accounting fees. With the larger asset base, shareholders should individually bear a lesser portion of the cost of these fixed expenses. Expenses that are based on a fund's asset value, such as fees charged as a percentage of a fund's assets, or the number of transactions, such as custody and transfer agent fees, would likely not decrease as a result of the reorganization. However, even with respect to these types of expenses, the larger asset base may enable the fund to negotiate lower overall fees. DISTRIBUTION FEES. Each fund has two classes of shares available to insurance companies. The class 2 shares have a separate distribution or "rule 12b-1" plan. These fees may be used to compensate the principal underwriter, the insurance company shareholders or others for distribution and related services, and as a servicing fee. The terms and provisions of the plans, including terms and provisions relating to required reports, term, and approval, are consistent with rule 12b-1. In no event shall the aggregate asset-based sales charges, which include payments made under each plan plus any other payments deemed to be made pursuant to a plan, exceed the amount permitted to be paid under the rules of the National Association of Securities Dealers, Inc. Currently, the 12b-1 fees for all TVP Funds and VIP Funds are 0.25% (prior to July 1, 1999 the 12b-1 fees for the VIP Funds were 0.30%). However, in the case of the VIP Templeton Global Income Securities Fund class 2 shares, the rule 12b-1 fee is 0.25% as compared to the TVP Templeton Bond Fund's charge of 0.15%. As a result of the combination of these two funds, the class 2 shareholders of the TVP Templeton Bond Fund will pay a higher rule 12b-1 fee, but the combined fund is anticipated to have lower total annual fund operating expenses. PROPOSAL 2: NEW INVESTMENT ADVISORY AGREEMENTS FOR THE VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND, VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND AND VIP TEMPLETON INTERNATIONAL EQUITY FUND In connection with the reorganization, we are proposing that the investment objectives, policies and strategies of the larger corresponding funds survive within the VIP Trust. In addition, the combined funds will have the same investment adviser and generally the same portfolio managers of the larger corresponding funds, except for the combined fund of the TVP Templeton International Fund and the VIP Templeton International Equity Fund. To do this, we propose that VIP Templeton Developing Markets Equity Fund and VIP Templeton Global Asset Allocation Fund, which are smaller than their corresponding TVP Funds, replace their investment advisory agreements with those in effect for the TVP Templeton Developing Markets Fund and TVP Templeton Asset Allocation Fund. In connection with the reorganization, we are proposing that the VIP Templeton International Equity Fund adopt a new investment advisory agreement with Templeton Global Advisors Limited. Information about these investment advisers and their officers and directors is set forth in Exhibit __. WILL THE MANAGEMENT CHANGE FOR THE VIP FUNDS WITH NEW INVESTMENT ADVISORY AGREEMENTS? For the VIP Templeton Developing Markets Equity Fund and VIP Templeton Global Asset Allocation Fund, the day-to-day management will remain the same. For the VIP Templeton Developing Markets Equity Fund, the new agreement will be with that fund's current investment adviser. For the VIP Templeton Global Asset Allocation Fund, the new agreement will be with its current sub-adviser. For the VIP Templeton International Equity Fund, the investment adviser will be Templeton Global Advisors Limited, an affiliate of Franklin Advisers, Inc., the current investment adviser to the fund. Copies of the proposed investment advisory agreements for the VIP Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund are attached as Exhibits , , and , respectively. WHAT ARE THE TERMS OF THE EXISTING AND PROPOSED CONTRACTS FOR THE VIP FUNDS? EXISTING CONTRACTS. The VIP Templeton Global Asset Allocation Fund has an existing investment advisory agreement, and the VIP Templeton Developing Markets Equity Fund and VIP Templeton International Equity Fund have existing investment management contracts with the investment advisers named in the table below. The table below also sets forth the dates of the contracts, dates the shareholders approved the contracts and the dates the VIP Trustees last approved these contracts. DATE DATE OF LAST DATE OF SOLE APPROVED FUND INVESTMENT CONTRACT SHAREHOLDERBY THE ADVISER APPROVAL VIP TRUSTEES VIP Templeton Global Asset Templeton 04-19-95 04-17-94 04-15-99 Allocation Fund Global Advisors Limited VIP Templeton Developing Markets Templeton 03-15-94*03-15-94 04-15-99 Equity Fund Asset Management, Ltd. VIP Templeton International Franklin 01-27-92 01-23-92 04-15-99 Equity Fund Advisers, Inc. * The Board of Trustees authorized a revised agreement reflecting a corporate consolidation of the investment adviser. For the VIP Global Asset Allocation and VIP Templeton International Equity Funds, the investment advisers have entered into sub-advisory agreements with Templeton Investment Counsel, Inc., which is paid from the amounts that the investment adviser receives. By its terms, each existing investment adviser and sub-adviser contract will continue in effect from year to year so long as approved annually by the VIP Trustees (at a meeting called for that purpose) or by vote of a majority of each fund's outstanding shares. In either case, renewal of the existing investment advisory and sub-advisory contracts must be approved by a majority of the trustees that satisfy the independence requirement under the federal securities laws. The existing investment advisory and sub-advisory contracts are subject to termination without penalty on 60 days' written notice by either party to the other and will terminate automatically in the event of assignment. Under the existing investment advisory and sub-advisory contracts, subject to the control and supervision of the VIP Trustees, each investment adviser or the sub-adviser o manages the investment and reinvestment of each fund's assets in accordance with each fund's investment objectives and policies, o makes all determinations with respect to buying, holding, and selling the fund's securities, and o exercises any investment security rights, including voting rights. In performing duties under its existing investment advisory and sub-advisory contract, each investment adviser or sub-adviser is required to comply with the provisions of the VIP Trust's Agreement and Declaration of Trust and By-Laws and each fund's stated investment objectives, policies and restrictions. The existing investment advisory and sub-advisory contracts provide that each investment adviser and sub-adviser will abide by each fund's brokerage policies when selecting broker-dealers to execute portfolio transactions for the fund. Although the services provided by broker-dealers may incidentally help the investment adviser or sub-adviser reduce its expenses or otherwise benefit the investment adviser or sub-adviser, its clients, its affiliates and the fund, the value of these services is indeterminable and the investment adviser's or the sub-adviser's fee is not reduced by any offsetting or compensating arrangement. Currently, the investment advisers for the VIP Templeton Developing Markets Equity Fund and the VIP Templeton International Equity Fund are also responsible for providing other services for the day-to-day operations of the funds. The investment advisers contract with an affiliate to provide the administration services to the funds. These services include preparing and maintaining books, records, and tax and financial reports, and monitoring compliance with regulatory requirements. The investment adviser for the VIP Templeton Global Asset Allocation Fund is not required to furnish any personnel, overhead items or facilities to the funds. The investment adviser does not provide trading desk facilities or daily pricing of the fund's portfolios, although these services are provided to some other investment companies by their investment advisers. Each existing investment advisory and sub-advisory contract also provides that each investment adviser or sub-adviser, its directors, officers, employees or agents will have no liability to any fund or its shareholders for any error in judgment, mistake of law, or for any loss arising out of any investment or other act or omission in the performance of its duties, except for any liability, loss or damage resulting from willful misfeasance, bad faith, gross negligence or reckless disregard of duty. For the fiscal year ended December 31, 1998, the investment advisers received the following amounts: FUND AMOUNT RECEIVED VIP Templeton Global Asset Allocation Fund $ 585,747 VIP Templeton Developing Markets Equity Fund $2,633,409 VIP Templeton International Equity Fund $8,900,761 For the fiscal year ended December 31, 1998, the sub-advisers received from the investment advisers the following amounts: FUND AMOUNT RECEIVED VIP Templeton Global Asset Allocation Fund $ 175,133 VIP Templeton International Equity Fund $ 561,199 PROPOSED CONTRACTS. The proposed contracts will generally be the same as the contracts currently in effect for the corresponding TVP Funds. For the VIP Global Asset Allocation Fund and VIP Templeton Developing Markets Equity Fund, the proposed contract will be with the current investment adviser to the corresponding TVP Fund. For the VIP Templeton Global Asset Allocation Fund, the proposed contract will be executed with Templeton Investment Counsel Inc., which previously served as the sub-adviser to this fund. For the VIP Templeton Developing Markets Equity Fund, the proposed contract will be executed with its existing investment adviser, Templeton Asset Management Ltd. For the VIP Templeton International Equity Fund, the proposed contract will be executed with Templeton Global Advisors Limited. The proposed contract for the VIP Templeton Global Asset Allocation Fund will be the same as the investment advisory agreement currently in effect for this fund. Under the proposed contract, the VIP Templeton Global Asset Allocation Fund will pay the same fee to the investment adviser. The proposed contract for the VIP Templeton International Equity Fund and the VIP Templeton Developing Markets Equity Fund will be nearly the same as their current contracts with regard to investment advisory services. Unlike the current contracts, the proposed contracts no longer require the investment adviser to provide fund administration services to the funds. Instead, these services will be provided by an affiliate of the funds under a separate contract. The impact on total fees for the combined funds as a result of the new investment advisory agreements is set forth below: TOTAL EXPENSES HIGHER OR TOTAL EXPENSES HIGHER OR COMBINATION LOWER THAN THE TVP FUND LOWER THAN THE VIP FUND Asset Allocation Slightly Higher Lower Developing Markets Lower Moderately Higher International Lower Lower The slightly higher total fees for the combined Asset Allocation Fund over those of the TVP Templeton Asset Allocation Fund are due to the change in the basis on which fund administration services fees are calculated. The fund administration services fees for the TVP Fund are based on the TVP Trust's assets while those of the combined fund will be based on the combined fund's assets. For the combined Developing Markets Fund, the increase is due to the additional fund administration services fees that will be paid by the combined fund. For the VIP Templeton Developing Markets Equity Fund, the fund administration services fee was paid by the investment adviser out of its fund management fee. For the combined fund, the fund administration services fee will be paid separately by the combined fund. While the total fund operating expenses of the Asset Allocation and Developing Markets combined funds may potentially be higher than those of the current TVP Templeton Asset Allocation Fund or the VIP Templeton Developing Markets Equity Fund, we believe that the reorganization will provide other benefits from the combinations. The proposed contract for the VIP Templeton International Equity Fund will also differ from the current contract because the investment adviser is different. Currently, Franklin Advisers, Inc. is the investment adviser. Under the proposed contract, the investment adviser would be Templeton Global Advisors Limited. Franklin Advisers, Inc. and Templeton Global Advisors Limited are affiliated companies in the Franklin Templeton organization. Each has access to substantially similar resources, including a global network of research and support offices and services, as well as computer and communication systems. For all of these VIP Funds, the proposed contracts will result in the fees set forth below: VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND CURRENT FEE (ANNUAL RATE)* PROPOSED FEE (ANNUAL RATE)* (DID NOT INCLUDE ADMINISTRATION (WILL NOT INCLUDE ADMINISTRATION SERVICES) SERVICES) 0.65% up to and including $200 million 0.65% up to and including $200 million 0.585% over $200 million up to and 0.585% over $200 million up to and including $1.3 billion including $1.3 billion 0.52% over $1.3 billion 0.52% over $1.3 billion *Based upon average daily net assets. VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND CURRENT FEE PROPOSED FEE PROPOSED ADMINISTRATION FEE (ANNUAL RATE)* (ANNUAL RATE)* (ANNUAL RATE)* (WILL NOT INCLUDE (INCLUDED ADMINISTRATION ADMINISTRATION SERVICES) SERVICES) 1.25% 1.25% 0.15% up to and including $200 million 0.135% over $200 million, up to and including $700 million 0.10% over $700 million, up to and including $1.2 billion 0.075% over $1.2 billion *Based upon average daily net assets. VIP TEMPLETON INTERNATIONAL EQUITY FUND CURRENT FEE PROPOSED FEE PROPOSED (ANNUAL RATE)* (ANNUAL RATE)* ADMINISTRATION FEE (ANNUAL RATE)* (INCLUDED ADMINISTRATION (WILL NOT INCLUDE SERVICES) ADMINISTRATION SERVICES) 1.00% up to and including 0.75% up to and including 0.15% up to and $100 million $200 million including $200 million 0.90% over $100 million up 0.675% over $200 million 0.135% over $200 to and including $250 up to and including $1.3 million, up to and million billion including $700 million 0.80% over $250 million up 0.60% over $1.3 billion 0.10% over $700 to and including $500 million, up to and million including $1.2 billion 0.75% over $500 million 0.075% over $1.2 billiion *Based upon average daily net assets. If approved, the proposed contracts will become effective May 1, 2000 and continue in effect until April 30, 2002, and thereafter from year to year as long as approved annually by (1) the VIP Trustees and a majority of the independent trustees at a meeting called for that purpose or (2) a vote of the fund's shareholders. COMPARISON OF FEES AND EXPENSES UNDER THE EXISTING AGREEMENTS AND THE PROPOSED AGREEMENTS. Shown below is a comparison of fees and expenses that the VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing Markets Equity Fund and VIP Templeton International Equity Fund incurred during the fiscal year ended December 31, 1998, and the fees and expenses the funds would have incurred if the proposed contracts and the fund combinations would have been in effect during that same period. FISCAL YEAR ENDED DECEMBER 31, 1998 VIP TEMPLETON VIP TEMPLETON VIP TEMPLETON GLOBAL DEVELOPING INTERNATIONAL ASSETS ALLOCATION MARKETS EQUITY FUND EQUITY FUND FUND CLASS 1 CLASS 2 CLASS 1 CLASS 2 CLASS 1 CLASS 2 INVESTMENT ADVISORY FEE AND FUND ADMINISTRATION FEE Current .80% .80% 1.25% 1.25% .80% .80% Agreement........ Proposed .73% .73% 1.39% 1.39% .75% .75% Agreements....... Change......... -.07% -.07% +0.14% +0.14% -.05% -.05% TOTAL ANNUAL FUND OPERATING EXPENSES* Current .84% 1.09% 1.41% 1.66% .88% 1.13% Agreement........ Proposed .79% 1.04% 1.56% 1.81% .83% 1.08% Agreements....... Change......... -.05% -.05% .15% .15% -.05% -.05% TOTAL AMOUNT PAID FOR INVESTMENT ADVISORY FEE Current $5,086,03$5,086,03$4,888,592 $4,888,592 $15,999,513$15,999,513 Agreement........ Proposed $5,027,46$5,027,46$4,888,592 $4,888,592 $13,959,750$13,959,750 Agreements....... Change......... -$58,575 -$58,575 $0 $0 -$2,039,763-$2,039,763 TOTAL AMOUNT PAID FOR FUND ADMINISTRATION FEE Current $850,899 $850,899 $172,848 $172,848 $986,271 $986,271 Agreement........ Proposed $1,112,17$1,112,173 $557,968 $557,968 $2,179,344$2,179,344 Agreements....... Change......... $261,274 $261,274 $385,120 $385,120 $1,193,073$1,193,073 AVERAGE NET ASSETS OF FUND FISCAL YEAR $90,114,852 $0$210,672,688 $0$1,106,768,060 $0 ENDED DECEMBER 31, 1998......... AVERAGE NET ASSETS OF COMBINED FUND FISCAL YEAR $837,172,833 $0$391,087,358 $0$2,139,125,017 $0 ENDED DECEMBER 31, 1998........ *Includes other expenses, and for class 2 shares, the distribution fee. For information on these fees, see the tables on pages 15 and 16 and Comparison of Fees and Expenses of the Funds on page 34. WHAT FEES DO THE INVESTMENT ADVISERS RECEIVE FROM FUNDS SIMILAR TO THE VIP FUNDS? Templeton Investment Counsel, Inc. does not serve as investment manager or sub-adviser to other U.S. registered investment companies that have an investment objective similar to that of the VIP Templeton Global Asset Allocation Fund after the reorganization. Templeton Asset Management Ltd. also serves as investment manager or sub-adviser to one other U.S. registered investment company that has an investment objective similar to that of the VIP Templeton Developing Markets Equity Fund after the reorganization. In this capacity, it receives and expects to receive from this investment company the following investment management fees: Approximate Investment net assets as Management Fee INVESTMENT COMPANY of (ANNUAL RATE)* NOVEMBER 30, 1999 Templeton Developing Markets Trust.......... 1.25% $ X,XXX,XXX,XXX Templeton Global Advisor Limited also serves as investment manager or sub-adviser to one other U.S. registered investment company that has an investment objective similar to that of the VIP Templeton International Equity Fund after the reorganization. In this capacity, it receives and expects to receive from this investment company the following investment management fees: Approximate Investment net assets as Management Fee INVESTMENT COMPANY of (ANNUAL RATE)* NOVEMBER 30, 1999 Templeton Foreign Fund. 0.75% up to and including $200 million, $ X,XXX,XXX,XXX 0.65% over $200 million and up to and including $1.3 billion, 0.60% over $1.3 billion REASONS FOR PROPOSALS 1 AND 2 WHY ARE WE PROPOSING THE REORGANIZATION? In 1992, the Franklin and Templeton organizations joined forces. Prior to this time, Franklin and Templeton each had separate trusts offering mutual funds dedicated to insurance companies, the TVP Trust and the VIP Trust. The VIP Funds have been offered in connection with insurance products issued by one insurance company, while the TVP Funds are offered in connection with products issued by other insurance companies. The TVP Trust and the VIP Trust include many substantially similar mutual funds generally having the same investment objectives and very similar investment policies and strategies. In most cases, the portfolio managers are also the same. The duplicate funds and related expenses have no clear benefits to shareholders. To eliminate this duplication, we are proposing the reorganization. This would enable Franklin Templeton to realize operating efficiencies by maintaining a single trust of mutual funds to be offered in connection with insurance products and employee benefit plans. These operating efficiencies would also benefit shareholders and are expected pass through to you. WHAT FACTORS DID THE TVP TRUSTEES CONSIDER PRIOR TO RECOMMENDING APPROVAL OF REORGANIZATION? In determining whether or not it was appropriate to approve the reorganization and to recommend approval to shareholders, the TVP Trustees considered various matters and extensive information provided by Franklin Templeton management and the Trust's legal counsel. The nature of the matters considered and the standards used by the TVP Trustees in reaching their decision were reviewed by the TVP Trust's special legal counsel, Jorden Burt Boros Cicchetti Berenson & Johnson LLP and Bleakley Platt & Schmidt, legal counsel to the independent TVP Trustees. After review and discussions of the information provided, the independent TVP Trustees met separately to discuss the information and consider the factors to be weighed and standards to be applied in evaluating the proposed fee increase. During its October 21, 1999 meeting, the TVP Trustees received detailed information about the reorganization, including: o detailed information about the funds which included comparisons of the corresponding funds that highlighted the number of similarities between them, and identified any notable differences; o the reasons for the reorganization; o the structure of the reorganization; and o the potential impact of the reorganization on the TVP Trust, VIP Trust, their shareholders, including the shareholders' interest in the impact, if any, on the owners of the variable annuity and variable life contracts. REASONS FOR THE REORGANIZATION. The TVP Trustees reviewed the background underlying the existence of the two trusts that offered mutual funds to insurance companies. Using the detailed comparisons of the funds, the TVP Trustees looked at the corresponding TVP Funds and VIP Funds and determined that they were nearly identical. The Franklin Templeton management informed the TVP Trustees that the reorganization would potentially result in cost savings and certain other portfolio advantages arising from having larger pools of assets to invest. In addition, the TVP Trustees learned that these operational efficiencies may lead to better performance of the combined corresponding funds than the performance that could be expected for the TVP Fund or the VIP Fund on a stand alone basis. STRUCTURE OF THE REORGANIZATION. The TVP Trustees reviewed detailed information about the manner in which the reorganization would be accomplished. The TVP Trustees considered whether the TVP Trust or the VIP Trust should continue after the reorganization. In addition, the TVP Trustees addressed which funds' characteristics should continue after the reorganization. The TVP Trustees looked at various factors to determine which entity should continue after the reorganization. In reviewing comparisons of the TVP Funds and the VIP Funds, the TVP Trustees found that in five of eight instances the VIP Funds were larger. Counsel informed the TVP Trustees that larger funds are generally considered the survivor in a fund reorganization under legal and accounting principles and precedent. Moreover, the TVP Trustees received information showing that the VIP Trust has a greater number of funds than the TVP Trust. The TVP Trustees examined the detailed comparisons of the TVP Funds and VIP Funds to determine which funds' characteristics should continue after the reorganization. These comparisons included information about the funds' size, age, investment objectives and policies, investment adviser and sub-adviser, portfolio managers, and expense ratios, along with other information. These comparisons showed that the corresponding funds' (1) investment objectives and policies, (2) investment advisers responsible for the day-to-day management, and (3) portfolio managers were the same in most cases. All the VIP Funds are larger than the corresponding TVP funds, except that the TVP Templeton Asset Allocation Fund, TVP Templeton Developing Markets Fund and the TVP Templeton International Fund are larger than the corresponding VIP Funds. The fund comparisons also showed that generally the larger funds have lower expense ratios, except for the TVP Templeton Developing Markets Fund. In addition, the performance comparison showed that the larger corresponding funds had the better performance. Counsel informed the TVP Trustees that if the characteristics of any TVP Fund were selected to survive, this would require the corresponding VIP Fund to adopt the major characteristics of the TVP Fund. This includes adopting the investment advisory agreement of the TVP Fund. The TVP Trustees considered the similarities of the TVP Templeton Asset Allocation Fund, Templeton Developing Markets Fund and the Templeton International Fund and the corresponding VIP Funds. POTENTIAL IMPACT. In reviewing the potential impact of the reorganization, the TVP Trustees considered the interests of the TVP Trust's shareholders and the shareholders' considerations of the owners of the variable annuity and variable life contracts. o COMPARABILITY OF THE FUNDS. The fund comparisons highlighted the similarities between the corresponding funds' investment objectives and policies. The TVP Trustees noted some minor differences. These occur with (1) the TVP Templeton Asset Allocation Fund and the VIP Templeton Global Asset Allocation Fund, and (2) the TVP Templeton Bond Fund and VIP Templeton Global Income Securities Fund. The TVP Templeton Asset Allocation Fund and the VIP Templeton Global Asset Allocation Fund have two differences. First, the VIP Fund may invest up to 25% of its assets in higher yielding, medium and lower-rated debt securities, while the TVP Fund may only invest 15% of its assets in these securities. Second, the VIP Fund is restricted from investing in defaulted debt securities. The TVP Templeton Bond Fund and the VIP Templeton Global Income Securities Fund have two differences. First, the VIP Fund may invest up to 30% of its assets in higher yielding, medium and lower-rated debt securities, while the TVP Fund's ability to invest in these securities is not limited. Second, the VIP Fund is restricted from investing in defaulted debt securities. Because the characteristics of the TVP Templeton Asset Allocation Fund would survive the reorganization, there would be no impact on its shareholders. For the TVP Templeton Bond Fund, the TVP Trustees found that these differences are very minor and/or are of no practical significance. The TVP Trustees determined that the shareholders of the TVP Templeton Bond Fund would benefit overall by the combination with the VIP Templeton Global Income Securities Fund. o COMPARABILITY OF THE FUNDS' MANAGEMENT. The TVP Trustees noted that all the corresponding funds' day-to-day management is the same except (1) for the TVP Templeton Stock Fund and the VIP Templeton Global Growth Fund and (2) that upon the combination of the TVP Templeton International Fund and the VIP Templeton International Equity Fund, the VIP Fund would adopt a new investment advisory agreement with Templeton Global Advisors Limited. The investment adviser to the TVP Templeton Stock Fund is Templeton Investment Counsel, Inc. and the investment adviser to the VIP Templeton Global Growth Fund is Templeton Global Advisors Limited. The TVP Trustees reviewed information about Templeton Global Advisors Limited, including the fact that Templeton Investment Counsel, Inc. and Templeton Global Advisors Limited are part of the Franklin Templeton group of investment advisory firms with access to substantially similar resources. The TVP Trustees noted that since its inception in 1994 the VIP Templeton Global Growth Fund has outperformed or had essentially the same performance as the TVP Stock Fund, while assessing lower overall management fees. For the proposed change in the investment adviser to the VIP Templeton International Equity Fund, the TVP Trustees considered information about Templeton Global Advisors Limited. The TVP Trustees noted that the change in investment adviser was merely a change within the Franklin Templeton organization. Thus, the TVP Trustees could assume that the new investment adviser would have access to substantially similar resources and would manage the fund in the same manner as the prior investment adviser. For the TVP Franklin S&P 500 Index Fund and the TVP Franklin Strategic Income Investments Fund, the TVP Trustees noted that the new corresponding VIP funds would have the same characteristics of these funds, including the same investment advisers and sub-advisers. o EXPENSES OF THE FUNDS. The TVP Trustees compared the expenses of the corresponding funds and reviewed the anticipated expense ratios of the combined funds. The TVP Trustees noted that fund comparisons showed that all the larger funds, except for the TVP Templeton Developing Markets Fund, had the lower expense ratios. The TVP Trustees found that the expense ratios of the combined funds were lower than the ratios for the TVP Funds, except for a slight increase in the combined fund for the TVP Templeton Asset Allocation Fund. The TVP Trustees considered the differential in the rule 12b-1 fees for class 2 shares of the TVP Templeton Bond Fund and the VIP Templeton Global Income Securities Fund. Total annual fund operating expenses for the combined fund, however, are expected to slightly decrease. The TVP Trustees considered all of the other benefits of the reorganization, and determined that these benefits outweighed the slight increase in the expense ratio for the TVP Templeton Asset Allocation Fund, and the slight increase in the rule 12b-1 fees for class 2 shares of the TVP Templeton Bond Fund. o PERFORMANCE OF THE FUNDS. The TVP Trustees compared the historical investment performance records of the corresponding funds. The performance of each of the TVP Funds and VIP Funds as of ___________, was as set out in Exhibit . The TVP --- Trustees noted that the larger corresponding funds had the better performance history. Any differences in performance were attributed to differences in asset sizes and cash flows. Due to the substantial similarities in investment objectives and policies, the TVP Trustees were informed that over time the corresponding funds could be expected to perform similarly, though not identically. In addition, the TVP Trustees were informed that due to the anticipated cost savings from the reorganization, it was expected that the combined funds would have better performance than the performance that could be expected for the TVP Fund or the VIP Fund on a stand alone basis. o TAX CONSEQUENCES. The TVP Trustees were informed that the reorganization plan was anticipated to be tax-free. o IMPACT ON CONTRACT VALUES. The TVP Trustees were told that the reorganization would not impact the contract owners' values because the exchange of shares would be made at the corresponding funds' net asset values. Moreover, the separate accounts through which the contracts are funded would not change except for the fund in which the separate accounts invest. After the reorganization, the contract owners' values would vary based upon the investment experience of the combined funds in the VIP Trust. The TVP Trustees were informed that the insurance company shareholders would take all action necessary to ensure that the interests of the contract owners will be duly and validly recorded on the books and records of the insurance company shareholders. WHAT FACTORS DID THE VIP TRUSTEES CONSIDER? In determining whether or not it was appropriate to approve the proposed investment advisory agreements and to recommend approval to shareholders, the VIP Trustees considered various matters and extensive information provided by the Franklin Templeton management and the VIP Trust's legal counsel. The nature of the matters to be considered and the standards to be used by the VIP Trustees in reaching their decision were reviewed by the VIP Trust's special legal counsel, Jorden Burt Boros Cicchetti Berenson & Johnson LLP, and Bleakley Platt & Schmidt, legal counsel to the independent VIP Trustees. After review and discussions of the information provided, the independent VIP Trustees determined separately to discuss the information and consider the factors to be weighed and standards to be applied in evaluating the proposed agreements. At a meeting held on October 22, 1999, the VIP Trustees considered substantially the same information as was considered by the TVP Trustees. VIP Trustees considered the similarities between the TVP Templeton Asset Allocation Fund, Templeton Developing Markets Fund and the Templeton International Fund and the corresponding VIP Funds to determine if these VIP Funds should adopt new investment advisory agreements. The VIP Trustees noted that the investment objectives were the same and the investment advisers of the VIP Templeton Developing Markets Equity Fund and VIP Templeton Global Asset Allocation Fund who would be responsible for the day-to-day management would be the same. The VIP Trustees noted that the proposed contract for the VIP Templeton Global Asset Allocation Fund will be the same as the investment advisory agreements currently in effect for this fund. Under the proposed contract, the VIP Templeton Global Asset Allocation Fund will pay the same fee to the investment adviser The VIP Trustees were informed that after the combination, the total annual operating expenses are anticipated to be lower than those of the VIP Fund. The VIP Trustees found that the proposed contract for the VIP Templeton International Equity Fund and the VIP Templeton Developing Markets Equity Fund will be nearly the same as their current contracts, except that the investment adviser would no longer be providing fund administration services to the funds. The VIP Trustees also reviewed the expense ratios of the combined funds. As a result of the new agreements, the fees for the proposed investment advisory contract and the administration service contract for the VIP Templeton International Fund will be lower than the amounts under the current contract. For the VIP Templeton Developing Markets Equity Fund, however, the change was expected to result in moderately higher total annual fund operating expenses. The increase is due to the separate fee for the fund administration services contract that the combined fund will pay, while paying the same fee to the investment adviser. Currently, the fee paid to the investment adviser includes an amount for fund administration services. Because the combined fund will pay this new separate fee, the VIP Trustees recognized that the investment advisory fee would effectively increase. The VIP Trustees reviewed information comparing the total operating fund expenses of the combined Developing Markets Fund with those of similar funds. This information showed that the current total fund operating expenses of the VIP Fund were generally lower than similar funds and that these expenses for the combined fund would continue to be lower than similar funds. In addition, the VIP Trustees compared the performance of the VIP Templeton Developing Markets Equity Fund with that of similar funds. Also, the VIP Trustees considered the expertise of and the services provided by the investment adviser. The VIP Trustees recognized that the investment adviser had established an extensive global network of research resources which includes a global research team traveling extensively throughout the world, visiting issuers and developing research ideas. The effective increase would also assist the investment adviser in retaining and attracting capable personnel. The VIP Trustees considered all of the other benefits of the reorganization, and determined that these benefits outweighed the modest increases in expense ratios. The VIP Trustees also considered the change in the investment adviser to the VIP Templeton International Equity Fund. The VIP Trustees reviewed information about Templeton Global Advisors Limited. The VIP Trustees noted that the change in investment adviser was merely a change in the corporate structure within the Franklin Templeton organization. Thus, the VIP Trustees believed that the new investment adviser would have access to substantially similar resources and would manage the fund in the same manner as the prior investment adviser. At this meeting the VIP Trustees also considered proposals that are appropriate to the reorganization to change and eliminate certain fundamental investment restrictions for the VIP Templeton Global Asset Allocation Fund, VIP Templeton Developing Markets Fund and VIP Templeton International Equity Fund. These proposals and the VIP Trustees consideration of these proposals are described in proposals 3 and 4 of this document. CONCLUSION o The TVP Trustees recommend that shareholders vote "for" approval of the reorganization as to each TVP Fund, including the adoption of the investment advisory agreements. o The VIP Trustees recommend that shareholders of the VIP Trust Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund and Templeton International Equity Fund vote "for" approval of the new investment advisory agreements. INFORMATION ABOUT THE REORGANIZATION HOW WILL THE REORGANIZATION WORK? The reorganization will be completed through two principal steps - creating two new funds for the VIP Trust and eliminating duplicate funds. In connection with the reorganization, certain VIP Funds will adopt new investment advisory agreements and will amend or eliminate some of their fundamental investment restrictions. To eliminate the duplicate funds, we propose that: o The TVP Trust transfer all of its assets and liabilities to the VIP Trust; o The VIP Trust issue shares of the VIP Funds which correspond to the TVP Funds in exchange for the TVP Trust's assets and liabilities; o The TVP Trust distribute shares of the corresponding VIP Funds to shareholders of the TVP Trust; and o The TVP Trust be dissolved. HOW WILL THE SHARES BE EXCHANGED AND DISTRIBUTED? In exchange for the transferred assets and liabilities of the TVP Funds, the TVP Trust will issue shares of the corresponding VIP Funds. The VIP Trust will issue the number of full or fractional shares equal to the dollar value of the shares of the corresponding TVP Fund that are outstanding immediately before the reorganization. The shareholders of class 1 shares of the TVP Trust will receive class 1 shares of the corresponding VIP Fund. The shareholders of class 2 shares of the TVP Trust will receive class 2 shares of the corresponding VIP Fund. The shareholder of class 3 shares of the TVP Trust will receive class 3 shares of the corresponding VIP Fund. TVP Trust shareholders will also receive any unpaid dividends or distributions that would be declared before the reorganization of the TVP Trust. The VIP Trust will establish an account for each shareholder of the TVP Trust reflecting the number of VIP Fund shares distributed to that shareholder. The VIP Trust will not issue share certificates. WHAT WILL HAPPEN WITH THE TVP FRANKLIN S&P 500 INDEX FUND AND THE TVP FRANKLIN STRATEGIC INCOME INVESTMENTS FUND? Two new VIP Funds will be created with the same features of the TVP Franklin S&P 500 Index and TVP Franklin Strategic Income Investments Funds. The VIP Trust has taken all actions required by state law and its controlling trust documents to establish the new VIP Funds. The new VIP Funds thus will be eligible to receive the assets of the corresponding TVP Funds. The VIP Trust will file a registration statement to add these two new funds. Because the VIP Funds will adopt the features of the current corresponding TVP Funds, the registration for the new VIP Funds is not anticipated to be materially different from those of the TVP Funds. The SEC must declare this registration statement effective prior to or concurrent with the reorganization. CAN THE REORGANIZATION BE DELAYED OR TERMINATED? Yes. In order for us to complete the reorganization, all the conditions contained in a reorganization agreement between the TVP Trust and VIP Trust must be satisfied. One condition is your approval of the reorganization. We are required to obtain approval of the reorganization from each of the TVP Fund's shareholders. If we do not receive enough votes for the reorganization of any TVP Fund, the reorganization will not be completed for that TVP Fund. In such case, we will consider what further action is appropriate for that TVP Fund. We are also required to obtain separate approval from the shareholders of each VIP Fund for which we propose to adopt a new investment advisory agreement. If we do not receive enough votes for the approval of the new investment advisory agreement from the shareholders of any of the applicable VIP Fund, we will complete the reorganization. The old investment advisory agreement will continue in effect for the combined corresponding funds. Finally, we are seeking approval to change the fundamental investment restrictions for certain VIP Funds. If we do not receive enough votes for the proposals, we will complete the reorganization, but the current fundamental investment restrictions will continue to apply. The TVP Trust and VIP Trust may agree to terminate the reorganization at any time, before or after approval by shareholders. In addition, if any condition in the agreement that benefits the VIP Trust has not been satisfied, the VIP Trust may terminate the reorganization, unless the VIP Trust agrees to waive the condition. Likewise, if any condition in the agreement that benefits the TVP Trust has not been satisfied, then the TVP Trust may terminate the reorganization, unless the TVP Trust agrees to waive the condition. WHAT ARE THE TAX CONSEQUENCES? In the opinion of Jorden Burt Boros Cicchetti Berenson & Johnson LLP, special counsel to the TVP Trust and the VIP Trust, based upon certain assumptions and representations, it is not expected that shareholders of the TVP Funds will recognize any gain or loss for federal income tax purposes as a result of the exchange of their shares of the TVP Funds for shares of the corresponding VIP Funds or that VIP Trust will recognize any gain or loss upon receipt of the assets of the TVP Funds. The TVP Trust and VIP Trust have not sought, and will not seek, a private letter ruling from the Internal Revenue Service (IRS) with respect to the federal income tax consequences of the reorganization. The opinion of Jorden Burt Boros Cicchetti Berenson & Johnson LLP with respect to the tax consequences of the reorganization is not binding on the IRS and does not preclude the IRS from adopting a contrary position. Shareholders should consult their own tax advisers concerning the potential tax consequences of the reorganization to them, including any applicable foreign, state or local income tax consequences. WHO WILL PAY THE EXPENSES? The TVP Trust and VIP Trust have agreed that the cost to accomplish the reorganization will be split among the TVP Trust and VIP Trust and the investment advisers to the funds. These costs include costs of obtaining the necessary approvals for the reorganization, as well as legal fees and accounting fees for preparing this document, fees for mailing this document and expenses for holding the special meetings. HOW WOULD THE REORGANIZATION CHANGE THE FUNDS' STATEMENT OF CAPITAL? The following tables show the capitalization of the TVP Funds and the corresponding VIP Funds as of June 30, 1999 and on a pro forma basis as of that date giving effect to the proposed reorganization. VIP FRANKLIN TVP FRANKLIN LARGE CAP LARGE CAP GROWTH GROWTH INVESTMENTS FUND SECURITIES FUND PRO FORMA NET ASSETS Class 1 $488,589 $355,536,656 $356,025 Class 2 n/a n/a n/a NET ASSET VALUE PER SHARE Class 1 $13.13 $18.06 $18.06 Class 2 n/a $18.02 $18.02 SHARES OUTSTANDING Class 1 37,220 19,689,451 19,716,505 Class 2 n/a 17,055 17,055 TVP FRANKLIN SMALL CAP VIP FRANKLIN INVESTMENTS FUND SMALL CAP FUND PRO FORMA NET ASSETS Class 1 $482,735 $299,177,022 $299,659,757 Class 2 $19,867,737 $78,214 $19,945,951 NET ASSET VALUE PER SHARE Class 1 $10.74 $15.98 $15.98 Class 2 $10.73 $15.95 $15.95 SHARES OUTSTANDING Class 1 44,934 18,724,755 18,754,964 Class 2 1,852,384 4,903 1,250,529 TVP MUTUAL SHARES VIP MUTUAL INVESTMENTS FUND SHARES PRO FORMA SECURITIES FUND NET ASSETS Class 1 $2,456,111 $496,887,152 $499,324,045 Class 2 $1,210,949 $442,187 $1,653,101 NET ASSET VALUE PER SHARE Class 1 $11.16 $13.70 $13.70 Class 2 $11.15 $13.68 $13.68 SHARES OUTSTANDING Class 1 220,178 36,256,033 36,435,311 Class 2 108,637 32,326 120,846 VIP TEMPLETON TVP TEMPLETON ASSET GLOBAL ASSET ALLOCATION FUND ALLOCATION FUND PRO FORMA NET ASSETS Class 1 $660,891,561 $70,553,184 $731,341,753 Class 2 $15,490,118 $43,061 $15,531,081 NET ASSET VALUE PER SHARE Class 1 $21.11 $13.32 $13.32 Class 2 $21.05 $13.29 $13.29 SHARES OUTSTANDING Class 1 31,309,340 5,297,517 54,914,001 Class 2 735,922 3,239 1,168,786 TVP TEMPLETON BOND FUND VIP TEMPLETON PRO FORMA GLOBAL INCOME SECURITIES FUND NET ASSETS Class 1 $23,523,321 $113,608,897 $137,145,104 Class 2 $289,795 $82,432 $372,240 NET ASSET VALUE PER SHARE Class 1 $10.04 $12.20 $12.20 Class 2 $10.03 $12.18 $12.18 SHARES OUTSTANDING Class 1 2,343,325 9,311,962 11,240,103 Class 2 28,891 6,766 30,559 VIP TEMPLETON TVP TEMPLETON DEVELOPING DEVELOPING MARKETS FUND MARKETS EQUITY PRO FORMA FUND NET ASSETS Class 1 $268,035,925 $188,802,531 $456,676,620 Class 2 $35,071,995 $587,362 $35,649,221 NET ASSET VALUE PER SHARE Class 1 $7.23 $9.39 $9.39 Class 2 $7.21 $9.38 $9.38 SHARES OUTSTANDING Class 1 37,062,731 20,102,042 48,646,869 Class 2 4,862,951 62,613 3,801,632 VIP TEMPLETON TVP TEMPLETON INTERNATIONAL INTERNATIONAL FUND EQUITY FUND PRO FORMA NET ASSETS Class 1 $996,310,751 $824,805,932 $1,821,453,295 Class 2 $81,169,758 $4,293,014 $85,472,863 NET ASSET VALUE PER SHARE Class 1 $19.85 $17.30 $17.30 Class 2 $19.77 $17.27 $17.27 SHARES OUTSTANDING Class 1 50,203,995 47,685,867 105,276,084 Class 2 4,105,074 248,579 4,948,623 VIP TEMPLETON TVP TEMPLETON STOCK GLOBAL GROWTH PRO FORMA FUND FUND NET ASSETS Class 1 $620,428,154 $732,163,775 $1,352,733,204 Class 2 $27,435,349 $1,481,045 $28,919,051 NET ASSET VALUE PER SHARE Class 1 $21.28 $16.54 $16.54 Class 2 $21.21 $16.52 $16.52 SHARES OUTSTANDING Class 1 29,158,278 44,256,213 81,766,984 Class 2 1,293,337 89,660 1,750,395 TVP FRANKLIN S&P 500 VIP FRANKLIN S&P INDEX FUND 500 INDEX FUND PRO FORMA NET ASSETS Class 1 n/a n/a n/a Class 2 n/a n/a n/a Class 3 n/a n/a n/a NET ASSET VALUE PER SHARE Class 1 n/a n/a n/a Class 2 n/a n/a n/a Class 3 n/a n/a n/a SHARES OUTSTANDING Class 1 n/a n/a n/a Class 2 n/a n/a n/a Class 3 n/a n/a n/a TVP FRANKLIN STRATEGIC VIP FRANKLIN INCOME INVESTMENTS FUND STRATEGIC INCOME PRO FORMA SECURITIES FUND NET ASSETS Class 1 $3,308,832 n/a $3,308,832 Class 2 n/a n/a n/a NET ASSET VALUE PER SHARE Class 1 $9.86 n/a $9.86 Class 2 n/a n/a n/a SHARES OUTSTANDING Class 1 335,659 n/a 335,659 Class 2 n/a n/a n/a PROPOSALS 3 & 4 - CHANGES TO THE FUNDAMENTAL INVESTMENT RESTRICTIONS OF THE VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND INTRODUCTION WHY ARE WE PROPOSING AMENDMENTS OR ELIMINATING CERTAIN FUNDAMENTAL INVESTMENT RESTRICTIONS? Recent changes in federal law no longer require certain investment restrictions of the funds. The changes are consistent with the reorganization by making the fundamental investment restrictions more like the larger corresponding TVP Funds.. The changes also are consistent with Franklin Templeton's goal of standardizing restrictions among all of the funds in the Franklin Templeton group of funds. We are proposing to make changes to the fundamental investment restrictions as shown in the chart below: <TABLE> <CAPTION> --------------------------------------------------------------------------------------- VIP TEMPLETON VIP TEMPLETON VIP RESTRICTION GLOBAL ASSET DEVELOPING TEMPLETON ALLOCATION MARKETS EQUITY INTERNATIONAL FUND FUND EQUITY FUND --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- <CAPTION> PROPOSAL 3 - MODIFICATION OF RESTRICTIONS (each sub-proposal must be individually approved) --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- <S> <C> <C> <C> (a) Diversification X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- (b) Borrowing X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- (c) Lending X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- (d) Underwriting X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- (e) Concentration X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- (f) Senior Securities X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- (g) Real Estate and Commodities* X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- PROPOSAL 4 - ELIMINATION OF RESTRICTIONS (all of the following approved as a group) --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Illiquid Securities** X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Exercising Control or Management X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Unseasoned Companies N/A X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Margin Securities X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Securities with Unlimited Liability X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Restricted Securities N/A X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Management Ownership of Securities X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Compliance with Section 817(h) X X X --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Warrants N/A X N/A --------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------- Unlisted Foreign Issuers N/A X N/A --------------------------------------------------------------------------------------- </TABLE> *Currently two restrictions that will be combined into one. **There are two restrictions with respect to illiquid securities that we are proposing to eliminate. Each fund is subject to certain investment restrictions that govern the fund's investment activities. Under the 1940 Act, certain investment restrictions are required to be "fundamental," which means that they can only be changed by a shareholder vote. Recently, certain legal and regulatory requirements applicable to mutual funds changed. Each fund currently is subject to fundamental investment restrictions that are either more restrictive than required under current law regarding diversification, and borrowing and lending by these funds. Accordingly, we are recommending the amendment to these fundamental investment restrictions. The proposed changes will not affect any fund's investment goal. Although the proposed changes in fundamental investment restrictions will provide each fund greater flexibility to respond to future investment opportunities, we do not anticipate that the changes, individually or in the aggregate, will result in a material change in the level of investment risk associated with investment in the fund. We do not anticipate that the proposed changes will materially affect the manner in which any fund is managed. PROPOSAL 3: TO APPROVE AMENDMENTS TO CERTAIN OF THE FUNDS' FUNDAMENTAL INVESTMENT RESTRICTIONS (THIS PROPOSAL INVOLVES SEPARATE VOTES ON SUB-PROPOSALS 3A - 3G) SUB-PROPOSAL 3A: TO AMEND THE FUNDS' FUNDAMENTAL INVESTMENT RESTRICTION REGARDING DIVERSIFICATION OF INVESTMENTS. The 1940 Act prohibits a "diversified" fund from purchasing securities of any one issuer if, at the time of purchase, as to 75% of the fund's total assets, more than 5% of the fund's total assets would be invested in securities of that issuer, or the fund would own or hold more than 10% of the outstanding voting securities of that issuer, except that up to 25% of the fund's total assets may be invested without regard to these limitations. Under the 1940 Act, as recently amended, these 5% and 10% limitations do not apply to securities issued or guaranteed by the U.S. government, its agencies or instrumentalities, or to the securities of other investment companies. While the 1940 Act excludes the securities of other investment companies and the U.S. government and its agencies and instrumentalities, each fund's current restriction does not include a carve out for the securities of other investment companies. In addition, although the 1940 Act prohibits a fund from owning or holding more than 10% of the "outstanding voting securities" of an issuer, each fund's current restriction prohibits the fund from holding more than 10% of "any or all classes" of the securities of an issuer. Since each fund's restriction excludes a broader class of securities from the 10% limitation, it is more restrictive than the 1940 Act. WHAT EFFECT WILL THE CHANGE IN THE CURRENT INVESTMENT DIVERSIFICATION RESTRICTION HAVE ON THE FUNDS? Amending each fund's diversification policy would make it consistent with the current definition of a diversified investment company under the 1940 Act, and would provide each fund with greater investment flexibility. The proposed restriction is similar to the current restriction. The most significant change in the proposed restriction is that it excludes other investment companies securities from the 5% and 10% limitations. With this exclusion, each fund would be able to invest cash held at the end of the day in money market funds or other short-term investments without regard to the 5% and 10% investment limitations. Each fund, together with the other Franklin Templeton funds, has obtained an exemptive order from the SEC (the "Cash Sweep Order") which permits the Franklin Templeton funds to invest their uninvested cash in one or more Franklin or Templeton money market funds. Amending each fund's current restriction would permit each fund to take advantage of the investment opportunities presented by the Cash Sweep Order, since the Cash Sweep Order contemplates relief from the 1940 Act restrictions relating to the permissible percentage investments in other investment companies. SUB-PROPOSAL 3B: TO AMEND THE FUNDS' FUNDAMENTAL INVESTMENT RESTRICTION REGARDING BORROWING. Investment companies must impose certain limitations on their borrowing activities. The limitations on borrowing are generally designed to protect shareholders and their investments by restricting a fund's ability to subject its assets to the claims of creditors who might have a claim to the fund's assets that would take precedence over the claims of shareholders. A fund's borrowing restriction must be fundamental. Federal law allows a fund to borrow from banks up to one-third of its total assets (including the amount borrowed). In addition, a fund may borrow up to 5% of its total assets for temporary purposes from any person. Funds typically borrow money to meet redemptions in order to avoid forced, unplanned sales of portfolio securities. This technique allows a fund greater flexibility to buy and sell portfolio securities for investment or tax considerations, rather than for cash flow considerations. WHAT EFFECT WILL THE CHANGE IN THE CURRENT BORROWING RESTRICTION HAVE ON A FUND? The VIP Templeton International Fund is presently limited to borrowing up to 5% of the value of its total assets for any reason, except from banks for temporary emergency purposes only. In addition, the current restriction does not specifically limit the fund's overall ability to borrow up to the 33 1/3% allowed under current law. The VIP Templeton International Fund's current restriction also states that the fund may not borrow in excess of 5% "for direct investment in securities." The 1940 Act limits on borrowing historically were interpreted to prohibit mutual funds from making additional investments in securities while borrowings exceeded 5% of total assets. However, such a 5% limit is not required under the 1940 Act, rather it originated from informal regulatory positions. Accordingly, under the proposed restriction, each fund would be permitted to make additional investments, even if borrowings exceed 5% of total assets. The VIP Templeton Global Asset Allocation and VIP Templeton Developing Markets Equity Funds' restriction only permit them to borrow from banks an amount not exceeding one-third of the value of the fund's total asset including the amount borrowed. The proposed restriction would clarify that each fund may borrow: (1) from banks to the extent permitted by the 1940 Act or any exemptions therefrom, and (2) from any person for temporary purposes. However, in either case, all borrowings must not exceed 33 1/3% of total assets. The proposed restriction also permits each fund to borrow cash from affiliated investment companies. Each fund, together with other Franklin Templeton funds, has requested an order from the SEC that would permit each fund to borrow money from affiliated Franklin Templeton funds (the "Interfund Borrowing and Lending Order.") As discussed in Sub-Proposal 2c, the Interfund Borrowing and Lending Order also would permit each fund to lend money to other Franklin Templeton funds. If the Interfund Borrowing and Lending Order is approved, the proposed restriction would permit each fund, under certain circumstances, to borrow money from other Franklin Templeton funds at rates which are more favorable than those which each fund would receive if it borrowed from banks or other lenders. Since the proposed borrowing restriction would provide each fund with greater borrowing flexibility, each fund may be subject to additional costs, as well as the risks inherent to borrowing, such as reduced total return. SUB-PROPOSAL 3C: TO AMEND THE FUNDS' FUNDAMENTAL INVESTMENT RESTRICTION REGARDING LENDING. Certain investment techniques could, under certain circumstances, be considered to be loans. For example, if a fund invests in debt securities, such investments might be considered to be loans from each fund to the issuer of the debt securities. In order to ensure that a fund may invest in bonds, debentures or other debt securities or repurchase agreements, which could technically be characterized as the making of loans, each fund's current fundamental restriction excludes these securities from the restrictions. In addition, each fund's fundamental policy explicitly permits each fund to lend its portfolio securities. Securities lending is a practice that has become common in the mutual fund industry and involves the temporary loan of portfolio securities to parties who use the securities for the settlement of securities transactions. The collateral delivered to a fund in connection with such a transaction is then invested to provide the fund with additional income it might not otherwise have. Securities lending involves certain risks if the borrower fails to return the securities. WHAT EFFECT WILL STANDARDIZATION OF THE CURRENT LENDING RESTRICTION HAVE ON THE FUNDS? The proposed restriction would provide each fund with greater lending flexibility. While the proposed restriction retains the carve-outs in the existing restriction, it also would provide each fund with additional flexibility to make loans to affiliated investment companies to the extent permitted by the Interfund Borrowing and Lending Order. If the Interfund Borrowing and Lending Order is approved, the proposed restriction would permit each fund, under certain conditions, to lend cash to other Franklin Templeton funds at rates higher than those which the fund would receive if the fund loaned cash to banks through short term lendings such as repurchase agreements. We anticipate that this additional flexibility to lend cash to affiliated investment companies would provide additional investment opportunities, and would enhance each fund's ability to respond to changes in legal, market, industry or regulatory conditions. SUB-PROPOSAL 3D: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING UNDERWRITING. Under the 1940 Act, a fund's policy concerning underwriting is required to be fundamental. Under the federal securities laws, a person or company generally is considered an underwriter if it participates in the public distribution of securities of OTHER ISSUERS, usually by purchasing the securities from the issuer with the intention of re-selling the securities to the public. From time to time, a mutual fund may purchase a security for investment purposes which it later sells or redistributes to institutional investors or others under circumstances where a fund could possibly be considered to be an underwriter under the technical definition of underwriter contained in the securities laws. For example, funds often purchase securities in private securities transactions where a resale could raise a question relating to whether or not the fund is technically acting as an underwriter. However, recent SEC interpretations clarify that re-sales of privately placed securities by institutional investors do not make the institutional investor an underwriter in these circumstances. The proposed restriction encompasses these SEC positions. WHAT EFFECT WILL CHANGING THE CURRENT UNDERWRITING RESTRICTION HAVE ON THE FUNDS? The proposed restriction is substantially similar to each fund's current restriction. As with the current restriction, the proposed restriction specifically permits the funds to resell restricted securities in those instances where there may be a question as to whether a fund is technically acting as an underwriter. The proposed underwriting restriction also clarifies that a fund may sell its own shares without being deemed an underwriter. Under the 1940 Act, a mutual fund will not be considered an underwriter if it sells its own shares pursuant to a written distribution plan that complies with Rule 12b-1 of the 1940 Act. Furthermore, the new restriction would help each fund achieve the goal of amending the language of the investment restrictions to reflect current SEC interpretations. It is not anticipated that adoption of the proposed restriction would involve any additional risk since it would not affect the way each fund is currently managed. SUB-PROPOSAL 3E: TO AMEND THE FUNDS FUNDAMENTAL INVESTMENT RESTRICTIONS REGARDING INVESTMENTS IN REAL ESTATE AND COMMODITIES. Under the 1940 Act, a fund's restrictions regarding investments in real estate and commodities must be fundamental. Each fund presently has two separate investment restrictions that govern each fund's ability to invest in real estate and commodities. The proposed standardized restriction would combine these two restrictions into one, as well as clarify the types of financial commodities and other instruments in which each fund may invest. WHAT EFFECT WILL COMBINING AND REVISING THE REAL ESTATE AND COMMODITIES RESTRICTIONS HAVE ON THE FUNDS? The proposed restriction would combine the limitations on investing in both real estate and commodities into one restriction. Real Estate: Each fund's current restriction states that the fund may not invest in real estate, but it specifically excludes "first mortgage loans or other direct obligations secured by real estate" from the restriction. Since an investment in first mortgage loans or other obligations secured by real estate would not be considered a direct investment in real estate, the proposed restriction would continue to permit such an investment. The proposed restriction would specifically reference each fund's ability to purchase securities of real estate investment trusts ("REITs") to the extent that an investment in REITs would otherwise meet each fund's investment criteria. Investing in REITs has gained popularity since the early 1990s, and the number of REITs available for investment has also increased dramatically. Each fund will continue to be prohibited from directly purchasing or selling real estate. It is not anticipated that the proposed restriction would involve any additional risk to the funds as the funds do not currently, and have not in the past, invested in real estate or REITs. Therefore, the proposed restriction will not affect the way the funds are currently managed. COMMODITIES: Generally, commodities are considered to be physical commodities such as wheat, cotton, rice and corn. However, futures contracts, including financial futures contracts such as those related to currencies, stock indices or interest rates, are also considered to be commodities. Funds typically invest in such contracts and options on contracts for hedging or other investment purposes. The proposed restriction clarifies that each fund has the flexibility to invest in financial futures contracts and related options. The proposed restriction would permit investment in financial futures instruments for either investment or hedging purposes. Although each fund hasalways had the ability to invest in options on securities and options on futures, they have not done so. Each fund does not intend to begin investing in financial futures contracts and related options. Therefore, it is not anticipated that the proposed restriction would involve any additional risk. Using financial futures instruments can involve substantial risks, and will be utilized only if the investment adviser believes such risks are advisable. SUB-PROPOSAL 3F: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING ISSUING SENIOR SECURITIES. Under the 1940 Act, a fund must have an investment policy describing its ability to issue senior securities. A "senior security" is an obligation of a fund with respect to its earnings or assets that takes precedence over the claims of the fund's shareholders with respect to the same earnings or assets. The 1940 Act generally prohibits an open-end fund from issuing senior securities in order to limit the use of leverage. In general, a fund uses leverage when it borrows money to enter into securities transactions, or acquires an asset without being required to make payment until a later time. SEC staff interpretations allow a fund to engage in a number of types of transactions which might otherwise be considered to create "senior securities" or "leverage," so long as the fund meets certain collateral requirements designed to protect shareholders. For example, some transactions that may create senior security concerns include short sales, certain options and futures transactions, reverse repurchase agreements and securities transactions that obligate the fund to pay money at a future date (such as when-issued, forward commitment or delayed delivery transactions). When engaging in such transactions, a fund must mark on its books or its custodian bank's books, or set aside money or securities with its custodian bank to meet the SEC staff's collateralization requirements. This procedure effectively eliminates a fund's ability to engage in leverage for these types of transactions. A number of each fund's current fundamental and non-fundamental investment restrictions relate to senior securities. For example, each fund currently is prohibited from purchasing securities on margin and making short sales. Each fund was originally required by the states to have fundamental restrictions regarding these transactions. These types of transactions also raise senior security issues under the federal securities laws. In addition, each fund presently has a non-fundamental policy under which it may not "pledge, mortgage or hypothecate its assets as security for loans (except to the extent of allowable temporary loans)." These types of transactions are generally considered to raise senior security concerns. Adopting Sub-Proposal 3f would consolidate into one investment restriction: (1) a concise statement of each fund's senior security restriction, as well as (2) each fund's current fundamental and non-fundamental restrictions that address senior security issues. The part of each fund's current restriction relating to the purchase of securities on margin is proposed to be eliminated in Proposal 4. The restriction on short sales would be carved out of the new senior securities restriction, as further described below. WHAT EFFECT WILL AMENDING THE RESTRICTION REGARDING ISSUING SENIOR SECURITIES HAVE ON THE FUNDS? The proposed restriction would permit each fund to engage in permissible types of leveraging transactions. The proposed restriction would permit a fund to engage in options, futures contracts, forward contracts, repurchase transactions or reverse repurchase transactions. The proposed restriction also would permit a fund to make short sales as permitted under the 1940 Act, and any exemptions available under the 1940 Act. Essentially, the proposed restriction clarifies a fund's ability to engage in those investment transactions (such as repurchase transactions) that, while appearing to raise senior security concerns, have been interpreted as not constituting the issuance of senior securities under the federal securities laws. The Board does not anticipate that any additional risk to a fund will occur if the fund combines the current fundamental restriction with the non-fundamental restriction to result in one, standardized, fundamental investment restriction regarding senior securities. SUB-PROPOSAL 3G: TO AMEND EACH FUND'S FUNDAMENTAL INVESTMENT RESTRICTION REGARDING CONCENTRATION OF THE FUND'S INVESTMENTS IN THE SAME INDUSTRY. Under the 1940 Act, a fund's policy of concentrating its investments in securities of companies in the same industry must be fundamental. Under the federal securities laws, a mutual fund "concentrates" its investments if it invests more than 25% of its "net" assets (exclusive of certain items such as cash, U.S. government securities, securities of other investment companies, and tax-exempt securities) in a particular industry or group of industries. A fund is not permitted to concentrate its investments in a particular industry unless it so states. WHAT EFFECT WILL AMENDING THE CURRENT RESTRICTION REGARDING INDUSTRY CONCENTRATION HAVE ON THE FUNDS? Each fund's existing fundamental restriction recites the fund's concentration policy and states that the fund may not invest more than 25% of its assets in any single industry. The proposed restriction provides each fund with marginally added flexibility because, consistent with SEC interpretations, it exempts from the 25% limitation: (i) securities of other investment companies, and (ii) securities issued or guaranteed by the U. S. government or any of its agencies or instrumentalities. It also recites the current federal securities law requirement with respect to concentration that limits investments to "net" as opposed to "total" assets. While the proposed restriction does not address specifically the timing of the application of the concentration policy, as the current restriction does, the parenthetical clarifying that a fund may not "invest" more than 25% of its assets in the securities industry is adequate to reflect that the test applies at the time of investment. The investment flexibility provided by the new concentration restriction will help each fund respond to future legal, regulatory, market or technical changes. However, adoption of the proposed restriction is not expected to change materially the way in which each fund currently is managed as each fund does not intend to begin concentrating in shares of other investment companies or the U. S. government or any of its agencies or instrumentalities. THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU APPROVE SUB-PROPOSALS 3A-3G PROPOSAL 4: TO APPROVE THE ELIMINATION OF CERTAIN OF THE FUNDS' FUNDAMENTAL INVESTMENT RESTRICTIONS WHICH FUNDAMENTAL INVESTMENT RESTRICTIONS IS THE BOARD RECOMMENDING THAT THE FUNDS ELIMINATE? Each fund has several fundamental investment restrictions that were originally drafted pursuant to state laws and regulations. Because of recent changes in law and recent SEC staff positions, these laws and regulations are no longer relevant to the fund. Thus, each fund is no longer legally required to include some of the current restrictions among its fundamental investment restrictions. Eliminating these investment restrictions will further the goal of the reorganization by making the fundamental investment restrictions more like the larger corresponding TVP Funds. In addition, it will standardize these funds fundamental investment restrictions with others in the Franklin Templeton group of funds. We have determined that all of these current fundamental investment restrictions should be eliminated. ILLIQUID AND RESTRICTED SECURITIES Each fund has fundamental investment restrictions that limit its ability to invest in illiquid securities and to purchase restricted securities. Illiquid securities are securities that may not be readily sold within seven days at the price at which they are being accounted. Similarly, restricted securities are subject to certain contractual or other restrictions on their resale. Restricted securities are often considered to be illiquid because their disposition is often difficult or requires more than seven days. We recommend that all these fundamental investment restrictions be eliminated. These restrictions likely originated under certain state securities laws and are no longer required by the states. The SEC does not require a fund's illiquid securities restriction to be fundamental. In addition, there is currently no SEC requirement that a fund state a restricted securities policy. Under the current restrictions, each fund is prevented from investing more than 10% of its assets in securities that are illiquid. The SEC recently amended its position to permit funds to invest up to 15% of their assets in illiquid securities. However, each fund may not take advantage of this new SEC position because its existing policies relating to investments in illiquid securities are both fundamental and contain a lower percentage limitation. Since the current policy is fundamental, it may only be changed by a shareholder vote. Eliminating this as a fundamental policy would enable each fund to both take advantage of the current SEC position and to respond to future SEC changes in this area without the delay and expense of a shareholder vote, thereby providing each fund with additional investment flexibility. Although each fund's policy relating to illiquid securities would no longer be fundamental, each fund would continue to be subject to the SEC rules and regulations in this area. The VIP Templeton Developing Markets Equity Fund and VIP Templeton International Equity Fund have adopted restrictions on the purchase of restricted securities. Current SEC rules have substantially increased the number of restricted securities that can now be considered liquid and, in addition, have given to the trustees the ability to determine, under specific guidelines, that a security is liquid. The most common form of liquid restricted securities would be Rule 144A securities. Elimination of this restriction would allow these funds greater flexibility to invest in restricted securities. Elimination of these restrictions should not have an impact on the day-to-day management of any fund as each fund does not currently intend to increase the percentages in which each fund invests in either illiquid or restricted securities. FOREIGN ISSUERS The VIP Templeton Developing Markets Fund has an investment restriction that provides that it will not invest more than 15% of its assets in securities of foreign issuers not listed on a recognized U.S. or foreign securities exchange, including no more than 10% in illiquid investments. The nature of the foreign securities markets has changed considerably since this restriction was adopted, including a greater variety of foreign securities that are not traded on a securities exchange. Elimination of this restriction would allow the fund greater flexibility to invest in securities that are now commonplace in the global securities market. Elimination of this restriction, however, should not have an impact on the day-to-day management of the fund as it does not currently intend to increase the percentages in which it invests in either unlisted or illiquid foreign securities. CONTROL OR MANAGEMENT Each fund has adopted a current fundamental investment restriction that limits each fund's ability to invest for purposes of exercising control or management. This restriction was enacted in response to various state securities laws and is no longer required. Typically, if a fund acquires a large percentage of the securities of a single issuer, it will be deemed to have invested in such issuer for the purposes of exercising control or management. This restriction was intended to ensure that a mutual fund would not make investments in order to become engaged in the business of managing another company or to influence management. Eliminating this restriction will not have any impact on the day-to-day management of any fund because each fund has not in the past, and has no present intention, of investing in an issuer for the purposes of exercising control or management. Further, the goal of this restriction, namely to limit a fund's ability to control another issuer, is embodied in the 1940 Act diversification rule, which is proposed to be incorporated in the proposed investment restriction relating to diversification (described in Sub-Proposal 3a). The diversification restriction limits each fund's ability to own more than a certain percentage of any one issuer, which acts to limit its ability to exercise control or management over another company. UNSEASONED COMPANIES Each fund, except the VIP Templeton Global Asset Allocation Fund, has adopted a current fundamental investment restriction that limits each fund's ability to invest in companies which have a record of less than three years of continuous operations. Such relatively new companies are considered to be unseasoned companies. This restriction was originally included in response to the various state law requirements to which mutual funds were previously subject. This restriction was intended to ensure a fund's stability through its investment in companies with a proven track record. Elimination of this restriction should not have an impact on the day-to-day management of any fund as each fund has not previously, nor does it currently intend, to invest in unseasoned companies. SECURITIES ON MARGIN Each fund has adopted a current fundamental investment restriction that limits each fund's ability to purchase securities on margin or sell securities short. This restriction was originally included in response to various state law requirements. Each fund is no longer required by state law to retain specific fundamental policies regarding these types of investment activities. As a general matter, elimination of this fundamental restriction relating to purchasing securities on margin should not have an impact on the day-to-day management of any fund, since the 1940 Act prohibitions on these types of transactions would continue to apply to each fund. SECURITIES WITH UNLIMITED LIABILITY Each fund has adopted a current fundamental investment restriction that limits each fund's ability to invest in assessable securities or securities involving unlimited liability on the part of the fund. This restriction was originally included to comply with various state laws. Each fund is no longer required to include this as a fundamental policy. Elimination of this restriction should not have an impact on the day-to-day management of any fund as each fund has not previously, nor does it currently intend, to invest in securities with unlimited liability. MANAGEMENT OWNERSHIP OF SECURITIES Each has a current restriction that limits each fund's ability to invest in securities issued by companies whose securities are owned in certain amounts by trustees and officers of the fund, or by its investment adviser. This policy originated many years ago with a now obsolete state securities law. As a general matter, elimination of this fundamental restriction should not have an impact on the day-to-day management of any fund, as the 1940 Act restrictions still apply to each fund. TAX DIVERSIFICATION FOR VARIABLE ANNUITY FUNDS Each fund has adopted a restriction that prohibits the fund from investing in a manner that does not comply with the investment diversification requirements of Section 817(h) of the Internal Revenue Code of 1986, as amended (the "Code"). Section 817(h) of the Code applies to investment companies, like each fund, which are held by segregated asset accounts of one or more insurance companies, and which are only available to the public through the purchase of a variable contract or under certain employee benefit plans. Under Section 817(h) of the Code and applicable Treasury Regulations, each fund will be "adequately diversified" for purposes of the Code, if: (i) no more than 55% of the value of the total assets of the fund may be represented by any one investment, (ii) no more than 70% by any two investments, (iii) no more than 80% by any three investments, and (iv) no more than 90% by any four investments. Each fund seeks to maintain compliance with the diversification provisions set forth in the Code and the Treasury Regulations in order to take advantage of certain tax opportunities available to insurance funds. As a general matter, elimination of this fundamental restriction should not have an impact on the day-to-day management of each fund since the restrictions of the Code and applicable Treasury Regulations will continue to apply to each fund, and each fund will continue to invest in a manner which complies with the diversification rules set forth in Section 817(h) of the Code and applicable Treasury Regulations. WARRANTS The VIP Templeton Developing Markets Fund has an investment restriction that prohibits it from investing more than 5% of its assets in warrants, whether or not listed on the New York Stock Exchange, including no more than 2% of its total assets which may be invested in warrants that are not listed on those exchanges. Warrants acquired by the fund in units or attached to securities are not included in this restriction. This policy originated many years ago with now obsolete state securities law. As a general matter, elimination of this fundamental restriction should not have an impact on the day-to-day management of the fund as it has not previously, nor does it currently intend, to invest in warrants in any significant excess of these prior limitations. WHY ARE WE RECOMMENDING THAT THE RESTRICTIONS BE ELIMINATED? We have determined that eliminating the restrictions is consistent with the federal securities laws. Moreover, eliminating these restrictions is consistent with the goals of the reorganization. This will also modify each fund's list of fundamental restrictions to standardized investment restrictions adopted by other Franklin and Templeton funds. By both standardizing and reducing the total number of investment restrictions that can be changed only by a shareholder vote, we believe that each fund will be able to minimize the costs and delays associated with holding future shareholder meetings to revise fundamental policies that become outdated or inappropriate. We believe that eliminating the restrictions is in the best interest of each fund's shareholders as it will provide each fund with increased flexibility to pursue its investment goal. WHAT ARE THE RISKS, IF ANY, IN ELIMINATING THE RESTRICTIONS? We do not anticipate that eliminating the restrictions will result in any additional risk to any fund. Although each fund's current restrictions, as drafted, are no longer legally required, each fund's ability to invest in these areas will continue to be subject to the limitations of the 1940 Act, any exemptive orders granted under the 1940 Act, and the Code. Further, each fund has no current intention of changing its present investment practices as a result of eliminating these restrictions. THE BOARD OF TRUSTEES UNANIMOUSLY RECOMMENDS THAT YOU APPROVE PROPOSAL 4 VOTING INFORMATION AND PRINCIPAL SHAREHOLDERS HOW ARE VOTES SOLICITED? We intend to solicit proxies by mail. In addition, the employees of (1) the Trusts and their affiliates and of (2) the insurance companies, may solicit voting instructions from you in person or by telephone. The cost of soliciting proxies and voting instructions is borne by the TVP Trust, VIP Trust and the investment advisers to the funds. The Trusts do not reimburse their employees and agents involved in the solicitation of proxies. WHAT IS A QUORUM? A majority of the shares entitled to vote--present in person or represented by proxy--constitutes a quorum at the meeting. Shares abstaining on any item are counted as shares present and entitled to vote for purposes of determining the presence of a quorum. HOW ARE VOTES COUNTED? The inspector of election will count the total number of votes cast "for" approval of each of the proposals for purposes of determining whether sufficient affirmative votes have been cast. Abstentions are counted towards quorum and will be treated as votes not cast. Approval of the proposals requires the affirmative vote of the shareholders. Thus, abstentions have the same effect as a negative vote. CAN THE MEETINGS BE ADJOURNED? If a sufficient number of votes in favor of any of the proposals contained in the notice of special meeting is not received by the time scheduled for the meeting, the persons named in the proxy may propose one or more adjournments of the meeting to permit further solicitation of proxies with respect to that proposal. Any proposed adjournment requires the affirmative vote of a majority of shares present at the meeting. Your insurance company will vote in favor of an adjournment those shares which it is entitled to vote for that proposal. It will vote against an adjournment those shares required to be voted against that proposal. Any proposals for which sufficient favorable votes have been received by the time of the meeting may be acted upon and considered final regardless of whether the meeting is adjourned to permit additional solicitation with respect to any other proposal. HOW MANY SHARES ARE OUTSTANDING? The number of outstanding shares for the TVP Funds on November 30, 1999 are as follows: NAME OF TVP FUND AND CLASS SHARES ENTITLED TO VOTE TVP Franklin Large Cap Growth Investments Fund Class 1................................................................ shares ------------------------------------------------------------------------ Class 2................................................................ shares ------------------------------------------------------------------------ TVP Franklin Small Cap Investments Fund Class 1................................................................ shares ------------------------------------------------------------------------ Class 2................................................................ shares ------------------------------------------------------------------------ TVP Mutual Shares Investments Fund Class 1................................................................ shares ------------------------------------------------------------------------ Class 2................................................................ shares ------------------------------------------------------------------------ TVP Templeton Asset Allocation Fund Class 1................................................................shares ----------------------------------------------------------------------- Class 2................................................................shares ----------------------------------------------------------------------- TVP Templeton Bond Fund Class 1................................................................shares ----------------------------------------------------------------------- Class 2................................................................shares ----------------------------------------------------------------------- TVP Templeton Developing Markets Fund Class 1................................................................shares ----------------------------------------------------------------------- Class 2................................................................shares ----------------------------------------------------------------------- TVP Templeton International Fund Class 1................................................................shares ----------------------------------------------------------------------- Class 2................................................................shares ----------------------------------------------------------------------- TVP Templeton Stock Fund Class 1................................................................shares ----------------------------------------------------------------------- Class 2................................................................shares ----------------------------------------------------------------------- TVP Franklin S&P 500 Index Fund Class 1................................................................shares ----------------------------------------------------------------------- Class 2................................................................shares ----------------------------------------------------------------------- Class 3................................................................shares ----------------------------------------------------------------------- TVP Franklin Strategic Income Investments Fund Class 1................................................................shares ----------------------------------------------------------------------- Class 2................................................................shares ----------------------------------------------------------------------- The number of outstanding shares for the VIP Funds on November 30, 1999 are as follows: NAME OF VIP FUND AND CLASS SHARES ENTITLED TO VOTE VIP Templeton Global Asset Allocation Fund Class 1................................................................shares ----------------------------------------------------------------------- Class 2................................................................shares ----------------------------------------------------------------------- VIP Templeton Developing Markets Equity Fund Class 1................................................................shares ----------------------------------------------------------------------- Class 2................................................................shares ----------------------------------------------------------------------- VIP Templeton International Equity Fund Class 1................................................................shares ----------------------------------------------------------------------- Class 2................................................................shares ----------------------------------------------------------------------- WHO ARE THE SHAREHOLDERS? The name, address and percentage of ownership of the shareholders that owned of record 5% or more of the TVP Funds on November 30, 1999, and the percentage of the corresponding VIP Funds that would be owned by these shareholders after completing the reorganization based upon their holdings on November 30, 1999 are as follows: <TABLE> <CAPTION> ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> PERCENTAGE PRO FORMA CLASS OF OF CLASS PERCENTAGE SHARES OWNED ON OF CLASS OF TVP TRUST NAME AND ADDRESS OWNED RECORD DATE VIP FUND OWNED ON CONSUMMATION ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Large Cap Growth Templeton Funds Annuity Class 1 47.01 Investments Fund Company 100 Fountain Parkway St. Petersburg, FL 33716-1205 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Large Cap Growth COVA Financial Services Class 1 49.7 Investments Fund Life Insurance Company One Tower Lane, Suite 3000 Oakbrook Terrace, IL 60181-4644 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Small Cap Templeton Funds Annuity Class 1 36.1 Investments Fund Company 100 Fountain Parkway St. Petersburg, FL 33716-1205 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Small Cap COVA Financial Services Class 1 60.9 Investments Fund Life Insurance Company One Tower Lane, Suite 3000 Oakbrook Terrace, IL 60181-4644 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Small Cap Pruco Life Insurance Class 2 64.22 Investments Fund Company 213 Washington Street Newark, NJ 07102-2992 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Small Cap Travelers Life & Annuity Class 2 27.03 Investments Fund Company/Travelers Life Insurance Company 1 Tower Square Hartford, CT 06183 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Small Cap Pruco Life Insurance Class 2 6.3 Investments Fund Company of New Jersey 213 Washington Street Newark, NJ 07102-2992 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Mutual Shares Investments COVA Financial Services Class 1 88.6 Fund Life Insurance Company One Tower Lane, Suite 3000 Oakbrook Terrace, IL 60181-4644 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Mutual Shares Investments Templeton Funds Annuity Class 2 10.6 Fund Company 100 Fountain Parkway St. Petersburg, FL 33716-1205 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Mutual Shares Investments Phoenix Home Life Mutual Class 2 1005 Fund Insurance Company One American Row Hartford, CT 06115 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Asset Allocation The Variable Annuity Class 1 47.26 Fund Life Insurance Company 2929 Allen Parkway Houston, TX 77019 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Asset Allocation Travelers Life & Annuity Class 1 35.83 Fund Company/Travelers Life Insurance Company 1 Tower Square Hartford, CT 06183 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Asset Allocation Phoenix Home Life Mutual Class 1 16.7 Fund Insurance Company One American Row Hartford, CT 06115 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Asset Allocation Phoenix Home Life Mutual Class 2 98.5 Fund Insurance Company One American Row Hartford, CT 06115 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Bond Fund Travelers Life & Annuity Class 1 53.53 Company/Travelers Life Insurance Company 1 Tower Square Hartford, CT 06183 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Bond Fund Phoenix Home Life Mutual Class 1 45.35 Insurance Company One American Row Hartford, CT 06115 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Bond Fund Glenbrook Life and Class 2 1007 Annuity Company 3100 Sanders Road Northbrook, IL 60062 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Developing IDS Life Insurance Class 1 85.38 Markets Fund Company IDS Tower 10 Minneapolis, MN 55440 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Developing IDS Life Insurance Class 1 5.6 Markets Fund Company of New York 20 Madison Avenue Extension Albany, NY 12203 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Developing Phoenix Home Life Mutual Class 2 30.35 Markets Fund Insurance Company One American Row Hartford, CT 06115 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Developing CUNA Mutual Life Class 2 33.29 Markets Fund Insurance Company 2000 Heritage Way Waverly, IA 50677 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Developing Minnesota Mutual Life Class 2 23.4 Markets Fund Insurance Company 400 Robert Street North St. Paul, MN 55101-2098 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Developing Travelers Life & Annuity Class 2 10.8 Markets Fund Company/Travelers Life Insurance Company 1 Tower Square Hartford, CT 06183 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton International The Variable Annuity Class 1 78.26 Fund Life Insurance Company 2929 Allen Parkway Houston, TX 77019 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton International Phoenix Home Life Mutual Class 1 8.1 Fund Insurance Company One American Row Hartford, CT 06115 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton International Jefferson Pilot Class 1 6.2 Fund Financial Insurance Company One Granite Place P.O. Box 515 Concord, NH 03302-0515 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton International Phoenix Home Life Mutual Class 2 34.45 Fund Insurance Company One American Row Hartford, CT 06115 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton International Travelers Life & Annuity Class 2 38.93 Fund Company/Travelers Life Insurance Company 1 Tower Square Hartford, CT 06183 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton International The Union Central Life Class 2 20.2 Fund Insurance Company P.O. Box 40888 1876 Waycross Road Cincinnati, OH 45240 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Stock Fund Travelers Life & Annuity Class 1 64.33 Company/Travelers Life Insurance Company 1 Tower Square Hartford, CT 06183 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Stock Fund Phoenix Home Life Mutual Class 1 32.95 Insurance Company One American Row Hartford, CT 06115 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Stock Fund Phoenix Home Life Mutual Class 2 84.95 Insurance Company One American Row Hartford, CT 06115 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Stock Fund The Union Central Life Class 2 9.9 Insurance Company P.O. Box 40888 1876 Waycross Road Cincinnati, OH 45240 ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin S&P 500 Index Fund ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Strategic Income Templeton Funds Annuity Class 1 1001 Investments Fund Company 100 Fountain Parkway St. Petersburg, FL 33716-1205 ------------------------------------------------------------------------------------------ </TABLE> 1Templeton Funds Annuity Company is a Florida corporation and is a wholly owned subsidiary of Franklin Resources, Inc. 2Pruco Life Insurance Company is an Arizona corporation and is owned by The Prudential Insurance Company of America. 3Travelers Life & Annuity Company and Travelers Life Insurance Company are Connecticut corporations and are owned by The Travelers Insurance Company, which is an indirect wholly owed subsidiary of Citigroup Inc. 4COVA Financial Services Life Insurance Company is a Missouri corporation and is a wholly owned subsidiary of General American Life Insurance Company. 5Phoenix Home Life Mutual Insurance Company is a New York corporation. 6The Variable Annuity Life Insurance Company is a Texas corporation and is an indirect wholly owned subsidiary of American General Corporation. 7Glenbrook Life and Annuity Company is an Illinois corporation and is a wholly owned subsidiary of Allstate Insurance Company. 8IDS Life Insurance Company is a Minnesota corporation and is a wholly owned subsidiary of American Express Financial Corporation. 9CUNA Mutual Life Insurance Company is an Iowa corporation. 10The Union Central Life Insurance Company is an Ohio corporation. As of November 30, 1999, the trustees and officers of TVP Trust, as a group, owned less than 1% of the outstanding shares of each TVP Fund. As of November 30, 1999, the name, address and percentage of ownership of the shareholders that owned of record 5% or more of the outstanding shares of the VIP Funds are as follows: <TABLE> <CAPTION> ------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> PERCENTAGE PRO FORM CLASS OF CLASS PERCENTAGE OF OWNED ON OF CLASS OF VIP TRUST NAME AND ADDRESS SHARES RECORD DATE VIP FUND OWNED OWNED ON CONSUMMATION ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Large Cap Growth Securities Fund ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Small Cap Fund ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Mutual Shares Securities Fund ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Global Asset Allocation Fund ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Global Income Securities Fund ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Developing Markets Equity Fund ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton International Equity Fund ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Templeton Global Growth Fund ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin S&P 500 Index Fund ------------------------------------------------------------------------------------------ ------------------------------------------------------------------------------------------ Franklin Strategic Income Securities Fund ------------------------------------------------------------------------------------------ </TABLE> Your insurance company will vote on the proposed reorganization as you instruct. Thus, your insurance company does not exercise control over the funds solely as the record owner of the funds' shares. As of November 30, 1999, the trustees and officers of the VIP Trust, as a group, owned less than 1% of the outstanding shares of each of the VIP Funds. ANNUAL MEETINGS AND SPECIAL MEETING Neither the TVP Trust's nor the VIP Trust's Agreement and Declaration of Trust provide for annual meetings of shareholders. Neither Trust currently intends to hold such a meeting in the year 2000. If the reorganization is completed, the TVP Trust will no longer have shareholders (or shareholder meetings). Proposals included in the proxy statement for any subsequent meeting must be received within a reasonable time before any such meeting at the VIP Trust's offices, 777 Mariners Island Boulevard, San Mateo, California 94404. If a shareholder submits a proposal after that time, the proposal will not appear in the proxy statement. THE FUNDS' SERVICE PROVIDERS WHO PROVIDES ADMINISTRATION SERVICES TO THE VIP FUNDS? Franklin Templeton Services, Inc. ("FT Services") provides certain administration services and facilities to each fund. FT Services has direct agreements with Templeton Global Asset Allocation Fund and Mutual Shares Investments Fund. FT Services has subcontracts with the managers of all other funds. FT Services is wholly owned by Franklin Resources, Inc. and is an affiliate of the funds' managers and principal underwriter. FT Services' administration services include preparing and maintaining books, records, and tax and financial reports, and monitoring compliance with regulatory requirements. ADMINISTRATION FEES. The funds, in the case of the VIP Templeton Global Asset Allocation Fund and Mutual Shares Securities Fund, and the investment advisers for all other funds, pay FT Services a monthly fee for each fund equal to an annual rate of: o 0.15% of the fund's average daily net assets up to $200 million; o 0.135% of average daily net assets over $200 million up to $700 million; o 0.10% of average daily net assets over $700 million up to $1.2 billion; and o 0.075% of average daily net assets over $1.2 billion. During the fiscal year ended December 31, 1998, FT Services received either from the funds or from the investment advisers the following amounts: VIP FUNDS AMOUNTS Franklin Large Cap Growth Securities $227,544 Fund Franklin Small Cap Fund $455,754 Mutual Shares Securities Fund $669,378 Templeton Global Asset Allocation Fund $135,172 Templeton Global Income Securities $250,588 Fund Templeton Developing Markets Equity $307,396 Fund Templeton International Equity Fund $1,379,045 Templeton Global Growth Fund $1,048,256 Franklin S&P 500 Index Fund (New) None Franklin Strategic Income Securities None Fund (New) WHO DISTRIBUTES SHARES OF THE VIP TRUST? Franklin Templeton Distributors, Inc. ("FT Distributors") acts as the principal underwriter in the continuous public offering of the VIP Trust shares. FT Distributors is located at 777 Mariners Island Blvd., San Mateo, CA 94404. FT Distributors pays the expenses of the distribution of fund shares, except to the extent these expenses are borne by your insurance company. These expenses include advertising expenses and the costs of printing sales material and prospectuses. The VIP Trust pays the expenses of preparing and printing amendments to its registration statements and prospectuses (other than those necessitated by the activities of FT Distributors) and of sending prospectuses to existing shareholders. FT Distributors may be entitled to receive payment under the class 2 rule 12b-1 plans, as discussed below. Except for the fees under the rule 12b-1 plans, FT Distributors receives no other compensation from the VIP Trust for acting as underwriter. For the fiscal year ended December 31, 1998, the funds did not pay any fees pursuant to the plans. WHO IS THE TRANSFER AGENT OF THE VIP TRUST? Franklin Templeton Investor Services, Inc. ("FT Investor Services") is the VIP Trust's shareholder servicing agent and acts as the fund's transfer agent and dividend-paying agent. FT Investor Services is located at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. WHO IS THE CUSTODIAN OF THE VIP TRUST? Custodian Bank of New York, Mutual Funds Division, 90 Washington Street, New York, NY 10286, acts as custodian of the VIP Funds' securities and other assets. In addition, The Chase Manhattan Bank, at its principal office at MetroTech Center, Brooklyn, NY 11245, and at the offices of its branches and agencies throughout the world, acts as custodian of the assets of Franklin Global Income Securities Fund, Templeton Developing Markets Equity Fund, Templeton Global Growth Fund and Templeton Global Asset Allocation Fund. As foreign custody manager, the bank selects and monitors foreign sub-custodian banks, selects and evaluates non-compulsory foreign depositories, and furnishes information relevant to the selection of compulsory depositories. WHO IS THE AUDITOR? PricewaterhouseCoopers LLP, 333 Market Street, San Francisco CA 94105, is VIP Trust's independent auditor. The auditor gives an opinion on the financial statements included in VIP Trust's annual report to shareholders and reviews the trust's registration statement filed with the SEC. FINANCIAL STATEMENTS The financial highlights and financial statements for TVP Funds for the fiscal year or period ended December 31, 1998, are contained in TVP Trust's annual report to shareholders and in the prospectuses and statement of additional information for the TVP Funds dated July 1, 1999, each of which is incorporated by reference into this document. The financial highlights and the financial statements for the VIP Funds for the fiscal year ended December 31, 1998 are contained in VIP Trust's annual reports to shareholders and VIP Trust's prospectuses and statement of additional information dated October 25, 1999, each of which is incorporated by reference in this document. The audited financial highlights and financial statements of the VIP Funds for the fiscal year ended December 31, 1999, contained in VIP Trust's annual reports and incorporated by reference in this document, have been audited by PricewaterhouseCoopers LLP, independent public accountants, as indicated in its reports with respect thereto and are incorporated herein in reliance upon the authority of said firm as experts in accounting and auditing. The audited financial highlights and financial statements of the TVP Funds for the fiscal year ended December 31, 1999, contained in TVP Trust's annual reports and incorporated by reference in this document, have been audited by McGladrey & Pullen, independent public accountants, as indicated in its reports with respect thereto and are incorporated herein in reliance upon the authority of said firm as experts in accounting and auditing. Unaudited pro forma combined financial statements of the TVP Funds and VIP Funds for the as of June 30, 1999 are included in the statement of additional information to this document. * * * THE TVP TRUST WILL FURNISH TO YOU, WITHOUT CHARGE, COPIES OF ITS DECEMBER 31, 1998 ANNUAL REPORT AND ITS JUNE 30, 1999 SEMI-ANNUAL REPORT TO ANY PARTICIPATING INSURANCE COMPANY IN SUFFICIENT NUMBER TO PROVIDE COPIES UPON REQUEST ADDRESSED TO: TVP FUNDS, OR BY TELEPHONE AT 1-800-774-5001. YOU ARE URGED TO FILL-IN, SIGN AND DATE THE ENCLOSED VOTING INSTRUCTION FORMS AND RETURN THEM PROMPTLY IN THE ENCLOSED ENVELOPE. NO POSTAGE IS NECESSARY IF MAILED IN THE UNITED STATES. By Order of the Board of Trustees Barbara J. Green Secretary December [13], 1999 1 Fund administration services will be directly provided to the fund by the same affiliate of the adviser currently indirectly providing such services. 1 The investment adviser has agreed in advance to assume certain fund expenses, and the investment adviser and fund administrator have agreed in advance to waive or limit their fees as necessary so that total annual fund operating expenses do not exceed 1.00% for class 1. The investment adviser and fund administrator are contractually obligated to continue this arrangement through year 2000. 2 The investment adviser has agreed in advance to assume certain fund expenses, and the investment adviser and fund administrator have agreed in advance to waive or limit their fees as necessary so that total annual fund operating expenses do not exceed 1.00% for class 1. The investment adviser and fund administrator are contractually obligated to continue this arrangement through year 2000. 3 Other expenses are based on 12/31/99 annualized estimates. 4 Apart from the reorganization, the shareholders of the VIP Franklin Small Cap Fund are voting to approve a new investment advisory agreement. If this advisory agreement is not approved, the management and fund administration fees, other expenses, and total annual fund operating expenses, for the combined fund class 1 would be 0.75%, 0.02% and 0.77%, respectively. 5 The TVP Franklin S&P 500 Index Fund will begin operation on November 1, 1999. For purposes of this table, the fees are estimated and based on net assets of $30 million. The investment adviser has agreed in advance to assume certain fund expenses, and the investment adviser and fund administrator have agreed in advance to waive or limit their fees as necessary so that total annual fund operating expenses do not exceed 0.55% for class 1. The investment adviser and fund administrator are contractually obligated to continue this arrangement through year 2000. 6 The TVP Franklin Strategic Income Securities Fund began operations on July 1, 1999. For purposes of this table, the fees are estimated and based on net assets of $7.5 million. The investment adviser has agreed in advance to assume certain fund expenses, and the investment adviser and fund administrator have agreed in advance to waive or limit their fees as necessary so that total annual fund operating expenses do not exceed 0.75% for class 1. The investment adviser and fund administrator are contractually obligated to continue this arrangement through year 200 1 Because no class 2 shares were issued as of December 31, 1998, figures (other than rule 12b-1 fees) are based on the funds' class 1 actual expenses for the fiscal year ended December 31, 1998, plus class 2's annual rule 12b-1 fee of 0.25%. (While the maximum amount payable under each fund's class 2 rule 12b-1 plan is 0.35% per year of the fund's average daily net assets, the Board of Trustees of Franklin Templeton Variable Insurance Products Trust has set the current rate at 0.25% of average daily net assets per year.) 2The TVP Franklin Large Cap Growth Investments Fund class 2 has not commenced operations. 3 The investment adviser has agreed in advance to assume certain fund expenses, and the investment adviser and fund administrator have agreed in advance to waive or limit their fees as necessary so that total annual fund operating expenses do not exceed 1.25% for class 2. The investment adviser and fund administrator are contractually obligated to continue this arrangement through year 2000. 4 Apart from the reorganization, the shareholders of the VIP Franklin Small Cap Fund are voting to approve a new investment advisory agreement. If this advisory agreement is not approved, the management and fund administration fees, other expenses, and the total annual fund operating expenses for the combined fund class 2 would be 0.75%, 0.02%, and 1.02%, respectively. 5 Other expenses are based on 12/31/99 annualized estimates. 6 The TVP Franklin S&P 500 Index Fund will begin operations on November 1, 1999. For purposes of this table, the fees are estimated and based on net asset of $30 million. The investment adviser has agreed in advance to assume certain fund expenses, and the investment adviser and fund administrator have agreed in advance to waive or limit their fees as necessary so that total fund operating expenses do not exceed 0.80% for class 2. The investment adviser and fund administrator are contractually obligated to continue this arrangement through year 2000. 7 The TVP /Franklin Strategic Income Investments Fund class 2 has not commenced operations. INDEX OF EXHIBITS Exhibit I Form of Agreement and Plan of Reorganization by and between Templeton Variable Products Series Fund and Franklin Templeton Variable Insurance Products Trust Exhibit II Prospectuses of the VIP Funds (attached separately) Exhibit III Form of Investment Advisory Agreement with respect to VIP Templeton Global Asset Allocation Fund Exhibit IV Form of Investment Advisory Agreement with respect to VIP Templeton Developing Markets Equity Fund Exhibit V Form of Investment Advisory Agreement with respect to VIP Templeton International Equity Fund Exhibit VI Information about the Investment Advisers and Certain Portfolio Managers Exhibit VII TVP Funds and VIP Funds Comparative Fee Table Examples Exhibit VIII TVP Funds and VIP Funds Comparative Fund Comparative Performance EXHIBIT I FORM OF AGREEMENT AND PLAN OF REORGANIZATION THIS AGREEMENT AND PLAN OF REORGANIZATION (the "Agreement") is made as of this ____ day of______________, by and between Templeton Variable Products Series Fund (the "TVP Trust"), a Massachusetts Business Trust with its principal place of business at Broward Financial Centre, Suite 2100, Ft. Lauderdale, Florida 33394, for itself and on behalf of Franklin Large Cap Growth Investments Fund, Franklin Small Cap Investments Fund, Mutual Shares Investments Fund, Templeton Asset Allocation Fund, Templeton Bond Fund, Templeton Developing Markets Fund, Templeton International Fund, Templeton Stock Fund, Franklin S&P 500 Index Fund, and Franklin Strategic Income Investments Fund (each an "Acquired Fund" and collectively the "Acquired Funds") and Franklin Templeton Variable Insurance Products Trust (the "VIP Trust"), a Massachusetts Business Trust with its principal place of business at 777 Mariners Island Boulevard, San Mateo, California 94404, for itself and on behalf of the Franklin Large Cap Growth Securities Fund, Franklin Small Cap Fund, Mutual Shares Securities Fund, Templeton Global Asset Allocation Fund, Templeton Global Income Securities Fund, Templeton Developing Markets Equity Fund, Templeton International Equity Fund, Templeton Global Growth Fund, Franklin S&P 500 Index Fund, and Franklin Strategic Income Securities Fund (each an "Acquiring Fund" and collectively the "Acquiring Funds"). In accordance with the terms and conditions set forth in this Agreement, the parties desire that all of the assets of each Acquired Fund be transferred to its corresponding Acquiring Fund corresponding thereto (as set forth in Exhibit A hereto) in exchange for shares of the specified classes of the corresponding Acquiring Fund (the "Acquiring Fund Shares") and the assumption by each Acquiring Fund of the liabilities (as defined in paragraph 1.6) of each corresponding Acquired Fund, and that Acquiring Fund Shares be distributed immediately after the Closing (as defined in paragraph 3.1) by each Acquired Fund to its shareholders of the respective share classes of the Acquired Fund in liquidation of the Acquired Fund. The parties intend that each Reorganization as defined herein qualify as a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"), and that each of the Acquiring Funds qualify as a "party to a reorganization" within the meaning of Section 368 (b) of the Code, with respect to such Reorganization. WHEREAS, the TVP Trust and the VIP Trust have agreed to a reorganization (the "Reorganization") pursuant to which the duplication of funds will be eliminated as the funds of the TVP Trust (the "TVP Funds") will become a part of the corresponding funds of the VIP Trust (the "VIP Funds"); WHEREAS, the Board of Trustees of the TVP Trust and the VIP Trust (including a majority of the non-interested Trustees for each Trust) have determined that the Reorganization is in the best interest of their respective funds and their respective shareholders and that the interest of the existing shareholders of the VIP Funds would not be diluted as a result of the Reorganization; WHEREAS, the purpose of the Reorganization is to combine the assets of the TVP Funds with those of the VIP Funds in an attempt to achieve greater operating economies; NOW, THEREFORE, in consideration of the premises and of the covenants and agreements hereinafter set forth, the parties hereto covenant and agree as follows: 1. TRANSFER OF ASSETS OF EACH ACQUIRED FUND TO ITS CORRESPONDING ACQUIRING FUND IN EXCHANGE FOR THE ACQUIRING FUND SHARES, THE ASSUMPTION OF CERTAIN IDENTIFIED ACQUIRED FUND LIABILITIES AND THE LIQUIDATION OF THE ACQUIRED FUND 1.1. Subject to the terms and conditions herein set forth and on the basis of the representations and warranties contained herein, each Acquired Fund agrees to transfer all of the Acquired Fund's assets (as set forth in paragraph 1.2) to its corresponding Acquiring Fund and each Acquiring Fund agrees in exchange therefor: (i) to deliver to the Acquired Fund the full and fractional number of each class of Acquiring Fund Shares, determined to three decimal places by dividing the value of each of the Acquired Fund's net assets that are so conveyed and are attributable to each class of the Acquired Fund, computed in the manner and as of the time and date set forth in paragraph 2.1 by the net asset value of one Acquiring Fund Share of the particular class that is to be delivered with respect thereto computed in the manner and as of the time and date set forth in paragraph 2.2; and (ii) to assume the liabilities of the Acquired Fund, as set forth in paragraph 1.6. Such transactions shall take place at the Closing provided for in paragraph 3.1 (the "Closing"). 1.2. The assets of each Acquired Fund to be acquired by the corresponding Acquiring Fund shall consist of all property, including without limitation, all cash, securities, commodities and futures interests and dividends or interest receivable which are owned by the Acquired Fund and any deferred or prepaid expenses shown as an asset on the books of the Acquired Fund on the date provided in paragraph 3.1 (the "Closing Date"). 1.3. Delivery of the assets of each Acquired Fund to be transferred shall be made on the Closing Date and to the Custodians (as defined in paragraph 3.2) for the account of the corresponding Acquiring Fund, together with proper instructions and all documents necessary to transfer such assets to the account of the corresponding Acquiring Fund, free and clear of all liens, encumbrances, rights, restrictions and claims, except as may be indicated in a schedule delivered by an Acquired Fund to the Acquiring Fund immediately prior to the Closing. All cash delivered shall be in the form of currency or immediately available funds payable to the order of the appropriate Custodian. 1.4. Following the transfer of assets by each Acquired Fund to its corresponding Acquiring Fund, the assumption of the Acquired Fund's liabilities set forth in paragraph 1.6 by the Acquiring Fund, and the distribution by the Acquired Fund of the Acquiring Fund Shares to the shareholders of the respective classes of the Acquired Fund, the TVP Trust shall terminate the registration of such Acquired Fund and its shares at all appropriate federal and state agencies. Any reporting responsibility of an Acquired Fund is and shall remain the exclusive responsibility of the Acquired Fund up to and including the date on which the particular Acquired Fund is terminated, dissolved and deregistered with federal and state securities or "blue sky" authorities. 1.5. Immediately after the transfer of its assets, each Acquired Fund will distribute pro rata to the Acquired Fund's shareholders of record, determined as of immediately after the close of business on the Closing Date (the "Acquired Fund Shareholders"), the Acquiring Fund Shares of the respective classes received by the Acquired Fund pursuant to paragraph 1.1 and will completely liquidate. Such distribution and liquidation will be accomplished by the transfer of the Acquiring Fund Shares then credited to the account of the Acquired Fund on the books of the Acquiring Fund to open accounts on the share records of the Acquiring Fund in the names of the Acquired Fund Shareholders. Acquired Fund Shareholders will be credited with full and fractional shares of the class that is issued by its corresponding Acquiring Fund under this Agreement with respect to the shares of the Acquired Fund that are held by the Acquired Fund Investor. The aggregate net asset value of Acquiring Fund Shares to be so credited to the Acquired Fund Shareholders shall be equal to the aggregate net asset value of the Acquired Fund shares owned by such shareholders as of immediately after the close of business of the New York Stock Exchange on the Valuation Date and the outstanding shares of the Acquired Fund will simultaneously be canceled on the books of the Acquired Fund. From and after the Closing, all of the share certificates representing interests in the Acquired Fund will represent a number of Acquiring Fund Shares after the Closing Date as determined in accordance with paragraph 2.3. An Acquiring Fund will not issue certificates representing the Acquiring Fund Shares in connection with such exchange except upon request by an Acquired Fund Shareholder. 1.6. Each Acquired Fund will endeavor to discharge all of its known liabilities and obligations prior to the Closing Date. Each Acquiring Fund shall assume all liabilities, expenses, costs, charges and reserves of its corresponding Acquired Fund (which shall include expenses incurred in the ordinary course of the Acquired Fund's operations, such as accounts payable relating to custodian and transfer agency fees, legal and audit fees, and expenses of state securities registration of the Acquired Fund's Shares) reflected on an unaudited statement of assets and liabilities of the Acquired Fund prepared by Franklin Templeton Services, Inc., the business manager of the Acquired Fund, as of the Valuation Date (as defined in paragraph 2.1) in accordance with generally accepted accounting principles consistently applied from the prior audited period. Each Acquiring Fund shall assume only those liabilities of its corresponding Acquired Fund reflected on that unaudited statement of assets and liabilities and shall not assume any other liabilities. 1.7. Ownership of Acquiring Fund Shares will be shown on the books of the Acquiring Fund and they will be issued in the manner described in the Acquiring Fund's then-current prospectus and statement of additional information. 1.8. Any reporting responsibility of each Acquired Fund including, but not limited to, the responsibility for any periods ending on or before the Closing Date for filing of regulatory reports, tax returns, or other documents with the Securities and Exchange Commission (the "SEC"), any state securities or any other relevant regulatory authority, is and shall remain the responsibility of that Acquired Fund. 1.9. At least ____ business days prior to the Closing Date, each Acquired Fund will provide its corresponding Acquiring Fund with a schedule of its assets and liabilities as of _________, and each Acquiring Fund will provide its corresponding Acquired Fund with a copy of its current investment objective and policies. Each Acquired Fund reserves the right to sell any of the securities or other assets shown on the schedule prior to the Closing Date but will not, without the prior approval of the corresponding Acquiring Fund, acquire any additional securities other than securities which the Acquiring Fund is permitted to purchase in accordance with its stated investment objective and policies. As used herein, with respect to the VIP Trust Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund, and Templeton International Equity Fund references to an Acquiring Fund's stated investment objectives and policies shall be the stated investment objectives and policies of their respective corresponding Acquired Fund that will be adhered to following the Closing Date. Within ____ business days after the receipt of the schedule of assets and liabilities from its corresponding Acquired Fund, each Acquiring Fund will advise its corresponding Acquired Fund of any investments shown on the schedule provided by its corresponding Acquired Fund which the Acquiring Fund would not be permitted to hold, pursuant to its stated investment objective and policies or otherwise. In the event that any Acquired Fund holds any investments that its corresponding Acquiring Fund would not be permitted to hold under its stated investment objective or policies, the Acquired Fund, if requested by the Acquiring Fund and, to the extent permissible and consistent with the Acquired Fund's own investment objective and policies, will dispose of such securities prior to the Closing Date. In addition, if it is determined that the holdings of any Acquired Fund and its corresponding Acquiring Fund, when aggregated, would contain investments exceeding certain percentage limitations to which the corresponding Acquiring Fund is or will be subject with respect to such investments, the Acquired Fund, if requested by the corresponding Acquiring Fund and, to the extent permissible and consistent with the Acquired Fund's own investment objective and policies, will dispose of and/or reinvest a sufficient amount of such investments as may be necessary. 2. VALUATION 2.1 The value of each Acquired Fund's assets to be acquired by its corresponding Acquiring Fund hereunder shall be the value of such assets computed as of the normal close of business of the New York Stock Exchange on the Closing Date (the "Valuation Date"), using the valuation procedures set forth in the TVP Trust's Declaration of Trust and then-current prospectus or statement of additional information. 2.2 The net asset value of each of Acquiring Fund Share of the particular class to be delivered with respect to the class of shares held by an Acquired Fund Shareholder shall be the net asset value per share computed as of immediately after the close of business of the New York Stock Exchange on the Valuation Date, using the valuation procedures set forth in the VIP Trust's Declaration of Trust and then-current prospectus or statement of additional information. 2.3. The number of each Acquiring Fund Shares to be issued (including fractional shares, if any) in exchange for its corresponding Acquired Fund's assets shall be determined by dividing the value of the net assets of its corresponding Acquired Fund that are so conveyed and are attributable to each class of the Acquired Fund determined using the same valuation procedures referred to in paragraph 2.1 by the net asset value of an Acquiring Fund Share of the particular class that is to be delivered with respect thereto determined in accordance with paragraph 2.2. 2.4. All computations of value with respect to the Acquiring Fund shall be made by Franklin Templeton Services, Inc.. 3. CLOSING AND CLOSING DATE 3.1. The Closing Date shall be April 30, 2000 or such later date as the parties may agree in writing. All acts taking place at the Closing shall be deemed to take place simultaneously as of immediately after the close of business on the Closing Date, unless otherwise agreed to by the parties. The close of business on the Closing Date shall be as of ______________. The Closing shall be held at ______________________________ or at such other place and time as the parties shall mutually agree. 3.2. The Bank of New York, Mutual Funds Division as custodian for the VIP Funds and The Chase Manhattan Bank, N.A., as custodian for Templeton Global Asset Allocation Fund, Templeton Developing Markets Equity Fund, Templeton International Equity Fund, and Templeton Global Growth Fund, and as custodian (collectively the "Custodians"), shall be instructed to deliver at the Closing a certificate of an authorized officer stating that: (a) each Acquired Fund's portfolio securities, cash, and any other assets shall have been delivered in proper form to the corresponding Acquiring Fund; and (b) all necessary taxes including without limitation all applicable federal and state stock transfer stamps, if any, shall have been paid, or provision for payment shall have been made, in conjunction with the delivery of portfolio securities. 3.3. Franklin/Templeton Investor Services, Inc. (the "Transfer Agent"), on behalf of the Acquired Funds, shall deliver at the Closing a certificate of an authorized officer stating that its records contain the names and addresses of the Acquired Fund Shareholders and the number and percentage ownership of outstanding shares by class owned by each such shareholder immediately prior to the Closing. Each Acquiring Fund shall deliver a certificate evidencing that the Acquiring Fund Shares to be credited on the Closing Date to its corresponding Acquired Fund or provide evidence satisfactory to the each Acquired Fund that such Acquiring Fund Shares have been credited to each Acquired Fund's account on the books of each Acquiring Fund. At the Closing, each party shall deliver to the other such bills of sale, checks, assignments, share certificates, if any, receipts or other documents as such other party or its counsel may reasonably request. 3.4. If on the Valuation Date (a) the primary trading market for portfolio securities of an Acquiring Fund or the applicable Acquired Fund shall be closed to trading or trading thereon shall be restricted; or (b) trading or the reporting of trading shall be disrupted so that accurate appraisal of the value of the net assets of the Acquiring Funds or the Acquired Funds is impracticable, the Closing Date shall be postponed with respect to the affected Acquired Funds until the first business day after the day when trading shall have been fully resumed and reporting shall have been restored, or such other time as the parties may mutually agree. 3.5. With respect to each Acquired Fund, the TVP Trust shall provide the VIP Trust and its Transfer Agent with immediate access from and after the Closing Date to (a) the computer, electronic or such other forms of records containing the names, addresses and taxpayer identification numbers of each Acquired Fund's shareholders and the number and percentage ownership of each outstanding Acquired Fund shares owned by such person, all as of the Valuation Date, and (b) all original documentation (including all applicable Internal Revenue Service forms, certificates, certifications and correspondence) relating to each investor's taxpayer identification number and their liability for or exemption from back-up withholding. Each corresponding Acquiring Fund shall issue and deliver to the Secretary or Assistant Secretary of the TVP Funds, acting on behalf of the Acquired Funds, a confirmation evidencing the Acquiring Fund Shares credited on the Closing Date or shall provide evidence satisfactory to each Acquired Fund that such Acquiring Fund Shares have been credited to each Acquired Fund's account on the books of each Acquiring Fund. At the Closing, each party shall deliver to the other such bills of sale, checks, assignments, assumptions of liability share certificates, if any, receipts or other documents of transfer, assignment or conveyance as such other party or its counsel may reasonably request. 4. REPRESENTATIONS AND WARRANTIES 4.1. The TVP Trust, on behalf of each Acquired Fund, represents and warrants to the VIP Trust that for each taxable year of operation since inception (including the taxable year ending on the Closing Date) each Acquired Fund has met the requirements of Subchapter M of the Code for qualification as a regulated investment company and has elected to be treated as such and has met the diversification requirements under Section 817(h) of the Code and the rules thereunder. 4.2. The VIP Trust, on behalf of each Acquiring Fund, represents and warrants to the TVP Trust that for each taxable year of its operation, each Acquiring Fund has met the requirements of Subchapter M of the Code for qualification as a regulated investment company and has elected to be treated as such and has met the diversification requirements under Section 817(h) of the Code and the rules thereunder. 5. CONVENANTS OF THE ACQUIRING FUND AND THE ACQUIRED FUND 5.1. The Acquiring Funds and the Acquired Funds will operate their business in the ordinary course between the date hereof and the Closing Date, it being understood that such ordinary course of business will include the declaration and payment of customary dividends and distributions, and any other distributions that may be advisable. 5.2. The Acquired Funds covenant that the Acquiring Fund Shares to be issued hereunder are not being acquired for the purpose of making any distribution thereof other than in accordance with the terms of this Agreement. 5.3. Subject to the provisions of this Agreement, the TVP Trust and the VIP Trust will each take, or cause to be taken, all action, and do or cause to be done, all things reasonably necessary, proper, or advisable to consummate and make effective the transactions contemplated by this Agreement. 5.4. As promptly as practicable, but in any case within ______ days after the Closing Date, the TVP Trust, on behalf of each Acquired Fund, shall furnish its corresponding Acquiring Fund, in such form as is reasonably satisfactory to VIP Trust, a statement of the earnings and profits of each Acquired Fund for federal income tax purposes which will be carried over to the applicable Acquiring Fund as a result of Section 381 of the Code and which will be certified by an authorizer officer of the TVP Trust. 5.5. On the Closing Date, the TVP Trust, on behalf of each Acquired Fund, shall furnish to its corresponding Acquiring Fund, a final statement of the total amount of fund assets and stated liabilities of each Acquired Fund as of the Closing Date, which statement shall be certified by an officer of the TVP Trust as being determined in accordance with generally accepted accounting principles consistently applied. 5.6. As promptly as practicable after the date hereof, the TVP Trust will call a meeting of each Acquired Fund's shareholders to consider and act upon this Agreement and to take all other action necessary and appropriate to obtain approval of the transactions contemplated herein. The VIP Trust shall prepare and file with the SEC a Registration Statement on Form N-14 complying in all material respects with the requirements of the Securities Act of 1933, as amended (the "1933 Act"), the Securities Exchange Act of 1934, as amended, the Investment Company Act of 1940, as amended, and applicable rules and regulations thereunder (the "Registration Statement"), relating to such meeting of the shareholders of each Acquired Fund. The VIP Trust shall take all necessary and reasonable actions to have such Registration Statement declared effective by the SEC. The TVP Trust agrees to provide all information relating to each Acquired Fund which the VIP Trust deems necessary, proper or advisable in the preparation of the Registration Statement or consummation of the transactions contemplated herein. 5.7. Prior to the Closing, each Acquired Fund shall have declared a dividend or dividends which, together with all previous such dividends, shall have the effect of distributing to its shareholders all of its investment company taxable income for its taxable year ended ______________ and the short taxable year beginning ______________ and ending on the Closing Date (computed without regard to any deduction for dividends paid), and all of its net capital gain realized in its taxable year beginning on ______________and ending on the Closing Date (after reduction for any capital loss carryover.) 5.8. As soon after the Closing Date as is reasonably practicable, the TVP Trust, on behalf of each Acquired Fund shall (i) prepare and file all federal and other tax returns and reports of each Acquired Fund required by law to be filed with respect to all period ending on or before the Closing Date but not previously filed, and (ii) pay all federal and other taxes shown as due and/or all federal and other taxes that were unpaid as of the Closing Date. 6. CONDITIONS PRECEDENT Each party's obligations hereunder shall be subject to (1) performance by the other party of all the obligations to be performed hereunder at or before the Closing Date, (2) all representations and warranties of the other party contained herein being true and correct in all material respects as of the date hereof, and, except as they may be affected by the transactions contemplated hereby, as of the Closing Date, with the same force and effect as if made at and as of the Closing Date, and (3) the following further conditions that, at or before the Closing Date: 6.1. The Agreement and the transactions contemplated herein shall have been approved by the requisite vote of the holders of the outstanding shares of each Acquired Fund in accordance with the provisions of the TVP Trust's Declaration of Trust and Bylaws and certified copies of the resolutions evidencing such approval shall have been delivered to the corresponding Acquiring Fund; 6.2. On the Closing Date, no action, suit or other proceeding shall be threatened or pending before any court or governmental agency in which it is sought to restrain or prohibit, or obtain damages or other relief in connection with, this Agreement or the transactions contemplated herein; 6.3. All consents of other parties and all other consents, orders and permits of Federal, state, and local regulatory authorities deemed necessary by the Acquiring Funds or the Acquired Funds to permit consummation, in all material respects, of the transactions contemplated hereby shall have been obtained, except where failure to obtain any such consent, order or permit would not involve a risk of a material adverse effect on the assets or properties of the Acquiring Funds or the Acquired Funds, provided that either party hereto may for itself waive any of such conditions; 6.4. The VIP Trust's registration statement shall have become effective under the 1933 Act and no stop orders suspending the effectiveness thereof shall have been issued and, to the best knowledge of the parties hereto, no investigation or proceeding for that purpose shall have been instituted or be pending, threatened or contemplated under the 1933 Act; and 6.5 The TVP Trust shall have received on the Closing Date the opinion of [NAME] in a form reasonably satisfactory to the TVP Trust, and dated as of the Closing Date, to the effect that: (a) the VIP Trust has been duly formed and is validly existing and in good standing under the laws of the Commonwealth of Massachusetts; and (b) the Agreement has been duly authorized, executed and delivered by the VIP Trust on behalf of each Acquiring Fund and constitutes a valid and legally binding obligation of each Acquiring Fund; and (c) the Agreement is enforceable against the VIP Trust in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and laws of general applicability relating to or affecting creditors' rights and to general equity principles. 6.6. The VIP Trust shall have received on the Closing Date the opinion of [NAME] in a form reasonably satisfactory to the VIP Trust, dated as of the Closing Date, to the effect that: (a) the TVP Trust has been duly formed and is in good standing under the laws of the Commonwealth of Massachusetts; (b) the Agreement has been duly authorized, executed and delivered by the TVP Trust, on behalf of each Acquired Fund, and constitutes a valid and legally binding obligation of each Acquired Fund; and (c) the Agreement is enforceable against each Acquired Fund in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and laws of general applicability relating to or affecting creditors' rights and to general equity principles. 6.7. The parties shall have received the opinion of Jorden, Burt, Boros, Cicchetti, Berenson & Johnson LLP addressed to the TVP Trust and the VIP as to the federal income tax consequences of the Reorganization (the "Tax Opinion"). In rendering the Tax Opinion, such counsel may rely as to factual matters, exclusively and without independent verification, on the representations made in this Agreement and each Fund's separate covenants. The Tax Opinion shall be substantially to the effect that, based on the facts and assumptions stated therein and conditioned on consummation of the Reorganization in accordance with this Agreement, for federal income tax purposes: 6.7.1The transfer of all or substantially all of the Acquired Funds' assets in exchange for shares of the applicable Acquiring Funds and the distribution of such shares to the shareholders of the Acquired Funds in liquidation of the Acquired Funds will constitute a "reorganization" within the meaning of Section 368(a)(1) of the Code; 6.7.2. No gain or loss will be recognized by an Acquiring Fund upon the receipt of the assets of the applicable Acquired Fund solely in exchange or the Acquiring Fund Shares 6.7.3. No gain or loss will be recognized by an Acquired Fund upon the transfer of the applicable Acquired Fund assets to the Acquiring Fund in exchange for the Acquiring Fund Shares or upon the distribution (whether actual or constructive) of the Acquiring Fund Shares to Acquired Fund shareholders in exchange for their shares of the Acquired Fund 6.7.4. No gain or loss will be recognized by the Acquired Fund shareholders upon the exchange of their Acquired Fund shares for the applicable Acquiring Fund Shares; 6.7.5. The tax basis of each Acquired Fund's assets acquired by the applicable Acquiring Fund will be the same as the tax basis of such assets to the Acquired Fund immediately prior to the Reorganization 6.7.6. The tax basis of the Acquiring Fund Shares received by each of the Acquired Fund shareholders pursuant to the Reorganization will be the same as the tax basis of the Acquired Fund shares held by such shareholder immediately prior to the Reorganization 6.7.7. The holding period of the assets of each Acquired Fund in the hands of the applicable Acquiring Fund will include the period during which those assets were held by the Acquired Fund; and 6.7.8. The holding period of the Acquiring Fund Shares to be received by each Acquired Fund's shareholders will include the period during which the Acquired Fund shares exchanged therefor were held by such shareholder (provided the Acquired Fund shares were held as capital assets on the date of the Reorganization). 7. BROKERAGE FEES AND EXPENSES 7.1. Each Acquiring Fund and each Acquired Fund represents and warrants to the other that it has no obligations to pay any brokers or finders fees in connection with the transactions provided for herein. 7.2. Each party to this Agreement shall bear or cause to be borne by an appropriate affiliate its own expenses in connection with carrying out the terms of this Agreement. 8. TERMINATION 8.1. This Agreement may be terminated by the mutual agreement of the VIP Trust and the TVP Trust. In addition, this Agreement may be terminated as follows at or prior to the Closing Date: (a) This Agreement may be terminated as to any Acquired Fund by resolution of the Board of Trustees of that Acquired Fund if, in good faith opinion of such Board, proceeding with the Agreement is not in the best interests of the Acquired Fund or its shareholders; or (b) This Agreement may be terminated as to any Acquiring Fund by resolution of the Board of Trustees of that Acquiring Fund if, in the good faith opinion of such Board, proceeding with the Agreement is not in the best interests of that Acquiring Fund or its shareholders. The termination of a Reorganization between an Acquired Fund and its corresponding Acquiring Fund, shall not affect the consummation or validity of a Reorganization with respect to any other corresponding funds, and the provisions of this Agreement shall be construed to effect this intent, including, without limitation, as the context requires, construing the terms "Acquiring Fund" and "Acquired Fund" as meaning only those TVP Funds and VIP Funds, respectively, which are involved in a Reorganization as of a Closing Date. 8.2. If this Agreement is terminated and the transactions contemplated hereby are abandoned, this Agreement shall become void and have no effect, without any liability on the part of any party hereto. 9. AMENDMENTS 9.1. This Agreement may be amended, modified or supplemented in such manner as may be mutually agreed upon in writing by the authorized officers of the TVP Trust and the VIP Trust; provided, however, that following the meeting of the Acquired Funds' Shareholders, no such amendment may have the effect of changing the provisions for determining the number of shares of each Acquiring Fund shares to be issued to the shareholders of the corresponding Acquired Fund under this Agreement to the detriment of such shareholders without their further approval. 10. ENTIRE AGREEMENT 10.1.This Agreement constitutes the entire agreement between the parties and supersedes any prior or contemporaneous understanding or arrangement with respect to the subject matter hereof. 11. SURVIVAL OF WARRANTIES 11.1.The representations, warranties and covenants contained in this Agreement or in any document delivered pursuant hereto or in connection herewith shall survive the consummation of the transactions contemplated herein. 12. LIABILITY AND INDEMNIFICATION 12.1.The parties acknowledge that the TVP Trust and the VIP Trust are business trusts, as defined by Massachusetts law. Notice is hereby given that this Agreement is executed on behalf of each Fund's trustees solely in their capacity as trustees, and not individually, and that each Fund's obligations under this Agreement are not binding on or enforceable against any of its trustees, officers, or shareholders, but are only binding on and enforceable against the respective Funds' assets and property. Each Fund agrees that, in asserting any rights or claims under this Agreement, it shall look only to the other Fund's assets and property in settlement of such rights or claims and not to such trustees, officers or trustees. 12.2.The Acquiring Funds agree to indemnify and hold harmless each trustee of the Acquired Fund at the time of the execution of this Agreement, whether or not such person is or becomes a trustee of the Acquiring Funds subsequent to the Reorganization, against expenses, including reasonable attorney's fees, judgments, fines and amount paid in settlement, actually and reasonably incurred by such trustee in connection with any claim that is asserted against such trustee arising out of such person's service as a trustee of the Acquired Funds, provided that such indemnification shall be limited to the full extent of indemnification that is available to the trustees of the Acquiring Funds pursuant to the provisions of applicable law. 12.3.For a period beginning at the time of the Reorganization and ending not less than ______ years thereafter, the Acquiring Funds shall provide for a liability policy covering the actions of each trustee of the Acquired Funds at the time of the execution of this Agreement for the period they served as such, which may be accomplished by causing such persons to be added as insured under the liability policy of the Acquiring Funds. 12.4.No Acquired Fund shall have any liability for the obligations of any other Acquired Fund hereunder and no Acquiring Fund shall have any liability for the obligation of any other Acquiring Fund hereunder. 13 WAIVER 13.1.At any time prior to the Closing Date, any of the foregoing conditions may be waived by the Trustees of the VIP Trust or those of the TVP Trust if, in the judgment of both Boards of Trustees, such waiver will not alter the shares to be received by shareholders of the Acquired Funds or otherwise have a material adverse effect on the benefits intended under this Agreement to the shareholders of the Acquiring Funds or the Acquired Funds, as the case may be. 14. NOTICES 14.1.Any notice, report, statement or demand required or permitted by any provision of this Agreement shall be in writing and shall be given by prepaid telegraph, telecopy, certified mail or overnight express courier addressed to: For TVP Funds, on behalf of itself or each Acquired Fund: ======================= ======================= For VIP Funds, on behalf of itself or each Acquiring Fund: ======================= ======================= 15. MISCELLANEOUS 15.1.The headings contained herein are for reference purposes only and shall note affect in any way the meaning or interpretation or this Agreement. 15.2.Whenever the terms "hereto", "hereunder", "herein" or "hereof" are used in this Agreement, they shall be construed as referring to this entire Agreement. 15.3.This Agreement may be executed by any number of counterparts, each of which shall be deemed an original. 15.4.This Agreement shall be governed by and construed in accordance with the laws of the state of Massachusetts, without giving effect to the conflict of laws principles otherwise applicable therein. 15.5.Nothing expressed or implied herein is intended or shall be construed to confer upon or give any person, firm, trust or corporation other than the parties and their respective successors and assigns any rights or remedies under or by reason of this Agreement. 15.6.Any announcement or similar publicity with respect to this Agreement or the transactions contemplated herein shall be made only at such time and in such manner as the parties shall agree, provided that nothing herein shall prevent either party upon notice to the other party from making such public announcements as such party's counsel may consider advisable in order to satisfy the party's legal and contractual obligations in such regard. 15.7.Subject to the conditions set forth in this Agreement, the failure of one Acquired Fund to consummate the transactions contemplated hereby shall not affect the consummation or validity of the Reorganization with respect to any other Acquired Fund, and the provisions of this Agreement shall be construed to effect this intent, including, without limitation, as the context requires, construing the terms "Acquiring Funds" and "Acquired Funds" to mean only those series of VIP Funds and TVP Funds, respectively, which are involved in the Reorganization as of the Closing Date. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed by its President or Vice President and its seal to be affixed thereto and attested by its Secretary or Assistant Secretary. Templeton Variable Products Series Fund on behalf of: Franklin Large Cap Growth Investments Fund Franklin Small Cap Investments Fund Mutual Shares Investments Fund Templeton Asset Allocation Fund Templeton Bond Fund Templeton Developing Markets Fund Templeton International Fund Templeton Stock Fund Franklin S&P 500 Index Fund Franklin Strategic Income Investments Fund By: ___________________________________ Franklin Templeton Variable Insurance Products Trust on behalf of: Franklin Large Cap Growth Securities Fund Franklin Small Cap Fund Mutual Shares Securities Fund Templeton Global Asset Allocation Fund Templeton Global Income Securities Fund Templeton Developing Markets Equity Fund Templeton International Equity Fund Templeton Global Growth Fund Franklin S&P 500 Index Fund Franklin Strategic Income Securities Fund By: ___________________________________ EXHIBIT IIa PROSPECTUS FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST CLASS 1 SHARES MAY 1, 1999 AS AMENDED NOVEMBER 1, 1999 INVESTMENT STRATEGY Capital Growth Franklin Capital Growth Fund (EFFECTIVE 12/15/99 THE NAME WILL BE FRANKLIN LARGE CAP GROWTH SECURITIES FUND) Capital Growth Franklin Small Cap Fund Growth and Income Mutual Shares Securities Fund Growth and Income Templeton Global Asset Allocation Fund Income Templeton Global Income Securities Fund Capital Growth Templeton Developing Markets Equity Fund Capital Growth Templeton International Equity Fund Capital Growth Templeton Global Growth Fund [Insert Franklin Templeton Ben Head] As with all fund prospectuses, the SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. CONTENTS FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST [Begin callout] INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING [End callout] [insert page #] Overview of the Trust [insert page #] Franklin Large Cap Growth Securities Fund (PREVIOUSLY FRANKLIN CAPITAL GROWTH FUND) [insert page #] Franklin Small Cap Fund [insert page #] Mutual Shares Securities Fund [insert page #] Templeton Developing Markets Equity Fund [insert page #] Templeton Global Asset Allocation Fund [insert page #] Templeton Global Growth Fund [insert page #] Templeton Global Income Securities Fund [insert page #] Templeton International Equity Fund ADDITIONAL INFORMATION, ALL FUNDS [insert page #] Important Recent Developments [insert page #] Distributions and Taxes FUND ACCOUNT INFORMATION [Begin callout] INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES [End callout] [insert page #] Buying Shares [insert page #] Selling Shares [insert page #] Exchanging Shares [insert page #] Fund Account Policies [insert page #] Questions FOR MORE INFORMATION [Begin callout] WHERE TO LEARN MORE ABOUT EACH FUND [End callout] Back Cover FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST [Insert graphic of pyramid]OVERVIEW OF THE TRUST FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (THE TRUST), FORMERLY FRANKLIN VALUEMARK FUNDS, CURRENTLY CONSISTS OF TWENTY-SIX SEPARATE FUNDS, OFFERING A WIDE VARIETY OF INVESTMENT CHOICES. EACH FUND HAS TWO CLASSES OF SHARES, CLASS 1 AND CLASS 2. THE FUNDS ARE ONLY AVAILABLE AS INVESTMENT OPTIONS IN VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACTS. THE ACCOMPANYING CONTRACT PROSPECTUS INDICATES WHICH FUNDS AND CLASSES ARE AVAILABLE TO YOU. INVESTMENT CONSIDERATIONS o Each fund has its own investment strategy and risk profile. Generally, the higher the expected rate of return, the greater the risk of loss. o No single fund can be a complete investment program; consider diversifying your fund choices. o You should evaluate each fund in relation to your personal financial situation, investment goals, and comfort with risk. Your investment representative can help you determine which funds are right for you. RISKS o There can be no assurance that any fund will achieve its investment goal. o Because you could lose money by investing in a fund, take the time to read each fund description and consider all risks before investing. o All securities markets, interest rates, and currency valuations move up and down, sometimes dramatically, and mixed with the good years can be some bad years. Since no one can predict exactly how financial markets will perform, you may want to exercise patience and focus not on short-term market movements, but on your long-term investments goals. o Fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. Government. Fund shares involve investment risks, including the possible loss of principal. MORE DETAILED INFORMATION ABOUT EACH FUND, ITS INVESTMENT POLICIES, AND ITS PARTICULAR RISKS CAN BE FOUND IN THE TRUST'S STATEMENT OF ADDITIONAL INFORMATION (SAI). MANAGEMENT The funds' investment managers and their affiliates manage over $218 billion in assets. In 1992, Franklin joined forces with Templeton, a pioneer in international investing. The Mutual Advisers organization became part of the Franklin Templeton organization four years later. Today, Franklin Templeton is one of the largest mutual fund organizations in the United States, and offers money management expertise spanning a variety of investment objectives. Franklin Capital Growth Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES Effective December 15, 1999, the fund's name will be changed to Franklin Large Cap Growth Securities Fund and the fund's strategy will be restated to one of investing, under normal market conditions, at least 65% of its total assets in equity securities of U.S. large-cap growth companies ($8.5 billion or more), focusing on those companies that are expected to have revenue growth in excess of the economy as a whole either through above-average industry expansion or market share gains. These companies generally dominate, or are gaining market share, in their respective industries and have a reputation for quality of management, as well as superior products and services. GOAL The fund's investment goal is capital appreciation. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in equity securities of companies believed to be globally competitive and to offer favorable opportunities for long-term capital appreciation. Following this policy, the fund will typically invest predominantly in established, large- to medium-cap companies with market capitalization values (share price times the number of common stock shares outstanding) greater than $1.5 billion. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, and securities convertible into common stock. [Begin callout] The fund invests primarily in large cap growth companies' equity securities. [End callout] In choosing equity investments, the manager will focus on companies that have exhibited above average growth, strong financial records, and large market capitalization. In addition, management expertise, industry leadership, growth in market share and sustainable competitive advantage are factors the manager also considers. Although the manager will search for investments across a large number of industries, it expects to have significant positions (but not in excess of 25% of its total assets in a given sector) in the technology (including computers, telecommunications, and electronics), health care, and finance industries. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. 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. TECHNOLOGY COMPANIES The technology sector has historically been volatile due to the rapid pace of product change and development within the sector. The stock prices of companies operating within this sector may be subject to abrupt or erratic movements. In addition, the activities of telecommunications companies fall under international, federal and state regulations. These companies may be adversely affected by changes in government regulations. HEALTH CARE COMPANIES The activities of health care companies may be funded or subsidized by federal and state governments. If government funding and subsidies are reduced or discontinued, the profitability of these companies could be adversely affected. Health care companies may also be affected by government policies on health care reimbursements, regulatory approval for new drugs and medical instruments, and similar matters. They are also subject to legislative risk, i.e., the risk of a reform of the health care system through legislation. FINANCIAL SERVICES COMPANIES Financial services companies are subject to extensive government regulation which tends to limit both the amount and types of loans and other financial commitments such companies can make, and the interest rates and fees they can charge. These limitations can have a significant impact on the profitability of a financial services company since profitability is impacted by the company's ability to make financial commitments such as loans. The financial services industry is currently undergoing a number of changes such as continuing consolidations, development of new products and structures and changes to its regulatory framework. These changes are likely to have a significant impact on the financial services industry. See "Important Recent Developments," in this prospectus for Year 2000 discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graph of a bull and a bear] PAST PERFORMANCE This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. FRANKLIN CAPITAL GROWTH FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 --------------------- 18.31% 20.29% --------------------- --------------------- 97 98 --------------------- YEAR [Begin callout] Best Quarter: Q4 '98 19.73% Worst Quarter: Q3 '98 -10.47% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 SINCE INCEPTION PAST 1 YEAR (05/01/96) ------------------------------------------------------------------------------- FRANKLIN CAPITAL GROWTH FUND - CLASS 11 20.29% 19.72% S&P 500(R) INDEX2 28.58% 29.00% RUSSELL 1000 INDEX(R)2 27.02% 27.92% 1. All fund performance assumes reinvestment of dividends and capital gains. 2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged group of widely held common stocks covering a variety of industries. The Russell 1000 Index measures the 1,000 largest companies in the Russell 3000 Index. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, California 94403-7777, is the fund's investment manager. MANAGEMENT TEAM The team responsible for the fund's management is: KENT SHEPHERD, CFA Vice President, Advisers Mr. Shepherd has been a manager of the fund since its inception in 1999, and has been with the Franklin Templeton Group since 1991. JASON R. NUNN Portfolio Manager, Advisers Mr. Nunn has been a manager of the fund since September 1999. Before joining the Franklin Templeton Group in 1998 he worked in corporate finance with Alex, Brown & Sons. CONRAD B. HERRMANN, CFA Senior Vice President, Advisers Mr. Herrmann has been a manager of the fund since its inception in 1996, and has been with the Franklin Templeton Group since 1989. The fund pays the manager a fee for managing its assets, making its investment decisions, and providing certain administrative facilities and services for the fund. For the fiscal year ended December 31, 1998, the fund paid 0.75% of its average daily net assets to the manager. [Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS The financial highlights table provides further details to help you understand the financial performance of the fund's Class 1 shares since inception. The table shows certain information on a single share basis (per share performance). It also shows some key fund statistics, such as total return (past performance) and expense ratios. Total return represents the annual change in value of a share assuming reinvestment of dividends and capital gains. This information has been audited by PricewaterhouseCoopers LLP, independent auditors. Their report, along with the financial statements, are included in the fund's Annual Report (available upon request). <TABLE> <CAPTION> PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA ------------------------------------------------------------------------- -------------------------------------- RATIO OF DISTRI- DISTRI- NET NET NET BUTIONS BUTIONS NET RATIO OF INVEST- ASSET REALIZED & TOTAL FROM FROM ASSET NET EXPENSES MENT PORT- VALUE, NET UNREAL- FROM NET NET VALUE, ASSETS, TO INCOME TO FOLIO BEGIN- INVEST- IZED INVEST- INVEST- REAL- TOTAL END TOTAL END OF AVERAGE AVERAGE TURN- PERIOD NING MENT GAINS MENT MENT IZED DISTRI- OF RETURN+ YEAR NET NET OVER ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS PERIOD (%) (000'S)($) ASSETS(%)ASSETS(%)RATE(%) -------------------------------------------------------------------------------------------------------------------- FRANKLIN CAPITAL GROWTH FUND <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 1996(1) 10.00 .0 1.33 1.36 - - - 11.36 13.60 44,667 .77* .96* 3.91 1997 11.36 .06 2.02 2.08 (.02) - (.02) 13.42 18.31 109,355 .77 .721 9.90 1998 13.42 .10 2.62 2.72 (.06) - (.06) 16.08 20.29 220,952 .771 .001 2.17 </TABLE> *Annualized + Total return does not include deductions at the contract level for cost of insurance charges, premium load, administrative charges, mortality and expense risk charges or other charges that may be incurred under the variable insurance contracts for which the funds serve as underlying investments. If they had been included, total return would be lower. Total return is not annulized. 1. For the period May 1, 1996 (effective date) to December 31, 1996. Franklin Small Cap Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is long-term capital growth. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in the equity securities of U.S. small capitalization (small cap) growth companies. Small cap companies are generally those with market cap values (share price times the number of common stock shares outstanding) of less than $1.5 billion, at the time of purchase. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, and securities convertible into common stock. [Begin callout] The fund invests primarily in common stocks of small cap U.S. companies. [End callout] PORTFOLIO SELECTION The manager is a research driven, fundamental investor, pursuing a disciplined "growth at a reasonable price" strategy. As a "bottom-up" investor focusing primarily on individual securities, the manager chooses small cap companies that it believes are positioned for rapid growth in revenues, earnings or assets, and are selling at reasonable prices. The manager relies on a team of analysts to provide in-depth industry expertise and uses both qualitative and quantitative analysis to evaluate companies for distinct and sustainable competitive advantages. Such advantages as a particular marketing or product niche, proven technology, and industry leadership are all factors the manager believes point to strong long-term growth potential. The manager diversifies the fund's assets across many industries, and from time to time may invest substantially in certain sectors, including technology and biotechnology. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. SMALLER COMPANIES While smaller companies may offer greater opportunities for capital growth than larger, more established companies, they also have more risk. Historically, smaller company securities have been more volatile in price and have fluctuated independently from larger company securities, especially over the shorter-term. Smaller or relatively new companies can be particularly sensitive to changing economic conditions, and their growth prospects are less certain. For example, smaller companies may lack depth of management or may have limited financial resources for growth or development. They may have limited product lines or market share. Smaller companies may be in new industries, or their new products or services may not find an established market or may become quickly obsolete. Smaller companies may also suffer significant losses, their securities can be less liquid, and investments in these companies may be speculative. Technology and biotechnology industry stocks, in particular, can be subject to erratic or abrupt price movements. [Begin callout] Because the stocks the fund holds fluctuate in price with market conditions, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. [End callout] See "Important Recent Developments" in this prospectus for Year 2000 discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of a bull and a bear] PAST PERFORMANCE This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. FRANKLIN SMALL CAP FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 --------------------------------- 28.95% 17.42% -0.98% --------------------------------- --------------------------------- 96 97 98 --------------------------------- YEAR [Begin callout] Best Quarter: Q4 '98 24.39% Worst Quarter: Q3 '98 -24.40% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 SINCE INCEPTION PAST 1 YEAR (11/01/95) ----------------------------------------------------------------------------- FRANKLIN SMALL CAP FUND - CLASS 11 -0.98% 14.51% S&P 500(R) INDEX2 28.58% 29.09% RUSSELL 2500(R) INDEX2 0.38% 15.45% 1. All fund performance assumes reinvestment of dividends and capital gains. 2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged group of widely held common stocks, whereas the Russell 2500(R) Index is an index of 2,500 companies with small market capitalizations, both covering a variety of industries. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, California 94403-7777, is the fund's investment manager. MANAGEMENT TEAM The team responsible for the fund's management is: EDWARD B. JAMIESON Executive Vice President, Advisers Mr. Jamieson has been a manager of the fund since its inception in 1995, and has been with the Franklin Templeton Group since 1987. MICHAEL MCCARTHY VICE PRESIDENT, Advisers Mr. McCarthy has been a manager of the fund since its inception in 1995. He joined the Franklin Templeton Group in 1992. AIDAN O'CONNELL Portfolio Manager, Advisers Mr. O'Connell has been a manager of the fund since September 1998. Before joining Franklin Templeton in May 1998, Mr. O'Connell was a research analyst and a corporate financial analyst at Hambrecht & Quist. The fund pays the manager a fee for managing its assets, making its investment decisions, and providing certain administrative facilities and services for the fund. For the fiscal year ended December 31, 1998, the fund paid 0.75% of its average daily net assets to the manager. [Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS The financial highlights table provides further details to help you understand the financial performance of the fund's Class 1 shares since inception. The table shows certain information on a single share basis (per share performance). It also shows some key fund statistics, such as total return (past performance) and expense ratios. Total return represents the annual change in value of a share assuming reinvestment of dividends and capital gains. This information has been audited by PricewaterhouseCoopers LLP, independent auditors. Their report, along with the financial statements, are included in the fund's Annual Report (available upon request). <TABLE> <CAPTION> PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA ------------------------------------------------------------------------- -------------------------------------- DISTRI- DISTRI- NET NET NET BUTIONS BUTIONS NET RATIO OF INVEST- ASSET REALIZED & TOTAL FROM FROM ASSET NET EXPENSES MENT PORT- VALUE, NET UNREAL- FROM NET NET VALUE, ASSETS, TO INCOME TO FOLIO BEGIN- INVEST- IZED INVEST- INVEST- REAL- TOTAL END TOTAL END OF AVERAGE AVERAGE TURN- PERIOD NING MENT GAINS MENT MENT IZED DISTRI- OF RETURN+ YEAR NET NET OVER ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS PERIOD (%) (000'S)($) ASSETS(%)ASSETS(%)RATE(%) -------------------------------------------------------------------------------------------------------------------- FRANKLIN SMALL CAP FUND <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 19951 10.00 .03 .21 .24 - - - 10.24 2.30 13,301 .90* 2.70* 16.04 1996 10.24 .02 2.95 2.97 (.01) - (.01) 13.20 28.95 170,969 .77 .63 63.72 1997 13.20 .01 2.24 2.25 (.03) (.37) (.40) 15.05 17.42 313,462 .77 .06 64.07 1998 15.05 .07 (.20) (.13) (.01) (1.19) (1.20) 13.72 (.98)315,460 .77 .51 53.01 </TABLE> * Annualized + Total return does not include deductions at the contract level for cost of insurance charges, premium load, administratvie charges, mortality and expense risk charges or other charges that may be incurred under the variable insurance contracts for which the funds serve as underlying investments. If they had been included, total return would be lower. Total return is not annulized. 1. For the period November 1, 1995 (effective date) to December 31, 1995. Mutual Shares Securities Fund [Insert graphic of bullseye and arrows] GOALS AND STRATEGIES GOALS The fund's principal goal is capital appreciation. Its secondary goal is income. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in equity securities of companies that the manager believes are available at market prices less than their actual value based on certain recognized or objective criteria (intrinsic value). Following this value-oriented strategy, the fund will primarily invest in: o UNDERVALUED STOCKS Stocks trading at a discount to asset value. O Reorganizing Companies SECURITIES OF COMPANIES IN THE MIDST OF CHANGE SUCH AS MERGERS, CONSOLIDATIONS, LIQUIDATIONS, REORGANIZATIONS, FINANCIAL RESTRUCTURINGS, OR COMPANIES WITH TAKEOVER, TENDER OR EXCHANGE OFFERS OR LIKELY TO RECEIVE SUCH OFFERS (REORGANIZING COMPANIES). THE FUND MAY PARTICIPATE IN SUCH TRANSACTIONS. o DISTRESSED COMPANIES Securities of companies that are distressed or even in bankruptcy. [Begin callout] The fund invests primarily in common stocks of companies the manager believes are significantly undervalued. [End callout] The fund invests primarily in companies with market capitalization values (share price times the number of common stock shares outstanding) greater than $1.5 billion, but may invest a small portion in small-cap companies, which have more risk. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, and securities convertible into common stock. While the fund generally purchases securities for investment purposes, the manager may use the fund's ownership in a company to seek to influence or control management, or invest in other companies that do so, when the manager believes the fund may benefit. The fund may invest in debt securities rated in any rating category established by an independent rating agency, including high yield, lower rated or defaulted debt securities ("junk bonds"), or if unrated, determined by the manager to be comparable. A debt security obligates the issuer to the bondholders, both to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stock or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. The fund typically invests in unrated and lower rated debt securities of Reorganizing Companies or Distressed Companies. Such debt securities are primarily secured or unsecured indebtedness or participations in the indebtedness, including loan participations and trade claims. Indebtedness represents a specific commercial loan or portion of a loan which has been given to a company by a financial institution such as a bank or insurance company. By purchasing direct indebtedness of companies, a fund steps into the shoes of a financial institution. Participation interests in indebtedness represent fractional interests in a company's indebtedness. The fund currently intends to invest up to approximately 20% of its total assets in foreign equity and debt securities, including American, European and Global Depositary Receipts. Depositary receipts are certificates typically issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. The fund generally seeks to hedge (protect) against currency risks, largely using forward foreign currency exchange contracts, where available, and in the manager's opinion, it is economical to do so (Hedging Instruments). PORTFOLIO SELECTION The manager is a research driven, fundamental investor, pursuing a disciplined value strategy. In choosing equity investments, the manager focuses on the market price of a company's securities relative to its evaluation of the company's asset value, including an analysis of book value, cash flow potential, long-term earnings, and multiples of earnings of comparable securities. Similarly, debt securities are generally selected based on the manager's own analysis of the security's intrinsic value rather than the coupon rate or rating. Thus, each security is examined separately and there are no set criteria as to asset size, earnings or industry type. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goals. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. REORGANIZING OR DISTRESSED COMPANIES The fund's bargain-driven focus may result in the fund choosing securities that are not widely followed by other investors, including companies reporting poor earnings, companies whose share prices have declined sharply, turnarounds, cyclical companies, or companies emerging from bankruptcy, which may have higher risk. There can be no assurance that any merger or other restructuring, or tender or exchange offer proposed at the time the fund invests in a Reorganizing Company will be completed on the terms contemplated and therefore, benefit the fund. [Begin callout] Because the stocks the fund holds fluctuate in price with market conditions, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. [End callout] FOREIGN SECURITIES Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. CURRENCY Where the fund's investments are denominated in foreign currencies, changes in foreign currency exchange rates, including devaluation of currency by a country's government, will increase or decrease the fund's returns from its foreign portfolio holdings. Currency markets generally are not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic, and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes and certain custody and settlement risks. Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies, or may become illiquid. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the security's value and, thus, impact the value of fund shares. INDEBTEDNESS AND PARTICIPATIONS The purchase of debt securities of Reorganizing or Distressed Companies always involves a risk as to the creditworthiness of the issuer and the possibility that the investment may be lost. There are no established markets for indebtedness, making them less liquid than other securities, and purchasers of participations, such as the fund, must rely on the financial institution issuing the participation to assert any rights against the borrower with respect to the underlying indebtedness. In addition, the fund takes on the risk as to the creditworthiness of the bank or other financial intermediary issuer, as well as of the issuer of the underlying indebtedness. LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated securities, and can be considered speculative. Companies issuing high yield debt securities are not as strong financially, and are more likely to encounter financial difficulties and be more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates. If an issuer stops paying interest and/or principal, payments may never resume. The fund may lose its entire investment on bonds that may be, or are, in default. The prices of high yield debt securities fluctuate more than higher quality securities. Prices are especially sensitive to developments affecting the company's business and to rating changes, and typically rise and fall in response to factors that affect the company's stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, market activity, large sustained sales, a high-profile default, or other factors. High yield securities generally are less liquid than higher-quality bonds, and infrequent trades can make accurate pricing more difficult. At times, it may be difficult to sell these securities promptly at an acceptable price. HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered derivative investments. Their successful use will depend on the manager's ability to predict market movements, and losses from their use can be greater than if they had not been used. Risks include potential loss to the fund due to the imposition of controls by a government on the exchange of foreign currencies, delivery failure, default by the other party, or inability to close out a position because the trading market becomes illiquid. ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in illiquid securities, which are securities with a limited trading market. There is a possible risk that the securities cannot be readily sold or can only be resold at a price significantly lower than their value. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of a bull and a bear] PAST PERFORMANCE This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. MUTUAL SHARES SECURITIES FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 ----------------------------- 17.73% 0.09% ----------------------------- ----------------------------- 97 98 ----------------------------- YEAR [Begin callout] Best Quarter: Q4 '98 12.94% Worst Quarter: Q3 '98 -17.65% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 SINCE INCEPTION PAST 1 YEAR (11/08/96) ---------------------------------------------------------------------------- MUTUAL SHARES SECURITIES FUND - CLASS 11 0.09% 9.70% S&P 500(R) INDEX2 28.58% 30.66% 1. All fund performance assumes reinvestment of dividends and capital gains. 2. Source: Standard and Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged group of widely held common stocks covering a variety of industries. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway, Short Hills, New Jersey 07078, is the fund's investment manager. MANAGEMENT TEAM The team members primarily responsible for the fund's management are: LAWRENCE N. SONDIKE Senior Vice President Franklin Mutual Mr. Sondike has been a manager of the fund since its inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine Securities Corporation, the predecessor of Franklin Mutual (Heine). DAVID E. MARCUS Senior Vice President Franklin Mutual Mr. Marcus has been a manager of the fund since its inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. Michael F. Price is Chairman of the Board of Directors which oversees the management of Franklin Mutual. The managers listed above are part of a larger team of investment professionals with management responsibility for all of the funds managed by Franklin Mutual, including this fund. Peter A. Langerman is Chief Executive Officer and Robert L. Friedman is Chief Investment Officer of Franklin Mutual. Mr. Friedman has overall supervisory responsibility for the day to day management of the funds managed by Franklin Mutual. The team also includes: PETER A. LANGERMAN Chief Executive Officer Franklin Mutual Mr. Langerman has been involved with the management of the fund since its President and inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. ROBERT L. FRIEDMAN Chief Investment Officer Senior Vice President Franklin Mutual Mr. Friedman has been involved with the management of the fund since its inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. JEFFREY A. ALTMAN Senior Vice President Franklin Mutual Mr. Altman has been a manager of the fund since its inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. RAYMOND GAREA Senior Vice President Franklin Mutual Mr. Garea has been a manager of the fund since its inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. DAVID J. WINTERS Senior Vice President Franklin Mutual Mr. Winters has been a manager of the fund since 1998. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. In addition, the following Franklin Mutual employees serve as Assistant Portfolio Managers: JIM AGAH Assistant Portfolio Manager Franklin Mutual Mr. Agah has been a manager of the fund since 1998. Before joining the Franklin Templeton Group in 1997, he was vice president of equity sales at Keefe, Bryette & Woods. JEFF DIAMOND Assistant Portfolio Manager Franklin Mutual Mr. Diamond has been a manager of the fund since 1998. Before joining the Franklin Templeton Group in 1998, he was a vice president and co-manager of Prudential Conservative Stock Fund. The fund pays the manager a fee for managing its assets and making its investment decisions. For the fiscal year ended December 31, 1998, the fund paid 0.60% of its average daily net assets to the manager. [Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS The financial highlights table provides further details to help you understand the financial performance of the fund's Class 1 shares since inception. The table shows certain information on a single share basis (per share performance). It also shows some key fund statistics, such as total return (past performance) and expense ratios. Total return represents the annual change in value of a share assuming reinvestment of dividends and capital gains. This information has been audited by PricewaterhouseCoopers LLP, independent auditors. Their report, along with the financial statements, are included in the fund's Annual Report (available upon request). <TABLE> <CAPTION> PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA -------------------------------------------------------------------------------------------------------------------- RATIO OF DISTRI- DISTRI- NET NET NET BUTIONS BUTIONS NET RATIO OF INVEST- ASSET REALIZED & TOTAL FROM FROM ASSET NET EXPENSES MENT PORT- VALUE, NET UNREAL- FROM NET NET VALUE, ASSETS, TO INCOME TO FOLIO BEGIN- INVEST- IZED INVEST- INVEST- REAL- TOTAL END TOTAL END OF AVERAGE AVERAGE TURN- PERIOD NING MENT GAINS MENT MENT IZED DISTRI- OF RETURN+ YEAR NET NET OVER ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS PERIOD (%) (000'S)($) ASSETS(%)ASSETS(%)RATE(%) -------------------------------------------------------------------------------------------------------------------- MUTUAL SHARES SECURITIES FUND <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 19961 10.00 .02 .33 .35 - - - 10.35 3.50 27,677 1.00* 2.56* 1.31 1997 10.35 .13 1.71 1.84 (.01) - (.01) 12.18 17.73 387,787 .80 2.10 49.01 1998 12.18 .28 (.25) .03 (.13) (.12) (.25) 11.96 .09 482,444 .77 2.60 70.19 </TABLE> * Annualized + Total return does not include deductions at the contract level for cost of insurance charges, premium load, administratvie charges, mortality and expense risk charges or other charges that may be incurred under the variable insurance contracts for which the funds serve as underlying investments. If they had been included, total return would be lower. Total return is not annulized. 1. For the period November 8, 1996 (effective date) to December 31, 1996. Templeton Developing Markets Equity Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is long-term capital appreciation. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in emerging markets equity securities. Emerging market equity securities generally include equity securities that trade in emerging markets or are issued by companies that have their principal activities in emerging market countries. Emerging market countries generally include those considered to be emerging by the World Bank, the International Finance Corporation, the United Nations, or the countries' authorities. These countries are typically located in the Asia-Pacific region, Eastern Europe, Central and South America, and Africa. Emerging market equity securities and emerging market countries are more fully described in the SAI. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stock, and securities convertible into common stock. The fund also invests in American, European and Global Depositary Receipts, which are certificates issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. [Begin callout] The fund invests primarily in the common stocks of companies located in emerging market countries. [End callout] In addition to its principal investments, the fund may invest significantly in securities of issuers in developed market countries, and particularly those developed market countries that are linked by tradition, economic markets, geography or political events to emerging market countries. Depending upon current market conditions, or for capital appreciation, the fund may also invest a substantial portion of its assets in rated or unrated debt securities of companies and governments located anywhere in the world. A debt security obligates the issuer to the bondholders, both to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stock or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. The fund may also invest up to 10% of its total assets in securities of closed-end investment companies to facilitate foreign investment. PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-oriented, and long-term. In choosing investments, the fund's manager will focus on the market price of a company's securities relative to its evaluation of the company's long-term earnings, asset value and cash flow potential. A company's historical value measures, including price/earnings ratio, profit margins and liquidation value, will also be considered. As a "bottom-up" investor focusing primarily on individual companies and securities, the fund may from time to time have significant investments in particular countries. The manager intends to manage the fund's exposure to various geographic regions and their currencies based on its assessment of changing market and political conditions. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency investments. Such investments may be medium-term (less than 5 years for this fund) or short-term, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. FOREIGN SECURITIES Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. 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. [Begin callout] Because the stocks the fund holds fluctuate in price with emerging market conditions and currencies, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. [End callout] CURRENCY Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Currency markets generally are not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes, and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the debt security's value and, thus, impact the value of fund shares. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of bull and bear] PAST PERFORMANCE This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. TEMPLETON DEVELOPING MARKETS EQUITY FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 [Insert bar graph] 2.77% 21.59% -8.72% -21.61% 95 96 97 98 YEAR [Begin callout] BEST QUARTER: Q4 '98 20.59% WORST QUARTER: Q4 '97 -23.44% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 SINCE INCEPTION 1 YEAR (03/15/94) ---------------------------------------------------------------------- Templeton Developing Markets Equity Fund - Class 11 21.61% -3.22% MSCI Emerging Markets Free Index2 -25.34% -8.80% IFC Investable Composite Index2 -22.01% -9.24% 1. All fund performance assumes reinvestment of dividends and capital gains. 2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI Emerging Markets Free Index measures the performance of securities located in 25 emerging market countries such as Brazil, China, Korea and Poland. The International Finance Corporation's Investable Composite Index is an emerging markets index that includes 650 stocks from 18 countries including Mexico, South Korea, Brazil, Jordan and Turkey. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Templeton Asset Management Ltd. (TAML), 7 Temasek Blvd., #38-03 Suntec Tower One, Singapore, 038987, is the fund's investment manager. MANAGEMENT TEAM The team responsible for the fund's management is: DR. J. MARK MOBIUS. Managing Director, TAML Dr. Mobius has been a manager of the fund since its inception in 1994, and has been with the Franklin Templeton Group since 1987. TOM WU Director, TAML Mr. Wu has been a manager of the fund since its inception in 1994, and has been with the Franklin Templeton Group since 1987. H. ALLAN LAM Portfolio Manager, TAML Mr. Lam has been a manager of the fund since its inception in 1994, and has been with the Franklin Templeton Group since 1987. EDDIE CHOW portfolio manager, TAML Mr. Chow has been a manager of the fund since 1996, and has been with the Franklin Templeton Group since 1994. DENNIS LIM director, TAML Mr. Lim has been a manager of the fund since 1996, and has been with the Franklin Templeton Group since 1990. TEK-KHOAN ONG Portfolio Manager, TAML Mr. Ong has been a manager if the fund since 1996, and has been with the Franklin Templeton Group since 1993. The fund pays the manager a fee for managing its assets, making its investment decisions and providing certain administrative facilities and services to the fund. For the fiscal year ended December 31, 1998, the fund paid 1.25% of its average daily net assets to the manager. [Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS The financial highlights table provides further details to help you understand the financial performance of the fund's Class 1 shares since inception. The table shows certain information on a single share basis (per share performance). It also shows some key fund statistics, such as total return (past performance) and expense ratios. Total return represents the annual change in value of a share assuming reinvestment of dividends and capital gains. This information has been audited by PricewaterhouseCoopers LLP, independent auditors. Their report, along with the financial statements, are included in the fund's Annual Report (available upon request). <TABLE> <CAPTION> PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA --------------------------------------------------------------- ------------------------------------ RATIO OF DISTRI- DISTRI- NET NET NET BUTIONS BUTIONS NET RATIO OF INVEST- ASSET REALIZED & TOTAL FROM FROM ASSET NET EXPENSES MENT PORT- VALUE, NET UNREAL- FROM NET NET VALUE, ASSETS, TO INCOME TO FOLIO BEGIN- INVEST- IZED INVEST- INVEST- REAL- TOTAL END TOTAL END OF AVERAGE AVERAGE TURN- PERIOD NING MENT GAINS MENT MENT IZED DISTRI- OF RETURN+ YEAR NET NET OVER ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS PERIOD (%) (000'S)($) ASSETS(%)ASSETS(%)RATE(%) -------------------------------------------------------------------------------------------------------------------- TEMPLETON DEVELOPING MARKETS EQUITY FUND <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 19941 10.00 .07 (.51) (.44) - - - 9.56 (4.40) 98,189 1.53* 1.85* 1.15 1995 9.56 .09 .18 .27 (.04) (.01) (.05) 9.78 2.77 158,084 1.41 2.011 9.96 1996 9.78 .12 1.97 2.09 (.10) (.18) (.28) 11.59 21.59 272,098 1.49 1.681 2.42 1997 11.59 .18 (1.10) (.92) (.15) (.23) (.38) 10.29 (8.72) 279,680 1.42 1.57 20.59 1998 10.29 .20 (2.35) (2.15) (.29) (.94) (1.23) 6.91 (21.61) 162,433 1.41 2.04 36.58 </TABLE> * Annualized + Total return does not include deductions at the contract level for cost of insurance charges, premium load, administratvie charges, mortality and expense risk charges or other charges that may be incurred under the variable insurance contracts for which the funds serve as underlying investments. If they had been included, total return would be lower. Total return is not annulized. 1. For the period March 15, 1994 (effective date) to December 31, 1994. Templeton Global Asset Allocation Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is high total return. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest in equity securities of companies in any nation, debt securities of companies and governments of any nation, and in money market instruments. The mix of investments will be adjusted to capitalize on total return potential produced by changing economic conditions throughout the world, including emerging market countries. While there are no minimum or maximum percentage targets for each asset class, historically stocks have been the predominant investment. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, securities convertible into common stock, and American, European and Global Depositary Receipts. Depositary Receipts are certificates issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. A debt security obligates the issuer to the bondholders, both to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stock or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. [Begin callout] The fund invests primarily in common stocks and bonds of U.S. and non-U.S. countries. [End callout] The fund focuses on "investment grade" debt securities. These are issues rated in the top four rating categories (AAA to BBB) by independent rating agencies such as Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or, if unrated, determined by the fund's manager to be comparable. The fund may also invest up to 25% of its total assets in high yield, medium and lower rated debt securities ("junk bonds"), or, if unrated, determined by the fund's manager to be comparable. The fund will not invest in defaulted securities. During 1998, about 10.2% of the fund's portfolio was invested in lower rated and comparable quality unrated debt securities. Many debt securities of non-U.S. issuers, and especially emerging market issuers, are rated below investment grade or are unrated so that their selection depends on the manager's internal analysis. PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-oriented, and long-term. In choosing equity investments, the fund's manager will focus on the market price of a company's securities relative to its evaluation of the company's long-term earnings, asset value and cash flow potential. A company's historical value measures, including price/earnings ratio, profit margins, and liquidation value, will also be considered. As a "bottom-up" investor focusing primarily on individual securities, the fund may from time to time have significant investments in particular countries. In choosing debt investments, the fund's manager allocates its assets among issuers, geographic regions, and currencies based upon its assessment of relative interest rates among currencies, the manager's outlook for changes in interest rates, and credit risks. The manager intends to manage the fund's exposure to various geographic regions and their currencies based on its assessment of changing market and political conditions; with respect to debt securities, the manager may also from time to time make use of forward currency exchange contracts for hedging (protection) purposes (Hedging Instruments). TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. [Begin callout] Because the stocks and bonds the fund holds fluctuate in price with foreign market conditions and currencies, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. [End callout] FOREIGN SECURITIES Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. CURRENCY Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because the investment is worth fewer dollars. Currency markets generally are not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes, and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the security's value and, thus, impact the value of fund shares. LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated securities, and can be considered speculative. Companies issuing high yield debt securities are not as strong financially, and are more likely to encounter financial difficulties and be more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates. If an issuer stops paying interest and/or principal, payments may never resume. The fund may lose its entire investment on bonds that may be, or are, in default. The prices of high yield debt securities fluctuate more than higher quality securities. Prices are especially sensitive to developments affecting the company's business and to rating changes, and typically rise and fall in response to factors that affect the company's stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, market activity, large sustained sales, a high-profile default, or other factors. High yield securities generally are less liquid than higher-quality bonds, and infrequent trades can make accurate pricing more difficult. At times, it may be difficult to sell these securities promptly at an acceptable price. HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered derivative investments. Their successful use will depend on the manager's ability to predict market movements, and losses from their use can be greater than if they had not been used. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, risks, and bond ratings can be found in the SAI. [Insert graphic of a bull and a bear] PAST PERFORMANCE This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. TEMPLETON GLOBAL ASSET ALLOCATION FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 ---------------------------------------- 19.84% 11.71% -0.04% ---------------------------------------- ---------------------------------------- 96 97 98 ---------------------------------------- YEAR [Begin callout] Best Quarter: Q4 '98 11.93% Worst Quarter: Q3 '98 -13.12% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 SINCE INCEPTION PAST 1 YEAR (05/01/95 ) ------------------------------------------------------------------------- TEMPLETON GLOBAL ASSET ALLOCATION FUND - CLASS 11 -0.04% 10.25% MSCI WORLD INDEX(R)2 24.80% 18.24% JP MORGAN GLOBAL GOVERNMENT BOND INDEX2 15.31% 7.49% 1. All fund performance assumes reinvestment of dividends and capital gains. 2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index(R) tracks the performance of approximately 1500 securities in 23 countries and is designed to measure world stock market performance. The unmanaged JP Morgan Global Government Bond Index tracks the performance of government bond markets in 13 countries. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Templeton Global Advisors Limited (TGAL), Lyford Cay, Nassau, N.P., Bahamas, is the fund's investment manager. Under an agreement with TGAL, Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, through its Templeton Global Bond Managers division (Global Bond Managers), is the fund's sub-advisor. MANAGEMENT TEAM The team responsible for managing the equity portion of the fund is: DALE WINNER, CFA Portfolio Manager, TGAL Mr. Winner has been a manager of the fund since 1997. Before joining Franklin Templeton in 1995, he was a trust officer at J.P. Morgan. MARK G. HOLOWESKO, CFA President, TGAL Mr. Holowesko has been a manager of the fund since 1999, and has been with the Franklin Templeton Group since 1985. A team from Global Bond Managers is responsible for managing the debt portion of the fund's investments. The fund pays the manager a fee for managing its assets and making its investment decisions. For the fiscal year ended December 31, 1998, the fund paid 0.65% of its average daily net assets to the manager. [Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS The financial highlights table provides further details to help you understand the financial performance of the fund's Class 1 shares since inception. The table shows certain information on a single share basis (per share performance). It also shows some key fund statistics, such as total return (past performance) and expense ratios. Total return represents the annual change in value of a share assuming reinvestment of dividends and capital gains. This information has been audited by PricewaterhouseCoopers LLP, independent auditors. Their report, along with the financial statements, are included in the fund's Annual Report (available upon request). <TABLE> <CAPTION> PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA --------------------------------------------------------------- ------------------------------------- RATIO OF DISTRI- DISTRI- NET NET NET BUTIONS BUTIONS NET RATIO OF INVEST- ASSET REALIZED & TOTAL FROM FROM ASSET NET EXPENSES MENT PORT- VALUE, NET UNREAL- FROM NET NET VALUE, ASSETS, TO INCOME TO FOLIO BEGIN- INVEST- IZED INVEST- INVEST- REAL- TOTAL END TOTAL END OF AVERAGE AVERAGE TURN- PERIOD NING MENT GAINS MENT MENT IZED DISTRI- OF RETURN+ YEAR NET NET OVER ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS PERIOD (%) (000'S)($) ASSETS(%)ASSETS(%)RATE(%) -------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> TEMPLETON GLOBAL ASSET ALLOCATION FUND 19951 10.00 .18 .52 .70 (.18) - (.18) 10.52 7.01 14,729 .90* 3.84* 30.00 1996 10.52 .34 1.75 2.09 (.01) (.01) (.02) 12.59 19.84 56,274 .86 4.21 52.35 1997 12.59 .42 1.04 1.46 (.26) (.07) (.33) 13.72 11.71 93,402 .94 4.22 61.93 1998 13.72 .61 (.59) .02 (.49) (.58) (1.07) 12.67 (.04) 81,670 .84 4.32 59.03 </TABLE> * Annualized + Total return does not include deductions at the contract level for cost of insurance charges, premium load, administratvie charges, mortality and expense risk charges or other charges that may be incurred under the variable insurance contracts for which the funds serve as underlying investments. If they had been included, total return would be lower. Total return is not annulized. 1. For the period April 19, 1995 (effctive date) to December 31, 1995. Templeton Global Growth Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is long-term capital growth. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in the equity securities of companies located anywhere in the world, including in the U.S. and emerging markets. While there are no set percentage targets, the fund generally invests in large- to medium-cap companies with market capitalization values (share price times the number of common stock shares outstanding) greater than $1.5 billion, but may invest a small portion in small-cap companies which have more risk. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, and securities convertible into common stock. The fund also invests in American, European, and Global Depositary Receipts, which are certificates issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. [Begin callout] The fund invests primarily in a diversified portfolio of U.S. and non-U.S. common stocks. [End callout] Depending upon current market conditions, the fund may invest a significant portion of its assets in debt securities of companies and governments located anywhere in the world. A debt security obligates the issuer to the bondholders, to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stocks or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-oriented, and long-term. In choosing investments, the fund's manager will focus on the market price of a company's securities relative to its evaluation of the company's long-term earnings, asset value and cash flow potential. A company's historical value measures, including price/earnings ratio, profit margins and liquidation value, will also be considered. As a "bottom-up" investor focusing primarily on individual securities, the fund may from time to time have significant investments in particular countries. The manager intends to manage the fund's exposure to various geographic regions and their currencies based on its assessment of changing market and political conditions. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. FOREIGN SECURITIES Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. [Begin callout] Because the stocks the fund holds fluctuate in price with foreign market conditions and currencies, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. [End callout] CURRENCY Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Currency markets generally are not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes, and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the debt security's value and, thus, impact the value of fund shares. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of bull and bear] PAST PERFORMANCE This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. TEMPLETON GLOBAL GROWTH FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 [Insert bar graph] 12.72% 21.28% 13.50% 8.98% 95 96 97 98 YEAR [Begin callout] BEST QUARTER: Q4 '98 16.30% WORST QUARTER: Q3 '98 -13.78% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 SINCE INCEPTION PAST 1 YEAR (03/15/94) ------------------------------------------------------------------------- Templeton Global Growth Fund - Class 11 8.98% 12.30% MSCI All Country World Free(R)Index2 21.97% 14.79% 1. All fund performance assumes reinvestment of dividends and capital gains. 2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI All Country World Free(R) Index measures the performance of securities located in 48 countries, including emerging markets in Latin America, Asia and Eastern Europe. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Templeton Global Advisors Limited (TGAL), Lyford Cay, Nassau, N.P., Bahamas, is the fund's investment manager. MANAGEMENT TEAM The team responsible for the fund's management is: RICHARD SEAN FARRINGTON, CFA Senior Vice President, TGAL Mr. Farrington has been a manager of the fund since 1995, and has been with the Franklin Templeton Group since 1990. JEFFREY A. EVERETT, CFA Executive Vice President, TGAL Mr. Everett has been a manager of the fund since its inception in 1994, and has been with the Franklin Templeton Group since 1990. The fund pays the manager a fee for managing its assets, making its investment decisions and providing certain administrative facilities and services to the fund. For the fiscal year ended December 31, 1998, the fund paid 0.83% of its average daily net assets to the manager. [Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS The financial highlights table provides further details to help you understand the financial performance of the fund's Class 1 shares since inception. The table shows certain information on a single share basis (per share performance). It also shows some key fund statistics, such as total return (past performance) and expense ratios. Total return represents the annual change in value of a share assuming reinvestment of dividends and capital gains. This information has been audited by PricewaterhouseCoopers LLP, independent auditors. Their report, along with the financial statements, are included in the fund's Annual Report (available upon request). <TABLE> <CAPTION> PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA -------------------------------------------------------------- ----------------------------------- DISTRI- DISTRI- NET NET NET BUTIONS BUTIONS NET RATIO OF INVEST- ASSET REALIZED & TOTAL FROM FROM ASSET NET EXPENSES MENT PORT- VALUE, NET UNREAL- FROM NET NET VALUE, ASSETS, TO INCOME TO FOLIO BEGIN- INVEST- IZED INVEST- INVEST- REAL- TOTAL END TOTAL END OF AVERAGE AVERAGE TURN- PERIOD NING MENT GAINS MENT MENT IZED DISTRI- OF RETURN+ YEAR NET NET OVER ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS PERIOD (%) (000'S)($) ASSETS(%)ASSETS(%)RATE(%) -------------------------------------------------------------------------------------------------------------------- TEMPLETON GLOBAL GROWTH FUND <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 19941 10.15 .07 .26 .33 - - - 10.48 3.25 158,856 1.14* 2.49* 7.14 1995 10.48 .16 1.17 1.33 (.06) - (.06) 11.75 12.72 338,755 .972 .46 30.92 1996 11.75 .25 2.22 2.47 (.21) (.21) (.42) 13.80 21.28 579,877 .932 .20 12.32 1997 13.80 .33 1.53 1.86 (.24) (.08) (.32) 15.34 13.50 758,445 .882 .49 24.81 1998 15.34 .35 .98 1.33 (.41) (1.49) (1.90) 14.77 8.98 747,080 .88 2.27 32.30 </TABLE> * Annualized + Total return does not include deductions at the contract level for cost of insurance charges, premium load, administratvie charges, mortality and expense risk charges or other charges that may be incurred under the variable insurance contracts for which the funds serve as underlying investments. If they had been included, total return would be lower. Total return is not annulized. 1. For the period March 15, 1994 (effective date) to December 31, 1994. Templeton Global Income Securities Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is high current income. Capital appreciation is a secondary consideration. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in the debt securities of governments and their political subdivisions and agencies, supranational organizations, and companies located anywhere in the world, including emerging markets. A debt security obligates the issuer to the bondholders, both to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stock or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. [Begin callout] The fund invests primarily in bonds of governments located around the world. [End callout] The fund focuses on "investment grade" debt securities. These are issues rated in the top four rating categories (AAA to BBB) by independent rating agencies such as Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or, if unrated, determined by the fund's manager to be comparable. The fund may also invest up to 30% of its net assets in high yield, lower rated debt securities ("junk bonds") that are rated at least B, including emerging market debt, or if unrated, determined by the fund's manager to be comparable. The fund will not purchase defaulted securities. If, however, a security is downgraded in rating or goes into default, the fund will not automatically sell the security. During 1998, about 20.2% of the fund's portfolio was invested in lower rated and comparable quality unrated debt securities. Many debt securities of non-U.S. issuers, and especially emerging market issuers, are rated below investment grade or are unrated so that their selection depends on the manager's internal analysis. The average maturity of debt securities in the fund's portfolio is medium-term (about 5 to 15 years) but will fluctuate depending on the manager's outlook on the country and future interest rate changes. PORTFOLIO SELECTION The fund's manager allocates its assets among issuers, geographic regions, and currencies based upon its assessment of relative interest rates among currencies, the manager's outlook for changes in interest rates, and credit risks. In considering these factors, a country's changing market, economic, and political conditions, such as inflation rate, growth prospects, global trade patterns, and government policies will be evaluated. The manager intends to manage the fund's exposure to various currencies, and may from time to time seek to hedge (protect) against currency risk by using forward currency exchange contracts (Hedging Instruments). TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. A sub-category of interest rate risk is reinvestment risk, which is the risk that interest rates will be lower when the fund seeks to reinvest interest payments, or the proceeds from a matured debt security, resulting in less income received by the fund. FOREIGN SECURITIES Securities of governments and companies located outside the U.S. involve risks that can increase the potential for losses in the fund. Changes in global interest rates affect the prices of the fund's debt securities. [Begin callout] If rates rise, the value of the fund's debt securities will fall and so too will the fund's share price. This means you could lose money. [End callout] CURRENCY Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because the investment is worth fewer dollars. Currency markets are generally not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes, and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the security's value and, thus, impact the value of fund shares. LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated securities, and can be considered speculative. Companies issuing high yield debt securities are not as strong financially, and are more likely to encounter financial difficulties and be more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates. If an issuer stops paying interest and/or principal, payments may never resume. The fund may lose its entire investment on bonds that may be, or are, in default. The prices of high yield debt securities fluctuate more than higher quality securities. Prices are especially sensitive to developments affecting the company's business and to rating changes, and typically rise and fall in response to factors that affect the company's stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, market activity, large sustained sales, a high-profile default, or other factors. High yield securities generally are less liquid than higher-quality bonds, and infrequent trades can make accurate pricing more difficult. At times, it may be difficult to sell these securities promptly at an acceptable price. HEDGING INSTRUMENTS Hedging Instruments used by the fund are considered derivative investments. Their successful use will depend on the manager's ability to predict market movements, and losses from their use can be greater than if they had not been used. Risks include potential loss to the fund due to the imposition of controls by a government on the exchange of foreign currencies, delivery failure, default by the other party, or inability to close out a position because the trading market becomes illiquid. DIVERSIFICATION The fund is non-diversified under federal securities laws. As such, it may invest a greater portion of its assets in one issuer and have a smaller number of issuers than a diversified fund. Therefore, the fund may be more sensitive to economic, business, political or other changes affecting similar issuers or securities. The fund will, however, meet tax diversification requirements. PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep interest rate risk and country allocations at desired levels, as well as bond maturities, may cause the fund's portfolio turnover rate to be high. High turnover generally increases the fund's transaction costs. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, risks, and bond ratings can be found in the SAI. [Insert graphic of a bull and a bear] PAST PERFORMANCE This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. TEMPLETON GLOBAL INCOME FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 ---------------------------------------------------------------------- 9.83% 12.34% -0.40% 16.68% -4.99% 14.68% 9.56% 2.55% 7.08% ---------------------------------------------------------------------- ---------------------------------------------------------------------- 90 91 92 93 94 95 96 97 98 ---------------------------------------------------------------------- YEAR [Begin callout] Best Quarter: Q1 '93 5.33% Worst Quarter: Q3 '92 -4.84% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 SINCE INCEPTION PAST 1 YEAR PAST 5 YEARS (01/24/89) ---------------------------------------------------------------------------- TEMPLETON GLOBAL INCOME SECURITIES FUND - CLASS 11 7.08% 5.56% 7.52% JP MORGAN GLOBAL GOVERNMENT BOND INDEX2 15.31% 8.09% 9.23% 1. All fund performance assumes reinvestment of dividends and capital gains. 2. Source: Standard & Poor's(R) Micropal. The unmanaged JP Morgan Global Government Bond Index tracks the performance of government bond markets in 13 countries. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, California 94403-7777, is the fund's investment manager. Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, through its Templeton Global Bond Managers division (Global Bond Managers), is the fund's sub-advisor. A team from Global Bond Managers provides Advisers with investment management advice and assistance and is responsible for the day-to-day management of the fund. The fund pays the manager a fee for managing its assets, making its investment decisions, and providing certain administrative facilities and services for the fund. For the fiscal year ended December 31, 1998, the fund paid 0.57% of its average daily net assets to the manager. [Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS The financial highlights table provides further details to help you understand the financial performance of the fund's Class 1 shares since inception. The table shows certain information on a single share basis (per share performance). It also shows some key fund statistics, such as total return (past performance) and expense ratios. Total return represents the annual change in value of a share assuming reinvestment of dividends and capital gains. This information has been audited by PricewaterhouseCoopers LLP, independent auditors. Their report, along with the financial statements, are included in the fund's Annual Report (available upon request). <TABLE> <CAPTION> PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA -------------------------------------------------------------- ------------------------------------------ RATIO OF DISTRI- DISTRI- NET NET NET BUTIONS BUTIONS NET RATIO OF INVEST- ASSET REALIZED & TOTAL FROM FROM ASSET NET EXPENSES MENT PORT- VALUE, NET UNREAL- FROM NET NET VALUE, ASSETS, TO INCOME TO FOLIO BEGIN- INVEST- IZED INVEST- INVEST- REAL- TOTAL END TOTAL END OF AVERAGE AVERAGE TURN- PERIOD NING MENT GAINS MENT MENT IZED DISTRI- OF RETURN+ YEAR NET NET OVER ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS PERIOD (%) (000'S)($) ASSETS(%)ASSETS(%)RATE(%) -------------------------------------------------------------------------------------------------------------------- TEMPLETON GLOBAL INCOME SECURITIES FUND <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 1994 13.31 .86 (1.52) (.66) (.33) (.13) (.46) 12.19 (4.99) 254,311 .71 7.99 79.38 1995 12.19 .29 1.47 1.76 (.49) - (.49) 13.46 14.68 243,194 .64 7.59 152.89 1996 13.46 1.02 .17 1.19 (1.04) - (1.04) 13.61 9.56 221,722 .61 7.30 140.96 1997 13.61 1.05 (.73) .32 (.96) - (.96) 12.97 2.55 185,016 .62 7.03 181.61 1998 12.97 1.07 (.19) .88 (.98) - (.98) 12.87 7.08 150,941 .63 6.86 84.17 </TABLE> + Total return does not include deductions at the contract level for cost of insurance charges, premium load, administratvie charges, mortality and expense risk charges or other charges that may be incurred under the variable insurance contracts for which the funds serve as underlying investments. If they had been included, total return would be lower. Total return is not annulized. Templeton International Equity Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is long-term capital growth. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in equity securities that trade in non-U.S. markets, including emerging markets, and that are issued by companies that have their principal activities outside the U.S. While there are no set percentage targets, the fund generally invests in large- to medium-cap companies with market capitalization values (share price times the number of common stock shares outstanding) greater than $1.5 billion, but may invest a small portion in small-cap companies which have more risk. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, and securities convertible into common stock. The fund also invests in American, European, and Global Depositary Receipts, which are certificates issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. [Begin callout] The fund invests primarily in a diversified portfolio of non-U.S. common stocks. [End callout] Depending upon current market conditions, the fund may invest a significant portion of its assets in debt securities of companies and governments located anywhere in the world. A debt security obligates the issuer to the bondholders, both to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stock or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-oriented, and long-term. In choosing equity investments, the fund's manager will focus on the market price of a company's securities relative to its evaluation of the company's long-term earnings, asset value and cash flow potential. A company's historical value measures, including price/earnings ratio, profit margins and liquidation value, will also be considered. As a "bottom-up" investor focusing primarily on individual securities, the fund may from time to time have significant investments in particular countries. The manager intends to manage the fund's exposure to various geographic regions and their currencies based on its assessment of changing market and political conditions. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. FOREIGN SECURITIES Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. Because the stocks the fund holds fluctuate in price with foreign market conditions and currencies, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. CURRENCY Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Currency markets generally are not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes, and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the debt security's value and, thus, impact the value of fund shares. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of bull and bear] PAST PERFORMANCE This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. [Insert bar graph] 93 94 95 96 97 98 28.56% 0.87% 10.59% 22.98% 11.69% 5.56% YEAR TEMPLETON INTERNATIONAL EQUITY FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 [Begin callout] BEST QUARTER: Q4 '93 13.64% WORST QUARTER: Q3 '98 -16.86% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 SINCE INCEPTION PAST 1 YEAR PAST 5 YEARS (01/27/92) ------------------------------------------------------------------------------- TEMPLETON INTERNATIONAL EQUITY FUND - CLASS 11 5.56% 10.09% 10.75% MSCI ALL COUNTRY WORLD EX-U.S. FREE INDEX2 14.46% 7.87% 8.64% 1. All fund performance assumes reinvestment of dividends and capital gains. 2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI All Country World Ex-U.S. Free Index measures the performance of securities located in 48 countries, both developed and emerging markets, except the U.S. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, California 94403-7777, is the fund's investment manager. Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI), Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, is the fund's sub-advisor. TICI provides Advisers with investment management advice and assistance. MANAGEMENT TEAM The team responsible for the fund's management is: HOWARD J. LEONARD CFA Executive Vice President, TICI Mr. Leonard has been a manager of the fund since 1997, and has been with the Franklin Templeton Group since 1989. MARK R. BEVERIDGE CFA Senior Vice President, TICI Mr. Beveridge has been a manager of the fund since 1994, and has been with the Franklin Templeton Group since 1994 The fund pays the manager a fee for managing its assets, making its investment decisions, and providing certain administrative facilities and services for the fund. For the fiscal year ended December 31, 1998, the fund paid 0.80% of its average daily net assets to the manager. [Insert graphic of dollar bill] FINANCIAL HIGHLIGHTS The financial highlights table provides further details to help you understand the financial performance of the fund's Class 1 shares since inception. The table shows certain information on a single share basis (per share performance). It also shows some key fund statistics, such as total return (past performance) and expense ratios. Total return represents the annual change in value of a share assuming reinvestment of dividends and capital gains. This information has been audited by PricewaterhouseCoopers LLP, independent auditors. Their report, along with the financial statements, are included in the fund's Annual Report (available upon request). <TABLE> <CAPTION> PER SHARE OPERATING PERFORMANCE ($) RATIOS/SUPPLEMENTAL DATA ------------------------------------------------------------------------ ------------------------------------ RATIO OF DISTRI- DISTRI- NET NET NET BUTIONS BUTIONS NET RATIO OF INVEST- ASSET REALIZED & TOTAL FROM FROM ASSET NET EXPENSES MENT PORT- VALUE, NET UNREAL- FROM NET NET VALUE, ASSETS, TO INCOME TO FOLIO BEGIN- INVEST- IZED INVEST- INVEST- REAL- TOTAL END TOTAL END OF AVERAGE AVERAGE TURN- PERIOD NING MENT GAINS MENT MENT IZED DISTRI- OF RETURN+ YEAR NET NET OVER ENDED OF PERIOD INCOME (LOSSES) OPERATIONS INCOME GAINS BUTIONS PERIOD (%) (000'S)($) ASSETS(%)ASSETS(%)RATE(%) -------------------------------------------------------------------------------------------------------------------- TEMPLETON INTERNATIONAL EQUITY FUND <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 1994 12.50 .19 (.07) .12 (.04) (.07) (.11) 12.51 .87 785,124 .99 2.17 12.22 1995 12.51 .37 .94 1.31 (.22) (.28) (.50) 13.32 10.59 850,117 .92 2.87 16.42 1996 13.32 .40 2.58 2.98 (.38) (.47) (.85) 15.45 22.98 1,108,099 .89 3.07 27.52 1997 15.45 .30 1.51 1.81 (.45) (.69) (1.14) 16.12 11.69 1,161,430 .89 3.01 26.96 1998 16.12 .56 .42 .98 (.53) (1.05) (1.58) 15.52 5.56 955,900 .88 2.90 5.98 </TABLE> + Total return does not include deductions at the contract level for cost of insurance charges, premium load, administratvie charges, mortality and expense risk charges or other charges that may be incurred under the variable insurance contracts for which the funds serve as underlying investments. If they had been included, total return would be lower. Total return is not annulized. [Insert graphic of STAR] IMPORTANT RECENT DEVELOPMENTS o Year 2000 problem The funds' business operations depend on a worldwide network of computer systems that contain date fields, including securities trading systems, securities transfer agent operations and stock market links. Many of the systems currently use a two digit date field to represent the date, and unless these systems are changed or modified, they may not be able to distinguish the Year 1900 from the Year 2000 (commonly called the Year 2000 problem). In addition, the fact that the Year 2000 is a leap year may create difficulties for some systems. When the Year 2000 arrives, the funds' operations could be adversely affected if the computer systems used by their managers, their service providers and other third parties they do business with are not Year 2000 ready. For example, the funds' portfolio and operational areas could be impacted, including securities trade processing, interest and dividend payments, securities pricing, shareholder account services, reporting, custody functions and others. The funds could experience difficulties in effecting transactions if any of their foreign subcustodians, or if foreign broker/dealers or foreign markets are not ready for Year 2000. When evaluating current and potential portfolio positions, Year 2000 is one of the factors that the funds' managers consider. The managers will rely upon public filings and other statements made by companies regarding their Year 2000 readiness. Issuers in countries outside of the U.S., particularly in emerging markets, may be more susceptible to Year 2000 problems and may not be required to make the same level of disclosure regarding Year 2000 readiness as is required in the U.S. The managers, of course, cannot audit any company or their major suppliers to verify their Year 2000 readiness. If a company in which any fund is invested is adversely affected by Year 2000 problems, it is likely that the price of its security will also be adversely affected. A decrease in the value of one or more of a fund's portfolio holdings will have similar impact on the price of the funds' shares. The funds' managers and their affiliated service providers are making a concerted effort to take steps they believe are reasonably designed to address their Year 2000 problems. Of course, the funds' ability to reduce the effects of the Year 2000 problem is also very much dependent upon the efforts of third parties over which the funds and their managers may have no control. o Euro On January 1, 1999, the European Monetary Union (EMU) introduced a new single currency, the euro, which replaced the national currency for participating member countries. Because this change to a single currency is new and untested, it is not possible to predict the impact of the euro on the business or financial condition of European issuers which the funds may hold in their portfolios, and their impact on fund performance. To the extent a fund holds non-U.S. dollar (euro or other) denominated securities, it will still be exposed to currency risk due to fluctuations in those currencies versus the U.S. dollar. [Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends substantially all of its net investment income. Except for the Money Fund, each fund typically pays dividends from net investment income and net capital gains, if any, following the close of the calendar year. Dividends or distributions by the funds will reduce the per share net asset value (NAV) by the per share amount paid. 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. Fund Account Information [Insert graphic of paper with lines and someone writing] BUYING SHARES Shares of each fund are sold at net asset value (NAV) to insurance company separate accounts to serve as investment options for variable annuity or variable life insurance contracts. The funds' Board monitors this to be sure there are no material conflicts of interest between the two different types of contract owners. If there were, the Board would take corrective action. Contract owners' payments will be allocated by the insurance company separate account to purchase shares of each fund chosen by the contract owner, and are subject to any limits or conditions in the contract. Requests to buy shares are processed at the NAV next calculated after we receive the request in proper form. The funds do not issue share certificates. [Insert graphic of a certificate] SELLING SHARES Each insurance company shareholder sells shares of the applicable fund to make benefit or surrender payments or to execute exchanges (transfers) between investment options under the terms of its contracts. Requests to sell shares are processed at the NAV next calculated after we receive the request in proper form. [Insert graphic of two arrows going in different directions] EXCHANGING SHARES Contract owners may exchange shares of any one class or fund for shares of other classes or funds through a transfer between investment options available under a variable insurance contract, subject to the terms and any specific limitations on the exchange (or "transfer") privilege described in the contract prospectus. Frequent exchanges can interfere with fund management or operations and drive up fund costs. To protect shareholders, there are limits on the number and amount of fund exchanges that may be made (please see "Market Timers" below). [Insert graphic of paper and pen] FUND ACCOUNT POLICIES CALCULATING SHARE PRICE The funds calculate their NAV per share each business day at the close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific time). Each class' 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 shareholders will receive the fund's financial reports every six months. To reduce fund expenses, if you need additional copies, please call 1-800/342-3863. If there is a dealer or other investment representative of record on the account, he or she will also receive confirmations, account statements and other information about the contract owner's account directly from the contract's administrator. MARKET TIMERS The funds are not designed for market timers, large or frequent transfers. The funds may restrict or refuse purchases or exchanges by market timers. You will be considered a market timer if you have (i) requested an exchange out of the fund within two weeks of an earlier exchange request, or (ii) exchanged shares out of the fund more than twice in a calendar quarter, or (iii) exchanged shares equal to at least $5 million, or more than 1% of the fund's net assets, or (iv) otherwise seem to follow a timing pattern. Accounts under common ownership or control are combined for these limits. ADDITIONAL POLICIES Please note that the funds maintain additional policies and reserves certain rights, including: o Each fund may refuse any order to buy shares. o At any time, each fund may establish or change investment minimums. o Each fund may modify or discontinue the exchange privilege on 60 days' notice to insurance company shareholders. o You may only buy shares of a fund eligible for sale in your state or jurisdiction. o IN UNUSUAL CIRCUMSTANCES, WE MAY TEMPORARILY SUSPEND REDEMPTIONS, OR POSTPONE THE PAYMENT OF PROCEEDS, AS ALLOWED BY FEDERAL SECURITIES LAWS. o TO PERMIT INVESTORS TO OBTAIN THE CURRENT PRICE, INSURANCE COMPANIES ARE RESPONSIBLE FOR TRANSMITTING ALL ORDERS TO THE FUND PROMPTLY. SHARE CLASSES Each fund has two classes of shares, class 1 and class 2. Each class is identical except that class 2 has a distribution plan or "rule 12b-1" plan which is described in prospectuses offering class 2 shares. [Insert graphic of question mark] QUESTIONS More detailed information about the Trust and the funds' account policies can be found in the funds' Statement of Additional Information (SAI). If you have any questions about the funds, you can write to us at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at 1-800/342-3863. For your protection and to help ensure we provide you with quality service, all calls may be monitored or recorded. FOR MORE INFORMATION The funds of Franklin Templeton Variable Insurance Products Trust (the Trust), formerly Franklin Valuemark Funds, are only available as investment options in variable annuity or variable life insurance contracts. Please consult the accompanying contract prospectus for information about the terms of an investment in a contract. You can learn more about the funds in the following documents: ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS Includes a discussion of recent market conditions and investment strategies, financial statements, detailed performance information, fund holdings, and the auditor's report (Annual Report only). STATEMENT OF ADDITIONAL INFORMATION (SAI) Contains more information about the funds, their investments, policies, and risks. It is incorporated by reference (is legally a part of this prospectus). You may obtain these free reports by contacting your investment representative or by calling us at the number below. Franklin(R)Templeton(R) 1-800/342-3863 You can also obtain information about the funds by visiting the SEC's Public Reference Room in Washington, D.C. (phone 1-800/SEC-0330) or by sending your request and a duplicating fee to the SEC's Public Reference Section, Washington, D.C. 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov. Investment Company Act file #811-5583 EXHIBIT IIb PROSPECTUS FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST CLASS 2 SHARES MAY 1, 1999 AS AMENDED NOVEMBER 1, 1999 INVESTMENT STRATEGY Capital Growth Franklin Capital Growth Fund (EFFECTIVE 12/15/99 THE NAME WILL BE FRANKLIN LARGE CAP GROWTH SECURITIES FUND) Capital Growth Franklin Small Cap Fund Growth and Income Mutual Shares Securities Fund Growth and Income Templeton Global Asset Allocation Fund Income Templeton Global Income Securities Fund Capital Growth Templeton Developing Markets Equity Fund Capital Growth Templeton International Equity Fund Capital Growth Templeton Global Growth Fund [Insert Franklin Templeton Ben Head] As with all fund prospectuses, the SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense. CONTENTS FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST [Begin callout] INFORMATION ABOUT EACH FUND YOU SHOULD KNOW BEFORE INVESTING [End callout] [insert page #] Overview of the Trust [insert page #] Franklin Large Cap Growth Securities Fund (PREVIOUSLY FRANKLIN CAPITAL GROWTH FUND) [insert page #] Franklin Small Cap Fund [insert page #] Mutual Shares Securities Fund [insert page #] Templeton Developing Markets Equity Fund [insert page #] Templeton Global Asset Allocation Fund [insert page #] Templeton Global Growth Fund [insert page #] Templeton Global Income Securities Fund [insert page #] Templeton International Equity Fund ADDITIONAL INFORMATION, ALL FUNDS [insert page #] Important Recent Developments [insert page #] Distributions and Taxes FUND ACCOUNT INFORMATION [Begin callout] INFORMATION ABOUT FUND ACCOUNT TRANSACTIONS AND SERVICES [End callout] [insert page #] Buying Shares [insert page #] Selling Shares [insert page #] Exchanging Shares [insert page #] Fund Account Policies [insert page #] Questions FOR MORE INFORMATION [Begin callout] WHERE TO LEARN MORE ABOUT EACH FUND [End callout] Back Cover FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST [Insert graphic of pyramid]OVERVIEW OF THE TRUST FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST (THE TRUST), FORMERLY FRANKLIN VALUEMARK FUNDS, CURRENTLY CONSISTS OF TWENTY-SIX SEPARATE FUNDS, OFFERING A WIDE VARIETY OF INVESTMENT CHOICES. EACH FUND HAS TWO CLASSES OF SHARES, CLASS 1 AND CLASS 2. THE FUNDS ARE ONLY AVAILABLE AS INVESTMENT OPTIONS IN VARIABLE ANNUITY OR VARIABLE LIFE INSURANCE CONTRACTS. THE ACCOMPANYING CONTRACT PROSPECTUS INDICATES WHICH FUNDS AND CLASSES ARE AVAILABLE TO YOU. INVESTMENT CONSIDERATIONS o Each fund has its own investment strategy and risk profile. Generally, the higher the expected rate of return, the greater the risk of loss. o No single fund can be a complete investment program; consider diversifying your fund choices. o You should evaluate each fund in relation to your personal financial situation, investment goals, and comfort with risk. Your investment representative can help you determine which funds are right for you. RISKS o There can be no assurance that any fund will achieve its investment goal. o Because you could lose money by investing in a fund, take the time to read each fund description and consider all risks before investing. o All securities markets, interest rates, and currency valuations move up and down, sometimes dramatically, and mixed with the good years can be some bad years. Since no one can predict exactly how financial markets will perform, you may want to exercise patience and focus not on short-term market movements, but on your long-term investments goals. o Fund shares are not deposits or obligations of, or guaranteed or endorsed by, any bank, and are not federally insured by the Federal Deposit Insurance Corporation, the Federal Reserve Board, or any other agency of the U.S. Government. Fund shares involve investment risks, including the possible loss of principal. MORE DETAILED INFORMATION ABOUT EACH FUND, ITS INVESTMENT POLICIES, AND ITS PARTICULAR RISKS CAN BE FOUND IN THE TRUST'S STATEMENT OF ADDITIONAL INFORMATION (SAI). MANAGEMENT The funds' investment managers and their affiliates manage over $218 billion in assets. In 1992, Franklin joined forces with Templeton, a pioneer in international investing. The Mutual Advisers organization became part of the Franklin Templeton organization four years later. Today, Franklin Templeton is one of the largest mutual fund organizations in the United States, and offers money management expertise spanning a variety of investment objectives. Franklin Capital Growth Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES Effective December 15, 1999, the fund's name will be changed to Franklin Large Cap Growth Securities Fund and the fund's strategy will be restated to one of investing, under normal market conditions, at least 65% of its total assets in equity securities of U.S. large-cap growth companies ($8.5 billion or more), focusing on those companies that are expected to have revenue growth in excess of the economy as a whole either through above-average industry expansion or market share gains. These companies generally dominate, or are gaining market share, in their respective industries and have a reputation for quality of management, as well as superior products and services. GOAL The fund's investment goal is capital appreciation. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in equity securities of companies believed to be globally competitive and to offer favorable opportunities for long-term capital appreciation. Following this policy, the fund will typically invest predominantly in established, large- to medium-cap companies with market capitalization values (share price times the number of common stock shares outstanding) greater than $1.5 billion. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, and securities convertible into common stock. [Begin callout] The fund invests primarily in large cap growth companies' equity securities. [End callout] In choosing equity investments, the manager will focus on companies that have exhibited above average growth, strong financial records, and large market capitalization. In addition, management expertise, industry leadership, growth in market share and sustainable competitive advantage are factors the manager also considers. Although the manager will search for investments across a large number of industries, it expects to have significant positions (but not in excess of 25% of its total assets in a given sector) in the technology (including computers, telecommunications, and electronics), health care, and finance industries. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. 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. TECHNOLOGY COMPANIES The technology sector has historically been volatile due to the rapid pace of product change and development within the sector. The stock prices of companies operating within this sector may be subject to abrupt or erratic movements. In addition, the activities of telecommunications companies fall under international, federal and state regulations. These companies may be adversely affected by changes in government regulations. HEALTH CARE COMPANIES The activities of health care companies may be funded or subsidized by federal and state governments. If government funding and subsidies are reduced or discontinued, the profitability of these companies could be adversely affected. Health care companies may also be affected by government policies on health care reimbursements, regulatory approval for new drugs and medical instruments, and similar matters. They are also subject to legislative risk, i.e., the risk of a reform of the health care system through legislation. FINANCIAL SERVICES COMPANIES Financial services companies are subject to extensive government regulation which tends to limit both the amount and types of loans and other financial commitments such companies can make, and the interest rates and fees they can charge. These limitations can have a significant impact on the profitability of a financial services company since profitability is impacted by the company's ability to make financial commitments such as loans. The financial services industry is currently undergoing a number of changes such as continuing consolidations, development of new products and structures and changes to its regulatory framework. These changes are likely to have a significant impact on the financial services industry. See "Important Recent Developments," in this prospectus for Year 2000 discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of bull and bear]PAST PERFORMANCE Because class 2 shares were not offered until January 6th, 1999, the fund's class 1 performance is shown. This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. FRANKLIN CAPITAL GROWTH FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 [Insert bar graph] 18.31% 20.29% 97 98 YEAR [Begin callout] BEST QUARTER: Q4 '98 19.73% WORST QUARTER: Q3 '98 -10.47% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 PAST 1 YEAR SINCE INCEPTION (05/01/96) ----------------------------------------------------------------------- FRANKLIN CAPITAL GROWTH FUND - CLASS 11 20.29% 19.72% S&P 500(R)2 INDEX 28.58% 29.00% RUSSELL 1000 INDEX(R)2 27.02% 27.92% 1. All fund performance assumes reinvestment of dividends and capital gains. Because class 2 shares were not offered until January 6th, 1999, performance shown represents class 1 shares, which are not offered in this prospectus. Although invested in the same portfolio of securities as class 1, class 2 performance will differ because of class 2's higher annual fees and expenses resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%. 2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged group of widely held common stocks covering a variety of industries. The Russell 1000 Index measures the 1,000 largest companies in the Russell 3000 Index. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, California 94403-7777, is the fund's investment manager. MANAGEMENT TEAM The team responsible for the fund's management is: KENT SHEPHERD, CFA Vice President, Advisers Mr. Shepherd has been a manager of the fund since its inception in 1999, and has been with the Franklin Templeton Group since 1991. JASON R. NUNN Portfolio Manager, Advisers Mr. Nunn has been a manager of the fund since September 1999. Before joining the Franklin Templeton Group in 1998 he worked in corporate finance with Alex, Brown & Sons. CONRAD B. HERRMANN, CFA Senior Vice President, Advisers Mr. Herrmann has been a manager of the fund since its inception in 1996, and has been with the Franklin Templeton Group since 1989. The fund pays the manager a fee for managing its assets, making its investment decisions, and providing certain administrative facilities and services for the fund. For the fiscal year ended December 31, 1998, the fund paid 0.75% of its average daily net assets to the manager. Franklin Small Cap Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is long-term capital growth. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in the equity securities of U.S. small capitalization (small cap) growth companies. Small cap companies are generally those with market cap values (share price times the number of common stock shares outstanding) of less than $1.5 billion, at the time of purchase. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, and securities convertible into common stock. [Begin callout] The fund invests primarily in common stocks of small cap U.S. companies. [End callout] PORTFOLIO SELECTION The manager is a research driven, fundamental investor, pursuing a disciplined "growth at a reasonable price" strategy. As a "bottom-up" investor focusing primarily on individual securities, the manager chooses small cap companies that it believes are positioned for rapid growth in revenues, earnings or assets, and are selling at reasonable prices. The manager relies on a team of analysts to provide in-depth industry expertise and uses both qualitative and quantitative analysis to evaluate companies for distinct and sustainable competitive advantages. Such advantages as a particular marketing or product niche, proven technology, and industry leadership are all factors the manager believes point to strong long-term growth potential. The manager diversifies the fund's assets across many industries, and from time to time may invest substantially in certain sectors, including technology and biotechnology. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Growth stock prices reflect projections of future earnings or revenues, and can, therefore, fall dramatically if the company fails to meet those projections. SMALLER COMPANIES While smaller companies may offer greater opportunities for capital growth than larger, more established companies, they also have more risk. Historically, smaller company securities have been more volatile in price and have fluctuated independently from larger company securities, especially over the shorter-term. Smaller or relatively new companies can be particularly sensitive to changing economic conditions, and their growth prospects are less certain. For example, smaller companies may lack depth of management or may have limited financial resources for growth or development. They may have limited product lines or market share. Smaller companies may be in new industries, or their new products or services may not find an established market or may become quickly obsolete. Smaller companies may also suffer significant losses, their securities can be less liquid, and investments in these companies may be speculative. Technology and biotechnology industry stocks, in particular, can be subject to erratic or abrupt price movements. [Begin callout] Because the stocks the fund holds fluctuate in price with market conditions, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. [End callout] See "Important Recent Developments" in this prospectus for Year 2000 discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of bull and bear]PAST PERFORMANCE Because class 2 shares were not offered until January 6th, 1999, the fund's class 1 performance is shown. This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. FRANKLIN CAPITAL GROWTH FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 [Insert bar graph] 18.31% 20.29% 97 98 YEAR [Begin callout] BEST QUARTER: Q4 '98 19.73% WORST QUARTER: Q3 '98 -10.47% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 PAST 1 YEAR SINCE INCEPTION (05/01/96) ----------------------------------------------------------------------- FRANKLIN CAPITAL GROWTH FUND - CLASS 11 20.29% 19.72% S&P 500(R)2 INDEX 28.58% 29.00% RUSSELL 1000 INDEX(R)2 27.02% 27.92% 1. All fund performance assumes reinvestment of dividends and capital gains. Because class 2 shares were not offered until January 6th, 1999, performance shown represents class 1 shares, which are not offered in this prospectus. Although invested in the same portfolio of securities as class 1, class 2 performance will differ because of class 2's higher annual fees and expenses resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%. 2. Source: Standard & Poor's(R) Micropal. The S&P 500(R) Index is an unmanaged group of widely held common stocks covering a variety of industries. The Russell 1000 Index measures the 1,000 largest companies in the Russell 3000 Index. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, California 94403-7777, is the fund's investment manager. MANAGEMENT TEAM The team responsible for the fund's management is: EDWARD B. JAMIESON Executive Vice President, Advisers Mr. Jamieson has been a manager of the fund since its inception in 1995, and has been with the Franklin Templeton Group since 1987. MICHAEL MCCARTHY VICE PRESIDENT, Advisers Mr. McCarthy has been a manager of the fund since its inception in 1995. He joined the Franklin Templeton Group in 1992. AIDAN O'CONNELL Portfolio Manager, Advisers Mr. O'Connell has been a manager of the fund since September 1998. Before joining Franklin Templeton in May 1998, Mr. O'Connell was a research analyst and a corporate financial analyst at Hambrecht & Quist. The fund pays the manager a fee for managing its assets, making its investment decisions, and providing certain administrative facilities and services for the fund. For the fiscal year ended December 31, 1998, the fund paid 0.75% of its average daily net assets to the manager. Mutual Shares Securities Fund [Insert graphic of bullseye and arrows] GOALS AND STRATEGIES GOALS The fund's principal goal is capital appreciation. Its secondary goal is income. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in equity securities of companies that the manager believes are available at market prices less than their actual value based on certain recognized or objective criteria (intrinsic value). Following this value-oriented strategy, the fund will primarily invest in: o UNDERVALUED STOCKS Stocks trading at a discount to asset value. O Reorganizing Companies SECURITIES OF COMPANIES IN THE MIDST OF CHANGE SUCH AS MERGERS, CONSOLIDATIONS, LIQUIDATIONS, REORGANIZATIONS, FINANCIAL RESTRUCTURINGS, OR COMPANIES WITH TAKEOVER, TENDER OR EXCHANGE OFFERS OR LIKELY TO RECEIVE SUCH OFFERS (REORGANIZING COMPANIES). THE FUND MAY PARTICIPATE IN SUCH TRANSACTIONS. o DISTRESSED COMPANIES Securities of companies that are distressed or even in bankruptcy. [Begin callout] The fund invests primarily in common stocks of companies the manager believes are significantly undervalued. [End callout] The fund invests primarily in companies with market capitalization values (share price times the number of common stock shares outstanding) greater than $1.5 billion, but may invest a small portion in small-cap companies, which have more risk. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, and securities convertible into common stock. While the fund generally purchases securities for investment purposes, the manager may use the fund's ownership in a company to seek to influence or control management, or invest in other companies that do so, when the manager believes the fund may benefit. The fund may invest in debt securities rated in any rating category established by an independent rating agency, including high yield, lower rated or defaulted debt securities ("junk bonds"), or if unrated, determined by the manager to be comparable. A debt security obligates the issuer to the bondholders, both to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stock or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. The fund typically invests in unrated and lower rated debt securities of Reorganizing Companies or Distressed Companies. Such debt securities are primarily secured or unsecured indebtedness or participations in the indebtedness, including loan participations and trade claims. Indebtedness represents a specific commercial loan or portion of a loan which has been given to a company by a financial institution such as a bank or insurance company. By purchasing direct indebtedness of companies, a fund steps into the shoes of a financial institution. Participation interests in indebtedness represent fractional interests in a company's indebtedness. The fund currently intends to invest up to approximately 20% of its total assets in foreign equity and debt securities, including American, European and Global Depositary Receipts. Depositary receipts are certificates typically issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. The fund generally seeks to hedge (protect) against currency risks, largely using forward foreign currency exchange contracts, where available, and in the manager's opinion, it is economical to do so (Hedging Instruments). PORTFOLIO SELECTION The manager is a research driven, fundamental investor, pursuing a disciplined value strategy. In choosing equity investments, the manager focuses on the market price of a company's securities relative to its evaluation of the company's asset value, including an analysis of book value, cash flow potential, long-term earnings, and multiples of earnings of comparable securities. Similarly, debt securities are generally selected based on the manager's own analysis of the security's intrinsic value rather than the coupon rate or rating. Thus, each security is examined separately and there are no set criteria as to asset size, earnings or industry type. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goals. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. REORGANIZING OR DISTRESSED COMPANIES The fund's bargain-driven focus may result in the fund choosing securities that are not widely followed by other investors, including companies reporting poor earnings, companies whose share prices have declined sharply, turnarounds, cyclical companies, or companies emerging from bankruptcy, which may have higher risk. There can be no assurance that any merger or other restructuring, or tender or exchange offer proposed at the time the fund invests in a Reorganizing Company will be completed on the terms contemplated and therefore, benefit the fund. [Begin callout] Because the stocks the fund holds fluctuate in price with market conditions, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. [End callout] FOREIGN SECURITIES Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. CURRENCY Where the fund's investments are denominated in foreign currencies, changes in foreign currency exchange rates, including devaluation of currency by a country's government, will increase or decrease the fund's returns from its foreign portfolio holdings. Currency markets generally are not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic, and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes and certain custody and settlement risks. Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies, or may become illiquid. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the security's value and, thus, impact the value of fund shares. INDEBTEDNESS AND PARTICIPATIONS The purchase of debt securities of Reorganizing or Distressed Companies always involves a risk as to the creditworthiness of the issuer and the possibility that the investment may be lost. There are no established markets for indebtedness, making them less liquid than other securities, and purchasers of participations, such as the fund, must rely on the financial institution issuing the participation to assert any rights against the borrower with respect to the underlying indebtedness. In addition, the fund takes on the risk as to the creditworthiness of the bank or other financial intermediary issuer, as well as of the issuer of the underlying indebtedness. LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated securities, and can be considered speculative. Companies issuing high yield debt securities are not as strong financially, and are more likely to encounter financial difficulties and be more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates. If an issuer stops paying interest and/or principal, payments may never resume. The fund may lose its entire investment on bonds that may be, or are, in default. The prices of high yield debt securities fluctuate more than higher quality securities. Prices are especially sensitive to developments affecting the company's business and to rating changes, and typically rise and fall in response to factors that affect the company's stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, market activity, large sustained sales, a high-profile default, or other factors. High yield securities generally are less liquid than higher-quality bonds, and infrequent trades can make accurate pricing more difficult. At times, it may be difficult to sell these securities promptly at an acceptable price. HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered derivative investments. Their successful use will depend on the manager's ability to predict market movements, and losses from their use can be greater than if they had not been used. Risks include potential loss to the fund due to the imposition of controls by a government on the exchange of foreign currencies, delivery failure, default by the other party, or inability to close out a position because the trading market becomes illiquid. ILLIQUID SECURITIES The fund may invest up to 15% of its net assets in illiquid securities, which are securities with a limited trading market. There is a possible risk that the securities cannot be readily sold or can only be resold at a price significantly lower than their value. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of bull and bear]PAST PERFORMANCE Because class 2 shares were not offered until January 6th, 1999, the fund's class 1 performance is shown. This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. MUTUAL SHARES SECURITIES FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 [Insert bar graph] 17.73% 0.09% 97 98 YEAR [Begin callout] BEST QUARTER: Q4 '98 12.94% WORST QUARTER: Q3 '98 -17.65% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 PAST 1 YEAR SINCE INCEPTION (11/08/96) ---------------------------------------------------------------------- MUTUAL SHARES SECURITIES FUND - CLASS 11 0.09% 9.70% S&P 500(R)INDEX2 28.58% 30.66% 1. All fund performance assumes reinvestment of dividends and capital gains. Because class 2 shares were not offered until January 6th, 1999, performance shown represents class 1 shares, which are not offered in this prospectus. Although invested in the same portfolio of securities as class 1, class 2 performance will differ because of class 2's higher annual fees and expenses resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%. 2. Source: Standard and Poor's(R) Micropal. The S&P 500(R) Index is an unmanagEd group of widely held common stocks covering a variety of industries. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Franklin Mutual Advisers, LLC (Franklin Mutual), 51 John F. Kennedy Parkway, Short Hills, New Jersey 07078, is the fund's investment manager. MANAGEMENT TEAM The team members primarily responsible for the fund's management are: LAWRENCE N. SONDIKE Senior Vice President Franklin Mutual Mr. Sondike has been a manager of the fund since its inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine Securities Corporation, the predecessor of Franklin Mutual (Heine). DAVID E. MARCUS Senior Vice President Franklin Mutual Mr. Marcus has been a manager of the fund since its inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. Michael F. Price is Chairman of the Board of Directors which oversees the management of Franklin Mutual. The managers listed above are part of a larger team of investment professionals with management responsibility for all of the funds managed by Franklin Mutual, including this fund. Peter A. Langerman is Chief Executive Officer and Robert L. Friedman is Chief Investment Officer of Franklin Mutual. Mr. Friedman has overall supervisory responsibility for the day to day management of the funds managed by Franklin Mutual. The team also includes: PETER A. LANGERMAN Chief Executive Officer Franklin Mutual Mr. Langerman has been involved with the management of the fund since its President and inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. ROBERT L. FRIEDMAN Chief Investment Officer Senior Vice President Franklin Mutual Mr. Friedman has been involved with the management of the fund since its inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. JEFFREY A. ALTMAN Senior Vice President Franklin Mutual Mr. Altman has been a manager of the fund since its inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. RAYMOND GAREA Senior Vice President Franklin Mutual Mr. Garea has been a manager of the fund since its inception in 1996. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. DAVID J. WINTERS Senior Vice President Franklin Mutual Mr. Winters has been a manager of the fund since 1998. Before joining the Franklin Templeton Group in 1996, he was a research analyst for Heine. In addition, the following Franklin Mutual employees serve as Assistant Portfolio Managers: JIM AGAH Assistant Portfolio Manager Franklin Mutual Mr. Agah has been a manager of the fund since 1998. Before joining the Franklin Templeton Group in 1997, he was vice president of equity sales at Keefe, Bryette & Woods. JEFF DIAMOND Assistant Portfolio Manager Franklin Mutual Mr. Diamond has been a manager of the fund since 1998. Before joining the Franklin Templeton Group in 1998, he was a vice president and co-manager of Prudential Conservative Stock Fund. The fund pays the manager a fee for managing its assets and making its investment decisions. For the fiscal year ended December 31, 1998, the fund paid 0.60% of its average daily net assets to the manager. Templeton Developing Markets Equity Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is long-term capital appreciation. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in emerging markets equity securities. Emerging market equity securities generally include equity securities that trade in emerging markets or are issued by companies that have their principal activities in emerging market countries. Emerging market countries generally include those considered to be emerging by the World Bank, the International Finance Corporation, the United Nations, or the countries' authorities. These countries are typically located in the Asia-Pacific region, Eastern Europe, Central and South America, and Africa. Emerging market equity securities and emerging market countries are more fully described in the SAI. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stock, and securities convertible into common stock. The fund also invests in American, European and Global Depositary Receipts, which are certificates issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. [Begin callout] The fund invests primarily in the common stocks of companies located in emerging market countries. [End callout] In addition to its principal investments, the fund may invest significantly in securities of issuers in developed market countries, and particularly those developed market countries that are linked by tradition, economic markets, geography or political events to emerging market countries. Depending upon current market conditions, or for capital appreciation, the fund may also invest a substantial portion of its assets in rated or unrated debt securities of companies and governments located anywhere in the world. A debt security obligates the issuer to the bondholders, both to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stock or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. The fund may also invest up to 10% of its total assets in securities of closed-end investment companies to facilitate foreign investment. PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-oriented, and long-term. In choosing investments, the fund's manager will focus on the market price of a company's securities relative to its evaluation of the company's long-term earnings, asset value and cash flow potential. A company's historical value measures, including price/earnings ratio, profit margins and liquidation value, will also be considered. As a "bottom-up" investor focusing primarily on individual companies and securities, the fund may from time to time have significant investments in particular countries. The manager intends to manage the fund's exposure to various geographic regions and their currencies based on its assessment of changing market and political conditions. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency investments. Such investments may be medium-term (less than 5 years for this fund) or short-term, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. FOREIGN SECURITIES Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. 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. [Begin callout] Because the stocks the fund holds fluctuate in price with emerging market conditions and currencies, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. [End callout] CURRENCY Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Currency markets generally are not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes, and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the debt security's value and, thus, impact the value of fund shares. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of bull and bear]PAST PERFORMANCE Because class 2 shares were not offered until January 6th, 1999, the fund's class 1 performance is shown. This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. TEMPLETON DEVELOPING MARKETS EQUITY FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 [Insert bar graph] 2.77% 21.59% -8.72% -21.61% 95 96 97 98 YEAR [Begin callout] BEST QUARTER: Q4 '98 20.59% WORST QUARTER: Q4 '97 -23.44% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 1 YEAR SINCE INCEPTION (03/15/94) --------------------------------------------------------------------------- TEMPLETON DEVELOPING MARKETS EQUITY FUND - CLASS 11 -21.61% -3.22% MSCI EMERGING MARKETS FREE INDEX2 -25.34% -8.80% IFC INVESTABLE COMPOSITE INDEX2 -22.01% -9.24% 1. All fund performance assumes reinvestment of dividends and capital gains. Because class 2 shares were not offered until January 6th, 1999, performance shown represents class 1 shares, which are not offered in this prospectus. Although invested in the same portfolio of securities as class 1, class 2 performance will differ because of class 2's higher annual fees and expenses resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%. 2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI Emerging Markets Free Index measures the performance of securities located in 25 emerging market countries such as Brazil, China, Korea and Poland. The International Finance Corporation's Investable Composite Index is an emerging markets index that includes 650 stocks from 18 countries including Mexico, South Korea, Brazil, Jordan and Turkey. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Templeton Asset Management Ltd. (TAML), 7 Temasek Blvd., #38-03 Suntec Tower One, Singapore, 038987, is the fund's investment manager. MANAGEMENT TEAM The team responsible for the fund's management is: DR. J. MARK MOBIUS. Managing Director, TAML Dr. Mobius has been a manager of the fund since its inception in 1994, and has been with the Franklin Templeton Group since 1987. TOM WU Director, TAML Mr. Wu has been a manager of the fund since its inception in 1994, and has been with the Franklin Templeton Group since 1987. H. ALLAN LAM Portfolio Manager, TAML Mr. Lam has been a manager of the fund since its inception in 1994, and has been with the Franklin Templeton Group since 1987. EDDIE CHOW portfolio manager, TAML Mr. Chow has been a manager of the fund since 1996, and has been with the Franklin Templeton Group since 1994. DENNIS LIM director, TAML Mr. Lim has been a manager of the fund since 1996, and has been with the Franklin Templeton Group since 1990. TEK-KHOAN ONG Portfolio Manager, TAML Mr. Ong has been a manager if the fund since 1996, and has been with the Franklin Templeton Group since 1993. The fund pays the manager a fee for managing its assets, making its investment decisions and providing certain administrative facilities and services to the fund. For the fiscal year ended December 31, 1998, the fund paid 1.25% of its average daily net assets to the manager. Templeton Global Asset Allocation Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is high total return. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest in equity securities of companies in any nation, debt securities of companies and governments of any nation, and in money market instruments. The mix of investments will be adjusted to capitalize on total return potential produced by changing economic conditions throughout the world, including emerging market countries. While there are no minimum or maximum percentage targets for each asset class, historically stocks have been the predominant investment. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, securities convertible into common stock, and American, European and Global Depositary Receipts. Depositary Receipts are certificates issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. A debt security obligates the issuer to the bondholders, both to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stock or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. [Begin callout] The fund invests primarily in common stocks and bonds of U.S. and non-U.S. countries. [End callout] The fund focuses on "investment grade" debt securities. These are issues rated in the top four rating categories (AAA to BBB) by independent rating agencies such as Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or, if unrated, determined by the fund's manager to be comparable. The fund may also invest up to 25% of its total assets in high yield, medium and lower rated debt securities ("junk bonds"), or, if unrated, determined by the fund's manager to be comparable. The fund will not invest in defaulted securities. During 1998, about 10.2% of the fund's portfolio was invested in lower rated and comparable quality unrated debt securities. Many debt securities of non-U.S. issuers, and especially emerging market issuers, are rated below investment grade or are unrated so that their selection depends on the manager's internal analysis. PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-oriented, and long-term. In choosing equity investments, the fund's manager will focus on the market price of a company's securities relative to its evaluation of the company's long-term earnings, asset value and cash flow potential. A company's historical value measures, including price/earnings ratio, profit margins, and liquidation value, will also be considered. As a "bottom-up" investor focusing primarily on individual securities, the fund may from time to time have significant investments in particular countries. In choosing debt investments, the fund's manager allocates its assets among issuers, geographic regions, and currencies based upon its assessment of relative interest rates among currencies, the manager's outlook for changes in interest rates, and credit risks. The manager intends to manage the fund's exposure to various geographic regions and their currencies based on its assessment of changing market and political conditions; with respect to debt securities, the manager may also from time to time make use of forward currency exchange contracts for hedging (protection) purposes (Hedging Instruments). TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. [Begin callout] Because the stocks and bonds the fund holds fluctuate in price with foreign market conditions and currencies, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. [End callout] FOREIGN SECURITIES Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. CURRENCY Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because the investment is worth fewer dollars. Currency markets generally are not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes, and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the security's value and, thus, impact the value of fund shares. LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated securities, and can be considered speculative. Companies issuing high yield debt securities are not as strong financially, and are more likely to encounter financial difficulties and be more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates. If an issuer stops paying interest and/or principal, payments may never resume. The fund may lose its entire investment on bonds that may be, or are, in default. The prices of high yield debt securities fluctuate more than higher quality securities. Prices are especially sensitive to developments affecting the company's business and to rating changes, and typically rise and fall in response to factors that affect the company's stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, market activity, large sustained sales, a high-profile default, or other factors. High yield securities generally are less liquid than higher-quality bonds, and infrequent trades can make accurate pricing more difficult. At times, it may be difficult to sell these securities promptly at an acceptable price. HEDGING INSTRUMENTS Hedging Instruments used by this fund are considered derivative investments. Their successful use will depend on the manager's ability to predict market movements, and losses from their use can be greater than if they had not been used. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, risks, and bond ratings can be found in the SAI. [Insert graphic of bull and bear]PAST PERFORMANCE Because class 2 shares were not offered until January 6th, 1999, the fund's class 1 performance is shown. This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. TEMPLETON GLOBAL ASSET ALLOCATION FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 [Insert bar graph] 19.84% 11.71% -0.04% 96 97 98 YEAR [Begin callout] BEST QUARTER: Q4 '98 11.93% WORST QUARTER: Q3 '98 -13.12% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 PAST 1 YEAR SINCE INCEPTION (05/01/95 ) ---------------------------------------------------------------------------- TEMPLETON GLOBAL ASSET ALLOCATION FUND - CLASS 11 -0.04% 10.25% MSCI WORLD INDEX(R)2 24.80% 18.24% JP MORGAN GLOBAL GOVERNMENT BOND INDEX2 15.31% 7.49% 1. All fund performance assumes reinvestment of dividends and capital gains. Because class 2 shares were not offered until January 6th, 1999, performance shown represents class 1 shares, which are not offered in this prospectus. Although invested in the same portfolio of securities as class 1, class 2 performance will differ because of class 2's higher annual fees and expenses resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%. 2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI World Index(R) tracks the performance of approximately 1500 securities in 23 countries and is designed to measure world stock market performance. The unmanaged JP Morgan Global Government Bond Index tracks the performance of government bond markets in 13 countries. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Templeton Global Advisors Limited (TGAL), Lyford Cay, Nassau, N.P., Bahamas, is the fund's investment manager. Under an agreement with TGAL, Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, through its Templeton Global Bond Managers division (Global Bond Managers), is the fund's sub-advisor. MANAGEMENT TEAM The team responsible for managing the equity portion of the fund is: DALE WINNER, CFA Portfolio Manager, TGAL Mr. Winner has been a manager of the fund since 1997. Before joining Franklin Templeton in 1995, he was a trust officer at J.P. Morgan. MARK G. HOLOWESKO, CFA President, TGAL Mr. Holowesko has been a manager of the fund since 1999, and has been with the Franklin Templeton Group since 1985. A team from Global Bond Managers is responsible for managing the debt portion of the fund's investments. The fund pays the manager a fee for managing its assets and making its investment decisions. For the fiscal year ended December 31, 1998, the fund paid 0.65% of its average daily net assets to the manager. Templeton Global Growth Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is long-term capital growth. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in the equity securities of companies located anywhere in the world, including in the U.S. and emerging markets. While there are no set percentage targets, the fund generally invests in large- to medium-cap companies with market capitalization values (share price times the number of common stock shares outstanding) greater than $1.5 billion, but may invest a small portion in small-cap companies which have more risk. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, and securities convertible into common stock. The fund also invests in American, European, and Global Depositary Receipts, which are certificates issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. [Begin callout] The fund invests primarily in a diversified portfolio of U.S. and non-U.S. common stocks. [End callout] Depending upon current market conditions, the fund may invest a significant portion of its assets in debt securities of companies and governments located anywhere in the world. A debt security obligates the issuer to the bondholders, to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stocks or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-oriented, and long-term. In choosing investments, the fund's manager will focus on the market price of a company's securities relative to its evaluation of the company's long-term earnings, asset value and cash flow potential. A company's historical value measures, including price/earnings ratio, profit margins and liquidation value, will also be considered. As a "bottom-up" investor focusing primarily on individual securities, the fund may from time to time have significant investments in particular countries. The manager intends to manage the fund's exposure to various geographic regions and their currencies based on its assessment of changing market and political conditions. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. FOREIGN SECURITIES Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. [Begin callout] Because the stocks the fund holds fluctuate in price with foreign market conditions and currencies, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. [End callout] CURRENCY Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Currency markets generally are not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes, and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the debt security's value and, thus, impact the value of fund shares. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of bull and bear]PAST PERFORMANCE Because class 2 shares were not offered until January 6th, 1999, the fund's class 1 performance is shown. This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. TEMPLETON GLOBAL GROWTH FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 [Insert bar graph] 12.72% 21.28% 13.50% 8.98% 95 96 97 98 YEAR [Begin callout] BEST QUARTER: Q4 '98 16.30% WORST QUARTER: Q3 '98 -13.78% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 PAST 1 SINCE INCEPTION YEAR (03/15/94) -------------------------------------------------------------------------- TEMPLETON GLOBAL GROWTH FUND - CLASS 11 8.98% 12.30% MSCI ALL COUNTRY WORLD FREE(R)INDEX2 21.97% 14.79% 1. All fund performance assumes reinvestment of dividends and capital gains. Because class 2 shares were not offered until January 6th, 1999, performance shown represents class 1 shares, which are not offered in this prospectus. Although invested in the same portfolio of securities as class 1, class 2 performance will differ because of class 2's higher annual fees and expenses resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%. 2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI All Country World Free(R) Index measures the performance of securities located in 48 countries, including emerging markets in Latin America, Asia and Eastern Europe. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Templeton Global Advisors Limited (TGAL), Lyford Cay, Nassau, N.P., Bahamas, is the fund's investment manager. MANAGEMENT TEAM The team responsible for the fund's management is: RICHARD SEAN FARRINGTON, CFA Senior Vice President, TGAL Mr. Farrington has been a manager of the fund since 1995, and has been with the Franklin Templeton Group since 1990. JEFFREY A. EVERETT, CFA Executive Vice President, TGAL Mr. Everett has been a manager of the fund since its inception in 1994, and has been with the Franklin Templeton Group since 1990. The fund pays the manager a fee for managing its assets, making its investment decisions and providing certain administrative facilities and services to the fund. For the fiscal year ended December 31, 1998, the fund paid 0.83% of its average daily net assets to the manager. Templeton Global Income Securities Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is high current income. Capital appreciation is a secondary consideration. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in the debt securities of governments and their political subdivisions and agencies, supranational organizations, and companies located anywhere in the world, including emerging markets. A debt security obligates the issuer to the bondholders, both to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stock or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. [Begin callout] The fund invests primarily in bonds of governments located around the world. [End callout] The fund focuses on "investment grade" debt securities. These are issues rated in the top four rating categories (AAA to BBB) by independent rating agencies such as Standard & Poor's Corporation (S&P) or Moody's Investors Services, Inc. (Moody's) or, if unrated, determined by the fund's manager to be comparable. The fund may also invest up to 30% of its net assets in high yield, lower rated debt securities ("junk bonds") that are rated at least B, including emerging market debt, or if unrated, determined by the fund's manager to be comparable. The fund will not purchase defaulted securities. If, however, a security is downgraded in rating or goes into default, the fund will not automatically sell the security. During 1998, about 20.2% of the fund's portfolio was invested in lower rated and comparable quality unrated debt securities. Many debt securities of non-U.S. issuers, and especially emerging market issuers, are rated below investment grade or are unrated so that their selection depends on the manager's internal analysis. The average maturity of debt securities in the fund's portfolio is medium-term (about 5 to 15 years) but will fluctuate depending on the manager's outlook on the country and future interest rate changes. PORTFOLIO SELECTION The fund's manager allocates its assets among issuers, geographic regions, and currencies based upon its assessment of relative interest rates among currencies, the manager's outlook for changes in interest rates, and credit risks. In considering these factors, a country's changing market, economic, and political conditions, such as inflation rate, growth prospects, global trade patterns, and government policies will be evaluated. The manager intends to manage the fund's exposure to various currencies, and may from time to time seek to hedge (protect) against currency risk by using forward currency exchange contracts (Hedging Instruments). TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. A sub-category of interest rate risk is reinvestment risk, which is the risk that interest rates will be lower when the fund seeks to reinvest interest payments, or the proceeds from a matured debt security, resulting in less income received by the fund. FOREIGN SECURITIES Securities of governments and companies located outside the U.S. involve risks that can increase the potential for losses in the fund. Changes in global interest rates affect the prices of the fund's debt securities. [Begin callout] If rates rise, the value of the fund's debt securities will fall and so too will the fund's share price. This means you could lose money. [End callout] CURRENCY Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because the investment is worth fewer dollars. Currency markets are generally not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes, and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the security's value and, thus, impact the value of fund shares. LOWER-RATED SECURITIES Junk bonds generally have more risk than higher-rated securities, and can be considered speculative. Companies issuing high yield debt securities are not as strong financially, and are more likely to encounter financial difficulties and be more vulnerable to changes in the economy, such as a recession or a sustained period of rising interest rates. If an issuer stops paying interest and/or principal, payments may never resume. The fund may lose its entire investment on bonds that may be, or are, in default. The prices of high yield debt securities fluctuate more than higher quality securities. Prices are especially sensitive to developments affecting the company's business and to rating changes, and typically rise and fall in response to factors that affect the company's stock prices. In addition, the entire high yield securities market can experience sudden and sharp price swings due to changes in economic conditions, market activity, large sustained sales, a high-profile default, or other factors. High yield securities generally are less liquid than higher-quality bonds, and infrequent trades can make accurate pricing more difficult. At times, it may be difficult to sell these securities promptly at an acceptable price. HEDGING INSTRUMENTS Hedging Instruments used by the fund are considered derivative investments. Their successful use will depend on the manager's ability to predict market movements, and losses from their use can be greater than if they had not been used. Risks include potential loss to the fund due to the imposition of controls by a government on the exchange of foreign currencies, delivery failure, default by the other party, or inability to close out a position because the trading market becomes illiquid. DIVERSIFICATION The fund is non-diversified under federal securities laws. As such, it may invest a greater portion of its assets in one issuer and have a smaller number of issuers than a diversified fund. Therefore, the fund may be more sensitive to economic, business, political or other changes affecting similar issuers or securities. The fund will, however, meet tax diversification requirements. PORTFOLIO TURNOVER The manager's rebalancing of the portfolio to keep interest rate risk and country allocations at desired levels, as well as bond maturities, may cause the fund's portfolio turnover rate to be high. High turnover generally increases the fund's transaction costs. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, risks, and bond ratings can be found in the SAI. [Insert graphic of bull and bear]PAST PERFORMANCE Because class 2 shares were not offered until January 6th, 1999, the fund's class 1 performance is shown. This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. TEMPLETON GLOBAL INCOME SECURITIES FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 ---------------------------------------------------------------------- 9.83% 12.34% -0.40% 16.68% -4.99% 14.68% 9.56% 2.55% 7.08% ---------------------------------------------------------------------- ---------------------------------------------------------------------- 90 91 92 93 94 95 96 97 98 ---------------------------------------------------------------------- YEAR [Begin callout] BEST QUARTER: Q1 '93 5.33% WORST QUARTER: Q3 '92 -4.84% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 SINCE PAST 1 YEAR PAST 5 YEARS INCEPTION (01/24/89) ---------------------------------------------------------------------- TEMPLETON GLOBAL INCOME SECURITIES FUND - CLASS 11 7.08% 5.56% 7.52% JP MORGAN GLOBAL GOVERNMENT BOND INDEX2 15.31% 8.09% 9.23% 1. All fund performance assumes reinvestment of dividends and capital gains. Because class 2 shares were not offered until January 6th, 1999, performance shown represents class 1 shares, which are not offered in this prospectus. Although invested in the same portfolio of securities as class 1, class 2 performance will differ because of class 2's higher annual fees and expenses resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%. 2. Source: Standard & Poor's(R) Micropal. The unmanaged JP Morgan Global Government Bond Index tracks the performance of government bond markets in 13 countries. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, California 94403-7777, is the fund's investment manager. Under an agreement with Advisers, Templeton Investment Counsel, Inc. (TICI), Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, through its Templeton Global Bond Managers division (Global Bond Managers), is the fund's sub-advisor. A team from Global Bond Managers provides Advisers with investment management advice and assistance and is responsible for the day-to-day management of the fund. The fund pays the manager a fee for managing its assets, making its investment decisions, and providing certain administrative facilities and services for the fund. For the fiscal year ended December 31, 1998, the fund paid 0.57% of its average daily net assets to the manager. Templeton International Equity Fund [Insert graphic of bullseye and arrows] GOAL AND STRATEGIES GOAL The fund's investment goal is long-term capital growth. PRINCIPAL INVESTMENTS Under normal market conditions, the fund will invest at least 65% of its total assets in equity securities that trade in non-U.S. markets, including emerging markets, and that are issued by companies that have their principal activities outside the U.S. While there are no set percentage targets, the fund generally invests in large- to medium-cap companies with market capitalization values (share price times the number of common stock shares outstanding) greater than $1.5 billion, but may invest a small portion in small-cap companies which have more risk. Equities represent ownership interests in individual companies and give shareholders a claim in the company's earnings and assets. They include common and preferred stocks, and securities convertible into common stock. The fund also invests in American, European, and Global Depositary Receipts, which are certificates issued by a bank or trust company that give their holders the right to receive securities issued by a foreign or domestic company. [Begin callout] The fund invests primarily in a diversified portfolio of non-U.S. common stocks. [End callout] Depending upon current market conditions, the fund may invest a significant portion of its assets in debt securities of companies and governments located anywhere in the world. A debt security obligates the issuer to the bondholders, both to repay a loan of money at a future date and generally to pay interest. Common debt securities are bonds, including bonds convertible into common stock or unsecured bonds; notes; and short-term investments, including cash or cash equivalents. PORTFOLIO SELECTION The Templeton investment philosophy is "bottom-up," value-oriented, and long-term. In choosing equity investments, the fund's manager will focus on the market price of a company's securities relative to its evaluation of the company's long-term earnings, asset value and cash flow potential. A company's historical value measures, including price/earnings ratio, profit margins and liquidation value, will also be considered. As a "bottom-up" investor focusing primarily on individual securities, the fund may from time to time have significant investments in particular countries. The manager intends to manage the fund's exposure to various geographic regions and their currencies based on its assessment of changing market and political conditions. TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unfavorable for investors, is unable to locate suitable investment opportunities, or seeks to maintain liquidity, it may invest all or substantially all of the fund's assets in U.S. or non-U.S. currency short-term investments, including cash or cash equivalents. Under these circumstances, the fund may temporarily be unable to pursue its investment goal. [Insert graphic of chart with line going up and down] MAIN RISKS The fund's main risks can affect the fund's share price, its distributions or income, and therefore, the fund's performance. STOCKS While stocks have historically outperformed other asset classes over the long term, they tend to go up and down more dramatically over the short term. These price movements may result from factors affecting individual companies, industries, or securities markets. Value stock prices are considered "cheap" relative to the company's perceived value and are often out of favor with other investors. If other investors fail to recognize the company's value and do not become buyers, or if they become sellers, or in markets favoring faster-growing companies, value stocks may not increase in value as anticipated by the manager or may decline further. FOREIGN SECURITIES Securities of companies and governments located outside the U.S., including Depositary Receipts, involve risks that can increase the potential for losses in the fund. Because the stocks the fund holds fluctuate in price with foreign market conditions and currencies, the value of your investment in the fund will go up and down. This means you could lose money over short or even extended periods. CURRENCY Many of the fund's investments are denominated in foreign currencies. Generally, when the U.S. dollar rises in value against a foreign currency, an investment in that country loses value because that currency is worth fewer U.S. dollars. Currency markets generally are not as regulated as securities markets. COUNTRY General securities market movements in any country where the fund has investments are likely to affect the value of the securities the fund owns that trade in that country. The political, economic and social structures of some countries the fund invests in may be less stable and more volatile than those in the U.S. The risks of investing in these countries include the possibility of currency devaluations by a country's government or banking authority, the imposition of exchange controls, foreign ownership limitations, expropriation, restrictions on removal of currency or other assets, nationalization of assets, punitive taxes, and certain custody and settlement risks. In addition, political or economic conditions can cause previously established securities markets to become limited trading markets, potentially causing liquid securities to become illiquid, particularly in emerging market countries. Emerging market countries are subject to all of the risks of foreign investing generally, and have additional heightened risks due to a lack of established legal, business, and social frameworks to support securities markets, and a greater likelihood of currency devaluations. Non-U.S. securities markets, particularly emerging markets, may have substantially lower trading volumes than U.S. markets, resulting in less liquidity and more volatility than experienced in the U.S. While short-term volatility in these markets can be disconcerting, declines in excess of 50% are not unusual. COMPANY Non-U.S. companies are not subject to the same disclosure, accounting, auditing and financial reporting standards and practices as U.S. companies and their securities may not be as liquid as securities of similar U.S. companies. Non-U.S. stock exchanges, trading systems, brokers, and companies generally have less government supervision and regulation than in the U.S. The fund may have greater difficulty voting proxies, exercising shareholder rights, pursuing legal remedies and obtaining judgments with respect to non-U.S. investments in non-U.S. courts than with respect to U.S. companies in U.S. courts. INTEREST RATE Rate changes can be sudden and unpredictable. When interest rates rise, debt securities can lose market value. Similarly, when interest rates fall, debt securities can gain value. In general, securities with longer maturities are more sensitive to these price changes. CREDIT This is the possibility that an issuer will be unable to make interest payments or repay principal. Changes in an issuer's financial strength may affect the debt security's value and, thus, impact the value of fund shares. See "Important Recent Developments" in this prospectus for Year 2000 and euro discussion, and any potential impact on the fund's portfolio and operations. More detailed information about the fund, its policies, and risks can be found in the SAI. [Insert graphic of bull and bear]PAST PERFORMANCE Because class 2 shares were not offered until January 6th, 1999, the fund's class 1 performance is shown. This bar chart and table show the volatility of the fund's returns, which is one indicator of the risks of investing in the fund. The bar chart shows changes in the fund's returns for each full calendar year over the past ten years or since the fund's inception. The table shows how the fund's average annual total returns compare to those of a broad-based securities index. Of course, past performance cannot predict or guarantee future results. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. TEMPLETON INTERNATIONAL EQUITY FUND - CLASS 1 CALENDAR YEAR TOTAL RETURNS1 [INSERT BAR GRAPH] 28.56% 0.87% 10.59% 22.98% 11.69% 5.56% 93 94 95 96 97 98 YEAR [Begin callout] BEST QUARTER: Q4 '93 13.64% WORST QUARTER: Q3 '98 -16.86% [End callout] AVERAGE ANNUAL TOTAL RETURNS For the periods ended December 31, 1998 PAST 1 PAST 5 YEARS SINCE INCEPTION YEAR (01/27/92) ------------------------------------------------------------------------- TEMPLETON INTERNATIONAL EQUITY FUND - CLASS 11 5.56% 10.09% 10.75% MSCI ALL COUNTRY WORLD EX-U.S. FREE INDEX2 14.46% 7.87% 8.64% 1. All fund performance assumes reinvestment of dividends and capital gains. Because class 2 shares were not offered until January 6th, 1999, performance shown represents class 1 shares, which are not offered in this prospectus. Although invested in the same portfolio of securities as class 1, class 2 performance will differ because of class 2's higher annual fees and expenses resulting from its rule 12b-1 plan. Current annual 12b-1 expenses are 0.25%. 2. Source: Standard & Poor's(R) Micropal. The unmanaged MSCI All Country World Ex-U.S. Free Index measures the performance of securities located in 48 countries, both developed and emerging markets, except the U.S. Indices include reinvested dividends and/or interest. One cannot invest directly in an index, nor is an index representative of the fund's investments. [Insert graphic of briefcase] MANAGEMENT Franklin Advisers, Inc. (Advisers), 777 Mariners Island Blvd., San Mateo, California 94403-7777, is the fund's investment manager. Under an agreement with Advisers, Templeton Investment Counsel, Inc., (TICI), Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida 33394, is the fund's sub-advisor. TICI provides Advisers with investment management advice and assistance. MANAGEMENT TEAM The team responsible for the fund's management is: HOWARD J. LEONARD CFA Executive Vice President, TICI Mr. Leonard has been a manager of the fund since 1997, and has been with the Franklin Templeton Group since 1989. MARK R. BEVERIDGE CFA Senior Vice President, TICI Mr. Beveridge has been a manager of the fund since 1994, and has been with the Franklin Templeton Group since 1994 The fund pays the manager a fee for managing its assets, making its investment decisions, and providing certain administrative facilities and services for the fund. For the fiscal year ended December 31, 1998, the fund paid 0.80% of its average daily net assets to the manager. [Insert graphic of STAR] IMPORTANT RECENT DEVELOPMENTS o Year 2000 problem The funds' business operations depend on a worldwide network of computer systems that contain date fields, including securities trading systems, securities transfer agent operations and stock market links. Many of the systems currently use a two digit date field to represent the date, and unless these systems are changed or modified, they may not be able to distinguish the Year 1900 from the Year 2000 (commonly called the Year 2000 problem). In addition, the fact that the Year 2000 is a leap year may create difficulties for some systems. When the Year 2000 arrives, the funds' operations could be adversely affected if the computer systems used by their managers, their service providers and other third parties they do business with are not Year 2000 ready. For example, the funds' portfolio and operational areas could be impacted, including securities trade processing, interest and dividend payments, securities pricing, shareholder account services, reporting, custody functions and others. The funds could experience difficulties in effecting transactions if any of their foreign subcustodians, or if foreign broker/dealers or foreign markets are not ready for Year 2000. When evaluating current and potential portfolio positions, Year 2000 is one of the factors that the funds' managers consider. The managers will rely upon public filings and other statements made by companies regarding their Year 2000 readiness. Issuers in countries outside of the U.S., particularly in emerging markets, may be more susceptible to Year 2000 problems and may not be required to make the same level of disclosure regarding Year 2000 readiness as is required in the U.S. The managers, of course, cannot audit any company or their major suppliers to verify their Year 2000 readiness. If a company in which any fund is invested is adversely affected by Year 2000 problems, it is likely that the price of its security will also be adversely affected. A decrease in the value of one or more of a fund's portfolio holdings will have similar impact on the price of the funds' shares. The funds' managers and their affiliated service providers are making a concerted effort to take steps they believe are reasonably designed to address their Year 2000 problems. Of course, the funds' ability to reduce the effects of the Year 2000 problem is also very much dependent upon the efforts of third parties over which the funds and their managers may have no control. o Euro On January 1, 1999, the European Monetary Union (EMU) introduced a new single currency, the euro, which replaced the national currency for participating member countries. Because this change to a single currency is new and untested, it is not possible to predict the impact of the euro on the business or financial condition of European issuers which the funds may hold in their portfolios, and their impact on fund performance. To the extent a fund holds non-U.S. dollar (euro or other) denominated securities, it will still be exposed to currency risk due to fluctuations in those currencies versus the U.S. dollar. [Insert graphic of dollar signs and stacks of coins] DISTRIBUTIONS AND TAXES INCOME AND CAPITAL GAINS DISTRIBUTIONS Each fund will declare as dividends substantially all of its net investment income. Except for the Money Fund, each fund typically pays dividends from net investment income and net capital gains, if any, following the close of the calendar year. Dividends or distributions by the funds will reduce the per share net asset value (NAV) by the per share amount paid. 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. Fund Account Information [Insert graphic of paper with lines and someone writing] BUYING SHARES Shares of each fund are sold at net asset value (NAV) to insurance company separate accounts to serve as investment options for variable annuity or variable life insurance contracts. The funds' Board monitors this to be sure there are no material conflicts of interest between the two different types of contract owners. If there were, the Board would take corrective action. Contract owners' payments will be allocated by the insurance company separate account to purchase shares of each fund chosen by the contract owner, and are subject to any limits or conditions in the contract. Requests to buy shares are processed at the NAV next calculated after we receive the request in proper form. The funds do not issue share certificates. [Insert graphic of a certificate] SELLING SHARES Each insurance company shareholder sells shares of the applicable fund to make benefit or surrender payments or to execute exchanges (transfers) between investment options under the terms of its contracts. Requests to sell shares are processed at the NAV next calculated after we receive the request in proper form. [Insert graphic of two arrows going in different directions] EXCHANGING SHARES Contract owners may exchange shares of any one class or fund for shares of other classes or funds through a transfer between investment options available under a variable insurance contract, subject to the terms and any specific limitations on the exchange (or "transfer") privilege described in the contract prospectus. Frequent exchanges can interfere with fund management or operations and drive up fund costs. To protect shareholders, there are limits on the number and amount of fund exchanges that may be made (please see "Market Timers" below). [Insert graphic of paper and pen] FUND ACCOUNT POLICIES CALCULATING SHARE PRICE The funds calculate their NAV per share each business day at the close of trading on the New York Stock Exchange (normally 1:00 p.m. Pacific time). Each class' 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 shareholders will receive the fund's financial reports every six months. To reduce fund expenses, if you need additional copies, please call 1-800/342-3863. If there is a dealer or other investment representative of record on the account, he or she will also receive confirmations, account statements and other information about the contract owner's account directly from the contract's administrator. MARKET TIMERS The funds are not designed for market timers, large or frequent transfers. The funds may restrict or refuse purchases or exchanges by market timers. You will be considered a market timer if you have (i) requested an exchange out of the fund within two weeks of an earlier exchange request, or (ii) exchanged shares out of the fund more than twice in a calendar quarter, or (iii) exchanged shares equal to at least $5 million, or more than 1% of the fund's net assets, or (iv) otherwise seem to follow a timing pattern. Accounts under common ownership or control are combined for these limits. ADDITIONAL POLICIES Please note that the funds maintain additional policies and reserves certain rights, including: o Each fund may refuse any order to buy shares. o At any time, each fund may establish or change investment minimums. o Each fund may modify or discontinue the exchange privilege on 60 days' notice to insurance company shareholders. o You may only buy shares of a fund eligible for sale in your state or jurisdiction. o IN UNUSUAL CIRCUMSTANCES, WE MAY TEMPORARILY SUSPEND REDEMPTIONS, OR POSTPONE THE PAYMENT OF PROCEEDS, AS ALLOWED BY FEDERAL SECURITIES LAWS. o TO PERMIT INVESTORS TO OBTAIN THE CURRENT PRICE, INSURANCE COMPANIES ARE RESPONSIBLE FOR TRANSMITTING ALL ORDERS TO THE FUND PROMPTLY. SHARE CLASSES Each fund has two classes of shares, class 1 and class 2. Each class is identical except that class 2 has a distribution plan or "rule 12b-1" plan which is described below. DISTRIBUTION AND SERVICE (12B-1) FEES Class 2 of each fund has a distribution plan, sometimes known as a rule 12b-1 plan, that allows class 2 to pay distribution and other fees to those who sell and distribute class 2 shares, or contracts funded by class 2 shares or for services provided to contract owners. Because these fees are paid out of class 2's assets on an on-going basis, these fees will increase the cost of your investment and may cost you more than paying other types of sales charges. While the maximum fee is up to 0.35% per year, the Board of Trustees has set the current rate of 0.25% of a fund's class 2 average daily net assets effective July 1, 1999. [Insert graphic of question mark] QUESTIONS More detailed information about the Trust and the funds' account policies can be found in the funds' Statement of Additional Information (SAI). If you have any questions about the funds, you can write to us at 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, CA 94403-7777. You can also call us at 1-800/342-3863. For your protection and to help ensure we provide you with quality service, all calls may be monitored or recorded. FOR MORE INFORMATION The funds of Franklin Templeton Variable Insurance Products Trust (the Trust), formerly Franklin Valuemark Funds, are only available as investment options in variable annuity or variable life insurance contracts. Please consult the accompanying contract prospectus for information about the terms of an investment in a contract. You can learn more about the funds in the following documents: ANNUAL/SEMIANNUAL FUND REPORTS TO SHAREHOLDERS Includes a discussion of recent market conditions and investment strategies, financial statements, detailed performance information, fund holdings, and the auditor's report (Annual Report only). STATEMENT OF ADDITIONAL INFORMATION (SAI) Contains more information about the funds, their investments, policies, and risks. It is incorporated by reference (is legally a part of this prospectus). You may obtain these free reports by contacting your investment representative or by calling us at the number below. Franklin(R)Templeton(R) 1-800/342-3863 You can also obtain information about the funds by visiting the SEC's Public Reference Room in Washington, D.C. (phone 1-800/SEC-0330) or by sending your request and a duplicating fee to the SEC's Public Reference Section, Washington, D.C. 20549-6009. You can also visit the SEC's Internet site at http://www.sec.gov. Investment Company Act file #811-5583 EXHIBIT III INVESTMENT ADVISORY AGREEMENT AGREEMENT dated as of the __ day of _________, 2000, between FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust (the "Trust"), on behalf of Templeton Global Asset Allocation Fund, a series of the Trust (the "Fund"), and TEMPLETON INVESTMENT COUNSEL, INC., a Florida Corporation (the "Adviser"). In consideration of the mutual agreements herein made, the Trust and the Adviser understand and agree as follows: (1) The Adviser agrees, during the life of this Agreement, to manage the investment and reinvestment of the Fund's assets consistent with the provisions of the Declaration of Trust of the Trust and the investment policies adopted and declared by the Trust's Board of Trustees. In pursuance of the foregoing, the Adviser shall make all determinations with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, and shall take all such steps as may be necessary to implement those determinations. (2) The Adviser is not required to furnish any personnel, overhead items or facilities for the Fund, including trading desk facilities or daily pricing of the Fund's portfolio. (3) The Adviser shall be responsible for selecting members of securities exchanges, brokers and dealers (such members, brokers and dealers being hereinafter referred to as "brokers") for the execution of the Fund's portfolio transactions consistent with the Fund's brokerage policies and, when applicable, the negotiation of commissions in connection therewith. All decisions and placements shall be made in accordance with the following principles: A. Purchase and sale orders will usually be placed with brokers which are selected by the Adviser as able to achieve "best execution" of such orders. "Best execution" shall mean prompt and reliable execution at the most favorable security price, taking into account the other provisions hereinafter set forth. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations, including, without limitation, the overall direct net economic result to the Fund (involving both price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction at all where a large block is involved, availability of the broker to stand ready to execute possibly difficult transactions in the future, and the financial strength and stability of the broker. Such considerations are judgmental and are weighed by the Adviser in determining the overall reasonableness of brokerage commissions. B. In selecting brokers for portfolio transactions, the Adviser shall take into account its past experience as to brokers qualified to achieve "best execution," including brokers who specialize in any foreign securities held by the Fund. C. The Adviser is authorized to allocate brokerage business to brokers who have provided brokerage and research services, as such services are defined in Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"), for the Fund and/or other accounts, if any, for which the Adviser exercises investment discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as to transactions for which fixed minimum commission rates are not applicable, to cause the Fund to pay a commission for effecting a securities transaction in excess of the amount another broker would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Trust and the other accounts, if any, as to which it exercises investment discretion. In reaching such determination, the Adviser will not be required to place or attempt to place a specific dollar value on the research or execution services of a broker or on the portion of any commission reflecting either of said services. In demonstrating that such determinations were made in good faith, the Adviser shall be prepared to show that all commissions were allocated and paid for purposes contemplated by the Trust's brokerage policy; that the research services provide lawful and appropriate assistance to the Adviser in the performance of its investment decision-making responsibilities; and that the commissions paid were within a reasonable range. Whether commissions were within a reasonable range shall be based on any available information as to the level of commission known to be charged by other brokers on comparable transactions, but there shall be taken into account the Trust's policies that (i) obtaining a low commission is deemed secondary to obtaining a favorable securities price, since it is recognized that usually it is more beneficial to the Fund to obtain a favorable price than to pay the lowest commission; and (ii) the quality, comprehensiveness and frequency of research studies that are provided for the Adviser are useful to the Adviser in performing its advisory services under this Agreement. Research services provided by brokers to the Adviser are considered to be in addition to, and not in lieu of, services required to be performed by the Adviser under this Agreement. Research furnished by brokers through which the Fund effects securities transactions may be used by the Adviser for any of its accounts, and not all research may be used by the Adviser for the Fund. When execution of portfolio transactions is allocated to brokers trading on exchanges with fixed brokerage commission rates, account may be taken of various services provided by the broker. D. Purchases and sales of portfolio securities within the United States other than on a securities exchange shall be executed with primary market makers acting as principal, except where, in the judgment of the Adviser, better prices and execution may be obtained on a commission basis or from other sources. E. Sales of the Fund's shares (which shall be deemed to include also shares of other registered investment companies which have either the same adviser or an investment adviser affiliated with the Adviser) by a broker are one factor among others to be taken into account in deciding to allocate portfolio transactions (including agency transactions, principal transactions, purchases in underwritings or tenders in response to tender offers) for the account of the Fund to that broker; provided that the broker shall furnish "best execution," as defined in subparagraph A above, and that such allocation shall be within the scope of the Trust's policies as stated above; provided further, that in every allocation made to a broker in which the sale of Fund shares is taken into account, there shall be no increase in the amount of the commissions or other compensation paid to such broker beyond a reasonable commission or other compensation determined, as set forth in subparagraph C above, on the basis of best execution alone or best execution plus research services, without taking account of or placing any value upon such sale of the Fund's shares. (4) In addition to the investment management services provided pursuant to paragraph (1) above, the Adviser agrees, during the life of this Agreement, to furnish or provide for the Fund, at the Adviser's expenses, such administrative services as are required to facilitate investment in the shares of the Fund by an insurance company, on behalf of one or more of its separate accounts, pursuant to a fund participation agreement among the Fund, Franklin Templeton Distributors, Inc. and such insurance company. Such services may include, but are not limited to, the following: maintaining books and records required by applicable state or federal laws; assisting in processing purchase and redemption transactions; transmitting to the Fund periodic reports necessary to enable the Fund to comply with applicable laws; processing Fund distributions; answering questions and handling correspondence from contractowners about their accounts; providing information about the Fund; acting as sole shareholder of record and nominee for shareholders; and similar administrative, recordkeeping, and contractowner services. (5) The Fund agrees to pay to the Adviser a monthly fee in dollars based on a percentage of the Fund's average daily net assets, payable at the end of each calendar month. This fee shall be calculated daily at the following annual rates: 0.65% of the value of the Fund's net assets up to an including $200 million; 0.585% of the value of the Fund's net assets over $200 million up to and including $1.3 billion; 0.52% of the value of the Fund's net assets over $1.3 billion. The Adviser may waive in advance all or a portion of its fee provided for hereunder and such waiver will be treated as a reduction in purchase price of its services. The Adviser shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee or any limitation of the Fund's expenses, as if such waiver or limitation were fully set forth herein. Notwithstanding the foregoing, if the total expenses of the Fund (including the fee to the Adviser) in any fiscal year of the Trust exceed any expense limitation imposed by applicable State law, the Adviser shall reimburse the Fund for such excess in the manner and to the extent required by applicable State law. The term "total expenses," as used in this paragraph, does not include interest, taxes, litigation expenses, distribution expenses, brokerage commissions or other costs of acquiring or disposing of any of the Fund's portfolio securities or any costs or expenses incurred or arising other than in the ordinary and necessary course of the Fund's business. When the accrued amount of such expenses exceeds this limit, the monthly payment of the Adviser's fee will be reduced by the amount of such excess, subject to adjustment month by month during the balance of the Trust's fiscal year if accrued expenses thereafter fall below the limit. (6) This Agreement shall become effective on May 1, 2000 and shall continue in effect until April 30, 2002. If not sooner terminated, this Agreement shall continue in effect for successive periods of 12 months each thereafter, provided that each such continuance shall be specifically approved annually by the vote of a majority of the Trust's Board of Trustees who are not parties to this Agreement or "interested persons" (as defined in Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in person at a meeting called for the purpose of voting on such approval and either the vote of (a) a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of Trustees as a whole. (7) Notwithstanding the foregoing, this Agreement may be terminated by either party at any time, without the payment of any penalty, on sixty (60) days' written notice to the other party, provided that termination by the Trust is approved by vote of a majority of the Trust's Board of Trustees in office at the time or by vote of a majority of the outstanding voting securities of the Fund (as defined by the 1940 Act). (8) This Agreement will terminate automatically and immediately in the event of its assignment (as defined in the 1940 Act). (9) In the event this Agreement is terminated and the Adviser no longer acts as Adviser to the Fund, the Adviser reserves the right to withdraw from the Fund the use of the name "Templeton" or any name misleadingly implying a continuing relationship between the Fund and the Adviser or any of its affiliates. (10) Except as may otherwise be provided by the 1940 Act, neither the Adviser nor its officers, directors, employees or agents shall be subject to any liability for any error of judgment, mistake of law, or any loss arising out of any investment or other act or omission in the performance by the Adviser of its duties under the Agreement or for any loss or damage resulting from the imposition by any government of exchange control restrictions which might affect the liquidity of the Trust's assets, or from acts or omissions of custodians, or securities depositories, or from any war or political act of any foreign government to which such assets might be exposed, or failure, on the part of the custodian or otherwise, timely to collect payments, except for any liability, loss or damage resulting from willful misfeasance, bad faith or gross on the Adviser's part or by reason of disregard of the Adviser's duties under this Agreement. It is hereby understood and acknowledged by the Trust that the value of the investments made for the Fund may increase as well as decrease and are not guaranteed by the Adviser. It is further understood and acknowledged by the Trust that investment decisions made on behalf of the Fund by the Adviser are subject to a variety of factors which may affect the values and income generated by the Fund's portfolio securities, including general economic conditions, market factors and currency exchange rates, and that investment decisions made by the Adviser will not always be profitable or prove to have been correct. (11) It is understood that the services of Adviser are not deemed to be exclusive, and nothing in this Agreement shall prevent the Adviser, or any affiliate thereof, from providing similar services to other investment companies and other clients, including clients which may invest in the same types of securities as the Fund, or, in providing such services, from using information furnished by others. When the Adviser determines to buy or sell the same security for the Fund that the Adviser or one or more of its affiliates has selected for clients of the Adviser or its affiliates, the orders for all such security transactions shall be placed for execution by methods determined by the Adviser, with approval by the Trust's Board of Trustees, to be impartial and fair. (12) This Agreement shall be construed in accordance with the laws of State of Florida, provided that nothing herein shall be construed as being inconsistent with applicable Federal and state securities laws and any rules, regulations and orders thereunder. (13) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable. (14) Nothing herein shall be construed as constituting the Adviser an agent of the Trust. (15) It is understood and expressly stipulated that neither the holders of shares of the Fund nor any Trustee, officer, agent or employee of the Trust shall be personally liable hereunder, nor shall any resort be had to other private property for the satisfaction of any claim or obligation hereunder, but the Trust only shall be liable. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers and their respective corporate seals to be hereunto duly affixed and attested. FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST on behalf of Templeton Global Allocation Fund By:_______________________________ TEMPLETON INVESTMENT COUNSEL, INC. By:_________________________________ EXHIBIT IV INVESTMENT ADVISORY AGREEMENT AGREEMENT dated as of the __ day of _________, 2000, between FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust (the "Trust"), on behalf of Templeton Developing Markets Equity Fund, a series of the Trust (the "Fund"), and TEMPLETON ASSET MANAGEMENT LTD., a company organized under the laws of Singapore (the "Adviser"). In consideration of the mutual agreements herein made, the Trust and the Adviser understand and agree as follows: (1) The Adviser agrees, during the life of this Agreement, to manage the investment and reinvestment of the Fund's assets consistent with the provisions of the Declaration of Trust of the Trust and the investment policies adopted and declared by the Trust's Board of Trustees. In pursuance of the foregoing, the Adviser shall make all determinations with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, and shall take all such steps as may be necessary to implement those determinations. It is understood that all acts of the Adviser in performing this Agreement are performed by it outside the United States. (2) The Adviser is not required to furnish any personnel, overhead items or facilities for the Fund, including trading desk facilities or daily pricing of the Fund's portfolio. (3) The Adviser shall be responsible for selecting members of securities exchanges, brokers and dealers (such members, brokers and dealers being hereinafter referred to as "brokers") for the execution of the Fund's portfolio transactions consistent with the Fund's brokerage policies and, when applicable, the negotiation of commissions in connection therewith. All decisions and placements shall be made in accordance with the following principles: A. Purchase and sale orders will usually be placed with brokers which are selected by the Adviser as able to achieve "best execution" of such orders. "Best execution" shall mean prompt and reliable execution at the most favorable security price, taking into account the other provisions hereinafter set forth. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations, including, without limitation, the overall direct net economic result to the Fund (involving both price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction at all where a large block is involved, availability of the broker to stand ready to execute possibly difficult transactions in the future, and the financial strength and stability of the broker. Such considerations are judgmental and are weighed by the Adviser in determining the overall reasonableness of brokerage commissions. B. In selecting brokers for portfolio transactions, the Adviser shall take into account its past experience as to brokers qualified to achieve "best execution," including brokers who specialize in any foreign securities held by the Fund. C. The Adviser is authorized to allocate brokerage business to brokers who have provided brokerage and research services, as such services are defined in Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"), for the Fund and/or other accounts, if any, for which the Adviser exercises investment discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as to transactions for which fixed minimum commission rates are not applicable, to cause the Fund to pay a commission for effecting a securities transaction in excess of the amount another broker would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Trust and the other accounts, if any, as to which it exercises investment discretion. In reaching such determination, the Adviser will not be required to place or attempt to place a specific dollar value on the research or execution services of a broker or on the portion of any commission reflecting either of said services. In demonstrating that such determinations were made in good faith, the Adviser shall be prepared to show that all commissions were allocated and paid for purposes contemplated by the Trust's brokerage policy; that the research services provide lawful and appropriate assistance to the Adviser in the performance of its investment decision-making responsibilities; and that the commissions paid were within a reasonable range. Whether commissions were within a reasonable range shall be based on any available information as to the level of commission known to be charged by other brokers on comparable transactions, but there shall be taken into account the Trust's policies that (i) obtaining a low commission is deemed secondary to obtaining a favorable securities price, since it is recognized that usually it is more beneficial to the Fund to obtain a favorable price than to pay the lowest commission; and (ii) the quality, comprehensiveness and frequency of research studies that are provided for the Adviser are useful to the Adviser in performing its advisory services under this Agreement. Research services provided by brokers to the Adviser are considered to be in addition to, and not in lieu of, services required to be performed by the Adviser under this Agreement. Research furnished by brokers through which the Fund effects securities transactions may be used by the Adviser for any of its accounts, and not all research may be used by the Adviser for the Fund. When execution of portfolio transactions is allocated to brokers trading on exchanges with fixed brokerage commission rates, account may be taken of various services provided by the broker. D. Purchases and sales of portfolio securities within the United States other than on a securities exchange shall be executed with primary market makers acting as principal, except where, in the judgment of the Adviser, better prices and execution may be obtained on a commission basis or from other sources. E. Sales of the Fund's shares (which shall be deemed to include also shares of other registered investment companies which have either the same adviser or an investment adviser affiliated with the Adviser) by a broker are one factor among others to be taken into account in deciding to allocate portfolio transactions (including agency transactions, principal transactions, purchases in underwritings or tenders in response to tender offers) for the account of the Fund to that broker; provided that the broker shall furnish "best execution," as defined in subparagraph A above, and that such allocation shall be within the scope of the Trust's policies as stated above; provided further, that in every allocation made to a broker in which the sale of Fund shares is taken into account, there shall be no increase in the amount of the commissions or other compensation paid to such broker beyond a reasonable commission or other compensation determined, as set forth in subparagraph C above, on the basis of best execution alone or best execution plus research services, without taking account of or placing any value upon such sale of the Fund's shares. (4) In addition to the investment management services provided pursuant to paragraph (1) above, the Adviser agrees, during the life of this Agreement, to furnish or provide for the Fund, at the Adviser's expenses, such administrative services as are required to facilitate investment in the shares of the Fund by an insurance company, on behalf of one or more of its separate accounts, pursuant to a fund participation agreement among the Fund, Franklin Templeton Distributors, Inc. and such insurance company. Such services may include, but are not limited to, the following: maintaining books and records required by applicable state or federal laws; assisting in processing purchase and redemption transactions; transmitting to the Fund periodic reports necessary to enable the Fund to comply with applicable laws; processing Fund distributions; answering questions and handling correspondence from contractowners about their accounts; providing information about the Fund; acting as sole shareholder of record and nominee for shareholders; and similar administrative, recordkeeping, and contractowner services. (5) The Fund agrees to pay to the Adviser a monthly fee in dollars at an annual rate of 1.25% of the Fund's average daily net assets payable at the end of each calendar month. The Adviser may waive in advance all or a portion of its fee provided for hereunder and such waiver will be treated as a reduction in purchase price of its services. The Adviser shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee or any limitation of the Fund's expenses, as if such waiver or limitation were fully set forth herein. Notwithstanding the foregoing, if the total expenses of the Fund (including the fee to the Adviser) in any fiscal year of the Trust exceed any expense limitation imposed by applicable State law, the Adviser shall reimburse the Fund for such excess in the manner and to the extent required by applicable State law. The term "total expenses," as used in this paragraph, does not include interest, taxes, litigation expenses, distribution expenses, brokerage commissions or other costs of acquiring or disposing of any of the Fund's portfolio securities or any costs or expenses incurred or arising other than in the ordinary and necessary course of the Fund's business. When the accrued amount of such expenses exceeds this limit, the monthly payment of the Adviser's fee will be reduced by the amount of such excess, subject to adjustment month by month during the balance of the Trust's fiscal year if accrued expenses thereafter fall below the limit. (6) This Agreement shall become effective on May 1, 2000 and shall continue in effect until April 30, 2002. If not sooner terminated, this Agreement shall continue in effect for successive periods of 12 months each thereafter, provided that each such continuance shall be specifically approved annually by the vote of a majority of the Trust's Board of Trustees who are not parties to this Agreement or "interested persons" (as defined in Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in person at a meeting called for the purpose of voting on such approval and either the vote of (a) a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of Trustees as a whole. (7) Notwithstanding the foregoing, this Agreement may be terminated by either party at any time, without the payment of any penalty, on sixty (60) days' written notice to the other party, provided that termination by the Trust is approved by vote of a majority of the Trust's Board of Trustees in office at the time or by vote of a majority of the outstanding voting securities of the Fund (as defined by the 1940 Act). (8) This Agreement will terminate automatically and immediately in the event of its assignment (as defined in the 1940 Act). (9) In the event this Agreement is terminated and the Adviser no longer acts as Adviser to the Fund, the Adviser reserves the right to withdraw from the Fund the use of the name "Templeton" or any name misleadingly implying a continuing relationship between the Fund and the Adviser or any of its affiliates. (10) Except as may otherwise be provided by the 1940 Act, neither the Adviser nor its officers, directors, employees or agents shall be subject to any liability for any error of judgment, mistake of law, or any loss arising out of any investment or other act or omission in the performance by the Adviser of its duties under the Agreement or for any loss or damage resulting from the imposition by any government of exchange control restrictions which might affect the liquidity of the Trust's assets, or from acts or omissions of custodians, or securities depositories, or from any war or political act of any foreign government to which such assets might be exposed, or failure, on the part of the custodian or otherwise, timely to collect payments, except for any liability, loss or damage resulting from willful misfeasance, bad faith or gross on the Adviser's part or by reason of disregard of the Adviser's duties under this Agreement. It is hereby understood and acknowledged by the Trust that the value of the investments made for the Fund may increase as well as decrease and are not guaranteed by the Adviser. It is further understood and acknowledged by the Trust that investment decisions made on behalf of the Fund by the Adviser are subject to a variety of factors which may affect the values and income generated by the Fund's portfolio securities, including general economic conditions, market factors and currency exchange rates, and that investment decisions made by the Adviser will not always be profitable or prove to have been correct. (11) It is understood that the services of Adviser are not deemed to be exclusive, and nothing in this Agreement shall prevent the Adviser, or any affiliate thereof, from providing similar services to other investment companies and other clients, including clients which may invest in the same types of securities as the Fund, or, in providing such services, from using information furnished by others. When the Adviser determines to buy or sell the same security for the Fund that the Adviser or one or more of its affiliates has selected for clients of the Adviser or its affiliates, the orders for all such security transactions shall be placed for execution by methods determined by the Adviser, with approval by the Trust's Board of Trustees, to be impartial and fair. (12) This Agreement shall be construed in accordance with the laws of the Commonwealth of Massachusetts, provided that nothing herein shall be construed as being inconsistent with applicable Federal and state securities laws and any rules, regulations and orders thereunder. (13) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable. (14) Nothing herein shall be construed as constituting the Adviser an agent of the Trust. (15) It is understood and expressly stipulated that neither the holders of shares of the Fund nor any Trustee, officer, agent or employee of the Trust shall be personally liable hereunder, nor shall any resort be had to other private property for the satisfaction of any claim or obligation hereunder, but the Trust only shall be liable. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers and their respective corporate seals to be hereunto duly affixed and attested. FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST on behalf of Templeton Developing Markets Equity Fund By:_______________________________ TEMPLETON ASSET MANAGEMENT LTD. By:_________________________________ EXHIBIT V INVESTMENT ADVISORY AGREEMENT AGREEMENT dated as of the __ day of _________, 2000, between FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST, a Massachusetts business trust (the "Trust"), on behalf of Templeton International Equity Fund, a series of the Trust (the "Fund"), and TEMPLETON GLOBAL ADVISORS LIMITED, a corporation organized under the laws of the Bahamas (the "Adviser"). In consideration of the mutual agreements herein made, the Trust and the Adviser understand and agree as follows: (1) The Adviser agrees, during the life of this Agreement, to manage the investment and reinvestment of the Fund's assets consistent with the provisions of the Declaration of Trust of the Trust and the investment policies adopted and declared by the Trust's Board of Trustees. In pursuance of the foregoing, the Adviser shall make all determinations with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, and shall take all such steps as may be necessary to implement those determinations. It is understood that all acts of the Adviser in performing this Agreement are performed by it outside the United States. (2) The Adviser is not required to furnish any personnel, overhead items or facilities for the Fund, including trading desk facilities or daily pricing of the Fund's portfolio. (3) The Adviser shall be responsible for selecting members of securities exchanges, brokers and dealers (such members, brokers and dealers being hereinafter referred to as "brokers") for the execution of the Fund's portfolio transactions consistent with the Fund's brokerage policies and, when applicable, the negotiation of commissions in connection therewith. All decisions and placements shall be made in accordance with the following principles: A. Purchase and sale orders will usually be placed with brokers which are selected by the Adviser as able to achieve "best execution" of such orders. "Best execution" shall mean prompt and reliable execution at the most favorable security price, taking into account the other provisions hereinafter set forth. The determination of what may constitute best execution and price in the execution of a securities transaction by a broker involves a number of considerations, including, without limitation, the overall direct net economic result to the Fund (involving both price paid or received and any commissions and other costs paid), the efficiency with which the transaction is effected, the ability to effect the transaction at all where a large block is involved, availability of the broker to stand ready to execute possibly difficult transactions in the future, and the financial strength and stability of the broker. Such considerations are judgmental and are weighed by the Adviser in determining the overall reasonableness of brokerage commissions. B. In selecting brokers for portfolio transactions, the Adviser shall take into account its past experience as to brokers qualified to achieve "best execution," including brokers who specialize in any foreign securities held by the Fund. C. The Adviser is authorized to allocate brokerage business to brokers who have provided brokerage and research services, as such services are defined in Section 28(e) of the Securities Exchange Act of 1934 (the "1934 Act"), for the Fund and/or other accounts, if any, for which the Adviser exercises investment discretion (as defined in Section 3(a)(35) of the 1934 Act) and, as to transactions for which fixed minimum commission rates are not applicable, to cause the Fund to pay a commission for effecting a securities transaction in excess of the amount another broker would have charged for effecting that transaction, if the Adviser determines in good faith that such amount of commission is reasonable in relation to the value of the brokerage and research services provided by such broker, viewed in terms of either that particular transaction or the Adviser's overall responsibilities with respect to the Trust and the other accounts, if any, as to which it exercises investment discretion. In reaching such determination, the Adviser will not be required to place or attempt to place a specific dollar value on the research or execution services of a broker or on the portion of any commission reflecting either of said services. In demonstrating that such determinations were made in good faith, the Adviser shall be prepared to show that all commissions were allocated and paid for purposes contemplated by the Trust's brokerage policy; that the research services provide lawful and appropriate assistance to the Adviser in the performance of its investment decision-making responsibilities; and that the commissions paid were within a reasonable range. Whether commissions were within a reasonable range shall be based on any available information as to the level of commission known to be charged by other brokers on comparable transactions, but there shall be taken into account the Trust's policies that (i) obtaining a low commission is deemed secondary to obtaining a favorable securities price, since it is recognized that usually it is more beneficial to the Fund to obtain a favorable price than to pay the lowest commission; and (ii) the quality, comprehensiveness and frequency of research studies that are provided for the Adviser are useful to the Adviser in performing its advisory services under this Agreement. Research services provided by brokers to the Adviser are considered to be in addition to, and not in lieu of, services required to be performed by the Adviser under this Agreement. Research furnished by brokers through which the Fund effects securities transactions may be used by the Adviser for any of its accounts, and not all research may be used by the Adviser for the Fund. When execution of portfolio transactions is allocated to brokers trading on exchanges with fixed brokerage commission rates, account may be taken of various services provided by the broker. D. Purchases and sales of portfolio securities within the United States other than on a securities exchange shall be executed with primary market makers acting as principal, except where, in the judgment of the Adviser, better prices and execution may be obtained on a commission basis or from other sources. E. Sales of the Fund's shares (which shall be deemed to include also shares of other registered investment companies which have either the same adviser or an investment adviser affiliated with the Adviser) by a broker are one factor among others to be taken into account in deciding to allocate portfolio transactions (including agency transactions, principal transactions, purchases in underwritings or tenders in response to tender offers) for the account of the Fund to that broker; provided that the broker shall furnish "best execution," as defined in subparagraph A above, and that such allocation shall be within the scope of the Trust's policies as stated above; provided further, that in every allocation made to a broker in which the sale of Fund shares is taken into account, there shall be no increase in the amount of the commissions or other compensation paid to such broker beyond a reasonable commission or other compensation determined, as set forth in subparagraph C above, on the basis of best execution alone or best execution plus research services, without taking account of or placing any value upon such sale of the Fund's shares. (4) In addition to the investment management services provided pursuant to paragraph (1) above, the Adviser agrees, during the life of this Agreement, to furnish or provide for the Fund, at the Adviser's expenses, such administrative services as are required to facilitate investment in the shares of the Fund by an insurance company, on behalf of one or more of its separate accounts, pursuant to a fund participation agreement among the Fund, Franklin Templeton Distributors, Inc. and such insurance company. Such services may include, but are not limited to, the following: maintaining books and records required by applicable state or federal laws; assisting in processing purchase and redemption transactions; transmitting to the Fund periodic reports necessary to enable the Fund to comply with applicable laws; processing Fund distributions; answering questions and handling correspondence from contractowners about their accounts; providing information about the Fund; acting as sole shareholder of record and nominee for shareholders; and similar administrative, recordkeeping, and contractowner services. (5) The Fund agrees to pay to the Adviser a monthly fee in dollars based on a percentage of the Fund's average daily net assets, payable at the end of each calendar month. This fee shall be calculated daily at the following annual rates: 0.75% of the value of the Fund's net assets up to an including $200 million; 0.675% of the value of the Fund's net assets over $200 million up to and including $1.3 billion; 0.60% of the value of the Fund's net assets over $1.3 billion. The Adviser may waive in advance all or a portion of its fee provided for hereunder and such waiver will be treated as a reduction in purchase price of its services. The Adviser shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee or any limitation of the Fund's expenses, as if such waiver or limitation were fully set forth herein. Notwithstanding the foregoing, if the total expenses of the Fund (including the fee to the Adviser) in any fiscal year of the Trust exceed any expense limitation imposed by applicable State law, the Adviser shall reimburse the Fund for such excess in the manner and to the extent required by applicable State law. The term "total expenses," as used in this paragraph, does not include interest, taxes, litigation expenses, distribution expenses, brokerage commissions or other costs of acquiring or disposing of any of the Fund's portfolio securities or any costs or expenses incurred or arising other than in the ordinary and necessary course of the Fund's business. When the accrued amount of such expenses exceeds this limit, the monthly payment of the Adviser's fee will be reduced by the amount of such excess, subject to adjustment month by month during the balance of the Trust's fiscal year if accrued expenses thereafter fall below the limit. (6) This Agreement shall become effective on May 1, 2000 and shall continue in effect until April 30, 2002. If not sooner terminated, this Agreement shall continue in effect for successive periods of 12 months each thereafter, provided that each such continuance shall be specifically approved annually by the vote of a majority of the Trust's Board of Trustees who are not parties to this Agreement or "interested persons" (as defined in Investment Company Act of 1940 (the "1940 Act")) of any such party, cast in person at a meeting called for the purpose of voting on such approval and either the vote of (a) a majority of the outstanding voting securities of the Fund, as defined in the 1940 Act, or (b) a majority of the Trust's Board of Trustees as a whole. (7) Notwithstanding the foregoing, this Agreement may be terminated by either party at any time, without the payment of any penalty, on sixty (60) days' written notice to the other party, provided that termination by the Trust is approved by vote of a majority of the Trust's Board of Trustees in office at the time or by vote of a majority of the outstanding voting securities of the Fund (as defined by the 1940 Act). (8) This Agreement will terminate automatically and immediately in the event of its assignment (as defined in the 1940 Act). (9) In the event this Agreement is terminated and the Adviser no longer acts as Adviser to the Fund, the Adviser reserves the right to withdraw from the Fund the use of the name "Templeton" or any name misleadingly implying a continuing relationship between the Fund and the Adviser or any of its affiliates. (10) Except as may otherwise be provided by the 1940 Act, neither the Adviser nor its officers, directors, employees or agents shall be subject to any liability for any error of judgment, mistake of law, or any loss arising out of any investment or other act or omission in the performance by the Adviser of its duties under the Agreement or for any loss or damage resulting from the imposition by any government of exchange control restrictions which might affect the liquidity of the Trust's assets, or from acts or omissions of custodians, or securities depositories, or from any war or political act of 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. (13) If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby and, to this extent, the provisions of this Agreement shall be deemed to be severable. (14) Nothing herein shall be construed as constituting the Adviser an agent of the Trust. (15) It is understood and expressly stipulated that neither the holders of shares of the Fund nor any Trustee, officer, agent or employee of the Trust shall be personally liable hereunder, nor shall any resort be had to other private property for the satisfaction of any claim or obligation hereunder, but the Trust only shall be liable. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their duly authorized officers and their respective corporate seals to be hereunto duly affixed and attested. FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST on behalf of Templeton International Equity Fund By:_______________________________ TEMPLETON GLOBAL ADVISORS LIMITED By:_________________________________ EXHIBIT VI ADDITIONAL INFORMATION ON THE INVESTMENT ADVISERS AND CERTAIN PORTFOLIO MANAGERS THE INVESTMENT ADVISERS The funds' investment managers and their affiliates manage over $218 billion in assets. Franklin Templeton is one of the largest mutual fund organizations in the United States, and offers money management expertise spanning a variety of investment objectives. In 1992, Franklin, recognized as a leader in managing domestic mutual funds, joined forces with Templeton, a pioneer in international investing. The Mutual Advisers team, known for its value-driven approach to domestic equity investing, became part of the organization four years later. o Franklin Advisers, Inc., 777 Mariners Island Blvd., P.O. Box 7777, San Mateo, California, 94403-7777. o Franklin Mutual Advisers, LLC, 51 John F. Kennedy Parkway, Short Hills, New Jersey, 07078. o Templeton Asset Management Ltd., 7 Temasek Blvd. #38-03, Suntec Tower One, Singapore, 038987. o Templeton Global Advisors Limited, Lyford Cay Nassau, N.P., Bahamas. o Templeton Investment Counsel, Inc., Broward Financial Centre, Suite 2100, Fort Lauderdale, Florida, 33394. FRANKLIN ADVISERS, INC. Franklin Advisers, Inc. ("FAV") is a California corporation formed on October 31, 1985 and is based in San Mateo, California. FAV is registered as an investment adviser with the SEC under the Investment Advisers Act of 1940. It is also registered as an investment adviser in the State of California. FAV is a wholly owned subsidiary of Franklin Resources, Inc. ("Resources"), 777 Mariners Island Blvd., San Mateo, California 94404-1585. Resources is primarily engaged, through various subsidiaries, in providing investment management, share distribution, transfer agent and administrative services to a family of investment companies. Resources is an NYSE, Inc. listed holding company (NYSE: BEN). Resources principal shareholders are Charles B. Johnson and Rupert H. Johnson, both principal officers and trustees of the Trust, who own approximately 20% and 16%, respectively, of Resources outstanding shares. FAV provides investment advisory and portfolio management services to most of the funds in the Franklin Group of Funds. The principal executive officers of FAV are: NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS ----------------------------------------------------------------- Charles B. Johnson Director and 777 Mariners Island Chairman of the Board Executive Manager Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Rupert H. Johnson, Jr. 777 Mariners Island Director and President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- R. Martin Wiskemann Director and Senior 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Harmon E. Burns 777 Mariners Island Executive Vice Attorney Blvd. President San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Martin L. Flanagan 777 Mariners Island Executive Vice Accountant Blvd. President San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Deborah R. Gatzek Executive Vice 777 Mariners Island President Attorney Blvd. and Assistant San Mateo, Secretary California ----------------------------------------------------------------- ----------------------------------------------------------------- Edward B. Jamieson 777 Mariners Island Executive Vice Securities Analyst Blvd. President San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Thomas J. Kenny 777 Mariners Island Executive Vice Securities Analyst Blvd. President San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Jack Lemein 777 Mariners Island Executive Vice Securities Analyst Blvd. President San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Sheila Amoroso 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Matt Avery 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Roger Bayston 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- David Capurro 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Rafael Costas 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Frank M. Felicelli 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Sally Haff 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Conrad Herrmann 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Chauncey Lufkin 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Christopher Molumphy 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Thomas Runkel 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Bernard Schroer 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Thomas Walsh 777 Mariners Island Senior Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Benjamin Barber 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Doug Barton 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Catherine Bowman 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Kenneth Broad 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Molly Butler 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Canyon Chan 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Tony Coffey 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Lisa Costa 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Fred Fromm 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Shan Green 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- John Hopp 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Steven Hiatt 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Jeff Holbrook 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Charles E. Johnson 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Gregory E. Johnson 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Ian Link 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Michael McCarthy 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Evan McCulloch 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Thomas Orphanos 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Mark Orsi 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Scott Owens 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Serena Perin 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Ed Perks 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- John Pomeroy 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- David Rath 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Betsy Schwab 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Kent Shepherd 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Richard Smyth 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Theresa Spath 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Eric Takaha 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Kurt Von Emster 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Glenn Voyles 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- John Wiley 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Jeffrey Wilson 205 9th Street N. Vice President Securities Analyst St. Petersburg, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Stella Wong 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Robert Yolland 777 Mariners Island Vice President Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Charles R. Sims 777 Mariners Island Vice President Accountant Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Kenneth A. Lewis 777 Mariners Island Vice President Accountant Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Leslie M. Kratter 777 Mariners Island Secretary Attorney Blvd. San Mateo, California ----------------------------------------------------------------- Some of trustees or officers of the VIP Trust (whose addresses and biographical information are included in the VIP Trust's statement of additional information) also serve as directors or officers of FAV. These trustees and officers are listed below: Charles B. Johnson Charles E. Johnson Rupert H. Johnson, Jr. Harmon E. Burns Martin L. Flanagan Deborah R. Gatzek Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers and the father and uncle, respectively, of Charles E. Johnson. TEMPLETON ASSET MANAGEMENT LTD. Templeton Asset Management Ltd. ("TAML") is a corporation organized under the laws of and based in Singapore. It is registered as an investment adviser in Singapore and Hong Kong. It is also registered with the SEC under the Advisers Act. TAML is a wholly-owned subsidiary of Templeton International Inc., which is a subsidiary of Templeton Worldwide, Inc., which, in turn, is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), 777 Mariners Island Blvd., San Mateo, California 94404-1585. Resources is primarily engaged, through various subsidiaries, in providing investment management, share distribution, transfer agent and administrative services to a family of investment companies. Resources is an NYSE, Inc. listed holding company (NYSE: BEN). Resources principal shareholders are Charles B. Johnson and Rupert H. Johnson, both principal officers and trustees of the Trust, who own approximately 20% and 16%, respectively, of Resources outstanding shares. TAML provides investment advisory and related services to certain Templeton funds and portfolios. TAML is principally an investment adviser to emerging market equity portfolios. There are no officers of corporations per se in Singapore, only directors and managing directors. They act in a capacity of an officer for U.S. purposes, such actions constituting the actions of an officer. DIRECTORS PRINCIPAL OCCUPATION ADDRESS ----------------------------------------------------------------- Martin L. Flanagan Accountant 777 Mariners Island Director Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Mark G. Holowesko Securities Analyst Box N-7759 Lyford Director Cay Nassau, Bahamas ----------------------------------------------------------------- ----------------------------------------------------------------- Charles E. Johnson 777 Mariners Island Director Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Lim Chong Boon 7 Temasek Blvd., (Dennis) Securities Analyst Suntec Tower One Director Singapore ----------------------------------------------------------------- ----------------------------------------------------------------- Gregory E. McGowan 500 East Broward Director Attorney Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- J. Mark Mobius 7 Temasek Blvd., Managing Director Suntec Tower One Securities Analyst Singapore ----------------------------------------------------------------- ----------------------------------------------------------------- Murray L. Simpson 2701 Shui On Center Director Attorney Hon Kong, China ----------------------------------------------------------------- ----------------------------------------------------------------- Wai Kwok (Tom) 7 Temasek Blvd., Director Securities Analyst Suntec Tower One Singapore ----------------------------------------------------------------- Some of trustees or officers of the VIP Trust (whose addresses and biographical information are included in the VIP Trust's statement of additional information) also serve as directors of TAML. These trustees and officers are listed below: Marty L. Flanagan Charles E. Johnson TEMPLETON GLOBAL ADVISORS LIMITED. Templeton Global Advisors Limited ("TGAL") is a Bahamian corporation located in Nassau, Bahamas. TGAL is registered as an investment adviser with the SEC under the Advisers Act. . TGAL is a wholly owned subsidiary of T.G.H. Holdings, Ltd., which is a subsidiary of Templeton International, Inc., which, in turn, is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), 777 Mariners Island Blvd., San Mateo, California 94404-1585. Resources is primarily engaged, through various subsidiaries, in providing investment management, share distribution, transfer agent and administrative services to a family of investment companies. Resources is an NYSE, Inc. listed holding company (NYSE: BEN). Resources principal shareholders are Charles B. Johnson and Rupert H. Johnson, both principal officers and trustees of the Trust, who own approximately 20% and 16%, respectively, of Resources outstanding shares. TGAL provides investment advisory and portfolio management services to certain of the Templeton funds and separate accounts. TGAL is the principal investment adviser to the Templeton funds. The principal executive officers of TGAL are: NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS ----------------------------------------------------------------- Mark G. Holowesko Box N-7759 Lyford Director and President Securities Analyst Cay Nassau, Bahamas ----------------------------------------------------------------- ----------------------------------------------------------------- Martin L. Flanagan Director and 777 Mariners Island Executive Vice Accountant Blvd. President San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- J. Mark Mobius 7 Temasek Blvd., Director and Suntec Tower One Executive Vice Securities Analyst Singapore, President ----------------------------------------------------------------- ----------------------------------------------------------------- Charles B. Johnson 777 Mariners Island Director Executive Manager Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Charles E. Johnson 777 Mariners Island Director Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Jeffrey A. Everett Box N-7759 Lyford Executive Vice Securities Analyst Cay President Nassau, Bahamas ----------------------------------------------------------------- ----------------------------------------------------------------- Gregory E. McGowan Executive Vice 500 East Broward President Attorney Blvd. and Secretary Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Richard Sean Box N-7759 Lyford Farrington Securities Analyst Cay Senior Vice President Nassau, Bahamas ----------------------------------------------------------------- ----------------------------------------------------------------- Timothy Brown Box N-7759 Lyford Vice President and Accountant Cay Treasurer Nassau, Bahamas ----------------------------------------------------------------- ----------------------------------------------------------------- Deborah R. Gatzek 777 Mariners Island Vice President Attorney Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Cindy Sweeting Box N-7759 Lyford Vice President Securities Analyst Cay Nassau, Bahamas ----------------------------------------------------------------- ----------------------------------------------------------------- Dale Winner Box N-7759 Lyford Vice President Securities Analyst Cay Nassau, Bahamas ----------------------------------------------------------------- Some of trustees or officers of the VIP Trust (whose addresses and biographical information are included in the VIP Trust's statement of additional information) also serve as directors or officers of TGAL. These trustees and officers are listed below: Marty L. Flanagan Charles B. Johnson Charles E. Johnson Deborah R. Gatzek Note: Charles B. Johnson is the father of Charles E. Johnson TEMPLETON INVESTMENT COUNSEL, INC. Templeton Investment Counsel, Inc. ("TICI") is a Florida corporation formed in October 1979 and whose address is 500 East Broward Boulevard, Suite 2100, Fort Lauderdale, Florida. TICI is a wholly owned subsidiary of Templeton Global Investors, Inc., which is a subsidiary of Templeton Worldwide, Inc., which, in turn, is a wholly-owned subsidiary of Franklin Resources, Inc. ("Resources"), 777 Mariners Island Blvd., San Mateo, California 94404-1585. Resources is primarily engaged, through various subsidiaries, in providing investment management, share distribution, transfer agent and administrative services to a family of investment companies. Resources is an NYSE, Inc. listed holding company (NYSE: BEN). Resources principal shareholders are Charles B. Johnson and Rupert H. Johnson, both principal officers and trustees of the Trust, who own approximately 20% and 16%, respectively, of Resources outstanding shares. TICI is the principal investment adviser to managed and institutional accounts. In addition, it provides portfolio management services to certain of the Templeton funds and sub-advisory services to certain of the Franklin funds. The principal executive officers of TICI are: NAME AND OFFICE PRINCIPAL OCCUPATION ADDRESS ----------------------------------------------------------------- Charles E. Johnson 777 Mariners Island Director and Chairman Securities Analyst Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Donald F. Reed 500 East Broward President and Director Securities Analyst Blvd. Ft. Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Martin L. Flanagan Director, Executive Vice President and 777 Mariners Island Chief Operating Accountant Blvd. Officer San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Howard Joseph Leonard P.O. Box 472867 Executive Vice Securities Analyst Charlotte, NC President ----------------------------------------------------------------- ----------------------------------------------------------------- Gregory E. McGowan Director and 500 East Broward Executive Vice Attorney Blvd. President Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Gary Paul Motyl Director and 500 East Broward Executive Vice Securities Analyst Blvd. President Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- W. Denman Zirkle 500 East Broward Executive Vice Sales & Client Blvd. President Services Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Niels E. Andersen Director and Senior Vice President of 500 East Broward Institutional Marketing Blvd. Business Development Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Mark R. Beveridge 500 East Broward Senior Vice President Securities Analyst Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Gary R. Clemons 500 East Broward Senior Vice President Securities Analyst Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- William T. Howard, Jr. 500 East Broward Senior Vice President Securities Analyst Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Charles Reed Hutchens 500 East Broward Senior Vice President Blvd. Client Services Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Elizabeth M. Knoblock Vice President, 500 East Broward General Counsel and Attorney Blvd. Secretary Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Peter A. Nori 500 East Broward Senior Vice President Securities Analyst Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Simon Rudolph 500 East Broward Senior Vice President Securities Analyst Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Catherine B. Alsop 500 East Broward Vice President Securities Analyst Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Heidi C. Andersen 500 East Broward Vice President Securities Analyst Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Peter D. Anderson 500 East Broward Vice President Securities Analyst Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Jean M. Cabot 500 East Broward President Client Services Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Michael J. Corcoran 777 Mariners Island Vice President and Accountant Blvd. Controller San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Cristina Elias 500 East Broward Vice President Client Services Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Norman R. Frisbie 777 Mariners Island Vice President Sales Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Deborah R. Gatzek 777 Mariners Island Vice President Attorney Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Douglas J. Gooding 500 East Broward Vice President Client Services Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Robert G. Paulson 500 East Broward Vice President Sales Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- John B. Rovick 500 East Broward Vice President Marketing Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Sandra Schoren-Testa 500 East Broward Vice President Client Services Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Edgerton Scott 500 East Broward Vice President Securities Analyst Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Catherine N. Triantis 500 East Broward Vice President Sales Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Ann Margaret Ulrich 500 East Broward Vice President Client Services Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- ----------------------------------------------------------------- Jeanne S. F. Wong 777 Mariners Island Vice President Client Services Blvd. San Mateo, California ----------------------------------------------------------------- ----------------------------------------------------------------- Guang Yang 500 East Broward Vice President Securities Analyst Blvd. Fort Lauderdale, Florida ----------------------------------------------------------------- Some of trustees or officers of the VIP Trust (whose addresses and biographical information are included in the VIP Trust's statement of additional information) also serve as directors or officers of TICI. These trustees and officers are listed below: Charles B. Johnson Marty L. Flanagan PORTFOLIO MANAGEMENT TEAM In general, the portfolio management team is the same between corresponding funds, except in three pairs. The three pairs are: (1) the TVP Templeton Asset Allocation Fund and the VIP Templeton Global Asset Allocation Fund; (2) the TVP Templeton International Fund and the VIP Templeton International Equity Fund; and (3) the TVP Templeton Stock Fund and the TVP Templeton Global Growth Fund. ----------------------------------------------------------------- TVP TEMPLETON VIP TEMPLETON ASSET GLOBAL ASSET COMBINED FUND ALLOCATION FUND ALLOCATION FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Portfolio Gary Clemons Dale Winner Gary Clemons Manager ----------------------------------------------------------------- ----------------------------------------------------------------- Other Team Peter Nori Mark Holowesko Peter Nori Members Tucker Scott A team of Tucker Scott A team of Templeton A team of Templeton Global Bond Templeton Global Bond Managers Global Bond Managers Managers ----------------------------------------------------------------- ----------------------------------------------------------------- TVP TEMPLETON VIP TEMPLETON INTERNATIONAL INTERNATIONAL FUND EQUITY FUND COMBINED FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Portfolio Peter Nori Howard Leonard Mark Holowesko Manager ----------------------------------------------------------------- ----------------------------------------------------------------- Other Team Gary Motyl Mark Beveridge Jeffrey Everett Members Heidi Anderson Christopher A. Maura ----------------------------------------------------------------- ----------------------------------------------------------------- TVP TEMPLETON VIP TEMPLETON STOCK FUND GLOBAL GROWTH COMBINED FUND FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Portfolio Mark Beveridge Sean Farrington Mark Holowesko Manager ----------------------------------------------------------------- ----------------------------------------------------------------- Other Team William Howard Jeffrey Everett Jeffrey Everett Members Edwin Lugo II ----------------------------------------------------------------- Information about each of these persons is set forth below. HEIDI S. ANDERSEN, CFA Ms. Andersen is a Vice President of TICI and has been a manager of the TVP Templeton International Fund since 1998. Ms. Andersen has been with the Franklin Templeton Group since 1995. MARK R. BEVERIDGE, CFA Mr. Beveridge is a Senior Vice President of TICI and has been a manager of the VIP Templeton International Equity Fund since 1994 and of the TVP Templeton Stock Fund since 1995. Mr. Beveridge has been with the Franklin Templeton Group since 1985. GARY CLEMONS Mr. Clemens is a Senior Vice President of TICI and has managed the equity portion of the TVP Templeton Asset Allocation Fund since 1995. Mr. Clemons has been with the Franklin Templeton Group since 1990. JEFFREY A. EVERETT, CFA Mr. Everett is an Executive Vice President of TGAL and has been a manager of the VIP Templeton Global Growth Fund since its inception in 1994 and will be a manager of the VIP Templeton International Equity Fund effective May 1, 2000. Mr. Everett has been with the Franklin Templeton Group since 1989. RICHARD SEAN FARRINGTON, CFA Mr. Farrington is a Senior Vice President of TGAL and has been a manager of the VIP Global Growth Fund since 1995. Mr. Farrington has been with the Franklin Templeton Group since 1991. MARK G. HOLOWESKO, CFA Mr. Holowesko is President of TGAL and has been a manager of the VIP Global Templeton Asset Allocation since 1999 and will be the manager of the VIP Templeton International Equity Fund and the VIP Templeton Global Growth Fund, effective May 1, 2000. Mr. Holowesko has been with the Franklin Templeton Group since 1985. WILLIAM T. HOWARD, JR., CFA Mr. Howard is a Senior Vice President of TICI and has been a manager of the TVP Stock Fund since 1996. Mr. Howard has been with the Franklin Templeton Group since 1993. HOWARD J. LEONARD, CFA Mr. Leonard is a Executive Vice President of TICI and has been a manager of the VIP Templeton International Equity Fund since 1997. Mr. Leonard has been with the Franklin Templeton Group since 1989. EDWIN LUGO II Mr. Lugo is a portfolio manager of TICI and has been a manager of the TVP Templeton Stock Fund since 1999. Mr. Lugo has been with the Franklin Templeton Group since 1996. Prior to joining the Franklin Templeton Group, he worked at the New Boston Group. CHRISTOPHER A. MAURA Mr. Maura is a portfolio manager of TGAL and will be the manager of VIP Templeton International Equity Fund effective May 1, 2000. He joined the Franklin Templeton Group in 1993. GARY P. MOTYL, CFA Mr. Motyl is a Director and a Executive Vice President of TICI and has been a manager of the TVP Templeton International Fund since 1995. Mr. Motyl has been with the Franklin Templeton Group since 1981. PETER A. NORI, CFA Mr. Nori is a Senior Vice President of TICI and has managed the equity portion of the TVP Asset Allocation Fund since 1996 and has been a manager of the TVP Templeton International Fund since 1996. Mr. Nori has been with the Franklin Templeton Group since 1987. TUCKER SCOTT, CFA Mr. Scott is a Vice President of TICI and has been a manager of the TVP Asset Allocation Fund since 1998 and has been with the Franklin Templeton Group since 1996. Prior to joining the Franklin Templeton Group, Mr. Scott worked for Aeltus Investment Management. DALE WINNER, CFA Mr. Winner has been a manager of the VIP Templeton Global Asset Allocation Fund since 1997. Before joining Templeton Global Advisors Limited ("TGAL") and Franklin Templeton in 1995, he was a trust officer at J.P. Morgan. EXHIBIT VII TVP FUNDS AND VIP FUNDS COMPARATIVE FEE TABLE EXAMPLES The following examples are intended to help you compare the cost of investing in each fund and in the combined funds. These examples assume you invest $10,000 for the periods shown and then sell your shares at the end of those periods. These examples also assume your investment has a 5% return each year and the fund's operating expenses are BEFORE WAIVER, if applicable, and remain the same. THESE EXAMPLES DO NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUNDS ARE INVESTMENT OPTIONS. If they had been included, your costs would be higher. Although your actual costs may be higher or lower, based on these assumptions your costs would be: TVP FRANKLIN LARGE CAP GROWTH INVESTMENTS FUND VIP FRANKLIN LARGE CAP GROWTH SECURITIES FUND ----------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------------------------------------------------------------- ----------------------------------------------------------------- TVP FRANKLIN LARGE CAP GROWTH INVESTMENTS FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $294 $901 $1,533 $3,233 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares n/a n/a n/a n/a ----------------------------------------------------------------- ----------------------------------------------------------------- VIP FRANKLIN LARGE CAP GROWTH SECURITIES FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $79 $246 $428 $954 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $109 $340 $590 $1,221 ----------------------------------------------------------------- ----------------------------------------------------------------- COMBINED FUND PRO FORMA ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $79 $246 $428 $954 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $109 $340 $590 $1,221 ----------------------------------------------------------------- TVP FRANKLIN SMALL CAP INVESTMENTS FUND VIP FRANKLIN SMALL CAP FUND ----------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------------------------------------------------------------- ----------------------------------------------------------------- TVP FRANKLIN SMALL CAP INVESTMENTS FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $103 $323 $560 $1,240 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $129 $401 $694 $1,527 ----------------------------------------------------------------- ----------------------------------------------------------------- VIP FRANKLIN SMALL CAP FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $79 $246 $428 $954 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $104 $325 $563 $1,248 ----------------------------------------------------------------- ----------------------------------------------------------------- COMBINED FUND PRO FORMA ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $84 $262 $455 $1,014 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $109 $340 $590 $1,306 ----------------------------------------------------------------- TVP MUTUAL SHARES INVESTMENTS FUND VIP MUTUAL SHARES SECURITIES FUND ----------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------------------------------------------------------------- ----------------------------------------------------------------- TVP MUTUAL SHARES INVESTMENTS FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $290 $889 $1,513 $3,195 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $315 $963 $1,635 $3,430 ----------------------------------------------------------------- ----------------------------------------------------------------- VIP MUTUAL SHARES SECURITIES FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $79 $246 $428 $954 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $109 $340 $590 $1,221 ----------------------------------------------------------------- ----------------------------------------------------------------- COMBINED FUND PRO FORMA ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $79 $246 $428 $954 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $104 $325 $563 $1,248 ----------------------------------------------------------------- TVP TEMPLETON ASSET ALLOCATION FUND VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND ----------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------------------------------------------------------------- ----------------------------------------------------------------- TVP TEMPLETON ASSET ALLOCATION FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $80 $249 $433 $966 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $105 $328 $569 $1,259 ----------------------------------------------------------------- ----------------------------------------------------------------- VIP TEMPLETON GLOBAL ASSET ALLOCATION FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $86 $268 $466 $1,037 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $116 $362 $628 $1,302 ----------------------------------------------------------------- ----------------------------------------------------------------- COMBINED FUND PRO FORMA ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $81 $252 $439 $978 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $106 $331 $574 $1,271 ----------------------------------------------------------------- TVP TEMPLETON BOND FUND VIP TEMPLETON GLOBAL INCOME SECURITIES FUND ----------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------------------------------------------------------------- ----------------------------------------------------------------- TVP TEMPLETON BOND FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $75 $233 $406 $906 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $90 $281 $488 $1,084 ----------------------------------------------------------------- ----------------------------------------------------------------- VIP TEMPLETON GLOBAL INCOME SECURITIES FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $64 $202 $351 $786 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $95 $296 $515 $1,058 ----------------------------------------------------------------- ----------------------------------------------------------------- COMBINED FUND PRO FORMA ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $63 $199 $346 $774 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $89 $278 $482 $1,073 ----------------------------------------------------------------- TVP TEMPLETON DEVELOPING MARKETS FUND VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND ----------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------------------------------------------------------------- ----------------------------------------------------------------- TVP TEMPLETON DEVELOPING MARKETS FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $169 $523 $902 $1,965 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $194 $600 $1,032 $2,233 ----------------------------------------------------------------- ----------------------------------------------------------------- VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $144 $446 $771 $1,691 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $174 $539 $928 $1,940 ----------------------------------------------------------------- ----------------------------------------------------------------- COMBINED FUND PRO FORMA ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $159 $493 $850 $1,856 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $184 $569 $980 $2,127 ----------------------------------------------------------------- TVP TEMPLETON INTERNATIONAL FUND VIP TEMPLETON INTERNATIONAL EQUITY FUND ----------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------------------------------------------------------------- ----------------------------------------------------------------- TVP TEMPLETON INTERNATIONAL FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $88 $274 $477 $1,061 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $113 $353 $612 $1,352 ----------------------------------------------------------------- ----------------------------------------------------------------- VIP TEMPLETON INTERNATIONAL EQUITY FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $90 $281 $488 $1,084 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $120 $375 $649 $1,348 ----------------------------------------------------------------- ----------------------------------------------------------------- COMBINED FUND PRO FORMA ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $85 $265 $460 $1,025 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $110 $343 $595 $1,317 ----------------------------------------------------------------- TVP TEMPLETON STOCK FUND VIP TEMPLETON GLOBAL GROWTH FUND ----------------------------------------------------------------- 1 YEAR 3 YEARS 5 YEARS 10 YEARS ----------------------------------------------------------------- ----------------------------------------------------------------- TVP TEMPLETON STOCK FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $91 $284 $493 $1,096 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $116 $362 $628 $1,386 ----------------------------------------------------------------- ----------------------------------------------------------------- VIP TEMPLETON GLOBAL GROWTH FUND ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $90 $281 $488 $1,084 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $120 $375 $649 $1,348 ----------------------------------------------------------------- ----------------------------------------------------------------- COMBINED FUND PRO FORMA ----------------------------------------------------------------- ----------------------------------------------------------------- Class 1 Shares $87 $271 $471 $1,049 ----------------------------------------------------------------- ----------------------------------------------------------------- Class 2 Shares $112 $350 $606 $1,340 ----------------------------------------------------------------- TVP FRANKLIN S&P 500 INDEX FUND VIP FRANKLIN S&P 500 INDEX FUND --------------------------------------------- 1 YEAR 3 YEARS --------------------------------------------- --------------------------------------------- TVP FRANKLIN S&P 500 INDEX FUND --------------------------------------------- --------------------------------------------- Class 1 Shares $54 $170 --------------------------------------------- --------------------------------------------- Class 2 Shares $80 $249 --------------------------------------------- --------------------------------------------- Class 3 Shares $82 $255 --------------------------------------------- --------------------------------------------- VIP FRANKLIN S&P 500 INDEX FUND --------------------------------------------- --------------------------------------------- Class 1 Shares $0 $0 --------------------------------------------- --------------------------------------------- Class 2 Shares $0 $0 --------------------------------------------- --------------------------------------------- COMBINED FUND PRO FORMA --------------------------------------------- --------------------------------------------- Class 1 Shares $54 $170 --------------------------------------------- --------------------------------------------- Class 2 Shares $80 $249 --------------------------------------------- --------------------------------------------- Class 3 Shares $82 $255 --------------------------------------------- TVP FRANKLIN STRATEGIC INCOME INVESTMENTS FUND VIP FRANKLIN STRATEGIC INCOME SECURITIES FUND --------------------------------------------- 1 YEAR 3 YEARS --------------------------------------------- --------------------------------------------- TVP FRANKLIN STRATEGIC INCOME INVESTMENTS FUND --------------------------------------------- --------------------------------------------- Class 1 Shares $97 $303 --------------------------------------------- --------------------------------------------- Class 2 Shares $122 $381 --------------------------------------------- --------------------------------------------- VIP FRANKLIN STRATEGIC INCOME SECURITIES FUND --------------------------------------------- --------------------------------------------- Class 1 Shares $ $ --------------------------------------------- --------------------------------------------- Class 2 Shares $ $ --------------------------------------------- --------------------------------------------- COMBINED FUND PRO FORMA --------------------------------------------- --------------------------------------------- Class 1 Shares $97 $303 --------------------------------------------- --------------------------------------------- Class 2 Shares $122 $381 --------------------------------------------- Exhibit VIII(a) EXHIBIT VIII - TVP AND VIP FUNDS - CLASS 1 COMPARATIVE PERFORMANCE <TABLE> <CAPTION> AVERAGE ANNUAL RETURNS CUMULATIVE TOTAL RETUNS INCEP- 5- 10- INCEP- 5-YEARS 10-YEARS TION 1-YEAR YEARS YEAR TION INCEPTION TO TO TO TO TO TO TO FUNDS DATE SEPT. SEPT. SEPT. SEPT. SEPT. SEPT. SEPT. 99 99 99 99 99 99 99 ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> TVP Franklin Large Cap May-01-98 N/A N/A 21.98 37.81 N/A N/A 32.57 Growth Investments Fund* VIP Franklin Large Cap May-01-96 N/A N/A 17.44 28.32 N/A N/A 73.26 Growth Investments Fund** TVP Franklin Small Cap May-01-98 N/A N/A 10.65 51.70 N/A N/A 15.45 Investments Fund VIP Franklin Small Cap Nov-01-95 N/A N/A 17.45 52.16 N/A N/A 87.81 Investments Fund TVP Mutual Shares May-01-98 N/A N/A 0.47 16.92 N/A N/A 0.66 Investments Fund VIP Mutual Shares Securities Nov-08-96 N/A N/A 8.84 18.30 N/A N/A 27.75 Fund TVP Templeton Asset Aug-24-813.91 12.15 12.15 31.49 91.78 214.65 257.18 Allocation Fund VIP Templeton Global Asset May-01-95 N/A N/A 8.58 12.55 N/A N/A 43.85 Allocation Fund TVP Templeton Bond Fund Aug-24-885.62 6.31 6.34 -1.94 31.46 84.31 97.86 VIP Templeton Global Income Jan-24-895.52 6.19 6.37 -1.99 30.81 82.39 93.33 Securities Fund TVP Templeton Developing Mar-04-96 N/A N/A -11.60 54.49 N/A N/A -35.64 Markets Fund VIP Templeton Developing Mar-15-9-0.19 N/A 0.75 47.02 -0.94 N/A 4.21 Markets Equity Fund TVP Templeton International May-01-913.30 N/A 13.95 24.62 86.69 N/A 163.33 Fund VIP Templeton International Jan-27-910.77 N/A 10.88 21.93 66.73 N/A 120.90 Equity Fund TVP Templeton Stock Fund Aug-24-812.79 11.76 12.18 27.47 82.53 203.99 258.17 VIP Templeton Global Growth Mar-15-912.49 N/A 12.15 25.91 80.15 N/A 88.83 Fund * PREVIOUSLY NAMED THE FRANKLIN GROWTH INVESTMENTS FUND ** PREVIOUSLY NAMED THE CAPITAL GROWTH FUND The managers of the TVP Franklin Large Cap Growth Investments, Franklin Small Cap Investments, and Mutual Shares Investments Funds, are contractually obligated to limit class 1 expenses for these funds to 1.00% of total net assets through 1999. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. Total return figures are based on the inception of each TVP and VIP Fund, which may have started before the contract. Total return represents the cumulative or average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year by year results. </TABLE> EXHIBIT VIII(b) EXHIBIT VIII - TVP AND VIP FUNDS - CLASS 2 COMPARATIVE PERFORMANCE <TABLE> <CAPTION> AVERAGE ANNUAL RETURNS CUMULATIVE TOTAL RETUNS INCEP- 5- 10- INCEP- 5-YEARS 10-YEARS TION 1-YEAR YEARS YEAR TION INCEPTION TO TO TO TO TO TO TO FUNDS DATE SEPT. SEPT. SEPT. SEPT. SEPT. SEPT. SEPT. 99 99 99 99 99 99 99 ------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> <C> <C> TVP Franklin Large Cap May-01-98 N/A N/A N/A N/A N/A N/A N/A Growth Investments Fund* VIP Franklin Large Cap May-01-96 N/A N/A 17.34 27.94 N/A N/A 72.76 Growth Investments Fund** TVP Franklin Small Cap May-01-98 N/A N/A 10.43 51.27 N/A N/A 15.12 Investments Fund VIP Franklin Small Cap Nov-01-95 N/A N/A 17.38 52.16 N/A N/A 87.36 Investments Fund TVP Mutual Shares May-01-98 N/A N/A 0.31 16.66 N/A N/A 0.45 Investments Fund VIP Mutual Shares Securities Nov-08-96 N/A N/A 8.93 18.59 N/A N/A 28.07 Fund TVP Templeton Asset Aug-24-813.78 12.08 12.09 31.16 90.65 212.80 255.08 Allocation Fund VIP Templeton Global Asset May-01-95 N/A N/A 8.56 12.38 N/A N/A 43.77 Allocation Fund TVP Templeton Bond Fund Aug-24-885.60 6.30 6.33 -2.03 31.32 84.13 97.66 VIP Templeton Global Income Jan-24-895.47 6.26 6.43 -2.23 30.50 83.61 94.63 Securities Fund TVP Templeton Developing Mar-04-96 N/A N/A -11.72 54.09 N/A N/A -36.01 Markets Fund VIP Templeton Developing Mar-15-9-0.24 N/A 0.70 46.67 -1.17 N/A 3.96 Markets Equity Fund TVP Templeton International May-01-913.20 N/A 13.90 24.30 85.50 N/A 161.60 Fund VIP Templeton International Jan-27-910.69 N/A 10.83 21.49 66.18 N/A 120.17 Equity Fund TVP Templeton Stock Fund Aug-24-812.64 11.69 12.12 27.14 81.34 202.01 255.84 VIP Templeton Global Growth Mar-15-912.47 N/A 12.12 25.76 79.94 N/A 88.83 Fund </TABLE> * PREVIOUSLY NAMED THE FRANKLIN GROWTH INVESTMENTS FUND ** PREVIOUSLY NAMED THE CAPITAL GROWTH FUND Standardized performance for class 2 shares reflects a "blended" figure, combining: (a) for periods prior to class 2's inception on 5/1/97 for the TVP Funds and 1/6/99 for the VIP Funds, historical results of class 1 shares, and (b) for periods after 5/1/97 for the TVP Funds and 1/6/99 for the VIP Funds, class 2's results reflecting an additional 12b-1 fee expense, which also affects all future performance. The managers of the TVP Franklin Large Cap Growth Investments, Franklin Small Cap Investments, and Mutual Shares Investments Funds, are contractually obligated to limit class 2 expenses for these funds to 1.25% of total net assets through 1999. PERFORMANCE REFLECTS ALL FUND EXPENSES BUT DOES NOT INCLUDE ANY FEES OR SALES CHARGES IMPOSED BY THE VARIABLE INSURANCE CONTRACT FOR WHICH THE FUND IS AN INVESTMENT OPTION. IF THEY HAD BEEN INCLUDED, PERFORMANCE WOULD BE LOWER. Total return figures are based on the inception of each TVP and VIP Fund, which may have started before the contract. Total return represents the culmulative or average annual change in value, assuming reinvestment of dividends and capital gains. Average returns smooth out variations in returns, which can be significant; they are not the same as year by year results. Statement of Additional Information Special Meeting To be held on February 1, 2000 Templeton Variable Products Series Fund 500 East Broward Boulevard, Suite 2100 Fort Lauderdale, Florida 33394-3091 1-(800) 774-5001 Franklin Templeton Variable Insurance Products Trust 777 Mariners Island Boulevard San Mateo, California 94404 1-(800) 342-3863 This Statement of Additional Information is not a prospectus. A combined proxy statement/prospectus, dated December 9, 1999, relating to the above matter may be obtained from the office of Franklin Templeton Variable Insurance Products Trust, 777 Mariners Island Boulevard, San Mateo, California 99404, or by calling 1-(800) 342-3863. This Statement of Additional Information relates to, and should be read in conjunction with the combined proxy statement/prospectus and is incorporated by reference into that document (which means that this statement of additional Information is legally a part of the combined proxy statement/prospectus). Unless otherwise indicated, capitalized terms used herein and not otherwise defined have the same meanings as are given in the combined proxy statement/prospectus. The date of this statement of additional information is December 9, 1999. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION Information incorporated by reference Pro forma financial statements INFORMATION INCORPORATED BY REFERENCE Each of the following documents is incorporated by reference into this Statement of Additional Information: 1. Statement of Additional Information of the Franklin Templeton Variable Insurance Products Series Trust, dated May 1, 1999, as supplemented July 1, 1999. 2. Annual Report of Franklin Templeton Variable Insurance Products Series Trust for the period ended December 31, 1998. 3. Semi-annual Report of Franklin Templeton Variable Insurance Products Series Trust for the period ended June 30, 1999. 4. Statement of Additional Information of the Templeton Variable Products Series Fund, dated July 1, 1999. 5. Annual Report of Templeton Variable Products Series Fund for the period ended December 31, 1998. 6. Semi-annual Report of Templeton Variable Products Series Fund for the period ended June 30, 1999. PRO FORMA COMBINED FINANCIAL STATEMENTS The following unaudited pro forma financial information gives effect to the proposed reorganization, accounted as if the reorganization had occurred as of June 30, 1999. In addition, each pro forma combined statement has been prepared based upon the structure of the proposed fee and expense structure after the combination, as discussed in the combined proxy statement/prospectus. Pro forma financial information has not been prepared for the VIP's Franklin S&P 500 Index Fund and the Franklin Strategic Income Securities Fund, because such funds will be organized to facilitate the reorganization and have not commenced operations. Moreover, the expenses of these funds are not expected to be materially different from the expenses of the corresponding TVP funds, each of which commenced operations after June 30, 1999. The pro forma financial information should be read in conjunction with the historical financial statements and notes thereto of the Franklin Templeton Variable Insurance Products Series Trust and the Templeton Variable Products Series Fund which are incorporated by reference in this Statement of Additional Information. Each combination will be accounted for as a tax-free reorganization. >> << VIP Capital Growth Fund TVP Growth Investments Fund Pro forma combined Statement of Investments, June 30, 1999 (unaudited) <TABLE> <CAPTION> VIP Capital Growth VIP Capital Growth FundTVP Growth Investments Fund Pro Forma Combined ----------------------------------------------------------------------------------------------------- SHARES VALUE SHARES VALUE SHARES VALUE ----------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Common Stocks 88.2% Commercial Services 3.2% a Concord EFS Inc. 140,000 $5,923,750 200 $ 8,463 140,200$5,932,213 Equifax Inc. 100,000 3,568,750 200 7,138 100,200 3,575,888 a Robert Half International Inc. 75,000 1,950,000 200 5,200 75,200 1,955,200 ------------ ------------ ------------- 11,442,500 20,801 11,463,301 ------------ ------------ ------------- Consumer Durables 2.0% a Electronic Arts Inc. 50,000 2,712,500 -- -- 50,000 2,712,500 Mattel Inc. 160,000 4,230,000 200 5,288 160,200 4,235,288 ------------ ------------ ------------- 6,942,500 5,288 6,947,788 ------------ ------------ ------------- Consumer Non-Durables 4.9% Campbell Soup Co. 30,000 1,391,250 100 4,638 30,100 1,395,888 Coca-Cola Co. 17,000 1,062,500 -- -- 17,000 1,062,500 Hershey Foods Corp. 75,000 4,453,125 -- -- 75,000 4,453,125 Nike Inc., B 50,000 3,165,625 100 6,331 50,100 3,171,956 PepsiCo Inc. 30,000 1,160,625 -- -- 30,000 1,160,625 Philip Morris Cos. Inc. 85,000 3,415,938 200 8,038 85,200 3,423,976 Procter & Gamble Co. 30,000 2,677,500 -- -- 30,000 2,677,500 ------------ ------------ ------------ 17,326,563 19,007 17,345,570 ------------ ------------ ------------- Consumer Services 3.0% McDonald's Corp. 100,000 4,131,250 -- -- 100,000 4,131,250 a Mirage Resorts Inc. 110,000 1,842,500 300 5,025 110,300 1,847,525 Time Warner Inc. 64,000 4,704,000 -- -- 64,000 4,704,000 ------------ ------------ ---------- 10,677,750 5,025 10,682,775 ------------ ------------ ---------- Electronic Technology 18.5% a 3Com Corp. 85,000 2,268,438 100 2,669 85,100 2,271,107 aApplied Materials Inc. 55,000 4,063,125 100 7,388 55,100 4,070,513 a Cisco Systems Inc. 110,000 7,095,000 200 12,900 110,200 7,107,900 Compaq Computer Corp. 100,000 2,368,750 200 4,738 100,200 2,373,488 Hewlett-Packard Co. 65,000 6,532,500 100 10,050 65,100 6,542,550 Intel Corp. 50,000 2,975,000 200 11,900 50,200 2,986,900 International Business Machines 50,000 6,462,500 -- -- 50,000 6,462,500 Corp. a KLA-Tencor Corp. 50,000 3,243,750 -- -- 50,000 3,243,750 Linear Technology Corp. 65,000 4,371,250 -- -- 65,000 4,371,250 Lucent Technologies Inc. 30,000 2,023,125 50 3,372 30,050 2,026,497 Molex Inc. 63,437 2,347,169 200 7,400 63,637 2,354,569 Nortel Networks Corp. (Canada) -- -- 50 4,341 50 4,341 a Synopsys Inc. 70,000 3,863,125 -- -- 70,000 3,863,125 a Tellabs Inc. 24,000 1,621,500 50 3,378 24,050 1,624,878 a Uniphase Corp. 40,000 6,640,000 100 16,600 40,100 6,656,600 United Technologies Corp. 60,000 4,301,250 -- -- 60,000 4,301,250 a Xilinx Inc. 100,000 5,725,000 -- -- 100,000 5,725,000 ------------ ----------- ---------- 65,901,482 84,736 65,986,218 ------------ ------------ --------- Energy Minerals 1.9% aBarrett Resources Corp. 58,200 2,233,425 -- -- 58,200 2,233,425 Royal Dutch Petroleum Co., N.Y. shs., ADR (Netherlands) 75,000 4,518,750 100 6,025 75,100 4,524,775 ------------ ----------- 6,752,175 6,025 6,758,200 ------------ ------------ ---------------- Finance 9.6% American International 33,550 3,927,447 -- -- 33,550 3,927,447 Group Inc. Associates First Capital 70,00 3,101,875 200 8,863 70,200 3,110,738 Corp., A Bank One Corp. 85,00 5,062,813 -- -- 85,000 5,062,813 Charles Schwab Corp. 32,500 3,570,938 50 5,494 32,550 3,576,432 Citigroup Inc. 127,500 6,056,250 150 7,125 127,650 6,063,375 Fannie Mae 75,000 5,128,125 100 6,838 75,100 5,134,963 aGoldman Sachs Group Inc. 22,600 1,632,850 100 7,225 22,700 1,640,075 Providian Financial Corp. 38,000 3,553,000 -- -- 38,000 3,553,000 aTD Waterhouse Group Inc. 89,900 2,253,119 200 5,013 90,100 2,258,132 ------------ ------------ ---------------- 34,286,417 40,558 34,326,975 ------------ ------------ ---------------- Health Services 1.0% McKesson HBOC Inc. 59,000$1,895,375 50 $ 1,606 59,050$1,896,981 Omnicare Inc. 120,000 1,767,500 -- -- 120,000 1,767,500 ------------ ----------- ---------------- 3,662,875 1,606 3,664,481 ------------ ------------ ---------------- Health Technology 13.8% Abbott Laboratories 110,000 5,005,000 200 9,100 110,200 5,014,100 American Home Products Corp. 60,000 3,450,000 100 5,750 60,100 3,455,750 a Amgen Inc. 90,000 5,478,750 -- -- 90,000 5,478,750 Baxter International Inc. 70,000 4,243,750 100 6,063 70,100 4,249,813 aBoston Scientific Corp. 85,000 3,734,688 100 4,394 85,100 3,739,082 Bristol-Myers Squibb Co. 80,000 5,635,000 -- -- 80,000 5,635,000 a Centocor Inc. 21,000 979,125 -- -- 21,000 979,125 Eli Lilly & Co. 40,000 2,865,000 -- -- 40,000 2,865,000 a Guidant Corp. 5,000 257,188 100 5,144 5,100 262,332 Johnson & Johnson 55,000 5,390,000 100 9,800 55,100 5,399,800 Medtronic Inc. 50,000 3,893,750 -- -- 50,000 3,893,750 Merck & Co. Inc. 15,000 1,110,000 -- -- 15,000 1,110,000 Pfizer Inc. 22,000 2,414,500 -- -- 22,000 2,414,500 Schering-Plough Corp. 90,000 4,770,000 200 10,600 90,200 4,780,600 ------------ ------------ ---------------- 49,226,751 50,851 49,277,602 ------------ ------------ ---------------- Industrial Services 3.6% a AES Corp. 65,000 3,778,125 100 5,813 65,100 3,783,938 aRepublic Services Inc., A 164,500 4,071,375 200 4,950 164,700 4,076,325 Schlumberger Ltd. 75,000 4,776,563 -- -- 75,000 4,776,563 ------------ ------------ ---------------- 12,626,063 10,763 12,636,826 ------------ ------------ ---------------- Non-Energy Minerals 1.0% De Beers Consolidated Mines AG, ADR (South Africa) 150,000 3,581,250 200 4,775 150,200 3,586,025 ------------ ----------- ---------------- Process Industries 3.4% Air Products Chemicals Inc 70,000 2,817,500 200 8,050 70,200 2,825,550 Millipore Corp. 60,000 2,433,750 -- -- 60,000 2,433,750 a Owens-Illinois Inc. 60,000 1,961,250 -- -- 60,000 1,961,250 Pall Corp. 110,000 2,440,625 200 4,438 110,200 2,445,063 Sigma-Aldrich Corp. 70,000 2,410,625 -- -- 70,000 2,410,625 ----------- ------------ ---------------- 12,063,750 12,488 12,076,238 ------------ ------------ ---------------- Producer Manufacturing 1.8% Avery Dennison Corp. 30,000 1,811,250 -- -- 30,000 1,811,250 Emerson Electric Co. 40,000 2,515,000 100 6,288 40,100 2,521,288 Minnesota Mining & 25,000 2,173,438 -- -- 25,00 2,173,438 Manufacturing Co. ------------ ------------ ------------- 6,499,688 6,288 6,505,976 ------------ ------------ --------------- Retail Trade 4.5% Albertson's Inc. 85,000 4,382,813 100 5,156 85,100 4,387,969 Tiffany & Co. 60,000 5,790,000 100 9,650 60,100 5,799,650 Wal-Mart Stores Inc. 120,000 5,790,000 -- -- 120,000 5,790,000 ----------- ------------ ---------------- 15,962,813 14,806 15,977,619 ------------ ------------ ---------------- Technology Services 6.6% Automatic Data 150,000 6,600,000 200 8,800 Processing Inc. 150,200 6,608,800 aComputer Sciences Corp. 50,000 3,459,375 -- -- 50,000 3,459,375 a EMC Corp. 50,000 2,750,000 -- -- 50,000 2,750,000 a Microsoft Corp. 80,000 7,215,000 200 18,038 80,200 7,233,038 a Oracle Corp. 90,000 3,341,250 -- -- 90,000 3,341,250 ------------ ------------ ---------------- 23,365,625 26,838 23,392,463 ------------ ----------- ---------------- Telecommunications 2.4% GTE Corp. 50,000 3,787,500 -- -- 50,000 3,787,500 Vodafone AirTouch PLC, ADR (United Kingdom) 25,000 4,925,000 50 9,850 25,050 4,934,850 ------------ ------------ ---------------- 8,712,500 9,850 8,722,350 ------------ ------------ ---------------- Transportation 2.6% Air Express 150,000 $3,806,250 300 $ 7,613 International Corp. 150,300 $3,813,863 Expeditors International of Washington Inc. 120,000 3,270,000 200 5,450 120,200 3,275,450 Southwest Airlines Co. 70,000 2,178,750 -- -- 70,000 2,178,750 ------------ ------------- --------------- 9,255,000 13,063 9,268,063 ------------ ------------ ---------------- Utilities 4.4% CMS Energy Corp. 117,000 4,899,375 150 6,281 117,150 4,905,656 Dominion Resources Inc. 42,000 1,819,125 100 4,331 42,100 1,823,456 Enron Corp. 60,000 4,905,000 100 8,175 60,100 4,913,175 MCN Energy Group Inc. 90,100 1,869,570 150 3,113 90,250 1,872,683 PECO Energy Co. 50,000 2,093,750 100 4,189 50,100 2,097,939 ------------ ------------ ---------------- 15,586,820 26,089 15,612,909 ------------ ------------ ---------------- Total Long Term Investments (Cost $238,590,005) 313,872,522 358,857 314,231,379 ------------ ------------ ---------------- </TABLE> <TABLE> <CAPTION> PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT AMOUNT AMOUNT ----------- ----------- ----------- Repurchase Agreement 11.8% Joint Repurchase Agreement, 4.767%, 7/01/99, (Maturity Value $42,202,325) <S> <C> <C> <C> <C> <C> <C> <C> (Cost $42,196,737) $42,076,712 42,076,712 $120,025 120,025 $42,196,737 42,196,737 Barclays Capital Inc. (Maturity Value $5,323,400) Bear, Stearns & Co. Inc. (Maturity Value $4,697,118) Chase Securities Inc. (Maturity Value $869,368) CIBC Oppenheimer Corp. (Maturity Value $5,323,400) Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $3,757,695) Dresdner Kleinwort Benson, North America LLC (Maturity Value $3,757,695) Goldman, Sachs & Co. (Maturity Value $1,878,847) NationsBanc Montgomery Securities LLC (Maturity Value $3,757,695) Paine Webber Inc. (Maturity Value $3,757,695) Paribas Corp. (Maturity Value $3,756,011) Warburg Dillon Read LLC (Maturity Value $5,323,401) Collateralized by U.S. Treasury Bills & Notes ------------ ------------ ---------------- Total Investments (Cost $280,786,742) 100.0% 355,949,234 478,882 356,428,116 Other Assets, less (105,172) 9,707 (99,013)c Liabilities ------------ ------------ ---------------- Net Assets 100.0% $355,844,062 $488,589 $356,329,103 ------------ ------------ ---------------- </TABLE> Non-income producing. bInvestment is through participation in a joint account with other funds managed by the investment advisor. At 6/30/99, all repurchase agreements had been entered into on that date.>> See accompanying notes to pro forma combined financial statements.>> VIP Capital Growth Fund TVP Growth Investments Fund Financial Statements Pro forma combined Statements of Assets and Liabilities June 30, 1999 (unaudited)>> <TABLE> <CAPTION> VIP Capital VIP TVP Growth Fund Capital Growth Pro Forma Growth Fund Combined -------------------------------------------------------------------------------------------- Assets: Investments in securities: <S> <C> <C> <C> <C> Cost $238,302,547 $287,458$238,590,005 -------------------------------------------------------------------------------------------- Value 313,872,522 358,857 314,231,379 Repurchase agreements, at value and cost 42,076,712 120,025 42,196,737 Receivables: Investment securities sold 1,657,275 16,784 1,674,059 Capital shares sold 967,061 1,505 968,566 Dividends and interest 688,532 236 688,768 -------------------------------------------------------------------------------------------- Total assets 359,262,102 497,407 359,759,509 Liabilities: Payables: Investment securities purchased 2,374,950 5,644 2,380,594 Capital shares redeemed 811,754 -- 811,754 Affiliates 210,988 -- 210,988 Custodian fees 881 -- 881 Postage and mailing fees 10,911 -- 10,911 Other liabilities 8,556 3,174 11,730 -------------------------------------------------------------------------------------------- Total liabilities 3,418,040 8,818 3,426,858 Net assets, at value $355,844,062 $488,589$356,332,651 Class 1 : Net assets, at value $355,536,656 $488,589$356,025,245 -------------------------------------------------------------------------------------------- Shares outstanding** 19,689,451 37,220 19,716,505 Net asset value and offering price per share $18.06 $13.13 $18.06 Class 2 : Net assets, at value $ 307,406 -- $ 307,406 -------------------------------------------------------------------------------------------- Shares outstanding 17,055 -- 17,055 Net asset value and offering price per share $18.02 N/A $18.02 **See note 2 in the accompanying notes to pro forma combined financial statements. </TABLE> See accompanying notes to pro forma combined financial statements.>> VIP Capital Growth Fund TVP Growth Investments Fund Financial Statements (continued) Pro forma combined Statements of Operations for the six months ended June 30, 1999 (unaudited)>> <TABLE> <CAPTION> VIP Capital VIP TVP Growth Fund Capital Growth Pro Forma Pro Forma Growth FundInvestments Adjustments Combined -------------------------------------------------------------------------------------------- Investment income:1 <S> <C> <C> <C> <C> Dividends $ 1,166,373 $ 1,495 -- $ 1,167,868 Interest 1,245,140 1,997 -- 1,247,137 -------------------------------------------------------------------------------------------- Total investment income 2,411,513 3,492 -- 2,415,005 Expenses: Management fees 1,141,192 1,133 4722 1,142,797 Administrative fees -- 221 (221)3 -- Distribution fees - Class 2 198 -- (33) 165 Custodian fees 1,351 20 -- 1,371 Reports to shareholders 18,685 3,682 -- 22,367 Registration and filing fees -- 37 -- 37 Professional fees 4,961 261 -- 5,222 Trustees' fees and expenses 785 254 -- 1,039 Other 784 93 -- 877 ------------------------------------------------------------------------------------------- Total expenses 1,167,956 5,701 218 1,173,875 Expenses waived/paid by affiliate -- (3,849) 3,8494 -- ------------------------------------------------------------------------------------------- Net expenses 1,167,956 1,852 4,067 1,173,356 Net investment income 1,243,557 1,640 (4,067) 1,241,130 Realized and unrealized gains (losses): Net realized gain from: Investments 4,715,973 21,796 -- 4,737,769 Net unrealized appreciation on investments 30,659,765 38,157 --30,697,922 -------------------------------------------------------------------------------------------- Net realized and unrealized gain 35,375,738 59,953 -- 35,435,691 Net increase in net assets resulting $36,619,295 $61,593 -- $36,676,821 from operations </TABLE> 1Net of foreign taxes and fees of $13,674 for the VIP Capital Growth Fund. 2Pro Forma adjustment for difference in Management fee schedule. The Pro Forma Combined VIP Fund's Management fee will be .75% of the first $500 million. Fees are reduced on net assets over $500 million. 3Under an agreement with Advisers, FT Services will provide administrative services to the Pro Forma Combined VIP Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Pro Forma Combined VIP Fund. 4The Pro Forma adjustment to remove TVP Growth Investments expense limitation.>> << See accompanying notes to pro forma combined financial statements.>> VIP Capital Growth Fund TVP Growth Investments Fund Notes to Pro forma combined Statements (unaudited) 1. Basis of Combination: Subject to approval of the proposed Agreement and Plan of Reorganization (the "Agreement and Plan") by the shareholders of the TVP Growth Investments Fund ("Growth Investments Fund"), the VIP Capital Growth Fund ("Capital Growth Fund") will acquire all the net assets of the Growth Investments Fund in exchange for the Class 1 shares of Capital Growth Fund. The merger will be accounted for by the method of accounting for tax free business combinations of investment companies. The pro forma combined Statement of Assets and Liabilities reflects the financial position of Capital Growth Fund and Growth Investments Fund at June 30, 1999 as though the merger occurred as of that date. The pro forma combined Statement of Operations reflects the results of operations of the Capital Growth Fund and the Growth Investments Fund for the period January 1, 1999 to June 30, 1999 as though the merger occurred on January 1, 1999. The pro forma financial statements do not reflect the expenses of either fund in carrying out its obligations under the Agreement and Plan of Reorganization or any adjustment with respect to additional distributions that may be made prior to reorganization. The pro forma financial statements are presented for the information of the reader, and should be read in conjunction with the historical financial statements of the funds. 2. Shares of Beneficial Interest: The number of Class 1 shares issued was calculated by dividing the Class 1 net assets of the Growth Investments Fund at June 30, 1999 by the Class 1 net asset values per share of the Capital Growth Fund at June 30, 1999. VIP - SMALL CAP FUND TVP - FRANKLIN SMALL CAP INVESTMENTS FUND PRO FORMA COMBINED STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) <TABLE> <CAPTION> TVP FRANKLIN SMALL CAP FUND VIP SMALL CAP FUND SMALL CAP INVESTMENTS FUND PRO FORMA COMBINED ------------------------------------------------------------------------------------------------------------- SHARES/ SHARES/ SHARES/ RIGHTS VALUE RIGHTS VALUE RIGHTS VALUE ------------------------------------------------------------------------------------------------------------- COMMON STOCKS AND RIGHTS 96.1% COMMERCIAL SERVICES 3.2% <S> <C> <C> <C> <C> <C> <C> <C> a24/7 Media Inc. 28,800 $ 1,108,800 500 $ 19,250 29,300 $ 1,128,050 aApplied Graphics Technologies Inc. 88,700 1,119,838 88,700 1,119,838 aCorporate Executive Board Co. 5,700 202,706 2,200 78,238 7,900 280,944 aExchange Applications Inc. 13,500 550,125 700 28,525 14,200 578,650 aInet Technologies Inc. 24,300 583,200 1,400 33,600 25,700 616,800 aLamar Advertising Co., A -- -- 800 32,750 800 32,750 Norrell Corp. 82,100 1,544,506 -- -- 82,100 1,544,506 aNOVA Corp. 55,900 1,397,500 5,000 125,000 60,900 1,522,500 aProbusiness Services Inc. 700 25,113 700 25,113 aRemedyTemp Inc., A 29,500 398,250 -- -- 29,500 398,250 aSmith-Gardner & Associates Inc. 4,100 33,056 3,300 26,606 7,400 59,662 aSOS Staffing Services Inc. 75,500 396,375 -- -- 75,500 396,375 aStamps.com Inc. -- -- 900 15,750 900 15,750 aSylvan Learning Systems Inc. 64,100 1,742,719 2,000 54,375 66,100 1,797,094 aViant Corp. -- -- 200 7,000 200 7,000 aWESCO International Inc. 29,100 596,550 1,500 30,750 30,600 627,300 ---------- ------- --------- 9,673,625 476,957 10,150,582 ---------- ------- ----------- CONSUMER DURABLES .4% aActivision Inc. 75,700 1,102,381 75,700 1,102,381 Ethan Allen Interiors Inc. -- -- 3,000 113,250 3,000 113,250 ------------ ------- ---------- 1,102,381 113,250 1,215,631 ------------ ------- ---------- CONSUMER NON-DURABLES 2.5% Alberto-Culver Co., A 7,100 157,407 -- -- 7,100 157,407 aSola International Inc. 24,400 474,275 -- -- 24,400 474,275 aTommy Hilfiger Corp. 66,800 4,909,800 5,000 367,500 71,800 5,277,300 aTropical Sportswear International Corp. 33,700 1,074,188 6,000 191,250 39,700 1,265,438 Wolverine World Wide Inc. 55,000 770,000 4,300 60,200 59,300 830,200 ------------ ------- ---------- 7,385,670 618,950 8,004,620 ------------ ------- ---------- aCONSUMER SERVICES 4.4% BEA Systems Inc. 2,900 82,831 2,900 82,831 DeVry Inc. 77,800 1,740,775 -- -- 77,800 1,740,775 Entercom Communications Corp. 1,300 55,575 1,000 42,750 2,300 98,325 Foodmaker Inc. 37,400 1,061,225 7,000 198,625 44,400 1,259,850 Harrah's Entertainment Inc. 59,900 1,317,800 6,900 151,800 66,800 1,469,600 Intelligent Life Corp. 61,600 404,250 4,400 28,875 66,000 433,125 Jones Intercable Inc. 2,100 100,800 -- -- 2,100 100,800 Jones Intercable Inc., A 29,100 1,425,900 2,000 98,000 31,100 1,523,900 MeriStar Hotels & Resorts Inc. 120,000 412,500 -- -- 120,000 412,500 Prime Hospitality Corp. 238,000 2,856,000 4,600 55,200 242,600 2,911,200 Radio One Inc. 5,700 265,050 300 13,950 6,000 279,000 SFX Entertainment Inc. 39,300 2,515,200 2,550 163,200 41,850 2,678,400 Vail Resorts Inc. 51,700 904,750 3,500 61,250 55,200 966,000 ------------ ------- ---------- 13,059,825 896,481 13,956,306 ------------ ------- ---------- aELECTRONIC TECHNOLOGY 22.8% Advanced Energy Industries Inc. 48,800 1,979,450 1,100 44,619 49,900 2,024,069 Alpha Industries Inc. 17,000 809,625 3,000 142,875 20,000 952,500 American Xtal Technology Inc. 4,500 107,156 4,500 107,156 ANTEC Corp. 5,000 160,313 200 6,413 5,200 166,726 Aspect Telecommunications Corp. 61,200 596,700 1,400 13,650 62,600 610,350 AVT Corp. 51,200 1,939,200 1,400 53,025 52,600 1,992,225 Brocade Communications Systems Inc. 1,400 135,013 200 19,288 1,600 154,301 Carrier Access Corp. 23,300 1,020,831 2,700 118,294 26,000 1,139,125 Catapult Communications Corp. 37,000 698,375 1,100 20,763 38,100 719,138 Coherent Inc. 178,400 3,322,700 6,000 111,750 184,400 3,434,450 Com21 Inc. 75,000 1,279,688 3,400 58,013 78,400 1,337,701 Copper Mountain Networks Inc. 1,100 84,975 100 7,725 1,200 92,700 Cymer Inc. 6,500 162,500 300 7,500 6,800 170,000 Digital Microwave Corp. -- -- 600 7,650 600 7,650 EG&G Inc. -- -- 1,000 35,625 1,000 35,625 Electro Scientific Industries Inc. -- -- 2,500 104,453 2,500 104,453 aElectronic Technology (cont.) EMCORE Corp. 28,400 $ 571,550 1,800 $ 36,225 30,200 $ 607,775 Etec Systems Inc. 38,100 1,266,825 1,700 56,525 39,800 1,323,350 E-Tek Dynamics Inc. 6,500 309,156 500 23,781 7,000 332,937 Excel Switching Corp. 23,800 712,513 600 17,963 24,400 730,476 Flextronics International Ltd. 52,000 2,886,000 1,500 83,250 53,500 2,969,250 FLIR Systems Inc. 90,000 1,361,250 1,500 22,688 91,500 1,383,938 FVC.COM Inc. 24,000 156,000 400 2,600 24,400 158,600 Gemstar International Group Ltd. 70,400 4,593,600 2,300 150,075 72,700 4,743,675 Harmonic Inc. 30,500 1,751,844 -- -- 30,500 1,751,844 hi/fn Inc. 3,000 228,375 100 7,613 3,100 235,988 H.T.E. Inc. 47,500 160,313 -- -- 47,500 160,313 Itron Inc. 62,800 537,725 -- -- 62,800 537,725 Jabil Circuit Inc. 55,000 2,481,875 1,000 45,125 56,000 2,527,000 Javelin Systems Inc. 29,200 357,700 1,200 14,700 30,400 372,400 Juniper Networks Inc. -- -- 400 59,600 400 59,600 Komag Inc. 317,800 1,052,713 15,000 49,688 332,800 1,102,401 Ladish Co. Inc. 58,800 455,700 -- -- 58,800 455,700 Latitude Communications Inc. 5,800 75,400 300 3,900 6,100 79,300 Lattice Semiconductor Corp. 10,300 641,175 3,200 199,200 13,500 840,375 Level One Communications Inc. -- -- 900 44,044 900 44,044 Maker Communications Inc. 1,000 31,000 11,000 341,000 12,000 372,000 Mettler-Toledo International Inc. 122,000 3,027,125 6,000 148,875 128,000 3,176,000 Micrel Inc. 7,500 555,000 600 44,400 8,100 599,400 Natural MicroSystems Corp. 80,900 773,606 900 8,606 81,800 782,212 Netopia Inc. -- -- 700 15,925 700 15,925 Novellus Systems Inc. 18,400 1,255,800 600 40,950 19,000 1,296,750 Perceptron Inc. 85,000 387,813 -- -- 85,000 387,813 Photronics Inc. 8,400 205,800 -- -- 8,400 205,800 PLX Technology Inc. 5,200 246,350 200 9,475 5,400 255,825 PMC-Sierra Inc. 106,000 6,247,375 5,000 294,688 111,000 6,542,063 Sanmina Corp. 26,800 2,033,450 2,500 189,688 29,300 2,223,138 Security Dynamics Technologies Inc. 155,700 3,308,625 8,000 170,000 163,700 3,478,625 SIPEX Corp. 27,000 553,500 2,500 51,250 29,500 604,750 Synopsys Inc. 100,000 5,518,750 5,000 275,938 105,000 5,794,688 Tekelec 115,900 1,412,532 5,900 71,906 121,800 1,484,438 TriStar Aerospace Co. 31,400 259,050 -- -- 31,400 259,050 Uniphase Corp. 40,900 6,789,400 2,100 348,600 43,000 7,138,000 Veeco Instruments Inc. 6,800 231,200 300 10,200 7,100 241,400 Waters Corp. 70,000 3,718,750 4,000 212,500 74,000 3,931,250 Wavecom SA, ADR (France) 8,200 107,625 500 6,563 8,700 114,188 Western Digital Corp. 60,000 390,000 6,500 42,250 66,500 432,250 ------------ -------- --------- 68,841,835 3,958,590 72,800,425 ------------ --------- --------- ENERGY MINERALS 4.6% aBarrett Resources Corp. 113,900 4,370,913 5,200 199,550 119,100 4,570,463 aBasin Exploration Inc. -- -- 2,200 44,138 2,200 44,138 aDenbury Resources Inc. 85,800 375,375 -- -- 85,800 375,375 aForest Oil Corp. 56,700 712,294 3,300 41,456 60,000 753,750 aNewfield Exploration Co. 125,800 3,577,438 7,200 204,750 133,000 3,782,188 Range Resources Corp. 125,000 765,625 100 613 125,100 766,238 aSanta Fe Snyder Corp. 262,810 2,003,926 16,400 125,050 279,210 2,128,976 aTitan Exploration Inc. 128,300 641,500 -- -- 128,300 641,500 aTom Brown Inc. 95,000 1,478,438 6,600 102,713 101,600 1,581,151 ------------ ---------- ------------ 13,925,509 718,270 14,643,779 ------------ --------- ------------ FINANCE 7.7% aAffiliated Managers Group Inc. 44,700 1,349,381 2,100 63,394 46,800 1,412,775 Allied Capital Corp. 40,000 960,000 -- -- 40,000 960,000 Bank United Corp., A 50,000 2,009,375 1,600 64,300 51,600 2,073,675 aDLJdirect 32,300 952,850 1,800 53,100 34,100 1,005,950 Espirito Santo Financial Group SA, ADR (Luxembourg) 25,900 424,113 200 3,275 26,100 427,388 Finance (cont.) EVEREN Capital Corp. 42,000 $ 1,252,125 -- $-- 42,000 $ 1,252,125 E.W. Blanch Holdings Inc. 5,000 340,938 200 13,638 5,200 354,576 Federated Investors Inc., B 122,900 2,204,519 5,700 102,244 128,600 2,306,763 aFirst Sierra Financial Inc. 25,800 645,000 1,500 37,500 27,300 682,500 Freedom Securities Corp. 26,300 450,388 -- -- 26,300 450,388 aGolden State Bancorp Inc. 118,000 2,596,000 6,000 132,000 124,000 2,728,000 aHambrecht & Quist Group 20,000 742,500 800 29,700 20,800 772,200 aHealthCare Financial Partner Inc. 39,100 1,339,175 1,200 41,100 40,300 1,380,275 Heller Financial Inc. 18,800 522,875 700 19,469 19,500 542,344 aKnight/Trimark Group Inc., A 25,100 1,513,844 1,100 66,344 26,200 1,580,188 Metris Cos. Inc. -- -- 300 12,225 300 12,225 Mutual Risk Management Ltd. 42,600 1,421,775 4,400 146,850 47,000 1,568,625 aNational Discount Brokers Group Inc. -- -- 1,000 58,000 1,000 58,000 aRadian Group Inc 31,038 1,515,045 -- -- 31,038 1,515,045 aSilicon Valley Bancshares 97,400 2,410,650 4,000 99,000 101,400 2,509,650 Westamerica BanCorp. 27,900 1,018,350 600 21,900 28,500 1,040,250 aWIT Capital Group Inc. 3,800 129,200 300 10,200 4,100 139,400 ------------ --------- ---------- 23,798,103 974,239 24,772,342 ------------ --------- ---------- aHEALTH SERVICES 2.8% American Dental Partners Inc. 20,300 225,838 20,300 225,838 Beverly Enterprises Inc. 136,900 1,103,756 10,000 80,625 146,900 1,184,381 Careinsite Inc. -- -- 14,700 694,575 14,700 694,575 Eclipsys Corp. 1,422 34,039 -- -- 1,422 34,039 Integrated Health Services Inc. 54,000 432,000 5,000 40,000 59,000 472,000 New American Healthcare Corp. 8,100 18,731 8,100 18,731 PAREXEL International Corp. 65,000 865,313 3,000 39,938 68,000 905,251 Pediatrix Medical Group Inc. -- -- 1,300 27,625 1,300 27,625 Pharmaceutical Product Development Inc. 85,000 2,326,875 6,700 183,413 91,700 2,510,288 Renal Care Group Inc. 94,650 2,449,069 2,700 69,863 97,350 2,518,932 Total Renal Care Holdings Inc. 15,933 247,957 -- -- 15,933 247,957 ------------ ---------- -------- 7,703,578 1,136,039 8,839,617 ------------ ---------- --------- aHEALTH TECHNOLOGY 1.1% Heska Corp. 39,300 90,881 -- -- 39,300 90,881 Inhale Therapeutic Systems Inc. 59,300 1,412,081 3,000 71,438 62,300 1,483,519 OrthoLogic Corp. 226,700 559,677 -- -- 226,700 559,677 Serologicals Corp. 138,750 1,127,344 17,000 138,125 155,750 1,265,469 SkyePharma PLC, ADR (United Kingdom) 24,391 187,506 -- -- 24,391 187,506 SkyePharma PLC, rts., 3/31/00 (United Kingdom) 83,600 -- -- -- 83,600 -- Wesley Jessen VisionCare Inc. -- -- 1,300 42,088 1,300 42,088 ------------ --------- --------- 3,377,489 251,651 3,629,140 ------------ --------- --------- aINDUSTRIAL SERVICES 4.5% Atwood Oceanics Inc. 3,400 106,250 6,000 187,500 9,400 293,750 Casella Waste Systems Inc., A 12,700 330,200 3,500 91,000 16,200 421,200 Catalytica Inc. 193,733 2,712,262 5,000 70,000 198,733 2,782,262 Core Laboratories NV (Netherlands) 110,400 1,538,700 3,000 41,813 113,400 1,580,513 Dycom Industries Inc. 15,700 879,200 5,200 291,200 20,900 1,170,400 KTI Inc. 3,000 42,750 200 2,850 3,200 45,600 Marine Drilling Cos. Inc. 71,100 973,181 3,000 41,063 74,100 1,014,244 Safety-Kleen Corp. 25,000 453,125 3,575 64,797 28,575 517,922 Tuboscope Inc. 121,300 1,660,294 -- -- 121,300 1,660,294 US Liquids Inc. 74,800 1,561,450 1,800 37,575 76,600 1,599,025 Varco International Inc. 300,800 3,290,000 16,000 175,000 316,800 3,465,000 ------------ --------- ------------ 13,547,412 1,002,798 14,550,210 ------------ --------- ------------ INSURANCE 2.5% Financial Security Assurance Holdings Ltd. 63,000 3,276,000 4,000 208,000 67,000 3,484,000 HCC Insurance Holdings Inc. 32,300 732,806 4,200 95,288 36,500 828,094 Life USA Holding Inc. 21,200 429,300 -- -- 21,200 429,300 Reinsurance Group of America Inc. 37,300 1,314,825 4,300 151,575 41,600 1,466,400 aRisk Capital Holdings Inc. 125,000 1,687,500 -- -- 125,000 1,687,500 ------------ --------- ---------- 7,440,431 454,863 7,895,294 ------------ --------- ---------- NON-ENERGY MINERALS .5% Carpenter Technology Corp. 50,000 1,428,125 1,200 34,275 51,200 1,462,400 ------------ --------- ---------- PROCESS INDUSTRIES 1.5% ChemFirst Inc. 85,100 2,068,994 -- -- 85,100 2,068,994 aCUNO Inc. 29,000 554,625 1,600 30,600 30,600 585,225 Optical Coating Laboratory Inc. 24,600 2,057,175 2,100 175,613 26,700 2,232,788 ------------ --------- ---------- 4,680,794 206,213 4,887,007 ------------ --------- ---------- PRODUCER MANUFACTURING 3.6% aGentex Corp. 127,800 3,578,400 5,400 151,200 133,200 3,729,600 Gibraltar Steel Corp. 100,000 2,475,000 2,800 69,300 102,800 2,544,300 JLG Industries Inc. 111,400 2,269,775 6,000 122,250 117,400 2,392,025 aPolycom Inc. 10,800 421,200 6,500 253,500 17,300 674,700 Reliance Steel & Aluminum Co. 9,000 351,000 -- -- 9,000 351,000 Roper Industries Inc. 57,400 1,836,800 4,600 147,200 62,000 1,984,000 ------------ -------- ----------- 10,932,175 743,450 11,675,625 ------------ -------- ----------- REAL ESTATE 3.6% Arden Realty Inc. 86,000 2,117,750 3,000 73,875 89,000 2,191,625 Camden Property Trust 75,000 2,081,250 3,600 99,900 78,600 2,181,150 Colonial Properties Trust 15,400 435,050 -- -- 15,400 435,050 FelCor Lodging Trust Inc. 50,000 1,037,500 800 16,600 50,800 1,054,100 Glenborough Realty Trust Inc. 54,100 946,750 3,000 52,500 57,100 999,250 Innkeepers USA Trust 98,900 989,000 -- -- 98,900 989,000 MeriStar Hospitality Corp. 130,000 2,916,875 8,000 179,500 138,000 3,096,375 SL Green Realty Corp. 30,900 631,519 -- -- 30,900 631,519 ------------ -------- ------------ 11,155,694 422,375 11,578,069 ------------ -------- ------------ RETAIL TRADE 1.1% aBeyond.com Corp. 54,500 1,563,469 1,300 37,294 55,800 1,600,763 Claire's Stores Inc. 34,000 871,250 6,700 171,688 40,700 1,042,938 aGuitar Center Inc. 55,000 574,063 2,500 26,094 57,500 600,157 aThe Men's Wearhouse Inc. -- -- 8,000 204,000 8,000 204,000 ------------ --------- ------------ 3,008,782 439,076 3,447,858 ------------ --------- ------------ aTECHNOLOGY SERVICES 20.2% Affiliated Computer Services Inc., A 135,300 6,849,563 7,000 354,375 142,300 7,203,938 Ask Jeeves Inc. -- -- 100 1,400 100 1,400 AppNet Systems Inc. -- -- 3,900 52,406 3,900 52,406 BackWeb Technologies Ltd. 1,100 30,113 100 2,738 1,200 32,851 Brightpoint Inc. 12,900 78,206 2,100 12,731 15,000 90,937 Brio Technology Inc. 13,000 260,000 -- -- 13,000 260,000 BroadVision Inc. 26,600 1,961,750 1,200 88,500 27,800 2,050,250 Check Point Software Technologies Ltd. 11,700 627,413 -- -- 11,700 627,413 Citrix Systems Inc. 37,800 2,135,700 1,400 79,100 39,200 2,214,800 Complete Business Solutions Inc. 69,600 1,248,450 10,000 179,375 79,600 1,427,825 Concord Communications Inc. 30,000 1,350,000 1,000 45,000 31,000 1,395,000 Cybersourc Corp. -- -- 600 8,850 600 8,850 Deltek Systems Inc. 13,800 136,275 300 2,963 14,100 139,238 Digital Island Inc. -- -- 1,000 17,938 1,000 17,938 Documentum Inc. 40,000 522,500 1,500 19,594 41,500 542,094 DoubleClick Inc. 19,100 1,752,425 600 55,050 19,700 1,807,475 Entrust Technologies Inc. 55,200 1,835,400 3,000 99,750 58,200 1,935,150 Exodus Communications Inc. 9,600 1,151,400 1,200 143,925 10,800 1,295,325 High Speed Access Corp. 9,600 246,000 600 15,375 10,200 261,375 HNC Software Inc. 90,000 2,773,125 4,000 123,250 94,000 2,896,375 i2 Technologies Inc. 117,600 5,056,800 6,800 292,400 124,400 5,349,200 Integrated Systems Inc. 98,100 1,152,675 400 4,700 98,500 1,157,375 International Network Services 88,200 3,561,075 5,500 222,063 93,700 3,783,138 Intuit Inc. 21,800 1,964,725 800 72,100 22,600 2,036,825 ISS Group Inc. 8,000 302,000 400 15,100 8,400 317,100 Keane Inc. 30,000 678,750 1,600 36,200 31,600 714,950 Legato Systems Inc. 39,200 2,263,800 3,300 190,575 42,500 2,454,375 Marimba Inc. 900 47,419 100 5,269 1,000 52,688 Media Metrix Inc. 13,900 740,175 700 37,275 14,600 777,450 Micromuse Inc. 57,000 2,842,875 2,340 116,708 59,340 2,959,583 MicroStrategy Inc. 19,500 738,563 300 11,363 19,800 749,926 Mpath Interactive Inc. 2,000 44,000 100 2,200 2,100 46,200 Proxicom Inc. 8,400 215,775 300 7,706 8,700 223,481 Sapient Corp. 41,300 2,338,613 3,000 169,875 44,300 2,508,488 Serena Software Inc. 22,200 298,313 500 6,719 22,700 305,032 Software.com Inc. -- -- 500 11,594 500 11,594 SS&C Technologies Inc. 2,800 21,350 -- -- 2,800 21,350 StarMedia Network Inc. 23,500 1,506,938 1,300 83,363 24,800 1,590,301 Sykes Enterprises Inc. 5,300 176,888 800 26,700 6,100 203,588 TenFold Corp. 3,400 107,950 200 6,350 3,600 114,300 Transaction Systems Architects Inc., A 42,000 1,638,000 -- -- 42,000 1,638,000 Vantive Corp. 50,400 576,450 -- -- 50,400 576,450 Verio Inc. 56,000 3,892,000 2,800 194,600 58,800 4,086,600 VRITAS Software Corp. 35,000 3,322,813 2,400 227,850 37,400 3,550,663 Vignette Corp. 13,800 1,035,000 1,500 112,500 15,300 1,147,500 Whittman-Hart Inc. 55,500 1,762,125 6,600 209,550 62,100 1,971,675 Wind River Systems Inc. 121,050 1,944,366 4,250 68,266 125,300 2,012,632 ------------ ---------- ----------- 61,187,758 3,433,346 64,621,104 ------------ ---------- ----------- aTELECOMMUNICATIONS 5.9% AT&T Canada Inc., B (Canada) 7,300 467,656 200 12,813 7,500 480,469 Clearnet Communications Inc., A (Canada) 19,300 268,994 1,200 16,725 20,500 285,719 ICG Communications Inc. 126,000 2,693,250 5,000 106,875 131,000 2,800,125 ITC DeltaCom Inc. 18,500 518,000 900 25,200 19,400 543,200 Millicom International Cellular SA (Luxembourg) 58,100 1,830,150 3,400 107,100 61,500 1,937,250 Pacific Gateway Exchange Inc. 54,300 1,581,488 -- -- 54,300 1,581,488 Pinnacle Holdings Inc. 65,600 1,607,200 2,100 51,450 67,700 1,658,650 Primus Telecommunications Group Inc. 87,800 1,970,013 1,700 38,144 89,500 2,008,157 Rhythms NetConnections Inc. 2,900 169,288 100 5,838 3,000 175,126 Rural Cellular Corp., A 109,300 2,186,000 -- -- 109,300 2,186,000 Time Warner Telecom Inc. 11,000 319,000 600 17,400 11,600 336,400 VoiceStream Wireless Corp. 83,100 2,363,156 3,000 85,313 86,100 2,448,469 Western Wireless Corp., A 83,100 2,243,685 3,000 80,980 86,100 2,324,665 ------------ ------- ------------ 18,217,880 547,838 18,765,718 ------------ ------- ------------ TRANSPORTATION 3.2% Air Express International Corp. 60,000 1,522,500 1,400 35,525 61,400 1,558,025 aAlaska Air Group Inc. -- -- 2,200 91,850 2,200 91,850 aAtlantic Coast Airlines Holdings Inc. 121,000 2,299,000 3,000 57,000 124,000 2,356,000 C.H. Robinson Worldwide Inc. 72,600 2,668,050 4,500 165,375 77,100 2,833,425 Expeditors International of Washington Inc. 109,600 2,986,600 9,000 245,250 118,600 3,231,850 aMesaba Holdings Inc. 12,900 164,475 -- -- 12,900 164,475 ------------ ------- ------------ 9,640,625 595,000 10,235,625 ------------ ------- ------------ TOTAL LONG TERM INVESTMENTS (COST $260,455,695) 290,107,691 17,023,661 307,131,352 ------------ ---------- ------------ </TABLE> <TABLE> <CAPTION> TVP - Franklin Small Cap Fund VIP - Small Cap FundSmall Cap Investments Fund Pro Forma Combined ------------------------------------------------------------------------------------------------------ PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT VALUE AMOUNT VALUE AMOUNT VALUE ------------------------------------------------------------------------------------------------------- bREPURCHASE AGREEMENT 6.7% Joint Repurchase Agreement, 4.767%, 7/01/99, (Maturity Value $21,368,951) <S> <C> <C> <C> <C> <C> <C> (COST $21,366,121) $18,106,327$ 18,106,327 $3,259,794 $ 3,259,794 $21,366,121 $ 21,366,121 Barclays Capital Inc. (Maturity Value $2,695,480) Bear, Stearns & Co. Inc. (Maturity Value $2,377,933) Chase Securities Inc. (Maturity Value $440,201) CIBC Oppenheimer Corp. (Maturity Value $2,695,480) Donaldson, Lufkin & Jenrette Securities Corp. (Maturity Value $1,902,692) Dresdner Kleinwort Benson, North America LLC (Maturity Value $1,902,692) Goldman, Sachs & Co. (Maturity Value $950,917) NationsBanc Montgomery Securities LLC (Maturity Value $1,902,692) Paine Webber Inc. (Maturity Value $1,902,692) Paribas Corp. (Maturity Value $1,902,692) Warburg Dillon Read LLC (Maturity Value $2,695,480) Collateralized by U.S. Treasury Bills & Notes TOTAL INVESTMENTS ------------ ------------ ---------------- (COST $281,821,816) 102.8% 308,214,018 20,283,455 328,497,473 OTHER ASSETS, LESS LIABILITIES (2.8%) (8,958,782) 67,017 (8,891,765) ------------ ------------ ---------------- NET ASSETS 100.0% $299,255,236 $20,350,472 $319,605,708 ============ ============ ================ </TABLE> aNon-income producing. binvestment advisor. At 6/30/99, all repurchase agreements had been entered into on that date. See accompanying notes to pro forma combined financial statements. VIP SMALL CAP FUND TVP SMALL CAP INVESTMENTS FUND FINANCIAL STATEMENTS PRO FORMA COMBINED STATEMENTS OF ASSETS AND LIABILITIES JUNE 30, 1999 (UNAUDITED) <TABLE> <CAPTION> VIP VIP TVP SMALL CAP FUND SMALL CAP SMALL CAP PRO FORMA FUND INVESTMENTS FUND COMBINED ---------------------------------------------------------------------------------------------------------- Assets: Investments in securities: <S> <C> <C> <C> Cost $246,346,501 $14,109,194 $260,455,695 ------------------------------------------------------------- Value 290,107,691 17,023,661 307,131,352 Repurchase agreements, at value and cost 18,106,327 3,259,794 21,366,121 Receivables: Investment securities sold 846,042 84,288 930,330 Capital shares sold 450,470 96,826 547,296 Dividends and interest 147,406 5,151 152,557 -------------------------------------------------------------- Total assets 309,657,936 20,469,720 330,127,656 -------------------------------------------------------------- Liabilities: Payables: Investment securities purchased 537,835 56,057 593,892 Capital shares redeemed -- -- -- Affiliates 179,512 20,960 200,472 Custodian fees 1,757 -- 1,757 Postage and mailing fees 9,648 -- 9,648 Payable upon return of securities loaned 9,656,982 -- 9,656,982 Other liabilities 16,966 42,231 59,197 ------------------------------------------------------------- Total liabilities 10,402,700 119,248 10,521,948 -------------------------------------------------------------- Net assets, at value $299,255,236 $20,350,472 $319,605,708 ============================================================== CLASS 1 : Net assets, at value $299,177,022 $ 482,735 $299,659,757 ============================================================== Shares outstanding** 18,724,755 44,934 18,754,964 2 ============================================================== Net asset value and offering price per share $15.98 $10.74 $15.97 ============================================================== CLASS 2 : Net assets, at value $ 78,214 $19,867,737 $ 19,945,951 ============================================================== Shares outstanding** 4,903 1,852,384 1,250,529 3 ============================================================== Net asset value and offering price per share $15.95 $10.73 $15.95 </TABLE> **See note 2 in the accompanying notes to pro forma combined financial statements. See accompanying notes to pro forma combined financial statements. VIP SMALL CAP FUND TVP SMALL CAP INVESTMENTS FUND FINANCIAL STATEMENTS (CONTINUED) PRO FORMA COMBINED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) <TABLE> <CAPTION> VIP VIP TVP SMALL CAP FUND SMALL CAP SMALL CAP PRO FORMA PRO FORMA FUND INVESTMENTS FUND ADJUSTMENTS COMBINED -------------------------------------------------------- Investment income: <S> <C> <C> <C> <C> Dividends $ 695,579 $ 17,563 -- $ 713,142 Interest 321,047 60,320 -- 381,367 -------------------------------------------------------- Total investment income 1,016,626 77,883 -- 1,094,509 -------------------------------------------------------- Expenses: Management fees 1,101,012 45,181 77,1591 1,223,352 Administrative fees -- 7,322 (7,322)2 -- Distribution fees - Class 2 32 14,812 (5) 14,839 Custodian fees 1,757 98 -- 1,855 Reports to shareholders 19,744 4,685 -- 24,429 Registration and filing fees -- 262 -- 262 Professional fees 7,859 1,135 -- 8,994 Trustees' fees and expenses 1,228 1,808 -- 3,036 Other 3,105 5,413 -- 8,518 ------------------------------------------------------ Total expenses 1,134,737 80,716 69,832 1,285,285 Expenses waived/paid by affiliate -- (6,115) 6,1153 -- ------------------------------------------------------ Net expenses 1,134,737 74,601 75,947 1,285,285 ------------------------------------------------------ Net investment income (loss) (118,111) 3,282 (75,947) (190,776) ------------------------------------------------------ Realized and unrealized gains (losses): Net realized gain from: Investments 15,619,206 369,105 -- 15,988,311 Net unrealized depreciation on investments 27,500,843 2,449,410 -- 29,950,253 ------------------------------------------------------ Net realized and unrealized gain 43,120,049 2,818,515 -- 45,938,564 ------------------------------------------------------ Net increase in net assets resulting from operations $43,001,938 $2,821,797 -- $45,747,788 ====================================================== </TABLE> 1Pro Forma adjustment for difference in Management fee schedule. Apart from the reorganization, the shareholders of the VIP Franklin Small Cap Fund are voting to approve a new investment advisory agreement with Management fees of .80% of the first $500 million. Fees are reduced on net assets over $500 million. 2Under an agreement with Advisers, FT Services will provide administrative services to the Pro Forma Combined VIP Fund. The fee is paid by Advisers based on average daily net assets, and is not an additional expense of the Pro Forma Combined VIP Fund. 3The Pro Forma adjustment to remove TVP Small Cap Investments expense limitation. See accompanying notes to pro forma combined financial statements. FRANKLIN SMALL CAP FUND TEMPLETON SMALL CAP INVESTMENTS FUND NOTES TO PRO FORMA COMBINED STATEMENTS (UNAUDITED) 1. BASIS OF COMBINATION: Subject to approval of the proposed Agreement and Plan of Reorganization (the "Agreement and Plan") by the shareholders of the Templeton Small Cap Investments Fund ("Small Cap Investments Fund"), the Franklin Small Cap Fund ("Small Cap Fund") will acquire all the net assets of the Small Cap Investments Fund Class 1 and 2 in exchange for the Classes 1 and 2 shares, respectively, of Small Cap Fund. The merger will be accounted for by the method of accounting for tax free business combinations of investment companies. The pro forma combined Statement of Assets and Liabilities reflects the financial position of Small Cap Fund and Small Cap Investments Fund at June 30, 1999 as though the merger occurred as of that date. The pro forma combined Statement of Operations reflects the results of operations of the Small Cap Fund and the Small Cap Investments Fund for the period January 1, 1999 to June 30, 1999 as though the merger occurred on January 1, 1999. The pro forma financial statements do not reflect the expenses of either fund in carrying out its obligations under the Agreement and Plan of Reorganization or any adjustment with respect to additional distributions that may be made prior to reorganization. The pro forma financial statements are presented for the information of the reader, and should be read in conjunction with the historical financial statements of the funds. 2. SHARES OF BENEFICIAL INTEREST: The number of Class 1 and Class 2 shares issued was calculated by dividing the Class 1 and Class 2 net assets of the Small Cap Investments Fund at June 30, 1999 by the Class 1 and Class 2 net asset values per share of the Small Cap Fund at June 30, 1999. << TVP MUTUAL SHARES INVESTMENTS FUND VIP MUTUAL SHARES SECURITIES FUND PRO FORMA COMBINED STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) <TABLE> <CAPTION> VIP Mutual Shares Securities Fund TVP Mutual Shares Investments Fund VIP Mutual Shares Securities Fund Pro Forma Combined ----------------------------------------------------------------------------------------------------------------------------- SHARES VALUE SHARES VALUE SHARES VALUE ----------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 78.2% AEROSPACE & MILITARY TECHNOLOGY 3.2% <S> <C> <C> <C> <C> <C> <C> aColtec Industries Inc. 2,150 $ 46,628 168,800 $ 3,660,850 170,950 $ 3,707,478 aHexcel Corp. -- -- 42,000 425,250 42,000 425,250 aLockheed Martin Corp. 2,203 82,062 223,300 8,317,925 225,503 8,399,987 Northrop Grumman Corp. 627 41,578 48,000 3,183,000 48,627 3,224,578 ---------- ------------ ------------- 170,268 15,587,025 15,757,293 ----------- ------------ -------------- APPLIANCES & HOUSEHOLD DURABLES .6% Premark International Inc. 1,500 56,250 79,500 2,981,250 81,000 3,037,500 ------------ ------------ -------------- AUTOMOBILES 4.5% Borg-Warner Automotive Inc. 50,000 2,750,000 - - 50,000 2,750,000 aConsorcio G Grupo Dina SA de CV, L, ADR 635,600 556,150 - - 635,600 556,150 Delphi Automotive Systems Corp. 3,653 67,809 254,557 4,725,214 258,210 4,793,023 aGeneral Motors Corp. 520 34,320 86,900 5,735,400 87,420 5,769,720 aLear Corp. 796 39,601 95,500 4,751,125 96,296 4,790,726 TRW Inc. 1,106 60,692 70,400 3,863,200 71,506 3,923,892 ----------- ------------ ---------------- 202,422 22,381,089 22,583,511 ------------ ------------ ---------------- BANKING 6.9% Bank One Corp. 774 46,101 216,600 12,901,238 217,374 12,947,339 Banknorth Group Inc. -- -- 8,900 293,700 8,900 293,700 Chase Manhattan Corp. 425 36,816 75,600 6,548,850 76,025 6,585,666 First American Corp. Tennessee 400 16,625 30,900 1,284,281 31,300 1,300,906 First Union Corp. 2,000 94,000 211,882 9,958,454 213,882 10,052,454 Peoples Heritage Financial Group Inc. 100 1,881 40,800 767,550 40,900 769,431 U.S. Bancorp 800 27,200 74,600 2,536,400 75,400 2,563,600 Western Bancorp -- -- 4,200 182,700 4,200 182,700 ------------ ------------ ---------------- 222,623 34,473,173 34,695,796 ------------ ------------ ---------------- BEVERAGES & TOBACCO 3.2% Allied Domecq PLC -- -- 118,400 1,144,958 118,400 1,144,958 Gallaher Group PLC 5,400 33,196 293,500 1,804,246 298,900 1,837,442 Gallaher Group PLC, ADR -- -- 14,300 349,456 14,300 349,456 Nabisco Group Holdings Corp. 100 1,956 74,600 1,459,363 74,700 1,461,319 Philip Morris Companies Inc. 800 32,150 164,500 6,610,844 165,300 6,642,994 UST Inc. 550 16,088 149,500 4,372,875 150,050 4,388,963 ------------ ------------ ---------------- 83,390 15,741,742 15,825,132 ------------ ------------ ---------------- BROADCASTING & PUBLISHING 6.9% aAT&T Corp. - Liberty Media Group, A -- -- 78,648 2,890,314 78,648 2,890,314 Central Newspapers Inc., A 1,600 60,200 115,900 4,360,738 117,500 4,420,938 Dow Jones & Co. Inc. -- -- 67,800 3,597,638 67,800 3,597,638 Media General Inc., A -- -- 53,900 2,748,900 53,900 2,748,900 aMediaOne Group Inc. 600 44,625 108,900 8,099,438 109,500 8,144,063 Meredith Corp. 500 17,313 41,100 1,423,088 41,600 1,440,401 NV Holdingsmig de Telegraaf 1,468 28,915 -- -- 1,468 28,915 Scripps Co., A 1,485 70,630 121,400 5,774,088 122,885 5,844,718 Washington Post Co., B 103 55,388 10,100 5,431,275 10,203 5,486,663 ------------ ------------ ---------------- 277,071 34,325,479 34,602,550 ------------ ------------ ---------------- BUILDING MATERIALS & COMPONENTS .9% aAmerican Standard Companies Inc. 650 31,200 78,800 3,782,400 79,450 3,813,600 Armstrong World Industries Inc. 320 18,500 15,100 872,969 15,420 891,469 ------------ ------------ ---------------- 49,700 4,655,369 4,705,069 ------------ ------------ ---------------- BUSINESS & PUBLIC SERVICES 1.5% Hillenbrand Industries Inc. 1,700 73,525 12,400 536,300 14,100 609,825 aRepublic Services Inc. 90 16,233 24,700 611,325 24,790 627,558 Suez Lyonnaise des Eaux SA -- -- 34,849 6,285,542 34,849 6,285,542 ------------ ------------ ---------------- 89,758 7,433,167 7,522,925 ------------ ------------ ---------------- CHEMICALS 1.3% Arch Chemicals Inc. -- -- 54,500 1,325,031 54,500 1,325,031 Crompton & Knowles Corp. 2,500 48,906 84,200 1,647,163 86,700 1,696,069 aCytec Industries Inc. -- -- 48,700 1,552,313 48,700 1,552,313 Olin Corp. 855 11,275 104,900 1,383,369 105,755 1,394,644 Chemicals (cont.) aW.R. Grace & Co. -- -- 19,700 $ 361,988 19,700 $ 361,988 Witco Corp. -- -- 12,300 246,000 12,300 246,000 ------------ ------------ ---------------- $ 60,181 6,515,864 6,576,045 ------------ ------------ ---------------- DATA PROCESSING & REPRODUCTION .1% aCadence Design Systems Inc. -- -- 43,600 577,575 43,600 577,575 ------------ ---------------- ELECTRICAL & ELECTRONICS .1% Honeywell Inc. -- -- 1,700 196,988 1,700 196,988 aLevel One Communications Inc. -- -- 4,000 195,750 4,000 195,750 ------------ ------------ ---------------- -- 392,738 392,738 ------------ ------------ ---------------- ELECTRONIC COMPONENTS & INSTRUMENTS .2% aQuantum Corp. 2,000 48,250 44,300 1,068,738 46,300 1,116,988 ------------ ------------ ---------------- ENERGY EQUIPMENT & SERVICES 1.1% Baker Hughes Inc. -- -- 30,000 1,005,000 30,000 1,005,000 aCooper Cameron Corp. 690 25,573 68,900 2,553,606 69,590 2,579,179 aWeatherford International Inc. 900 32,963 48,750 1,785,469 49,650 1,818,432 ------------ ------------ ---------------- 58,536 5,344,075 5,402,611 ------------ ------------ ---------------- ENERGY SOURCES 1.9% Atlantic Richfield Co. -- -- 11,800 986,038 11,800 986,038 Shell Transport & Trading Co. PLC 2,130 15,956 521,300 3,905,107 523,430 3,921,063 Societe Elf Aquitaine SA, Br. 275 40,355 29,650 4,351,031 29,925 4,391,386 ------------ ------------ ---------------- 56,311 9,242,176 9,298,487 ------------ ------------ ---------------- FINANCIAL SERVICES 9.1% Bear Stearns Co. Inc. 1,525 71,294 124,775 5,833,231 126,300 5,904,525 CIT Group Inc., A 1,700 49,087 119,300 3,444,788 121,000 3,493,875 Finova Group Inc. -- -- 26,500 1,394,563 26,500 1,394,563 Greenpoint Financial Corp. 1,228 40,294 146,430 4,804,734 147,658 4,845,028 Greenpoint Financial Corp., 144A 3,800 124,688 3,800 124,688 Hell Financial Inc. 1,200 33,375 -- -- 1,200 33,375 Household International Inc. 735 34,821 133,730 6,335,459 134,465 6,370,280 aLaser Mortgage Management Inc. -- -- 186,700 641,781 186,700 641,781 Lehman Brothers Holdings Inc. 1,200 74,700 94,000 5,851,500 95,200 5,926,200 Liberty Financial Cos. Inc. 2,347 68,356 2,347 -- -- 68,356 aMFN Financial Corp. -- -- 39,765 395,167 39,765 395,167 Morgan Stanley, Dean Witter & Co. -- -- 28,400 2,911,000 28,400 2,911,000 Newcourt Credit Group Inc. 985 12,743 1,900 24,862 2,885 37,605 Newcourt Credit Group Inc., fgn. -- -- 104,000 1,345,500 104,000 1,345,500 Power Financial Corp. -- -- 10,700 204,715 10,700 204,715 The PMI Group Inc. -- -- 56,900 3,574,031 56,900 3,574,031 United Asset Management Corp. 1,700 38,675 362,000 8,235,500 363,700 8,274,175 ------------ ------------ ---------------- 423,345 45,121,519 45,544,864 ------------ ------------ ---------------- FOOD & HOUSEHOLD PRODUCTS 1.7% aFine Host Corp. -- -- 139,062 1,529,682 139,062 1,529,682 U.S. Industries Inc. 4,050 68,850 248,300 4,221,100 252,350 4,289,950 Van Melle NV -- -- 45,490 2,920,236 45,490 2,920,236 ------------ ------------ ---------------- 68,850 8,671,018 8,739,868 ------------ ------------ ---------------- FOREST PRODUCTS & PAPER 1.4% Rayonier Inc. -- -- 107,400 5,349,863 107,400 5,349,863 St. Joe Co. 750 37,359 55,400 1,495,800 56,150 1,533,159 ------------ ------------ ---------------- 37,359 6,845,663 6,883,022 ------------ ------------ ---------------- HEALTH & PERSONAL CARE 4.1% aBeverly Enterprises Inc. -- -- 166,400 1,341,600 166,400 1,341,600 aFoundation Health Systems, A -- -- 142,170 2,132,550 142,170 2,132,550 aHealthsouth Corp. -- -- 181,800 2,715,638 181,800 2,715,638 McKesson HBOC Inc. -- -- 47,800 1,535,575 47,800 1,535,575 aPacificare Health Systems Inc. 500 35,969 48,700 3,503,356 49,200 3,539,325 Rhone-Poulenc SA, A 1,647 75,259 112,800 5,154,345 114,447 5,229,604 Sankyo Co. Ltd. -- -- 11,600 292,300 11,600 292,300 HEALTH & PERSONAL CARE (CONT.) aTenet Healthcare Corp. -- -- 198,100 $ 3,677,231 198,100 $ 3,677,231 Ventas Inc. -- -- 31,800 170,925 31,800 170,925 ------------ ------------ ------------ $ 111,228 20,523,520 20,634,748 ------------ ------------ ------------ INDUSTRIAL COMPONENTS 1.9% a Owens-Illinois Inc. 2,000 65,375 206,600 6,753,238 208,600 6,818,613 a Thermo Electron Corp. -- -- 132,600 2,660,288 132,600 2,660,288 ------------ ------------ ------------ 65,375 9,413,526 9,478,901 ----------- --------- ------------ </TABLE> <TABLE> <CAPTION> INSURANCE 1.6% <S> <C> <C> <C> <C> <C> <C> Allmerica Financial Corp. -- -- 49,900 3,034,544 49,900 3,034,544 American Bankers Insurance Group Inc. -- -- 10,300 560,706 14,600 635,150 a Old Republic International Corp. 4,300 74,444 11,700 202,556 11,700 202,556 Provident Companies Inc. -- -- 11,800 472,000 11,800 472,000 Sampo Insurance Co. PLC., A -- -- 6,800 197,051 6,800 197,051 Torchmark Corp. -- -- 36,400 1,242,150 36,400 1,242,150 White Mountain Insurance Group Inc. -- 15,600 2,199,600 15,600 2,199,600 ------------ ------------ ------------ 74,444 7,908,607 7,983,051 ------------ ------------ ------------ LEISURE & TOURISM 3.3% a Park Place Entertainment Corp. 1,600 15,500 301,000 2,915,938 302,600 2,931,438 Pathe SA -- -- 28,500 3,421,058 28,500 3,421,058 a Promus Hotel Corp. 3,740 115,940 171,200 5,307,200 174,940 5,423,140 Starwood Hotels & Resorts Worldwide Inc. 1,375 42,023 157,000 4,798,313 158,375 4,840,336 ------------ ------------ ------------ 173,463 16,442,509 16,615,972 ------------ ------------ ------------ MACHINERY & ENGINEERING 1.2% Case Corp. -- -- 8,200 394,625 8,200 394,625 Invensys PLC 17,760 84,122 1,206,152 5,713,071 1,223,912 5,797,193 ------------ ------------ ------------ 84,122 6,107,696 6,191,818 ------------ ------------ ------------ MERCHANDISING 3.9% a Barney's Inc. -- -- 45,635 410,715 45,635 410,715 a Barney's Inc., wts. -- -- 11,018 26,994 11,018 26,994 a Federated Department Stores Inc. 954 50,502 88,700 4,695,556 89,654 4,746,058 JC Penney Co. Inc. 858 41,667 100,900 4,899,956 101,758 4,941,623 a Payless Shoesource Inc. 680 36,380 51,100 2,733,850 51,780 2,770,230 Rite Aid Corp. 1,876 46,197 170,600 4,201,025 172,476 4,247,222 a Toys R Us Inc. 1,880 38,892 122,070 2,525,323 123,950 2,564,215 ------------ ------------ ------------ 213,638 19,493,419 19,707,057 ------------ ------------ ------------ METALS & MINING .4% Allegheny Teledyne Inc. -- -- 95,680 2,164,760 95,680 2,164,760 ------------ ------------ ------------ MULTI-INDUSTRY 8.3% a Alleghany Corp. 319 59,015 15,558 2,878,230 15,877 2,937,245 a Berkshire Hathaway Inc. -- -- 22 49,280 22 49,280 a Berkshire-Hathaway Inc., A -- -- 57 3,927,300 57 3,927,300 Compagnie Financiere Richemont AG, Br., A 22 42,313 2,390 4,596,745 2,412 4,639,058 Compagnie Generale D'Industrie et de Participation 990 47,881 57,210 2,766,989 58,200 2,814,870 Corporacion Financiera Alba SA 240 38,857 19,000 3,076,209 19,240 3,115,066 Investor AB, A 1,100 12,097 658,360 7,240,256 659,460 7,252,353 Investor AB, B 2,580 28,829 652,800 7,294,284 655,380 7,323,113 Kansas City Southern Industries Inc. -- -- 38,900 2,482,306 38,900 2,482,306 Kinnevik AB, B -- -- 10,200 191,955 10,200 191,955 Lagardere SCA -- -- 95,862 3,568,751 95,862 3,568,751 Ogden Corp. 1,300 35,019 88,500 2,383,969 89,800 2,418,988 Power Corp. of Canada -- -- 29,400 566,505 29,400 566,505 ------------ ------------ ------------ 264,011 41,022,779 41,286,790 ------------ ------------ ------------ REAL ESTATE .4% a Alexander's Inc. -- -- 8,000 591,000 8,000 591,000 a Cadillac Fairview Corp. -- -- 62,000 1,175,606 62,000 1,175,606 Real Estate (cont.) acSecurity Capital European Realty -- $-- 23,055 $ 399,479 23,055 $ 399,479 ------------ ------------ ------------ -- -- 2,166,085 2,166,085 ------------ ------------ ------------ TELECOMMUNICATIONS 4.5% BCE Inc. -- -- 45,750 2,242,954 45,750 2,242,954 General Motors Corp., H -- -- 25,500 1,434,375 25,500 1,434,375 a Telecom Italia SpA, di Risp -- -- 486,200 2,644,844 486,200 2,644,844 Telephone & Data Systems Inc. 675 49,317 142,900 10,440,631 143,575 10,489,948 a United States Cellular Corp. -- -- 85,100 4,552,850 85,100 4,552,850 Vodafone Airtouch PLC, ADR -- -- (30,950) 994,850 (30,950) 994,850 ------------ ------------ ------------ 49,317 22,310,504 22,359,821 ------------ ------------ ------------ TEXTILES & APPAREL .6% Liz Claiborne Inc. 1,400 51,100 77,300 2,821,450 78,700 2,872,550 ------------ ------------ ------------ TRANSPORTATION 2.3% Burlington Northern Santa Fe Corp. -- -- 53,200 1,649,200 53,200 1,649,200 Florida East Coast Industries Inc. 500 22,125 114,500 5,066,625 115,000 5,088,750 ac Golden Ocean Group Ltd., wts. -- -- 1,120 -- 1,120 -- Railtrack Group PLC -- -- 239,552 4,897,370 239,552 4,897,370 ------------ ------------ ------------ 22,125 11,613,195 11,635,320 ------------ ------------ ------------ UTILITIES ELECTRICAL & GAS 1.1% a Citizens Utilities Co., B 6,443 71,678 -- -- 6,443 71,678 a MidAmerican Energy Holding Co. 800 47,190 91,700 3,175,113 92,500 3,222,303 Veba AG -- -- 38,100 2,247,417 38,100 2,247,417 ------------ ------------ ------------ 118,868 5,422,530 5,541,398 ------------ ------------ ------------ TOTAL COMMON STOCKS (COST $338,565,570) 3,132,005 388,768,240 391,900,245 ------------ ------------ ------------ PREFERRED STOCKS .6% Embratel Participacoes SA, ADR, pfd. -- -- 36,350 504,345 36,350 504,345 Tele Centro Sul Participacoes SA, ADR, pfd. 261 14,486 17,570 975,135 17,831 989,621 Tele Norte Leste Participacoes SA, ADR, pfd. 865 16,057 81,650 1,515,628 82,515 1,531,685 ------------ ------------ ------------ TOTAL PREFERRED STOCKS (COST $2,634,618) 30,543 2,995,108 3,025,651 </TABLE> <TABLE> <CAPTION> PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT* AMOUNT* AMOUNT* ----------- ----------- ----------- BONDS 2.7% <S> <C> <C> <C> <C> <C> <C> Abraxas Petroleum Corp., 11.50%, 11/01/04 $-- -- $ 415,000 261,450 $ 415,000 261,450 Aiken Cnty S C Indl. Rev. Ref. Belott, 6.00%, 12/01/11 -- -- 45,000 27,450 45,000 27,450 Consorcio G Grupo Dina SA de CV, cvt., 8.00%, 8/08/04 -- -- 4,250,000 2,125,000 4,250,000 2,125,000 Eurotunnel Finance Ltd., Equity Note, 12/31/03 -- -- 481,406 371,818 481,406 371,818 Eurotunnel PLC: 12/31/12, Tier 1 -- -- 406,877 GBP 525,896 406,877 GBP 525,896 12/31/18, Tier 2 -- -- 1,051,800 GBP 1,226,840 1,051,800 GBP 1,226,840 12/31/25, Tier 3 -- -- 281,758 GBP 288,677 281,758 GBP 288,677 12/31/50, Resettable Advance R5 -- -- 408,583 GBP 273,711 408,583 GBP 273,711 4/30/40, ptc loan note -- -- 220,000 GBP 149,113 220,000 GBP 149,113 Stabilization Advance S8 Tier 1 -- -- 70,043 GBP 26,497 70,043 GBP 26,497 Stabilization Advance S8 Tier 2 -- -- 54,215 GBP 17,091 54,215 GBP 17,091 Eurotunnel SA: 5.28%, 7/07/02, Tier 1 -- -- 46,223 EUR 38,610 46,223 EUR 38,610 5.28%, 7/07/02, Tier 2 -- -- 133,474 EUR 101,857 133,474 EUR 101,857 5.28%, 7/07/02, Tier 3 -- -- 166,595 EUR 109,952 166,595 EUR 109,952 12/31/12, Tier 1 (Libor) -- -- 155,834 EUR 130,170 155,834 EUR 130,170 12/31/18, Tier 2 (Libor) -- -- 471,681 EUR 357,519 471,681 EUR 357,519 </TABLE> <TABLE> <CAPTION> <S> <C> <C> <C> <C> <C> <C> Eurotunnel SA: (cont.) 12/31/25, Tier 3 (Libor) $-- $-- $ 367,578 EUR $ 242,601 $ 367,578 EUR $ 242,601 12/31/50, Resettable Advance R4 -- -- 392,330 EUR 167,904 392,330 EUR 167,904 Eurotunnel Stabilization Facility Stabilization Advance Tier 1 -- -- 24,850 EUR 6,150 24,850 EUR 6,150 Stabilization Advance Tier 1 -- -- 11,279 EUR 2,792 11,279 EUR 2,792 Stabilization Advance Tier 2 -- -- 29,666 EUR 6,119 29,666 EUR 6,119 Golden Books Publishing, 7.65%, 9/15/02 -- -- 190,000 75,050 190,000 75,050 Hechinger Co., 6.95%, 10/15/03 -- -- 1,702,000 178,710 1,702,000 178,710 HIH Capital Ltd., cvt., 7.50%, 9/25/06 -- -- 1,235,000 845,975 1,235,000 845,975 Hvide Marine Inc., 8.375%, 2/15/08 -- -- 170,000 82,450 170,000 82,450 Kelley Oil & Gas Corp. 144A, 14.00%, 4/15/03 -- -- 190,000 195,700 190,000 195,700 10.375%, 10/15/06 -- -- 95,000 54,625 95,000 54,625 Series D, 10.375%, 10/15/06 -- -- 120,000 69,000 120,000 69,000 MFN Financial Corp.; Series A, 10.00%, 4/23/01 -- -- 158,828 150,092 158,828 150,092 Series B, 10.00%, 4/23/01 -- -- 278,828 263,492 278,828 263,492 Port Seattle Wash. Rev. Ref-Beloit Proj., 6.00%, 12/01/17 -- -- 20,000 12,200 20,000 12,200 aRoil Limited, 12.779%, 12/05/02 -- -- 2,328,000 814,800 2,328,000 814,800 Security Capital US Realty, cvt., 144A, 2.00%, 5/22/03 -- -- 2,208,000 1,698,780 2,208,000 1,698,780 Southwest Royalties Inc., B, 10.50%, 10/15/04 -- -- 1,475,000 715,375 1,475,000 715,375 Specialty Foods Corp.: 11.00%, 8/15/09 -- -- 111,297 11 111,297 11 13.25%, 8/15/09 -- -- 1,180,000 920,400 1,180,000 920,400 TFM SA de CV: 10.25%, 6/15/07 -- -- 250,000 221,875 250,000 221,875 0/11.75%, 6/15/09 -- -- 885,000 535,425 885,000 535,425 -------- ------------ -------------- TOTAL BONDS (COST $118,784,832) -- 13,291,177 13,291,177 -------- ------------ -------------- BONDS & NOTES IN REORGANIZATION 2.9% aAltos Hornos de Mexico SA: 5.50%, 12/15/01 -- -- 20,000 8,000 20,000 8,000 Series A, 11.375%, 4/30/02 -- -- 95,000 42,750 95,000 42,750 Series B, 11.875%, 4/15/04 -- -- 60,000 27,000 60,000 27,000 aAPS Inc., bank claim -- -- 242,324 104,199 242,324 104,199 aBrunos Inc., Bank Claim: Revolver Commitment -- -- 201,200 115,690 201,200 115,690 Tranche A -- -- 360,300 194,562 360,300 194,562 Tranche B -- -- 292,000 157,680 292,000 157,680 aCrown Leasing, Bank Claim -- -- 87,565,976 JPY 114,847 87,565,976 JPY 114,847 aDecision One, Bank Claim: Revolver Commitment -- -- 266,219 116,471 266,219 116,471 Tranche A -- -- 477,294 208,816 477,294 208,816 Tranche B -- -- 139,690 61,114 139,690 61,114 aDictaphone Corporation, Bank Claim Revolver Commitment -- -- 305,800 266,046 305,800 266,046 Tranche C Term Loan -- -- 116,000 102,080 116,000 102,080 aDow Corning Corp.: Bank Debt #1 -- -- 100,000 128,250 100,000 128,250 9.375%, 2/20/99 -- -- 550,000 705,375 550,000 705,375 acGolden Ocean Group Ltd., 10.00%, 8/31/01 -- -- 1,050,000 115,500 1,050,000 115,500 Harnischfeger Industries Inc. 8.90%, 3/01/22 -- -- 290,000 176,900 290,000 176,900 8.70%, 6/15/22 -- -- 145,000 88,450 145,000 88,450 6.875%, 2/15/27 -- -- 353,000 215,330 353,000 215,330 aIntegrated Health Services Inc., Tranche B, Term Loan -- -- 239,392 221,438 239,392 221,438 aKoninklijke Nederlandse Vliegtuigenfabriek Fokker, Trade Claim $-- $-- $ 550,118 EUR $ 453,846 $ 550,118 EUR $ 453,846 aLoewen Group Inc.: Bank Claim, Revolver Commitment -- -- 129,798 81,124 129,798 81,124 144A, 6.70%, 10/01/99 -- -- 355,000 214,775 355,000 214,775 Series 3, 7.50%, 4/15/01 -- -- 90,000 56,700 90,000 56,700 Series 7, 7.75%, 10/15/01 -- -- 170,000 107,100 170,000 107,100 Series 5, 6.10%, 10/02/02 -- -- 250,000 CAD 103,348 250,000 CAD 103,348 Series 4, 8.25%, 4/15/03 -- -- 190,000 118,750 190,000 118,750 Series 6, 7.20%, 6/01/03 -- -- 1,550,000 992,000 1,550,000 992,000 Series 2, 8.25%, 10/15/03 -- -- 555,000 346,875 555,000 346,875 Series 7, 7.60%, 6/01/08 -- -- 1,235,000 784,225 1,235,000 784,225 aNippon Credit Bank Ltd., Bank Claim -- -- 44,574,201 JPY 58,842 44,574,201 JPY 58,842 aNippon Total Finance, Bank Claim -- -- 45,189,925 JPY 22,209 45,189,925 JPY 22,209 aPaging Network Inc., Revolver Commitment, A -- -- 1,650,000 1,485,000 1,650,000 1,485,000 aPeregrine Investments Holdings Ltd., zero cpn., 2/28/99 -- -- 5,000,000 JPY 4,596 5,000,000 JPY 4,596 aPhilip Services Corp. Bank Claim, Canadian Operating -- -- 448,166 CAD 131,678 448,166 CAD 131,678 Bank Claim, Canadian Operating, fgn. -- -- 9,144 3,932 9,144 3,932 Tranche 1 -- -- 319,116 137,220 319,116 137,220 Tranche 2 -- -- 296,498 127,494 296,498 127,494 Tranche 3 -- -- 148,249 63,747 148,249 63,747 aPIV Investment Finance (Cayman) Ltd., 12/01/00 -- -- 12,060,000 3,316,500 12,060,000 3,316,500 aPratama Datakom Asia BV Reg S, 12.75%, 7/15/05 -- -- 140,000 32,900 140,000 32,900 144A, 12.75%, 7/15/05 -- -- 665,000 156,275 665,000 156,275 aRitvik Holdings, Bank Claim: Term Loan B -- -- 55,000 46,750 55,000 46,750 Term Loan C -- -- 137,000 116,450 137,000 116,450 aTribasa Toll Road Trust I, 10.50%, 12/01/11 -- -- 165,589 86,106 165,589 86,106 aVencor Operating Inc., 9.875%, 5/01/05 -- -- 1,635,000 498,675 1,635,000 498,675 aVencor Inc., Bank Claim: Commitment Revolver -- -- 78,150 66,428 78,150 66,428 Term Loan A -- -- 432,469 356,787 432,469 356,787 Term Loan B -- -- 57,755 48,658 57,755 48,658 aVentas Inc., Bank Claim: Commitment Revolver, Tranche B -- -- 194,782 181,147 194,782 181,147 Tranche A -- -- 79,500 73,935 79,500 73,935 Tranche C -- -- 75,300 70,782 75,300 70,782 Tranche D -- -- 26,626 21,833 26,626 21,833 aUnited Companies Financial Corp, revolver -- -- 1,883,700 1,054,872 1,883,700 1,054,872 -------- ------------ ----------- TOTAL BONDS & NOTES IN REORGANIZATION (COST $12,780,047) -- 14,592,057 14,592,057 -------- ------------ ----------- SHORT TERM INVESTMENTS 11.2% Fannie Mae, 4.69% to 5.140% with maturities to 12/08/99 -- -- 22,578,000 12,133,547 22,578,000 12,133,547 Federal Home Loan Bank, 4.72% to 5.10% with maturities to 11/05/99 -- -- 7,000,000 6,887,678 7,000,000 6,887,678 Federal Home Loan Mortgage Corp., 4.67% to 5.10% with maturities to 3/08/00 -- -- 37,550,000 37,110,346 37,550,000 37,110,346 -------- ------------ ----------- TOTAL SHORT TERM INVESTMENTS (COST $56,121,702) -- 56,131,571 56,131,571 -------- ------------ ----------- TOTAL INVESTMENTS (COST $426,310,610) 95.6% 3,162,548 475,778,153 478,940,701 NET EQUITY IN FORWARD CONTRACTS .6% -- 3,203,691 3,203,691 SECURITIES SOLD SHORT (.6%) -- (3,295,800) (3,295,800) OTHER ASSETS, LESS LIABILITIES 4.4% 504,512 21,643,295 22,147,807 ----------- ------------ ------------ TOTAL NET ASSETS 100.0% $3,667,060 $497,329,339 $500,996,399 ----------- ------------ ------------ VIP MUTUAL SHARES SECURITIES FUND TVP MUTUAL SHARES INVESTMENTS FUND VIP MUTUAL SHARES SECURITIES FUND PRO FORMA COMBINED ----------------------------------------------------------------------------------------------------------------------------------- SHARES VALUE SHARES VALUE SHARES VALUE ----------------------------------------------------------------------------------------------------------------------------------- j Securities Sold Short ISSUER COUNTRY COUNTRY -------- ------------ <S> <C> <C> <C> <C> <C> <C> Allied Signal Inc. -- -- United States 3,100 $195,300 United States 3,100 $ 195,300 BP Amoco PLC, ADR -- -- United Kingdom 4,200 455,700 United States 4,200 455,700 a DST Systems Inc. -- -- United States 6,300 396,112 United States 6,300 396,112 Intel Corp. -- -- United States 3,400 202,300 United States 3,400 202,300 Nortel Networks Corp. -- -- Canada 18,300 1,575,538 Canada 18,300 1,575,538 Unum Corp. -- -- United States 8,600 470,850 United States 8,600 470,850 ---- ------------ ------------ Total Securities Sold Short (Proceeds $3,132,279) -- $3,295,800 $3,295,800 ---- ------------ ------------ CONTRACTS FOR DIFFERENCES VALUE AT UNREALIZED VALUE AT UNREALIZED SECURITY COUNTRY SHARES 06/30/1999 GAIN/LOSS COUNTRY SHARES 06/30/1999 GAIN/LOSS ----------------------------------------------------------------------------------------------------------------------------------- BP Amoco PLC, cfd. 10.3574 -- -- United Kingdom 13,600 $ 234,952 $ (21,921) United Kingdom 13,600 $234,952 $(21,921) BP Amoco PLC, cfd. 10.9450 -- -- United Kingdom 5,500 98,657 (3,771) United Kingdom 5,500 98,657 (3,771) BP Amoco PLC, cfd. 11.2992 -- -- United Kingdom 10,200 182,964 (1,299) United Kingdom 10,200 182,964 (1,299) Vodafone Group PLC, cfd. 11.2893-- -- United Kingdom 30,000 590,145 (56,305) United Kingdom 30,000 590,145 (56,305) Vodafone Group PLC, cfd 12.272 -- -- United Kingdom 20,000 393,430 (6,557) United Kingdom 20,000 393,430 (6,557) ---------------------------- --------------------- TOTAL CONTRACT FOR DIFFERENCES -- -- $1,500,148 $ (89,853) $1,500,148 $(89,853) ============================ ===================== CURRENCY ABBREVIATIONS: CAD - Canadian Dollar EUR - European Unit GBP - British Pound JPY - Japanese Yen *Securities traded in U.S. dollars unless otherwise indicated. aNon-income producing. cRestricted security. See accompanying notes to pro forma combined financial statements. TEMPLETON VARIABLE PRODUCTS SERIES FUND - MUTUAL SHARES INVESTMENTS FUND ("TVP MUTUAL SHARES INVESTMENTS FUND") FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST- MUTUAL SHARES SECURITIES FUND ("VIP MUTUAL SHARES SECURITIES FUND") FINANCIAL STATEMENTS </TABLE> PRO FORMA COMBINING STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1999 <TABLE> <CAPTION> VIP MUTUAL SHARES TVP MUTUAL VIP MUTUAL SECURITIES FUND SHARES INVESTMENTS SHARES SECURITIES PRO FORMA FUND FUND COMBINED ------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Assets: Investments in securities: Cost $2,776,100 $423,534,510 $ 426,310,610 ------------------------------------------------------- Value 3,162,548 475,778,153 478,940,701 Cash 581,040 12,358,049 12,939,089 Receivables: Investment securities sold 56,875 6,285,733 6,342,608 Capital shares sold 2,037 56,716 58,753 Dividends and interest 4,525 1,156,679 1,161,204 From affiliates 15,840 -- 15,840 Unrealized gain (loss) on forward exchange contracts -- 3,417,587 3,417,587 Deposits with brokers for securities sold short 7,772,566 7,772,566 Other assets -- -- -- ------------------------------------------------------- Total assets 3,822,865 506,825,483 510,648,348 ------------------------------------------------------- Liabilities: Payables: Investment securities purchased 137,417 5,274,802 5,412,219 Capital shares redeemed -- 270,516 270,516 Affiliates 433 299,331 299,764 Custodian fees -- 5,231 5,231 Postage and mailing -- (4,419) (4,419) Securities sold short, at value (proceeds $3,132,279) 3,295,800 3,295,800 Due To broker, variation margin 77,867 77,867 Funds advanced by custodian -- -- -- Accrued expenses 17,955 -- 17,955 Unrealized loss on forward exchange contracts 213,896 213,896 Other liabilities -- 63,120 63,120 ------------------------------------------------------- Total liabilities 155,805 9,496,144 9,651,949 ------------------------------------------------------- Net assets, at value $3,667,060 $497,329,339 $500,996,399 ------------------------------------------------------- Class 1: Net assets, at value $2,456,111 $496,887,152 $499,343,263 ------------------------------------------------------- Shares outstanding** 220,178 36,256,033 36,435,311 ------------------------------------------------------- Net asset value and offering price per share $11.16 $13.70 $13.70 ------------------------------------------------------- Class 2: Net assets, at value $1,210,949 $ 442,187 $ 1,653,136 ------------------------------------------------------- Shares outstanding** 108,637 32,326 120,846 ------------------------------------------------------- Net asset value and offering price per share $11.15 $13.68 $13.68 ------------------------------------------------------- **See note 2 in the accompanying notes to pro forma combined financial statements. See accompanying notes to pro forma combined financial statements. </TABLE> TVP MUTUAL SHARES INVESTMENTS FUND VIP MUTUAL SHARES SECURITIES FUND FINANCIAL STATEMENTS (CONTINUED) PRO FORMA COMBINING STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 1999 (UNAUDITED) <TABLE> <CAPTION> FTVIPT MUTUAL SHARES TVP MUTUAL VIP MUTUAL SECURITIES FUND ARES INVESTMENTS SHARES SECURITIES PRO FORMA PRO FORMA FUND FUND ADJUSTMENTS COMBINED ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Investment income:+ Dividends $ 17,296 $ 3,173,746 $ -- $ 3,191,042 Interest 283 2,795,696 -- 2,795,979 ------------------------------------------------------------------------- Total investment income 17,579 5,969,442 -- 5,987,021 ------------------------------------------------------------------------- Expenses: Management fees 7,319 1,430,056 -- 1,437,375 Administrative fees 1,181 336,639 466a 338,286 Distribution fees - Class 2 890 296 (51)b 1,135 Custodian fees 100 16,100 -- 16,200 Reports to shareholders 10,100 28,800 -- 38,900 Professional fees 11,422 18,500 -- 29,922 Trustees' fees and expenses -- 1,900 -- 1,900 Other -- 29,294 -- 29,294 ------------------------------------------------------------------------- Total expenses 31,012 1,861,585 415 1,893,012 Expenses waived/paid by affiliate (17,938) -- 17,938c -- ------------------------------------------------------------------------- Net expenses 13,074 1,861,585 18,353 1,893,012 ------------------------------------------------------------------------- Net investment income 4,505 4,107,857 18,353 4,094,009 ------------------------------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments 36,585 20,421,696 -- 20,458,281 Foreign currency transactions (3,290) 1,923,527 -- 1,920,237 ------------------------------------------------------------------------- Net realized gain 33,295 22,345,223 -- 22,378,518 Net unrealized appreciation on: Investments 339,010 35,521,440 -- 35,860,450 Translation of assets and liabilities denominated in foreign currencies 3,439 3,031,844 -- 3,035,283 ------------------------------------------------------------------------- Net unrealized gain 342,449 38,553,284 -- 38,895,733 ------------------------------------------------------------------------- Net realized and unrealized gain 375,744 60,898,507 -- 61,274,251 ------------------------------------------------------------------------- Net increase in net assets resulting from operations $380,249 $65,006,364 $18,353 $65,368,260 ------------------------------------------------------------------------- </TABLE> aPro Forma adjustment for difference in Administrative fee schedule. bPro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate reflected in the Pro Forma Combined is 0.25% of the average net assets. cPro Forma adjustment to remove TVP Mutual Shares expense limitation +Net of foreign taxes of $157,586 and $896,270 for VIP Mutual Shares Securities Fund and TVP Mutual Shares Investments Fund, respectively See accompanying notes to pro forma combined financial statements. VIP - TEMPLETON MUTUAL SHARES FUND TVP - TEMPLETON MUTUAL SHARES FUND Notes to Pro forma combining Statements (unaudited) 1. BASIS OF COMBINATION Subject to approval of the proposed Agreement and Plan of Reorganization (the "Agreement and Plan") by the shareholders of the Templeton Variable Products Series Fund - Templeton Mutual Shares Fund("TVP-Templeton Mutual Shares"), the Franklin Templeton Variable Insurance Products Trust - Templeton Templeton Mutual Shares Fund ("VIP - Templeton Mutual Shares Fund") will acquire all the net assets of the TVP - Templeton Mutual Shares Class 1 and 2 in exchange for the Classes 1 and 2 shares, respectively, shares of VIP - Templeton Mutual Shares Fund. The merger will be accounted for by the method of accounting for tax free business combinations of investment companies. The pro forma combined Statement of Assets and Liabilities reflects the financial position of TVP - Templeton Mutual Shares June 30, 1999 as though the merger occurred as of that date. The pro forma combined Statement of Operations reflects the results of operations of the TVP - Templeton Mutual Shares and VIP - Templeton Mutual Shares for the period January 1, 1999 to June 30, 1999 as though the merger occurred on January 1, 1999. The pro forma financial statements do not reflect the expenses of either fund in carrying out its obligations under the Agreement and Plan of Reorganization or any adjustment with respect to additional distributions that may be made prior to reorganization. The pro forma financial statements are presented for the information of the reader, and should be read in conjunction with the historical financial statements of the funds. 2. CAPITAL SHARES: The number of Class 1 and 2 shares issued was calculated by dividing the Class 1 and 2 net assets of the TVP - Templeton Mutual Shares at June 30, 1999 by the Class 1 and 2 net asset value per share of the VIP - Templeton Mutual Shares, respectively at June 30, 1999. <TABLE> <CAPTION> TVP Templeton Bond Fund VIP Templeton Global Income Securities Fund Pro forma combined Statement of Investments, June 30, 1999 (unaudited) VIP TEMPLETON GLOBAL INCOME VIP TEMPLETON GLOBAL INCOME SECURITIES FUND TVP TEMPLETON BOND FUND SECURITIES FUND PRO FORMA COMBINED ------------------------------------------------------------------------------------------------------------------------------------ PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT* VALUE AMOUNT* VALUE AMOUNT* VALUE ------------------------------------------------------------------------------------------------------------------------------------ Long Term Securities 98.8% Argentina 1.5% <S> <C> <C> <C> <C> <C> <C> Republic of Argentina, 10.95%, 11/01/99 $ 350,000 $ 353,500 $ 1,645,000 $ 1,661,450 $ 1,995,000 $ 2,014,950 ------------ ------------ -------------- Australia 5.2% Australian Government, 10.00%, 10/15/07 1,463,000 AUD 1,201,184 7,220,000 AUD 5,927,922 8,683,000 AUD 7,129,106 ------------ ------------ ------------- Belgium 5.1% Kingdom of Belgium, 6.25%, 3/28/07 838,376 EUR 958,984 5,291,039 EUR 6,052,203 6,129,415 EUR 7,011,187 ------------ ------------ ------------ Brazil .9% Republic of Brazil, FRN, 5.938%, 4/15/09 170,000 117,300 1,510,000 1,041,900 1,680,000 1,159,200 ------------ ------------ ------------ Bulgaria 1.8% Republic of Bulgaria, Series A, FRN, 5.875%, 7/28/24 605,000 413,669 2,970,000 2,030,738 3,575,000 2,444,407 ------------ ------------ ------------ Canada 1.5% Government of Canada, 7.00%, 12/01/06 475,000 CAD 353,970 2,345,000 CAD 1,747,494 2,820,000 CAD 2,101,464 ------------ ------------ ------------ Denmark 2.1% Kingdom of Denmark, 7.00%, 11/15/07 3,001,000 DKK 481,257 14,838,000 DKK 2,379,506 17,839,000 DKK 2,860,763 ------------ ------------ ------------ Ecuador 1.4% Republic of Ecuador, FRN, 6.00%, 2/28/25 670,000 313,647 3,500,000 1,638,455 4,170,000 1,952,102 ------------ ------------ ------------ Germany 12.8% Federal Republic of Germany, 5.25%, 2/21/01 - - 9,129,117 EUR 9,723,728 9,129,117 EUR 9,723,728 Hypothekenbank In Essen AG, Series 502, 5.25%, 1/22/08 935,664 995,970 5,279,089 EUR 5,619,341 6,214,753 EUR 6,615,311 Treuhandanstalt, 7.50%, 9/09/04 1,022,584 EUR 1,221,364 1,022,584 EUR 1,221,364 ------------ ------------ ------------ 2,217,334 15,343,069 17,560,40 ------------ ------------ ------------ India Essar Steel Ltd., Reg S, FRN, 7.635%, 7/20/99 50,000 33,750 -- 50,000 33,750 ------------ ------------ ------------ Italy 6.1% Buoni Poliennali del Tesoro, 10.50%, 7/15/00 612,000 EUR 677,953 2,272,406 EUR 2,517,293 2,884,406 EUR 3,195,246 Government of Italy, 7.75%, 11/01/06 877,975 EUR 1,086,763 3,305,318 EUR 4,091,341 4,183,293 EUR 5,178,104 ------------ ------------ ------------ 1,764,716 6,608,634 8,373,350 ------------ ------------ ------------ Mexico 7.9% United Mexican States: 9.75%, 4/06/05 650,000 660,563 6,000,000 6,097,500 6,650,000 6,758,063 9.875%, 1/15/07 1,700,000 1,721,250 1,700,000 1,721,250 11.375%, 9/15/16 175,000 188,213 175,000 188,213 6.25%, 12/31/19 800,000 593,000 800,000 593,000 11.50%, 5/15/26 250,000 279,375 1,230,000 1,374,525 1,480,000 1,653,900 ------------ ------------ ------------ 1,721,151 9,193,275 10,914,426 ------------ ------------ ------------ New Zealand 2.4% Government of New Zealand, 7.00%, 7/15/09 990,000 NZD 543,312 5,050,000 NZD 2,771,439 6,040,000 NZD 3,314,751 ------------ ------------ ------------ Norway .4% Statkraft SF, 7.50%, 11/10/99 511,292 EUR 535,177 -- 511,292 EUR 535,177 ------------ ------------ ------------ Panama .1% Republic of Panama, 8.875%, 9/30/27 170,000 141,100 -- 170,000 141,100 ------------ ------------ ------------ Peru .7% Republic of Peru, FRN, 4.50%, 3/07/17 235,000 144,967 1,300,000 801,944 1,535,000 946,911 ------------ ------------ ------------ Sweden 3.1% Kingdom of Sweden, 6.00%, 2/09/05 5,800,000 SEK 725,750 28,700,000 SEK 3,591,213 34,500,000 SEK 4,316,963 ------------ ------------ ------------ Turkey .5% Republic of Turkey, 12.375%, 6/15/09 $ 100,000 $ 99,250 $ 535,000 $ 530,988 $ 635,000 $ 630,238 ------------ ------------ ------------ United Kingdom 10.2% United Kingdom: 6.50%, 12/07/03 820,000 GBP 1,375,628 5,400,000 GBP 9,059,015 6,220,000 GBP 10,434,643 7.50%, 12/07/06 500,000 GBP 888,607 1,500,000 GBP 2,665,821 2,000,000 GBP 3,554,428 ------------ ------------ ------------ 2,264,235 11,724,836 13,989,071 ------------ ------------ ------------ United States 33.9% Fannie Mae, 6.875%, 6/07/02 475,000 GBP 768,191 475,000 GBP 768,191 U.S. Treasury Notes: 4.50%, 1/31/01 2,100,000 2,069,157 11,000,000 10,838,443 13,100,000 12,907,600 7.25%, 8/15/04 1,072,000 1,139,000 5,519,000 5,863,938 6,591,000 7,002,938 6.125%, 11/15/27 412,000 408,266 412,000 408,266 5.25%, 11/15/28 4,395,000 3,890,950 24,500,000 21,690,167 28,895,000 25,581,117 ------------ ------------ ------------ 8,275,564 38,392,548 46,668,112 ------------ ------------ ------------ Venezuela 1.2% Republic of Venezuela, 144A, 9.125%, 6/18/07 300,000 228,000 1,940,000 1,474,400 2,240,000 1,702,400 ------------ ------------ ------------ Total Long Term Securities (Cost $144,447,861) 22,887,817 112,912,014 135,799,831 ------------ ------------ ------------ Short Term Investments (Cost $509,000) .4% Chase Securities Inc., 5.00%, 6/30/99, Time Deposit 509,000 -- 509,000 ------------ ------------ ------------ Total Investments (Cost $144,956,861) 99.1% 23,396,817 112,912,014 136,308,831 Net Equity In Forward Contracts 15,853 31,411 47,264 Other Assets, Less Liabilities .8% 400,446 747,904 1,148,350 ------------ ------------ ------------- Total Net Assets 100.0% $23,813,116 $113,691,329 $137,504,445 ------------ ------------ ------------- Currency Abbreviations: AUD - Australian Dollar CAD - Canadian Dollar DKK - Danish Krone EUR - European Unit GBP - British Pound NZD - New Zealand Dollar SEK - Swedish Krone *Securities traded in U.S. dollars unless otherwise indicated. See accompanying notes to pro forma combined financial statements. </TABLE> <TABLE> <CAPTION> Templeton Variable Products Series Fund - Templeton Bond Fund ("TVP Templeton Bond Fund") Franklin Templeton Variable Insurance Products Trust - Templeton Global Income Securities Fund ("VIP Templeton Global Income Securities Fund") Financial Statements Pro Forma Combined Statements of Assets and Liabilities (unaudited) June 30, 1999 VIP Templeton Global Income TVP Templeton VIP Templeton Securities Fund Bond Global Income Pro Forma Fund Securities Fund Combined ------------------------------------------------------ Assets: Investments in securities: <S> <C> <C> <C> Cost $24,840,681 $120,116,180 $144,956,861 ------------------------------------------------------ Value 23,396,817 112,912,014 136,308,831 Cash 602 -- 602 Receivables: Capital shares sold 430 113 543 Dividends and interest 439,143 1,882,841 2,321,984 Unrealized gain on forward exchange contracts 15,853 31,411 47,264 Other assets -- -- -- ------------------------------------------------------ Total assets 23,852,845 114,826,379 138,679,224 ------------------------------------------------------ Liabilities: Payables: Capital shares redeemed 11 171,188 171,199 Affiliates 11,601 54,811 64,412 Custodian fees -- 25,009 25,009 Postage and mailing -- 12,541 12,541 Funds advanced by custodian -- 853,913 853,913 Accrued expenses 28,117 -- 28,117 Other liabilities -- 17,588 17,588 ------------------------------------------------------ Total liabilities 39,729 1,135,050 1,174,779 ------------------------------------------------------ Net assets, at value $23,813,116 $113,691,329 $137,504,445 ====================================================== Class 1: Net assets, at value $23,523,321 $113,608,897 $137,132,218 ====================================================== Shares outstanding ** 2,343,325 9,311,962 11,240,103 ====================================================== Net asset value and offering price per share $10.04 $12.20 $12.20 ====================================================== Class 2: Net assets, at value $ 289,795 $ 82,432 $ 372,227 ====================================================== Shares outstanding ** 28,891 6,766 30,559 ====================================================== Net asset value and offering price per share $10.03 $12.18 $12.18 ====================================================== **See note 2 in the accompanying notes to pro forma combined financial statements. eExpense adjustment for differences in administrative fees and 12B1 fees. See accompanying notes to pro forma combined financial statements.>> </TABLE> <TABLE> <CAPTION> TVP Templeton Bond Fund VIP Templeton Global Income Securities Fund Financial Statements (continued) Pro forma combined Statements of Operations for the six months ended June 30, 1999 (unaudited) VIP Templeton GLOBAL INCOME TVP TEMPLETON VIP TEMPLETON SECURITIES FUND BOND GLOBAL INCOME PRO FORMA PRO FORMA FUND SECURITIES FUND ADJUSTMENTS COMBINED ------------------------------------------------------------------------------------------------------------------------------- Investment income: <S> <C> <C> <C> <C> Interest $ 877,644 $ 4,131,998 $-- $ 5,009,642 ------------------------------------------------------------------------------------------------------------------------------- Total investment income 877,644 4,131,998 -- 5,009,642 Expenses: Management fees 66,912 393,647 -- 460,559 Administrative fees 12,962 -- (12,962)a -- Distribution fees-Class 2 103 32 63b 198 Custodian fees 3,600 26,200 -- 29,800 Reports to shareholders 4,900 12,800 -- 17,700 Registration and filing fees 700 -- -- 700 Professional fees 7,000 3,400 -- 10,400 Trustees' fees and expenses 400 -- 400 Other 194 556 -- 750 ------------------------------------------------------------------------------------------------------------------------------- Total expenses 96,371 437,035 (12,899) 520,507 Net investment income 781,273 3,694,963 (12,899) 4,489,135 Realized and unrealized gains (losses): Net realized gain (loss) from: Investments (278,372) (921,611) -- (1,199,983) Foreign currency transactions 25,160 147,984 -- 173,144 ------------------------------------------------------------------------------------------------------------------------------- Net realized loss (253,212) (773,627) -- (1,026,839) Net unrealized depreciation on: Investments (1,979,559) (10,006,919) -- (11,986,478) Translation of assets and liabilities denominated in foreign currencies (18,666) (46,104) -- (64,770) ------------------------------------------------------------------------------------------------------------------------------- Net unrealized loss (1,998,225) (10,053,023) -- (12,051,248) Net realized and unrealized loss (2,251,437) (10,826,650) -- (13,078,087) Net decrease in net assets resulting from operations $(1,470,164) $ (7,131,687) $(12,899) $ (8,588,952) aPro Forma adjustment for difference in Administrative fee schedule. bPro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate reflected in the Pro Forma Combined is 0.25% of the average net assets. See accompanying notes to pro forma combined financial statements.>> </TABLE> VIP - Templeton Global Income Fund TVP - Templeton Bond Fund Notes to Pro forma combined Statements (unaudited) 1. Basis of Combination Subject to approval of the proposed Agreement and Plan of Reorganization (the "Agreement and Plan") by the shareholders of the Templeton Variable Products Series Fund - Templeton Bond Fund ("TVP Bond Fund"), the Franklin Templeton Variable Insurance Products Trust - Templeton Global Income Fund ("VIP - Templeton Global Income Fund") will acquire all the net assets of the TVP - Templeton Bond Class 1 and 2 in exchange for the Classes 1 and 2 shares, respectively, shares of VIP - Templeton Global Income Fund. The merger will be accounted for by the method of accounting for tax free business combinations of investment companies. The pro forma combined Statement of Assets and Liabilities reflects the financial position of TVP - Templeton Bond Fund June 30, 1999 as though the merger occurred as of that date. The pro forma combined Statement of Operations reflects the results of operations of the TVP - Templeton Bond and VIP - Templeton Global Income for the period January 1, 1999 to June 30, 1999 as though the merger occurred on January 1, 1999. The pro forma financial statements do not reflect the expenses of either fund in carrying out its obligations under the Agreement and Plan of Reorganization or any adjustment with respect to additional distributions that may be made prior to reorganization. The pro forma financial statements are presented for the information of the reader, and should be read in conjunction with the historical financial statements of the funds. 2. Capital Shares: The number of Class 1 and 2 shares issued was calculated by dividing the Class 1 and 2 net assets of the TVP - Templeton Bond at June 30, 1999 by the Class 1 and 2 net asset value per share of the VIP - Templeton Global Income, respectively at June 30, 1999. <TABLE> <CAPTION> TVP Developing Markets Fund VIP Templeton Developing Markets Equity Fund Pro forma combined Statement of Investments, June 30, 1999 (unaudited) VIP TEMPLETON DEVELOPING VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND TVP DEVELOPING MARKETS FUND MARKETS EQUITY FUND PRO FORMA COMBINED ------------------------------------------------------------------------------------------------------------------------------------ SHARES VALUE SHARES VALUE SHARES VALUE ------------------------------------------------------------------------------------------------------------------------------------ Long Term Securities 97.9% Argentina 4.3% <S> <C> <C> <C> <C> <C> <C> a Atanor Cia Nacional Para la Industria Quimica SA, D 82,061 $ 40,214 152,050 $ 74,512 234,111 $ 114,726 Banco de Galicia y Buenos Aires SA de CV, B 76,205 390,971 59,765 306,625 135,970 697,596 a Banco Frances SA 36,000 234,032 -- -- 36,000 234,032 a Buenos Aires Embotelladora SA, B, ADR 29,000 1,827 56,200 3,541 85,200 5,368 a Capex SA, A 25,000 145,765 48,735 284,153 73,735 429,918 Central Costanera SA, B 35,860 103,287 -- -- 35,860 103,287 a Molinos Rio de la Plata SA, B 60,018 100,840 923,413 1,551,489 983,431 1,652,329 Nobleza Piccardo Sdad Industrial Comercial y Financial 52,451 173,106 -- -- 52,451 173,106 Perez Companc SA, B 509,070 2,927,445 295,695 1,700,416 804,765 4,627,861 Quilmes Industrial SA, ADR 123,000 1,522,125 144,600 1,789,427 267,600 3,311,552 a Sociedad Comercial del Plata Cadelplata Come 345,950 132,858 1,140,960 438,172 1,486,910 571,030 Telecom Argentina Stet-France SA, ADR 118,200 3,161,850 34,200 914,850 152,400 4,076,700 Telefonica De Argentina SA, ADR 110,730 3,474,154 34,610 1,085,889 145,340 4,560,043 Transportadora de Gas del Sur SA, ADR 51,600 483,750 -- -- 51,600 483,750 Transportadora de Gas del Sur SA, B 110,115 207,037 -- -- 110,115 207,037 ------------ ------------ ------------ 13,099,261 8,149,074 21,248,335 ------------ ------------ ------------ Austria 1.2% Austria Tabak AG 23,700 1,380,891 7,000 407,858 30,700 1,788,749 Bank Austria AG 20,800 1,093,947 19,810 1,041,879 40,610 2,135,826 OMV AG 17,200 1,534,112 5,300 472,720 22,500 2,006,832 ------------ ------------ ------------ 4,008,950 1,922,457 5,931,407 ------------ ------------ ------------ Botswana .0% Sechaba Brewery Holding Ltd. 159,200 183,886 -- -- 159,200 183,886 ------------ ------------ ------------ Brazil 12.3% Aracruz Celulose SA, ADR 267,200 5,878,400 119,000 2,618,000 386,200 8,496,400 Banco Bradesco SA 132,856,544 530,668 59,329,083 236,978 192,185,627 767,646 Banco Bradesco SA, pfd. 65,233,889 335,010 40,276,150 206,839 105,510,039 541,849 Banco do Brasil SA 37,626,000 150,289 75,902,976 303,178 113,528,976 453,467 Brasmotor SA, pfd. 1,306,000 104,256 3,246,000 259,124 4,552,000 363,380 Centrais Eletricas Brasileiras SA (Electrobras) 14,941,000 284,753 45,251,000 862,416 60,192,000 1,147,169 Centrais Eletricas Brasileiras SA (Electrobras), B, pfd. 170,946,000 3,482,324 183,925,000 3,746,718 354,871,000 7,229,042 Centrais Geradoras Do Sul Do Brasil SA, B, pfd. 161,900,000 131,183 209,667,000 169,887 371,567,000 301,070 Cia Cervejaria Brahma, pfd. 495,000 282,171 473,000 269,630 968,000 551,801 Cia Energetica de Minas Gerais Cemig, Br., pfd. 113,752,000 2,402,261 40,185,000 848,643 153,937,000 3,250,904 a Cia Mesbla SA, pfd. 7,400,000 31,838 7,400,000 31,838 Cia Vale do Rio Doce, A, pfd. 156,750 3,112,639 50,900 1,010,739 207,650 4,123,378 Copene-Petroquimica do Nordeste SA, A, pfd. 1,097,000 172,140 2,864,700 449,525 3,961,700 621,665 Duratex SA, pfd. 12,525,000 335,906 52,566,800 1,409,780 65,091,800 1,745,686 Embratel Participacoes SA, pfd. 62,558,000 878,132 15,877,000 222,867 78,435,000 1,100,999 Investimentos Itau SA 212,359 113,561 89,527 47,876 301,886 161,437 a Investimentos Itau SA, pfd. 5,218,000 2,798,813 2,200,200 1,180,136 7,418,200 3,978,949 a Mannesmann SA 2,692,000 199,231 2,048,500 151,607 4,740,500 350,838 a Mannesmann SA, pfd. 307,200 23,226 307,200 23,226 Petroleo Brasileiro SA, pfd. 1,523,000 238,987 -- -- 1,523,000 238,987 Tele Celular Sul Participacoes SA, pfd. 62,558,000 133,862 15,877,000 33,974 78,435,000 167,836 Tele Centro Oeste Celular Participacoes SA, pfd. 23,658,000 30,104 2,629,000 3,345 26,287,000 33,449 Tele Centro Sul Participacoes SA, pfd. 397,594,000 4,421,746 71,999,000 800,720 469,593,000 5,222,466 Brazil (cont.) Tele Leste Celular Participacoes SA, pfd. 62,558,000 $ 37,481 15,877,000 $ 9,513 78,435,000 $ 46,994 Tele Nordeste Celular Participacoes SA, pfd. 62,558,000 86,385 15,877,000 21,924 78,435,000 108,309 Tele Norte Celular Participacoes SA, pfd. 62,558,000 35,696 15,877,000 9,060 78,435,000 44,756 Tele Norte Leste Participacoes SA, pfd. 243,998,000 4,483,158 55,911,000 1,027,295 299,909,000 5,510,453 Tele Sudeste Celular Participacoes SA, pfd. 499,230,000 2,862,914 109,402,000 627,383 608,632,000 3,490,297 Telemig Celular Participacoes SA, pfd. 62,558,000 79,603 15,877,000 20,203 78,435,000 99,806 Telesp Celular Participacoes SA, pfd. 62,558,000 663,954 15,877,000 168,509 78,435,000 832,463 Telesp Participacoes SA, ADR 248,400 5,682,150 47,500 1,086,563 295,900 6,768,713 Telesp Participacoes SA, pfd. 62,558,000 1,481,402 15,877,000 375,975 78,435,000 1,857,377 Unibanco Uniao de Bancos Brasileiros SA 7,111,000 324,611 15,439,000 704,776 22,550,000 1,029,387 ------------ ------------ ------------ 41,753,790 18,938,247 60,692,037 ------------ ------------ ------------ Chile 2.4% Cia Cervecerias Unidas SA, ADR 7,500 214,687 15,000 429,375 22,500 644,062 Cia de Telecomunicaciones de Chile SA, ADR 161,414 3,994,997 105,300 2,606,175 266,714 6,601,172 Empresa Nacional de Electricidad SA, ADR 99,615 1,207,832 103,142 1,250,597 202,757 2,458,429 Enersis SA, ADR 38,753 886,475 26,642 609,436 65,395 1,495,911 Madeco Manufacturera de Cobre SA, ADR 5,600 56,700 -- -- 5,600 56,700 Quinenco SA, ADR 30,900 289,687 47,900 449,063 78,800 738,750 ------------ ------------ ------------ 6,650,378 5,344,646 11,995,024 ------------ ------------ ------------ China .8% Beijing Datang Power Generation Co. Ltd., H 5,000 1,611 -- -- 5,000 1,611 China Resources Enterprises Ltd. 116,000 204,824 -- -- 116,000 204,824 a China Telecommunications Ltd. 58,000 161,093 -- -- 58,000 161,093 China Vanke Co. Ltd., B 2,857,867 1,919,033 2,857,867 1,919,033 Guangshen Railway Co. Ltd., H 768,000 117,791 -- -- 768,000 117,791 Guangshen Railway Co. Ltd., H, ADR 20,400 155,550 -- -- 20,400 155,550 a Shanghai Dazhong Taxi Shareholding Co. Ltd., B -- -- 455,300 309,604 455,300 309,604 Shandong Huaneng Power Development Co. Ltd., ADR 22,500 116,719 96,500 500,594 119,000 617,313 a Shanghai New Asia Group Co. Ltd., B 34,502 9,316 -- -- 34,502 9,316 Shanghai Petrochemical Co. Ltd., H 1,812,900 427,590 1,060,500 250,129 2,873,400 677,719 Yanzhou Coal Mining Company Ltd., H 100,000 35,766 100,000 35,766 ------------ ------------ ------------ 1,230,260 2,979,360 4,209,620 ------------ ------------ ------------ Colombia .3% Barvaria SA -- -- 202,807 753,258 202,807 753,258 Cementos Agros SA -- -- 255,000 662,105 255,000 662,105 ------------ ------------ ------------ 457,807 1,415,363 457,807 1,415,363 ------------ ------------ ------------ Czech Republic 1.6% a CEZ AS 1,079,250 2,221,246 1,408,880 2,899,671 2,488,130 5,120,917 a SPT Telecom AS 113,540 1,843,341 66,310 1,076,554 179,850 2,919,895 Tabak AS 260 61,926 -- -- 260 61,926 ------------ ------------ ------------ 4,126,513 3,976,225 8,102,738 ------------ ------------ ------------ Egypt .1% Commercial International Bank Ltd. 38,700 347,550 -- -- 38,700 347,550 Eastern Tobacco Co. 1,100 26,793 -- -- 1,100 26,793 ------------ ------------ ------------ 374,343 -- 374,343 ------------ ------------ ------------ Ghana .1% Ashanti Goldfields Co. Ltd., GDR 25,159 174,541 21,164 146,825 46,323 321,366 ------------ ------------ ------------ Hong Kong 5.3% CDL Hotel International Ltd. 61,250 $ 25,656 -- -- 61,250 $ 25,656 Cheung Kong Holdings Ltd. 145,000 1,289,495 276,000 $ 2,454,487 421,000 3,743,982 China Overseas Land & Investment Ltd. 487,000 69,044 -- -- 487,000 69,044 Citic Pacific Ltd. 407,000 1,298,292 458,000 1,460,977 865,000 2,759,269 Cross Harbour Tunnel Co. Ltd. 44,000 33,175 -- -- 44,000 33,175 Dairy Farm International Holdings Ltd. 1,334,370 1,601,244 237,772 285,326 1,572,142 1,886,570 Hang Lung Development Co. Ltd. 972,000 1,202,652 980,000 1,212,551 1,952,000 2,415,203 Hong Kong & Shanghai Hotels Ltd. 966,000 821,720 568,000 483,164 1,534,000 1,304,884 Hong Kong Electric Holdings Ltd. 206,594 665,672 168,682 543,515 375,276 1,209,187 Hong Kong Land Holdings Ltd. 19,000 30,780 5,000 8,100 24,000 38,880 HSBC Holdings PLC 46,902 1,710,726 41,078 1,498,299 87,980 3,209,025 Jardine Matheson Holdings Ltd. 376,055 1,880,275 240,815 1,204,075 616,870 3,084,350 Jardine Strategic Holdings Ltd. 35,000 91,000 -- -- 35,000 91,000 a Lai Sun Development Co. Ltd. 48,000 4,207 -- -- 48,000 4,207 a Lai Sun Garment International Ltd. 612,000 44,960 -- -- 612,000 44,960 New World Development Co. Ltd. 786,322 2,356,275 827,632 2,480,064 1,613,954 4,836,339 Shangri La Asia Ltd. 2,000 2,475 -- -- 2,000 2,475 Sun Hung Kai Properties Ltd. 47,617 434,201 54,739 499,144 102,356 933,345 Wheelock and Company Ltd. 196,890 270,256 -- -- 196,890 270,256 ------------ ------------ ------------ 13,832,105 12,129,702 25,961,807 ------------ ------------ ------------ Hungary 1.5% Borsodchem RT 45,569 1,111,531 29,330 711,600 74,899 1,823,131 Borsodchem RT, GDR, Reg S 6,900 169,567 -- -- 6,900 169,567 Egis RT 6,720 160,860 -- -- 6,720 160,860 a Fotex First Hungarian American Photo Service Co. 45,385 17,262 -- -- 45,385 17,262 Gedeon Richter Ltd. 23,110 1,005,593 10,180 442,966 33,290 1,448,559 Matav RT 41,500 224,417 13,800 74,625 55,300 299,042 Mol Magyar Olay-Es Gazipari RT 62,070 1,496,065 21,800 525,442 83,870 2,021,507 Pannonplast Plastic Industries PLC 842 16,326 -- -- 842 16,326 Tiszai Vegyi Kombinat RT 74,562 779,899 44,001 460,239 118,563 1,240,138 Zwack Unicum Ltd. 100 2,295 -- -- 100 2,295 ------------ ------------ ------------ 4,983,815 2,214,872 7,198,687 ------------ ------------ ------------ India .7% Bajaj Auto Ltd. 650 8,110 25 312 675 8,422 a Bank of Baroda 100 151 100 151 -- -- Bharat Petroleum Corp. Ltd. 12,900 78,243 -- -- 12,900 78,243 a Hindalco Industries Inc. 19,742 286,151 -- -- 19,742 286,151 Hindustan Petroleum Corporation Ltd 64,338 368,716 35,600 204,021 99,938 572,737 Indian Aluminium Co Ltd 29,000 40,964 45,000 63,565 74,000 104,529 Indian Petrochemicals Corp. Ltd. 100 237 100 237 Larsen and Toubro Ltd. 91,671 605,696 120,924 798,978 212,595 1,404,674 Mahanagar Telephone Nigam Ltd. 96,800 415,228 96,800 415,228 *National Aluminum Co Ltd., 14.50%, 3/08/05 1,529,000 INR 37,249 3,085,500 INR 75,167 4,614,500 INR 112,416 Reliance Industries Ltd. 8,515 34,699 87,500 356,568 96,015 391,267 Tata Iron & Steel Co. Ltd. -- -- 100 323 100 323 ------------ ------------ ------------ 1,875,056 1,499,322 5,227,465 3,374,378 ------------ ------------ ------------ Indonesia 5.5% a Asia Pulp & Paper Co. Ltd., ADR 92,800 893,200 82,900 797,913 175,700 1,691,113 a Asia Pulp & Paper Co. Ltd., ADR, wts. 20,540 53,917 18,340 48,143 38,880 102,060 a PT Barito Pacific Timber TBK 1,774,000 193,246 -- -- 1,774,000 193,246 PT Gudang Garamm 320,000 869,136 226,000 613,827 546,000 1,482,963 a PT Indah Kiat Pulp & Paper Corp. 3,750,750 1,743,268 3,938,000 1,830,298 7,688,750 3,573,566 a PT Indocement Tunggal PrakarSA 1,746,000 893,922 1,408,500 721,127 3,154,500 1,615,049 a PT Indofoods Sukses Makmurr 1,054,685 1,439,948 594,020 811,008 1,648,705 2,250,956 PT Indosat 232,000 444,793 197,000 377,691 429,000 822,484 a PT Semen Cibinong 35,534,500 4,903,090 -- -- 35,534,500 4,903,090 PT Semen Gresik (Persero) 316,501 689,545 338,617 737,728 655,118 1,427,273 Indonesia (cont.) a PT Sinar Mas Agro Resources & Technology Corp. 482,800 $ 431,259 -- $-- 482,800 $ 431,259 PT Tambang TimaH 1,289,500 1,123,747 1,002,000 873,203 2,291,500 1,996,950 PT Telekomunikasi Indonesia (Persero), B 5,611,140 3,259,922 3,348,260 1,945,249 8,959,400 5,205,171 PT Tempo Scan Pacific 487,000 203,359 -- -- 487,000 203,359 a PT Tjiwi Kimia 909,454 350,044 1,520,926 585,396 2,430,380 935,440 ------------ ------------ ------------ 17,492,396 12,674,563 9,341,583 66,296,233 26,833,979 ------------ ------------ ------------ Israel .3% a Formula Systems Ltd. 18,380 557,917 9,780 296,868 28,160 854,785 Koor Industries Ltd. 2,590 298,623 2,686 309,692 5,276 608,315 ------------ ------------ ------------ 856,540 606,560 1,463,100 ------------ ------------ ------------ Jordan .1% a Zara Investment Holdings Company Ltd. 345,450 752,561 -- 345,450 752,561 ------------ ------------ ------------ Malaysia 3.8% Boustead Holdings Bhd. 403,000 366,942 384,000 349,642 787,000 716,584 Federal Flour Mills Bhd. 33,000 31,263 99,000 93,789 132,000 125,052 Genting Bhd. 306,600 1,169,921 326,400 1,245,474 633,000 2,415,395 Golden Hope Plantations Bhd. 122,000 104,663 37,000 31,742 159,000 136,405 Hong Leong Industries Bhd. 206,800 243,806 336,200 396,362 543,000 640,168 Island & Peninsula Bhd. 443,000 433,674 454,000 444,442 897,000 878,116 Kian Joo Can Factory Bhd. 59,000 107,132 59,000 107,132 118,000 214,264 a Leader Universal Holdings Bhd. 1,452,000 607,547 982,000 410,889 2,434,000 1,018,436 Malayawata Steel Bhd. 563,000 225,200 -- -- 563,000 225,200 Malaysian Airlines System Bhd. 246,000 336,632 197,000 269,579 443,000 606,211 Malaysian International Shipping Corp., fgn. 76,000 139,000 207,666 379,810 283,666 518,810 Oriental Holdings Bhd. 61,000 166,947 45,000 123,158 106,000 290,105 Perlis Plantations Bhd. 175,000 204,474 374,500 437,574 549,500 642,048 Perusahaan Otomobil Nasional Bhd. 141,000 326,526 214,000 495,579 355,000 822,105 Public Bank Bhd. 1,740,400 1,323,620 149,000 113,318 1,889,400 1,436,938 Public Bank Bhd., fgn. 2,219,000 2,324,110 20,000 20,947 2,239,000 2,345,057 Resorts World Bhd. 679,000 1,599,224 789,000 1,858,303 1,468,000 3,457,527 Shangri La Hotels (Malaysia) Bhd. 31,000 11,339 886,000 324,089 917,000 335,428 Tanjong PLC 312,000 775,895 214,000 532,184 526,000 1,308,079 Technology Resources Industries Bhd. 437,000 356,500 104,000 84,842 541,000 441,342 YTL Corp. Bhd. 176,000 370,526 -- -- 176,000 370,526 ------------ ------------ ------------ 11,224,941 7,718,855 18,943,796 ------------ ------------ ------------ Mexico 10.7% Cemex SA 616,990 3,060,244 54,810 271,855 671,800 3,332,099 Cemex SA, B 1,322,500 6,594,848 1,454,500 7,253,086 2,777,000 13,847,934 a Cifra SA de CV, V 710,833 1,426,979 209,000 419,562 919,833 1,846,541 a Coca Cola Femsa SA de CV, L, ADR 52,300 1,013,312 45,000 871,875 97,300 1,885,187 DESC SA de CV DESC, B 1,250,000 1,374,800 460,170 506,113 1,710,170 1,880,91 Fomento Economico Mexicano SA de CV FemSA 31,000 1,236,125 5,000 199,375 36,000 1,435,500 a Grupo Financiero Banamex Accival SA de CV 1,895,068 4,856,554 1,250,885 3,205,685 3,145,953 8,062,239 Grupo Industrial Maseca SA de CV, B 19,000 11,361 -- -- 19,000 11,361 Panamerican Beverages Inc., A 59,800 1,423,988 2,900 69,056 62,700 1,493,044 Telefonos de Mexico SA (Telmex), ADR 66,500 5,374,031 144,800 11,701,650 211,300 17,075,681 Vitro SA De CV, A 353,500 609,990 718,349 1,239,564 1,071,849 1,849,554 ------------ ------------ ------------ 26,982,232 25,737,821 52,720,053 ------------ ------------ ------------ New Zealand Brierley Investments Ltd. 713,000 200,244 -- 713,000 200,244 ------------ ------------ ------------ Pakistan .3% a Bank of Punjab 35,204 9,040 -- 35,204 9,040 a DG Khan Cement Co. 1,034,288 83,184 -- 1,034,288 83,184 Pakistan (cont.) Engro Chemical Pakistan Ltd. 138,534 $ 194,646 -- $-- 138,534 $ 194,646 Pakistan Telecommunications Corp., A 906,000 348,529 2,222,000 854,781 3,128,000 1,203,310 ------------ ------------ ------------ 635,399 854,781 1,490,180 ------------ ------------ ------------ Peru .8% Telefonica Del Peru SA, ADR 154,200 2,332,275 109,500 1,656,188 263,700 3,988,463 ------------ ------------ ------------ Philippines 2.9% a A Soriano Corp. 6,301,500 182,172 -- -- 6,301,500 182,172 Ayala Corp. 441,840 145,151 -- -- 441,840 145,151 a Belle Corp. 39,075,000 4,159,100 -- -- 39,075,000 4,159,100 a Filinvest Development Corp. 2,639,000 242,746 -- -- 2,639,000 242,746 a Keppel Philippine Holdings Inc., B 8,776,186 174,140 -- -- 8,776,186 174,140 Petron Corp. 1,144,000 121,766 3,695,000 393,292 4,839,000 515,058 a Philex Mining Corp., B 6,059,500 60,515 6,059,500 60,515 Philippine Commercial International Bank Inc. 185,060 1,264,536 -- -- 185,060 1,264,536 Philippine Long Distance Telephone Co., ADR 45,800 1,379,725 71,700 2,159,963 117,500 3,539,688 a Philippine National Bank 701,931 1,900,102 -- -- 701,931 1,900,102 RFM Corp. 1,587,636 202,366 -- -- 1,587,636 202,366 San Miguel Corp., B 703,200 1,533,919 132,700 289,464 835,900 1,823,383 a Southeast Asia Cement Holdings Inc. 16,230,683 234,609 1,772,577 25,622 18,003,260 260,231 ------------ ------------ ------------ 11,600,847 2,868,341 14,469,188 ------------ ------------ ------------ Poland .8% Bank Slaski SA W KatowicacH 19,900 973,824 700 34,255 20,600 1,008,079 Elektrim SA 84,700 1,198,127 -- -- 84,700 1,198,127 a Impexmetal SA 93,892 430,752 -- -- 93,892 430,752 a Prokom Software SA. 491 16,331 -- -- 491 16,331 a Rolimpex SA 22,617 34,299 -- -- 22,617 34,299 Telekomunikacja Polska SA 40,416 283,278 40,416 283,278 Warta SA 14,709 288,669 28,395 557,261 43,104 845,930 Wielkopolski Bank Kredytowy SA 12,100 70,932 12,100 70,932 ----------- ------------ ------------ 3,012,934 874,794 3,887,728 ----------- ------------ ------------ Russia 1.1% a Aeroflot-Russia International Airlines 1,684,800 225,763 1,684,800 225,763 GAZ Auto Works 1,270 44,755 1,310 46,164 2,580 90,919 Irkutskenergo 680,800 69,305 439,500 44,741 1,120,300 114,046 Irkutskenergo, ADR 7,000 35,630 7,000 35,630 14,000 71,260 a Krasnoyarsk Aluminum Plant 5,748 35,375 5,748 35,375 Lukoil Holdings, ADR 19,320 765,072 3,360 133,056 22,680 898,128 Mosenergo 5,937,200 265,987 2,052,000 91,930 7,989,200 357,917 Mosenergo, ADR 38,930 175,185 3,000 13,500 41,930 188,685 a Norilsk Nickel 41,700 136,776 -- -- 41,700 136,776 a Novorosissk Sea Shipping 28,000 4,715 -- -- 28,000 4,715 a Novorosissk Sea Shipping., pfd. 224,000 13,418 -- -- 224,000 13,418 a Red October 3,000 20,700 -- -- 3,000 20,700 a Rostelecom 553,000 873,740 2,000 3,160 555,000 876,900 a Rostelecom, ADR 33,300 326,756 11,900 116,769 45,200 443,525 a Rostelecom, pfd. 257,300 132,509 -- -- 257,300 132,509 a Saint Petersburg City Telephone Network, A, pfd. 53,000 7,420 -- -- 53,000 7,420 a Tsum Trade House 317,500 64,833 -- -- 317,500 64,833 Unified Energy Systems 3,400,000 297,500 610,600 53,428 4,010,600 350,928 Unified Energy Systems, ADR 11,000 97,075 12,000 105,900 23,000 202,975 Unified Energy Systems, pfd. 200,000 8,160 -- -- 200,000 8,160 a Vimpel Communications, ADR 45,400 1,052,712 10,950 253,903 56,350 1,306,615 ------------ ------------ ------------ 4,653,386 898,181 5,551,567 Singapore 8.5% Acer Computer International Ltd. 195,000 $ 232,050 -- $-- 195,000 $ 232,050 Acma Ltd. 193,000 194,984 -- -- 193,000 194,984 City Developments Ltd. 277,000 1,773,451 367,500 2,352,863 644,500 4,126,314 Cycle & Carriage Ltd. 177,000 1,018,855 45,000 259,031 222,000 1,277,886 Delgro Corp. 39,500 95,125 -- -- 39,500 95,125 Development Bank of Singapore Ltd., fgn. 5,000 61,087 -- -- 5,000 61,087 First Capital Corp. Ltd. 408,000 635,066 262,000 407,812 670,000 1,042,878 Fraser and Neave Ltd. 466,000 2,066,549 445,000 1,973,421 911,000 4,039,970 Hai Sun Hup Group Ltd. 714,000 423,577 1,315,000 780,117 2,029,000 1,203,694 Hong Leong Finance Ltd., fgn. 172,000 394,009 -- -- 172,000 394,009 Inchcape Motors Ltd. 143,000 230,144 163,000 262,332 306,000 492,476 Isetan (Singapore) Ltd. 18,000 30,132 -- -- 18,000 30,132 Jurong Shipyard Ltd. 194,000 951,483 224,000 1,098,620 418,000 2,050,103 Keppel Corp., Ltd. 969,000 3,301,145 725,000 2,469,897 1,694,000 5,771,042 MCL Land Ltd. 605,000 764,023 -- -- 605,000 764,023 Metro Holdings Ltd. 39,000 61,392 -- -- 39,000 61,392 Natsteel Ltd. 1,323,000 2,315,736 1,008,000 1,764,370 2,331,000 4,080,106 a Neptune Orient Lines Ltd. 300,000 366,520 -- -- 300,000 366,520 a Osprey Maritime Ltd. 267,000 183,489 -- -- 267,000 183,489 Overseas Chinese Banking Corp. Ltd., fgn. 229,000 1,910,015 198,000 1,651,454 427,000 3,561,469 Overseas Union Enterprise Ltd. 106,400 337,480 173,400 549,991 279,800 887,471 Sembcorp Industries Ltd. 1,416,925 2,247,106 1,119,769 1,775,845 2,536,694 4,022,951 Singapore Petroleum Company, fgn. 110,000 90,455 -- -- 110,000 90,455 United Industrial Corporation Ltd. 1,691,000 1,142,232 1,371,000 926,079 3,062,000 2,068,311 United Overseas Bank Ltd., fgn. 391,000 2,732,981 284,000 1,985,081 675,000 4,718,062 United Overseas Land Ltd. 109,000 122,925 -- -- 109,000 122,925 WBL Corp. Ltd. 87,000 119,577 -- -- 87,000 119,577 ------------ ------------ ------------ 23,801,588 18,256,913 42,058,501 ------------ ------------ ------------ Slovak Republic .2% Nafta Gbely AS 6,695 88,399 4,800 63,378 11,495 151,777 a Slovnaft AS 11,000 145,241 28,010 369,836 39,010 515,077 a Vychodoslovenske Zeleziarne AS 22,857 93,661 8,400 34,421 31,257 128,082 ------------ ----------- ------------ 327,301 467,635 794,936 ------------ ----------- ------------ South Africa 10.1% AECI Ltd. 63,600 142,282 63,600 142,282 Anglo American PLC 100,878 4,714,160 68,395 3,196,187 169,273 7,910,347 Barlow Ltd. 228,500 1,317,723 205,300 1,183,932 433,800 2,501,655 CG Smith Ltd. 513,000 1,474,944 618,600 1,778,558 1,131,600 3,253,502 De Beers/Centenary Linked Units 118,100 2,829,938 66,740 1,599,238 184,840 4,429,176 a Del Monte Royal Foods Ltd. 1,411,300 877,020 -- -- 1,411,300 877,020 Dunlop Africa Ltd. 191,200 99,806 -- -- 191,200 99,806 Edgars Consolidated Stores Ltd. 16,563 128,727 -- -- 16,563 128,727 Firstrand Ltd. 710,000 811,832 79,000 90,331 789,000 902,163 Iscor Ltd. 2,859,390 895,558 3,395,912 1,063,597 6,255,302 1,959,155 Kersaf Investments Ltd. 391,367 1,751,083 2,000 8,949 393,367 1,760,032 a Liberty International PLC 79,444 525,938 27,075 179,241 106,519 705,179 Liberty Life Association of Africa Ltd. 198,392 2,541,338 62,070 795,097 260,462 3,336,435 Palabora Mining Co. Ltd. 29,500 210,208 114,000 812,329 143,500 1,022,537 Rembrandt Group Ltd. 185,100 1,542,883 156,170 1,301,740 341,270 2,844,623 Sappi Ltd. 401,073 2,937,679 311,651 2,282,703 712,724 5,220,382 Sasol Ltd. 372,000 2,653,840 378,900 2,703,065 750,900 5,356,905 South African Breweries PLC 397,580 3,452,348 251,244 2,181,653 648,824 5,634,001 Tongaat-Hulett Group Ltd. 132,952 812,980 96,043 587,288 228,995 1,400,268 ------------ ----------- ------------ 29,720,287 19,763,908 49,484,195 ------------ ----------- ------------ South Korea 8.7% Asia Cement Manufacturing Co. Ltd. 61,820 1,522,134 -- -- 61,820 1,522,134 a Cho Hung Bank Co. Ltd. 34,188 191,689 -- -- 34,188 191,689 a Cho Hung Bank Co. Ltd., GDR, Reg S 20,868 116,965 -- -- 20,868 116,965 a Daegu Bank Co. Ltd. 143,655 640,397 -- -- 143,655 640,397 South Korea (cont.) a Daewoo Electronics Co. 62,560 $ 308,071 -- $-- 62,560 $ 308,071 Dongkuk Steel Mill Co. Ltd. 14,592 85,724 -- -- 14,592 85,724 Hana Bank 585,442 8,598,284 27,132 398,483 612,574 8,996,767 Hana Bank, GDR, Reg S 98,502 1,418,429 94,732 1,364,141 193,234 2,782,570 a Hotel Shilla Co. 109,330 1,218,451 -- -- 109,330 1,218,451 Korea Electric Power Corp. 200,970 8,351,324 83,100 3,453,227 284,070 11,804,551 a Kyongnam Bank 520,745 1,979,506 -- -- 520,745 1,979,506 LG Electronics Inc. 71,376 1,973,246 13,900 384,276 85,276 2,357,522 Pohang Iron & Steel Co. Ltd., ADR 15,500 521,188 15,500 521,188 Saehan Precision Co. Ltd. 58,905 1,201,000 -- -- 58,905 1,201,000 Samsung Display Devices Ltd. 22,337 1,215,750 27,586 1,501,441 49,923 2,717,191 Samsung Electronics Co. Ltd. 28,595 3,137,421 19,481 2,137,440 48,076 5,274,861 a Samsung Heavy Industries Co. Ltd. 191,755 1,043,677 190,082 1,034,572 381,837 2,078,249 Shin Poong Paper Manufacturing Co Ltd. 5,361 53,263 -- -- 5,361 53,263 Shin Young Wocoal Inc. 1,288 75,667 -- -- 1,288 75,667 SK Corp. 1,410 40,564 1,410 40,564 Ssangyong Oil Refining Co. Ltd. 3,570 92,527 -- -- 3,570 92,527 Tong Yang Merchant Bank 55,502 343,802 118 731 55,620 344,533 ------------ ----------- ------------ 33,567,327 10,836,063 44,403,390 ------------ ----------- ------------ Thailand 8.0% Advanced Info Service Public Co. Ltd., fgn. 72,900 988,475 100,300 1,360,000 173,200 2,348,475 American Standard Sanitaryware Publi Co. Ltd., fgn. -- -- 30,800 154,522 30,800 154,522 Ayudhya Insurance Public Co. Ltd., fgn. 3,800 12,263 3,800 12,263 a Bangkok Bank Public Co. Ltd. 1,249,687 2,728,130 922,400 2,013,646 2,172,087 4,741,776 a Bangkok Bank Public Co. Ltd., fgn. 123,000 460,312 23,000 86,075 146,000 546,387 a Bangkok Insurance Public Co. Ltd. 25,600 96,499 -- -- 25,600 96,499 BEC World Public Co Ltd., fgn. 23,000 143,458 -- -- 23,000 143,458 a Charoen Pokphand Feedmill Public Co. Ltd., fgn. 547,800 891,336 511,500 832,271 1,059,300 1,723,607 a Hana Microelectronics Co. Ltd., fgn. 86,200 259,477 160,400 482,831 246,600 742,308 Hua Thai Manufacturing Public Co. Ltd., fgn. -- -- 8,000 11,260 8,000 11,260 Industrial Finance Corp. of Thailand, fgn. 1,041,500 663,736 1,078,700 687,443 2,120,200 1,351,179 Italian-Thai Development Public Co. Ltd., fgn. 66,900 161,467 -- -- 66,900 161,467 a Jasmine International Public Co. Ltd., fgn. 678,000 473,451 -- -- 678,000 473,451 a Land and House Public Co. Ltd. 484,978 677,325 -- -- 484,978 677,325 a Land and House Public Co. Ltd., fgn. 206,278 374,797 5,800 10,538 212,078 385,335 Saha Pathanapibul Public Co. Ltd., fgn. 430,500 642,102 -- -- 430,500 642,102 a Saha Union Public Co. Ltd. 259,306 114,270 -- -- 259,306 114,270 Saha Union Public Co. Ltd., fgn. 277,994 124,391 -- -- 277,994 124,391 a Serm Suk Public Co. Ltd. 31,100 144,220 -- -- 31,100 144,220 Serm Suk Public Co. Ltd., fgn. 4,900 25,912 -- -- 4,900 25,912 a Shin Corporations Public Company Ltd., fgn. 13,200 61,570 -- -- 13,200 61,570 a Siam Cement Public Co. Ltd. 22,750 426,929 68,100 1,277,972 90,850 1,704,901 Siam Cement Public Co. Ltd., fgn. 84,950 2,580,176 -- -- 84,950 2,580,176 a Siam Commercial Bank, fgn. 361,901 500,527 -- -- 361,901 500,527 a Siam Commercial Bank, 144A, 5.25%, cvt. pfd., fgn. 547,000 778,780 40,000 56,949 587,000 835,729 Siam Makro Public Company Ltd., fgn. 307,900 586,158 376,000 715,802 683,900 1,301,960 a Telecomasia Corp. Public Co. Ltd., fgn. 219,000 221,227 54,000 54,549 273,000 275,776 a Thai Airways International Public Co. Ltd., fgn. 414,000 812,843 408,700 802,437 822,700 1,615,280 a Thai Farmers Bank Public Co. Ltd. 1,319,008 2,646,958 1,984,200 3,981,852 3,303,208 6,628,810 a Thai Farmers Bank Public Co. Ltd., fgn. 775,025 2,396,009 569,800 1,761,551 1,344,825 4,157,560 a Thai Petrochemical Industry Public Co. Ltd., fgn. 795,120 517,502 -- -- 795,120 517,502 </TABLE> <TABLE> <CAPTION> VIP TEMPLETON DEVELOPING VIP TEMPLETON DEVELOPING MARKETS EQUITY FUND TVP DEVELOPING MARKETS FUND MARKETS EQUITY FUND PRO FORMA COMBINED ------------------------------------------------------------------------------------------------------------------------------------ SHARES VALUE SHARES VALUE SHARES VALUE ------------------------------------------------------------------------------------------------------------------------------------ Long Term Securities (cont.) Thailand (cont.) aThai Telephone & Telecommunication <S> <C> <C> <C> <C> <C> Public Co. Ltd.,fgn. 866,500 $ 328,976 -- $-- 866,500 $ 328,976 Thai Wacoal Public Co. Ltd., fgn. 30,100 61,220 -- -- 30,100 61,220 aTipco Asphalt Public Co. Ltd., fgn. 81,400 112,580 -- -- 81,400 112,580 aTotal Access Communication Public Co. Ltd. 607,200 1,943,040 419,800 1,343,360 1,027,000 3,286,400 aUnited Communications Industries, fgn. 284,500 323,269 471,700 535,979 756,200 859,248 ------------ ------------ ------------- 23,279,385 16,169,037 39,448,422 ------------ ------------ ------------- Turkey 2.4% Akbank 138,078,552 2,028,547 332,362,112 4,882,815 470,440,664 6,911,362 Akcansa Cimento Sanayi Ve Ticaret AS 38,200,000 389,223 -- -- 38,200,000 389,223 Anadolu Anonim Turk Sigorta Sirketi, Br. 28,898,000 126,680 28,898,000 126,680 aArcelik AS, Br. 11,012,000 391,404 14,110,456 501,533 25,122,456 892,937 aErciyas Biracilik 11,706,000 269,059 8,638,000 198,542 20,344,000 467,601 aEregli Demir ve Celik Fabrikalari AS 18,168,000 253,996 57,961,000 810,317 76,129,000 1,064,313 Haci Omer Sabanci Holding AS, ADR, 144A 23,500 128,075 150,100 818,045 173,600 946,120 Hurriyet Gazete 23,577,900 167,608 -- -- 23,577,900 167,608 Koc Holding AS 5,147,000 323,197 -- -- 5,147,000 323,197 aTofas Turk Otomobil Fabrikasi AS 6,225,500 24,709 17,732,561 70,380 23,958,061 95,089 aTofas Turk Otomobil Fabrikasi AS, new 9,337,875 37,062 -- -- 9,337,875 37,062 aTofas Turk Otomobil Fabrikasi AS, rts. 12,450,500 34,518 14,186,035 39,329 26,636,535 73,847 aTurkiye Garanti Bankasi AS 26,780,454 199,892 40,231,380 300,291 67,011,834 500,183 Turkiye Is Bankasi AS, C 1,763,200 31,335 -- -- 1,763,200 31,335 ------------ ------------ ------------- 4,278,625 7,747,932 12,026,557 ------------ ------------ ------------- Venezuela 3.3% Compania Anonima Nacional Telefonos de Venezuela, ADR 150,900 4,112,025 54,700 1,490,575 205,600 5,602,600 Electricidad De Caracas Saica Saca, ADR 198,071 3,876,544 95,528 1,869,626 293,599 5,746,170 Mavesa SA, ADR 95,700 311,025 306,300 995,475 402,000 1,306,500 ------------ ------------ ------------- 8,299,594 4,355,676 16,361,625 ------------ ------------ ------------- Total Long Term Securities (Cost $443,606,387) 295,310,760 186,870,361 482,181,121 ------------ ------------ ------------- </TABLE> <TABLE> <CAPTION> PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT* AMOUNT* AMOUNT* ----------- ----------- ----------- Short Term Investments 1.1% U.S. Treasury Bills, 4.59% to 4.81% <S> <C> <C> <C> <C> <C> <C> with maturities to 12/02/99 $4,845,000 4,772,948 $729,000 717,422 $5,574,000 5,490,370 ------------ ------------ ------------- Total Investments (Cost $449,087,809) 99.0% 300,083,708 187,587,783 487,671,491 Other Assets, less Liabilities 1.0% 3,024,212 1,802,110 4,826,322 ------------ ------------ ------------- Total Net Assets 100.0% $303,107,920 $189,389,893 $492,497,813 ------------ ------------ ------------- </TABLE> *Securities denominated in U.S. dollars. aNon-income producing. See accompanying notes to pro forma combined financial statements. Templeton Variable Products Series Fund - Templeton Developing Markets Fund ("TVP Developing Markets Fund") Franklin Templeton Variable Insurance Products Trust - Templeton Developing Markets Equity Fund ("VIP Templeton Developing Markets Equity Fund") Financial Statements Pro forma combined Statements of Assets and Liabilities (unaudited) June 30, 1999 <TABLE> <CAPTION> VIP Templeton Developing Markets TVP VIP Equity Fund Developing Developing Pro Forma Markets Fund Markets Fund Combined -------------------------------------------------------------------------------------------------------- Assets: Investments in securities: <S> <C> <C> <C> Cost $ 272,632,324 $ 176,455,485 $ 449,087,809 ------------------------------------------------- Value 300,083,708 187,587,783 487,671,491 Cash 1,707,046 336,898 2,043,944 Receivables: Investment securities sold 5,056,763 2,824,516 7,881,279 Capital shares sold 215,579 583 216,162 Dividends and interest 942,653 840,659 1,783,312 ------------------------------------------------- Total assets 308,005,749 191,590,439 499,596,188 ------------------------------------------------- Liabilities: Payables: Investment securities purchased 4,026,453 1,386,072 5,412,525 Capital shares redeemed -- 185,016 185,016 Affiliates 333,099 191,123 524,222 Custodian fees -- 56,601 56,601 Postage and mailing -- 12,341 12,341 Shareholders -- -- -- Equity in foreign currencies -- -- -- Deffered tax liability (Note 1j) 420,541 341,01 761,553 Distributions to shareholders -- -- -- Funds advanced by custodian -- -- -- Accrued expenses 117,736 -- 117,736 Other liabilities -- 28,381 28,381 ------------------------------------------------- Total liabilities 4,897,829 2,200,546 7,098,375 ------------------------------------------------- Net assets, at value $ 303,107,920 $ 189,389,893 $ 492,497,813 ================================================= Class 1: Net assets, at value $ 268,035,925 $ 188,802,531 $ 456,838,456 ================================================= Shares outstanding** 37,062,731 20,102,042 48,646,869 ================================================= Net asset value and offering price per share $7.23 $9.39 $9.39 ================================================= Class 2: Net assets, at value $ 35,071,995 $ 587,362 $ 35,659,357 ================================================= Shares outstanding** 4,862,951 62,613 3,801,632 ================================================= Net asset value and offering price per share $7.21 $9.38 $9.38 ================================================= </TABLE> **See note 2 in the accompanying notes to pro forma combined financial statements. eExpense adjustment for differrences in administrative fees and 12B1 fees. See accompanying notes to pro forma combined financial statements. TVP Developing Markets Fund VIP Templeton Developing Markets Equity Fund Financial Statements (continued) Pro forma combined Statements of Operations for the six months ended June 30, 1999 (unaudited) <TABLE> <CAPTION> VIP Templeton Developing TVP VIP Markets Templeton Templeton Equity Fund Developing Developing Proforma Pro Forma Markets Fund Markets Fund Adjustments Combined ------------------------------------------------------------------------------------------------------ Investment income:+ <S> <C> <C> <C> Dividends $ 3,124,301 $ 2,475,116 $ 5,599,417 Interest 143,566 6,057 149,623 --------------------------------------------------------------- Total investment income 3,267,867 2,481,173 -- 5,749,040 --------------------------------------------------------------- Expenses: Management fees 1,460,484 1,041,397 2,501,881 Administrative fees 113,170 -- $171,910a 285,080 Distribution fees - Class 2 29,391 39 (6) 29,424 Custodian fees 138,500 105,800 244,300 Reports to shareholders 9,000 8,000 17,000 Professional fees 12,400 11,500 23,900 Trustees' fees and expenses 600 600 Other 1,202 69 1,271 --------------------------------------------------------------- Total expenses 1,764,147 1,167,405 171,904 3,103,456 --------------------------------------------------------------- Net expenses 1,764,147 1,167,405 171,904 3,103,456 --------------------------------------------------------------- Net investment income (loss) 1,503,720 1,313,768 171,904 2,645,584 --------------------------------------------------------------- Realized and unrealized gains (losses): Net realized gain (loss) from: Investments (28,889,873) (26,187,877) (55,077,750) Foreign currency transactions (112,458) (45,691) (158,149) --------------------------------------------------------------- Net realized gain (loss) (29,002,331) (26,233,568) -- (55,235,899) Net unrealized appreciation (depreciation) -- on: Investments 116,493,272 76,644,013 193,137,285 Deferred taxes (Note X) (420,541) 341,012 (79,529) --------------------------------------------------------------- Net unrealized gain 116,072,731 76,985,025 193,057,756 --------------------------------------------------------------- Net realized and unrealized gain 87,070,400 50,751,457 -- 137,821,857 --------------------------------------------------------------- Net increase (decrease) in net assets resulting from operations $ 88,574,120 $ 52,065,225 $ 171,904 $ 140,467,441 =============================================================== </TABLE> aPro Forma adjustment for difference in Administrative fee schedule. The combined entity will adopt an administrative fee based on the fund's average net assets as follows: First $ 200,000,000 0.150% Next $ 500,000,000 0.135% Next $ 500,000,000 0.100% Over $1,200,000,000 0.075% bPro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate reflected in the Pro Forma Combined is 0.25% of the average net assets. +Net of foreign taxes of $393,488 and $319,010 for TVP Templeton Developing Markets Fund and VIP Templeton Developing Markets Equity Fund, respectively. See accompanying notes to pro forma combined financial statements. VIP - Templeton Developing Markets Fund TVP - Templeton Developing Markets Fund Notes to Pro forma combined Statements (unaudited) 1. Basis of Combination Subject to approval of the proposed Agreement and Plan of Reorganization (the "Agreement and Plan") by the shareholders of the Templeton Variable Products Series Fund - Templeton Developing Markets Fund ("TVP-Templeton Developing Markets Fund"), the Franklin Templeton Variable Insurance Products Trust - Templeton Developing Markets Fund ("VIP - Templeton Developing Markets") will acquire all the net assets of the TVP - Templeton Developing Markets Class 1 and 2 in exchange for the Classes 1 and 2 shares, respectively, shares of VIP - Templeton Developing Markets. The merger will be accounted for by the method of accounting for tax free business combinations of investment companies and TVP - Templeton Developing Markets Fund will be the accounting survivor. The pro forma combined Statement of Assets and Liabilities reflects the financial position of TVP - Templeton Developing Markets June 30, 1999 as though the merger occurred as of that date. The pro forma combined Statement of Operations reflects the results of operations of the TVP - Templeton Developing Markets and VIP - Templeton Developing Markets for the period January 1, 1999 to June 30, 1999 as though the merger occurred on January 1, 1999. The pro forma financial statements do not reflect the expenses of either fund in carrying out its obligations under the Agreement and Plan of Reorganization or any adjustment with respect to additional distributions that may be made prior to reorganization. The pro forma financial statements are presented for the information of the reader, and should be read in conjunction with the historical financial statements of the funds. 2. Capital Shares: The number of Class 1 and 2 shares issued was calculated by dividing the Class 1 and 2 net assets of the TVP - Templeton Developing Markets at June 30, 1999 by the Class 1 and 2 net asset value per share of the VIP - Templeton Developing Markets, respectively at June 30, 1999. TVP TEMPLETON INTERNATIONAL FUND VIP TEMPLETON INTERNATIONAL EQUITY FUND PRO FORMA COMBINED STATEMENT OF INVESTMENTS, JUNE 30, 1999 (UNAUDITED) <TABLE> <CAPTION> TVP TEMPLETON VIP TEMPLETON VIP TEMPLETON INTERNATIONAL EQUITY INTERNATIONAL FUND INTERNATIONAL EQUITY FUND PRO FORMA COMBINED ---------------------------------------------------------------------------------------------------------------------------------- SHARES VALUE SHARES VALUE SHARES VALUE ---------------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 92.5% AEROSPACE & MILITARY TECHNOLOGY .2% <S> <C> <C> <C> <C> <C> <C> Hong Kong Aircraft Engineering Co. Ltd. 1,160,200 $ 2,242,987 513,400 $ 992,544 1,673,600 $ 3,235,531 ------------ ------------ ------------- Appliances & Household Durables 2.7% Electrolux AB, B -- -- 1,160,000 24,286,050 1,160,000 24,286,050 Fisher & Paykel Ltd. -- -- 1,321,125 4,200,382 1,321,125 4,200,382 Sony Corp. 215,200 23,201,917 215,200 23,201,917 ------------ ------------ ------------- 23,201,917 28,486,432 51,688,349 ------------ ------------ ------------- AUTOMOBILES 3.8% Autoliv Inc., SDR 358,450 10,919,613 317,000 9,656,904 675,450 20,576,517 Fiat SpA 2,552,500 8,112,617 3,391,410 10,778,927 5,943,910 18,891,544 Volkswagen AG 156,000 10,065,917 -- -- 156,000 10,065,917 Volvo AB, B 672,100 19,486,315 91,500 2,652,876 763,600 22,139,191 ------------ ------------ ------------- 48,584,462 23,088,707 71,673,169 ------------ ------------ ------------- BANKING 9.7% Australia & New Zealand Banking Group Ltd. 1,745,350 12,833,660 -- -- 1,745,350 12,833,660 Banco Popular Espanol SA 64,000 4,603,486 62,400 4,488,398 126,400 9,091,884 aBangkok Bank Public Co. Ltd., fgn. 2,763,800 10,343,170 -- -- 2,763,800 10,343,170 Bank Austria AG, 144A 230,146 12,104,203 -- -- 230,146 12,104,203 BPI Socieda de Gestora de Participacoes Socias SA -- -- 321,978 6,756,989 321,978 6,756,989 Credit Commercial de France CCF -- -- 128,800 13,920,017 128,800 13,920,017 Credicorp Ltd. 292,160 3,213,760 -- -- 292,160 3,213,760 Foreningssparbanken AB, A 228,000 3,218,066 244,500 3,450,953 472,500 6,669,019 Kookmin Bank -- -- 96,678 1,962,793 96,678 1,962,793 HSBC Holdings PLC, ADR 30,100 10,978,818 30,100 10,978,818 Merita AS 3,400,000 19,319,377 1,254,500 7,128,282 4,654,500 26,447,659 National Bank of Canada 440,000 5,802,528 447,000 5,894,841 887,000 11,697,369 National Westminster Bank PLC 574,342 12,167,265 641,668 13,593,547 1,216,010 25,760,812 Svenska Handelsbanken, A -- -- 466,200 5,593,084 466,200 5,593,084 Unibanco Uniao de Bancos Brasileiros SA, GDR -- -- 548,700 13,203,094 548,700 13,203,094 Unibanco Uniao de Bancos Brasileiros SA, unit -- -- 28,412,000 1,296,981 28,412,000 1,296,981 Unidanmark AS, A 150,000 10,011,123 -- -- 150,000 10,011,123 Union Bank of Norway 199,000 3,715,846 199,000 3,715,846 ------------ ------------ ------------- 104,595,456 81,004,825 185,600,281 ------------ ------------ ------------- BROADCASTING & PUBLISHING 1.0% Cordiant Communications Group PLC -- -- 3,561,500 9,852,200 3,561,500 9,852,200 NV Holdingsmig de Telegraaf -- -- 504,000 9,927,194 504,000 9,927,194 ------------ ------------ ------------- -- 19,779,394 19,779,394 ------------ ------------ ------------- BUILDING MATERIALS & COMPONENTS 2.4% Anglian Group PLC -- -- 2,028,800 10,473,062 2,028,800 10,473,062 Caradon PLC 3,265,240 7,694,483 -- -- 3,265,240 7,694,483 Cie de Saint Gobain -- -- 13,292 2,117,783 13,292 2,117,783 Hepworth PLC -- -- 1,330,100 4,130,224 1,330,100 4,130,224 Pioneer International Ltd. -- -- 7,462,117 19,015,853 7,462,117 19,015,853 Unione Cementi Marchino Emiliane (Unicem), di Risp -- -- 468,000 2,195,937 468,000 2,195,937 ------------ ------------ ------------- 7,694,483 37,932,859 45,627,342 ------------ ------------ ------------- BUSINESS & PUBLIC SERVICES .5% Esselte AB, B -- -- 158,500 1,640,555 158,500 1,640,555 Lex Service PLC -- -- 902,000 8,296,034 902,000 8,296,034 ------------ ------------ ------------- -- 9,936,589 9,936,589 ------------ ------------ ------------- CHEMICALS 2.6% Akzo Nobel NV 352,800 14,844,014 129,200 5,436,073 482,000 20,280,087 BASF AG 273,530 12,016,477 273,530 12,016,477 DSM NV, Br. 19,000 2,037,744 19,000 2,037,744 CHEMICALS (CONT.) Imperial Chemical Industries PLC -- $ -- 857,000 $ 8,523,801 857,000 $ 8,523,801 Kemira OY 1,088,632 6,578,719 1,088,632 6,578,719 ------------ ------------ ------------- 33,439,210 15,997,618 49,436,828 ------------ ------------ ------------- CONSTRUCTION & HOUSING .9% Fairview Holdings PLC -- -- 623,475 1,321,796 623,475 1,321,796 Fletcher Challenge Building Ltd. -- -- 4,627,000 6,742,575 4,627,000 6,742,575 Sirti SpA -- -- 1,833,800 8,850,350 1,833,800 8,850,350 ------------ ------------ ------------- 6,578,719 16,914,721 16,914,721 ------------ ------------ ------------- DATA PROCESSING & REPRODUCTION .6% aNewbridge Networks Corp. 418,260 12,024,975 -- 418,260 12,024,975 ------------ ------------ ------------- ELECTRICAL & ELECTRONICS 4.5% aABB Ltd. 64,840 6,110,292 -- -- 64,840 6,110,292 Alcatel SA 134,405 18,919,545 -- -- 134,405 18,919,545 General Electric Co. PLC 1,920,000 19,520,192 1,920,000 19,520,192 Koninklijke Philips Electronics NV 210,312 20,744,914 201,762 19,901,596 412,074 40,646,510 aMeto AG 158,500 784,857 158,500 784,857 ------------ ------------ ------------- 45,774,751 40,206,645 85,981,396 ------------ ------------ ------------- ENERGY SOURCES 4.6% Perez Companc SA, B 1,975,000 11,357,386 -- -- 1,975,000 11,357,386 Repsol SA 807,000 16,477,880 -- -- 807,000 16,477,880 Shell Transport & Trading Co. PLC 1,913,742 14,336,022 -- -- 1,913,742 14,336,022 Societe Elf Aquitaine SA, Br. 106,150 15,577,132 148,024 21,721,992 254,174 37,299,124 aTotal Fina SA, B 62,039 8,003,588 62,039 8,003,588 ------------ ------------ ------------- 57,748,420 29,725,580 87,474,000 ------------ ------------ ------------- FINANCIAL SERVICES 3.8% AXA SA 130,000 15,859,544 -- 130,000 15,859,544 ING Groep NV 214,846 11,631,860 288,685 15,629,537 503,531 27,261,397 Lend Lease Corp. Ltd. 1,040,000 14,279,005 -- -- 1,040,000 14,279,005 Nomura Securities Co. Ltd. 1,210,000 14,165,317 -- -- 1,210,000 14,165,317 ------------ ------------ ------------- 55,935,726 15,629,537 71,565,263 ------------ ------------ ------------- FOOD & HOUSEHOLD PRODUCTS 2.0% Illovo Sugar Ltd. 3,005,800 3,312,382 -- -- 3,005,800 3,312,382 McBride PLC 1,000,000 1,749,630 1,000,000 1,749,630 Northern Foods PLC 2,868,307 5,900,099 -- -- 2,868,307 5,900,099 Panamerican Beverages Inc., A 290,000 6,905,625 -- -- 290,000 6,905,625 Tate & Lyle PLC 1,763,000 11,053,139 1,540,500 9,658,174 3,303,500 20,711,313 ------------ ------------ ------------- 27,171,245 11,407,804 38,579,049 ------------ ------------ ------------- FOREST PRODUCTS & PAPER 3.0% Carter Holt Harvey Ltd. -- -- 3,243,400 3,884,208 3,243,400 3,884,208 Cartiere Burgo SpA -- -- 696,200 4,472,136 696,200 4,472,136 Fletcher Challenge Ltd. Forestry Division -- -- 6,020,000 3,381,395 6,020,000 3,381,395 Kimberly Clark de Mexico SA de CV, A -- -- 1,115,000 4,619,541 1,115,000 4,619,541 Mayr-Melnhof Karton AG -- -- 39,400 1,787,769 39,400 1,787,769 aPT Indah Kiat Pulp & Paper Corp. TBK -- -- 9,724,297 4,519,644 9,724,297 4,519,644 aPT Indah Kiat Pulp & Paper Corp. TBK, wts., 4/13/01 -- -- 782,553 340,982 782,553 340,982 aPT Indah Kiat Pulp & Paper Corp. TBK, wts., 7/11/02 -- -- 818,888 249,770 818,888 249,770 Stora Enso OYJ, R 400,000 4,289,987 1,167,304 12,631,377 1,567,304 16,921,364 Stora Enso OYJ, R, fgn. 435,426 4,711,737 186,900 2,004,496 622,326 6,716,233 Unipapel SA, Br. -- -- 104,400 1,185,360 104,400 1,185,360 UPM-Kymmene Corp. 351,000 10,062,700 -- -- 351,000 10,062,700 ------------ ------------ ------------- 19,064,424 39,076,678 58,141,102 ------------ ------------ ------------- HEALTH & PERSONAL CARE 2.7% Internatio-Muller NV -- $ -- 240,308 $ 5,290,890 240,308 $ 5,290,890 Medeva PLC 3,190,000 5,229,343 3,190,000 5,229,343 Nycomed Amersham PLC 1,575,700 11,208,536 1,575,700 11,208,536 Rhone-Poulenc SA, A 279,800 12,785,334 -- -- 279,800 12,785,334 Teva Pharmaceutical Industries Ltd., ADR 335,200 16,424,800 -- -- 335,200 16,424,800 ------------ ------------ ------------- 34,439,477 16,499,426 50,938,903 ------------ ------------ ------------- INDUSTRIAL COMPONENTS .7% Granges AB -- -- 191,000 3,235,004 191,000 3,235,004 Madeco Manufacturera de Cobre SA, ADR 190,000 1,923,750 -- -- 190,000 1,923,750 Meggitt PLC -- -- 1,487,610 4,584,152 1,487,610 4,584,152 Yamato Kogyo Co. Ltd. 446,000 3,246,249 -- -- 446,000 3,246,249 ------------ ------------ ------------- 5,169,999 7,819,156 12,989,155 ------------ ------------ ------------- INSURANCE 6.1% Ace Ltd. 320,545 9,055,396 682,500 19,280,625 1,003,045 28,336,021 AXA China Region Ltd. 11,930,000 9,533,114 11,930,000 9,533,114 Baloise-Holding -- -- 7,380 6,019,452 7,380 6,019,452 Muenchener Rueckversicherungs- Gesellschaft 27,260 5,136,024 33,000 6,217,490 60,260 11,353,514 aMuenchener Rueckversicherungs- Gesellschaft, 144A 27,260 5,088,232 33,000 6,159,637 60,260 11,247,869 Partnerre Ltd. 269,000 10,053,875 -- -- 269,000 10,053,875 Scor SA 250,000 12,400,743 -- -- 250,000 12,400,743 XL Capital Ltd., A 170,450 9,630,425 -- -- 170,450 9,630,425 Zurich Allied AG 32,300 18,366,911 -- -- 32,300 18,366,911 ------------ ------------ ------------- 79,264,720 37,677,204 116,941,924 ------------ ------------ ------------- LEISURE & TOURISM .7% Kuoni Reisen Holding AG, B -- -- 3,570 13,766,982 3,570 13,766,982 ------------ ------------ ------------- MACHINERY & ENGINEERING 2.1% Bucher Holding AG, Br. -- -- 12,800 10,662,550 12,800 10,662,550 IHC Caland NV -- -- 375,000 14,695,267 375,000 14,695,267 Invensys PLC 1,318,675 6,246,049 1,820,854 8,624,675 3,139,529 14,870,724 ------------ ------------ ------------- 6,246,049 33,982,492 40,228,541 ------------ ------------ ------------- MERCHANDISING 3.3% David Jones Ltd. 2,225,500 2,180,130 2,463,527 2,413,304 4,689,027 4,593,434 Hudsons Bay Co. 357,000 4,024,940 357,000 4,024,940 Marks & Spencer PLC 2,243,000 12,939,977 -- -- 2,243,000 12,939,977 Safeway PLC 3,247,408 12,988,711 1,695,778 6,782,631 4,943,186 19,771,342 Somerfield PLC 1,552,716 7,281,186 1,552,716 7,281,186 Storehouse 3,498,781 7,527,877 3,314,000 7,130,308 6,812,781 14,658,185 ------------ ------------ ------------- 35,636,695 27,632,369 63,269,064 ------------ ------------ ------------- METALS & MINING 5.2% Angang New Steel Company Ltd., H, 144A 22,414,000 3,351,043 -- -- 22,414,000 3,351,043 Anglo American Platinum Corp. Ltd. 349,009 8,143,254 417,465 9,740,504 766,474 17,883,758 Boehler Uddeholm AG 31,505 1,559,168 33,000 1,633,155 64,505 3,192,323 Boehler Uddeholm AG, 144A 33,800 1,672,746 27,055 1,338,939 60,855 3,011,685 British Steel PLC 4,090,000 10,588,924 4,033,200 10,441,870 8,123,200 21,030,794 Chongqing Iron & Steel Ltd., H 25,564,000 2,471,114 -- -- 25,564,000 2,471,114 Companhia Siderurgica Nacional CSN, ADR -- -- 276,365 7,254,581 276,365 7,254,581 Grupo Mexico SA de CV, B -- -- 1,983,600 8,493,578 1,983,600 8,493,578 Ispat International NV, A 227,600 2,517,825 -- -- 227,600 2,517,825 Pechiney SA, A 136,212 5,854,714 -- -- 136,212 5,854,714 METALS & MINING (CONT.) Pohang Iron & Steel Co. Ltd. 85,000 $ 10,597,000 10,450 $ 1,302,808 95,450 $ 11,899,808 WMC Ltd. 2,870,000 12,328,766 -- -- 2,870,000 12,328,766 ------------ ------------ ------------- 59,084,554 40,205,435 99,289,989 ------------ ------------ ------------- MISC MATERIALS & COMMODITIES .4% Korea Chemical Co. Ltd. -- 57,900 5,202,246 57,900 5,202,246 Unitor ASA -- 295,000 2,548,111 295,000 2,548,111 ------------ ------------ ------------- -- 7,750,357 7,750,357 ------------ ------------ ------------- MULTI-INDUSTRY 3.9% Alfa SA de CV, A 2,110,000 8,820,769 -- -- 2,110,000 8,820,769 Broken Hill Proprietary Co. Ltd. 1,210,543 14,022,043 -- -- 1,210,543 14,022,043 Cheung Kong Holdings Ltd. 850,000 7,559,110 188,600 1,677,233 1,038,600 9,236,343 Elementis PLC 2,052,331 3,412,896 3,336,000 5,547,555 5,388,331 8,960,451 Jardine Strategic Holdings Ltd. 2,574,940 6,694,844 2,574,940 6,694,844 Next PLC 1,255,500 15,257,881 -- -- 1,255,500 15,257,881 Saab AB, B 726,900 5,642,837 -- -- 726,900 5,642,837 Swire Pacific Ltd., B 7,937,100 5,933,248 7,937,100 5,933,248 ------------ ------------ ------------- 54,715,536 19,852,880 74,568,416 ------------ ------------ ------------- REAL ESTATE .3% Hang Lung Development Co. Ltd. -- -- 779,000 963,854 779,000 963,854 New Asia Realty and Trust Co. Ltd., A 2,670,000 4,060,653 -- -- 2,670,000 4,060,653 ------------ ------------ ------------- 4,060,653 963,854 5,024,507 ------------ ------------ ------------- RECREATION & OTHER CONSUMER GOODS 1.6% Nintendo Co. Ltd. 143,500 19,976,661 143,500 19,976,661 Swatch Group AG, Br. -- -- 15,400 10,361,765 15,400 10,361,765 Yue Yuen Industrial (Holdings) Ltd. -- -- 394,800 910,821 394,800 910,821 ------------ ------------ ------------- 19,976,661 11,272,586 31,249,247 ------------ ------------ ------------- TELECOMMUNICATIONS 11.3% aCable & Wireless Optus Ltd., 144A 3,417,600 7,781,668 3,417,600 7,781,668 Cia de Telecomunicaciones de Chile SA, ADR 431,500 10,679,625 -- -- 431,500 10,679,625 Hong Kong Telecommunications Ltd. 5,427,349 14,095,012 7,908,279 20,538,072 13,335,628 34,633,084 Koninklijke KPN NV 263,235 12,351,441 263,235 12,351,441 aKorea Telecom Corp., ADR 104,200 4,168,000 308,300 12,332,000 412,500 16,500,000 Nippon Telegraph & Telephone Corp. 1,210 14,095,340 1,210 14,095,340 Nokia Corp., A -- -- 178,600 15,655,357 178,600 15,655,357 Smartone Telecommunications Holdings Ltd. -- -- 1,602,000 5,698,680 1,602,000 5,698,680 aTelecom Italia SpA, di Risp 2,252,750 12,254,570 -- -- 2,252,750 12,254,570 aTelecomunicacoes Brasileiras SA, ADR 156,170 14,084,582 177,300 15,990,244 333,470 30,074,826 Telefonica de Argentina SA, ADR 368,800 11,571,100 -- -- 368,800 11,571,100 Telefonica del Peru SA, ADR 29,000 438,625 251,900 3,809,988 280,900 4,248,613 Telefonica del Peru SA, B 3,000,000 4,506,071 2,445,602 3,673,352 5,445,602 8,179,423 Telefonos de Mexico SA (Telmex), ADR 191,300 15,459,431 191,300 15,459,431 aTelefonica SA 323,100 15,563,577 323,100 15,563,577 ------------ ------------ ------------- 121,485,465 93,261,270 214,746,735 ------------ ------------ ------------- TEXTILES & APPAREL .3% Yizheng Chemical Fibre Co. Ltd., H -- 19,340,200 5,047,643 19,340,200 5,047,643 ------------ ------------ ------------- TRANSPORTATION 2.7% Air New Zealand Ltd., B -- -- 1,132,000 2,339,401 1,132,000 2,339,401 aHelikopter Services Group ASA -- -- 134,000 995,745 134,000 995,745 Hitachi Zosen Corp. 3,342,000 4,031,163 -- -- 3,342,000 4,031,163 Koninklijke Nedlloyd Groep NV 216,300 5,353,408 -- -- 216,300 5,353,408 Mayne Nickless Ltd., A 3,227,820 11,045,691 2,125,500 7,273,521 5,353,320 18,319,212 Peninsular & Oriental Steam Navigation Co. 833,414 12,538,912 -- -- 833,414 12,538,912 Singapore Airlines Ltd., fgn. 736,500 7,008,106 -- -- 736,500 7,008,106 Tranz Rail Holdings Ltd., ADR -- -- 47,765 253,752 47,765 253,752 ------------ ------------ ------------- 39,977,280 10,862,419 50,839,699 ------------ ------------ ------------- UTILITIES ELECTRICAL & GAS 8.9% BG PLC -- -- 2,566,588 $ 15,666,454 2,566,588 $ 15,666,454 Centrais Eletricas Brasileiras SA (Electrobras) -- -- 363,450,000 6,926,807 363,450,000 6,926,807 aCentrais Geradoras do Sul do Brasil SA -- -- 363,450,000 290,345 363,450,000 290,345 Centrica PLC -- -- 1,161,000 2,731,302 1,161,000 2,731,302 Compania Sevillana de Electricidad SA 246,970 2,862,682 246,970 2,862,682 Evn AG 48,600 $ 7,106,816 -- -- 48,600 7,106,816 Gener SA, ADR 303,800 5,392,450 -- -- 303,800 5,392,450 Hong Kong Electric Holdings Ltd. 4,062,365 13,089,456 -- -- 4,062,365 13,089,456 Iberdrola SA, Br. 807,900 12,305,541 1,517,800 23,118,393 2,325,700 35,423,934 aKorea Electric Power Corp. 269,000 11,178,315 66,000 2,742,635 335,000 13,920,950 National Grid Group PLC 953,785 6,633,738 -- -- 953,785 6,633,738 National Power PLC 1,972,900 14,328,263 -- -- 1,972,900 14,328,263 Shandong Huaneng Power Development Co. Ltd., ADR 338,300 1,754,931 338,300 1,754,931 Thames Water Group PLC 747,372 11,862,861 896,939 14,236,903 1,644,311 26,099,764 Transportadora de Gas del Sur SA, B, Reg S, ADR -- -- 516,300 4,840,310 516,300 4,840,310 Veba AG 221,850 13,086,336 -- -- 221,850 13,086,336 ------------ ------------- ------------- 94,983,776 75,170,762 170,154,538 ------------ ------------ ------------- TOTAL COMMON STOCKS (Cost $1,447,096,366) 992,518,921 771,944,768 1,764,463,689 ------------ ------------ ------------- PREFERRED STOCKS 2.2% Banco Bradesco SA, pfd. 896,769,450 4,605,378 525,200,000 2,697,175 1,421,969,450 7,302,553 Banco Itau SA, pfd. -- -- 4,209,000 2,185,558 4,209,000 2,185,558 Cia Vale do Rio Doce, A, ADR, pfd. 350,400 6,958,014 350,400 6,958,014 Lojas Americanas SA, pfd. 238,431,408 952,365 238,431,408 952,365 News Corp. Ltd., pfd. -- -- 3,486 26,558 3,486 26,558 Petroleo Brasileiro SA, pfd. -- -- 60,000,000 9,415,121 60,000,000 9,415,121 aTelecomunicacoes Brasileiras SA (Telebras), ADR, pfd. 156,170 9,761 177,300 11,081 333,470 20,842 aTelecomunicacoes de Minas Gerais Celular Telemig, pfd. 1,705,000 15,323 -- -- 1,705,000 15,323 Telesp Participacoes SA, pfd. 4,866,533 115,242 -- -- 4,866,533 115,242 Telesp Participacoes SA, ADR, pfd. 334,800 7,658,550 -- -- 334,800 7,658,550 Usinas Siderurgicas de Minas Gerais, Reg S, ADR, pfd. 320,000 1,088,274 1,851,400 6,296,345 2,171,400 7,384,619 ------------ ------------ ------------- TOTAL PREFERRED STOCKS (Cost $56,534,968) 21,402,907 20,631,838 42,034,745 ------------ ------------ ------------- </TABLE> <TABLE> <CAPTION> PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT* AMOUNT* AMOUNT* ----------- ----------- ----------- SHORT TERM INVESTMENT COST ($12,794,920) .7% Federal National Mortgage Association, <S> <C> <C> <C> <C> <C> 4.90%, 9/08/99 $12,918,000 12,798,160 $-- -- $12,918,000 12,798,160 ------------ ------------ ------------- TOTAL INVESTMENTS BEFORE REPURCHASE Agreement (Cost $1,516,426,254) 1,026,719,988 792,576,606 1,819,296,594 ------------ ------------ ------------- REPURCHASE AGREEMENT 3.9% Paine Webber, 4.80%, 6/30/99 (Maturity Value $43,006,733) Collaterized by U.S. Treasury Bonds and Notes $43,001,000 $ 43,001,000 $-- $-- $43,001,000 $ 43,001,000 Morgan Stanley Inc., 4.88%, 7/01/99 (Maturity Value $31,113,217) Collateralized by U.S. Treasury Notes and Bonds -- -- 31,109,000 31,109,000 31,109,000 31,109,000 ------------ ------------ ------------- TOTAL REPURCHASE AGREEMENT (Cost $74,110,000) 43,001,000 31,109,000 74,110,000 ------------ ------------ ------------- TOTAL INVESTMENTS (Cost $1,590,536,254) 99.3% 1,069,720,988 823,685,606 1,893,406,594 Other Assets, less Liabilities .7% 7,759,521 5,413,340 13,172,861 ------------ ------------ ------------- TOTAL NET ASSETS 100.0% $1,077,480,509 $829,098,946 $1,906,579,455 ------------ ------------ ------------- *Securities denominated in U.S. dollars. aNon-income producing. </TABLE> See accompanying notes to pro forma combined financial statements. TEMPLETON VARIABLE PRODUCTS SERIES FUND - TEMPLETON INTERNATIONAL FUND ("TVP TEMPLETON INTERNATIONAL FUND") FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST - TEMPLETON INTERNATIONAL EQUITY FUND ("VIP TEMPLETON INTERNATIONAL EQUITY FUND") FINANCIAL STATEMENTS PRO FORMA COMBINED STATEMENTS OF ASSETS AND LIABILITIES (UNAUDITED) JUNE 30, 1999 <TABLE> <CAPTION> VIP TEMPLETON INTERNATIONAL TVP TEMPLETON VIP TEMPLETON EQUITY FUND INTERNATIONAL INTERNATIONAL PRO FORMA FUND EQUITY FUND COMBINED ----------------------------------------------------------------------------------------------------- Assets: Investments in securities: <S> <C> <C> <C> Cost $ 876,135,516 $640,290,738 $1,516,426,254 ----------------------------------------------------- Value 1,026,719,988 792,576,606 1,819,296,594 Repurchase Agreements, at value and cost 43,001,000 31,109,000 74,110,000 Cash -- 400,884 400,884 Receivables: Investment securities sold -- 1,306,512 1,306,512 Capital shares sold 2,683,348 1,974,355 4,657,703 Dividends and interest 6,265,179 3,501,787 9,766,966 ----------------------------------------------------- Total assets 1,078,669,515 830,869,144 1,909,538,659 ----------------------------------------------------- Liabilities: Payables: Investment securities purchased 105,369 157,553 262,922 Capital shares redeemed -- 627,401 627,401 Affiliates 698,020 565,730 1,263,750 Custodian fees -- 248,787 248,787 Postage and mailing -- 75,097 75,097 Funds advanced by custodian 34,450 -- 34,450 Accrued expenses 351,167 -- 351,167 Other liabilities -- 95,630 95,630 ----------------------------------------------------- Total liabilities 1,189,006 1,770,198 2,959,204 ----------------------------------------------------- Net assets, at value $1,077,480,509 $829,098,946 $1,906,579,455 ===================================================== Class 1: Net assets, at value $ 996,310,751 $824,805,932 $1,821,116,683 ===================================================== Shares outstanding** 50,203,995 47,685,867 105,276,084 ===================================================== Net asset value and offering price per share $19.85 $17.30 $17.30 ===================================================== Class 2: Net assets, at value $ 81,169,758 $ 4,293,014 $ 85,462,772 ===================================================== Shares outstanding** 4,105,074 248,579 $ 4,948,623 ===================================================== Net asset value and offering price per share $19.77 $17.27 $17.27 ===================================================== </TABLE> **See note 2 in the accompanying notes to pro forma combined financial statements. eExpense adjustment for differences in management fees, administrative fees, and 12B1fees. See accompanying notes to pro forma combined financial statements. TVP Templeton International Fund VIP Templeton International Equity Fund Financial Statements (continued) Pro forma combined Statements of Operations for the six months ended June 30, 1999 (unaudited) <TABLE> <CAPTION> VIP Templeton International TVP Templeton VIP Templeton Equity Fund International International Pro Forma Pro Forma Fund Equity Fund Adjustments Combined ------------------------------------------------------------------------------------------------------ Investment income:+ <S> <C> <C> <C> Dividends 17,654,395 14,953,862 32,608,257 Interest 883,934 1,189,313 2,073,247 ------------------------------------------------------------ Total investment income 18,538,329 16,143,175 -- 34,681,504 ------------------------------------------------------------ Expenses: Management fees 3,511,590 3,540,668 (845,476)a 6,206,782 Administrative fees 493,227 -- 498,023b 991,250 Distribution fees Class 2 66,442 1,313 (192) 67,563 Transfer agent fees -- -- -- Custodian fees 177,000 299,100 476,100 Reports to shareholders 121,000 79,300 200,300 Professional fees 14,000 21,400 35,400 Trustees' fees and expenses 4,000 4,000 Other 4,022 5,334 9,356 ------------------------------------------------------------ Total expenses 4,387,281 3,951,115 7,990,751 ------------------------------------------------------------ Net investment income 14,151,048 12,192,060 (347,645) 26,690,753 ------------------------------------------------------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments 60,537,527 90,886,731 151,424,258 Foreign currency transactions (1,229,829) (1,165,446) (2,395,275) ------------------------------------------------------------ Net realized gain 59,307,698 89,721,285 -- 149,028,983 Net unrealized appreciation (depreciation) on: Investments 30,280,684 (10,209,283) 20,071,401 Net unrealized gain (loss) 30,280,684 (10,209,283) 20,071,401 ------------------------------------------------------------ Net realized and unrealized gain (loss) 89,588,382 79,512,002 -- 169,100,384 ------------------------------------------------------------ Net increase in net assets resulting from operations 103,739,430 91,704,062 195,791,137 ============================================================ </TABLE> aPro Forma adjustment for difference in Management fee schedule. The combined entity will appoint a new advisor, Templeton Global Advisor Limited and will adopt the following fee structure: First$ 200,000,000 0.75% Next$1,100,000,000 0.675% Over$1,300,000,000 0.600% bPro Forma adjustment for difference in Administrative fee schedule. The combined entity will adopt the following management fee structure: First$ 200,000,000 0.150% Next$ 500,000,000 0.135% Next$ 500,000,000 0.100% Over$1,200,000,000 0.075% cPro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate reflected in the Pro Forma Combined is 0.25% of the average net assets. +Net of foreign taxes of $1,789,958 and $1,715,049 for TVP Templeton International Fund and VIP Templeton International Fund, respectively. See accompanying notes to pro forma combined financial statements. VIP - Templeton International Equity Fund TVP - Templeton International Fund Notes to Pro forma combined Statements (unaudited) 1. Basis of Combination Subject to approval of the proposed Agreement and Plan of Reorganization (the "Agreement and Plan") by the shareholders of the Templeton Variable Products Series Fund - Templeton International Fund("TVP-Templeton International Fund"), the Franklin Templeton Variable Insurance Products Trust - Templeton International Equity Fund ("VIP - Templeton International Equity Fund") will acquire all the net assets of the TVP - Templeton International Class 1 and 2 in exchange for the Classes 1 and 2 shares, respectively, shares of VIP - Templeton International Equity Fund. The merger will be accounted for by the method of accounting for tax free business combinations of investment companies and TVP - Templeton International will be the accounting survivor. The pro forma combined Statement of Assets and Liabilities reflects the financial position of TVP - Templeton International June 30, 1999 as though the merger occurred as of that date. The pro forma combined Statement of Operations reflects the results of operations of the TVP - Templeton International and VIP - Templeton International Equity for the period January 1, 1999 to June 30, 1999 as though the merger occurred on January 1, 1999. The pro forma financial statements do not reflect the expenses of either fund in carrying out its obligations under the Agreement and Plan of Reorganization or any adjustment with respect to additional distributions that may be made prior to reorganization. The pro forma financial statements are presented for the information of the reader, and should be read in conjunction with the historical financial statements of the funds. 2. Capital Shares: The number of Class 1 and 2 shares issued was calculated by dividing the Class 1 and 2 net assets of the TVP - Templeton International at June 30, 1999 by the Class 1 and 2 net asset value per share of the VIP - Templeton International Equity, respectively at June 30, 1999. TVP Templeton Stock Fund VIP Templeton Global Growth Fund Pro forma combined Statement of Investments, June 30, 1999 (unaudited) <TABLE> <CAPTION> TVP TEMPLETON VIP TEMPLETON VIP TEMPLETON GLOBAL GROWTH FUND STOCK FUND GLOBAL GROWTH FUND PRO FORMA COMBINED ----------------------------------------------------------------------------------------------------------------- SHARES VALUE SHARES VALUE SHARES VALUE ------------------------------------------------------------------------------------------------------------------ Common Stocks 92.1% Aerospace & Military Technology 2.6% <S> <C> <C> <C> <C> <C> <C> Boeing Co. 182,500$ 8,064,219 210,769$ 9,313,355 393,269$ 17,377,574 a Fairchild Corp., A 204,957 2,613,202 204,957 2,613,202 Raytheon Co., A 230 15,841 222,644 15,334,606 222,874 15,350,447 ------------ ------------- --------------- 8,080,060 27,261,163 35,341,223 ----------- ------------ -------------- Appliances & Household Durables 1.5% Guangdong Kelon Electrical Holdings. Ltd., H 1,123,000 1,309,878 1,123,000 1,309,878 Laox Co. Ltd. 725,000 6,289,243 725,000 6,289,243 Sony Corp. 124,100 13,379,916 124,100 13,379,916 ------------ ------------ ---------------- 14,689,794 6,289,243 20,979,037 ------------ ------------ ---------------- Automobiles 4.2% Autoliv Inc., SDR 246,100 7,497,048 246,100 7,497,048 Delphi Automotive Systems Corp. 41,935 778,418 41,935 778,418 Fiat Spa 1,307,680 4,156,203 1,919,720 6,101,451 3,227,400 10,257,654 Ford Motor Co. 117,000 6,603,188 90,000 5,079,375 207,000 11,682,563 General Motors Corp. 60,000 3,960,000 60,000 3,960,000 Volkswagen AG 102,400 6,607,371 63,000 4,065,082 165,400 10,672,453 Volvo AB, B 269,200 7,804,964 171,900 4,983,927 441,100 12,788,891 ------------ ------------ ---------------- 25,171,726 32,465,301 57,637,027 ------------ ------------ ---------------- Banking 4.1% Australia & New Zealand Banking Group Ltd. 542,900 3,991,975 542,900 3,991,975 a Banca Nazionale 1,781,960 5,619,505 1,781,960 5,619,505 Del Lavoro Spa Banque Nationale 62,054 5,170,633 62,054 5,170,633 de Paris Deutsche Bank AG, Br. 100,700 6,137,331 100,700 6,137,331 HSBC Holdings PLC 153,404 5,595,331 223,724 8,160,216 377,128 13,755,547 Kookmin Bank, 293,927 5,981,414 293,927 5,981,414 GDR, 144A Merita AS 320,600 1,821,704 320,600 1,821,704 Shinhan Bank Co. Ltd. 169,682 1,905,711 169,682 1,905,711 a Thai Farmers Bank 1,492,300 4,613,483 1,492,300 4,613,483 Public Co. Ltd., fgn. Unibanco Uniao de Bancos Brasileiros SA, GDR 149,000 3,585,313 149,000 3,585,313 Unidanmark AS, A 69,100 4,611,791 69,100 4,611,791 ------------ ----------- --------------- 35,740,049 21,454,358 57,194,407 ------------ ------------ ---------------- Broadcasting & Publishing News Corp. Ltd., ADR 112,400 3,969,125 112,400 3,969,125 Television 1,023,000 4,799,319 1,023,000 4,799,319 Broadcasts Ltd. ------------ ------------ ---------------- 8,768,444 -- 8,768,444 ------------ ------------ ---------------- Building Materials & Components 1.5% Caradon PLC 2,752,600 6,486,455 2,752,600 6,486,455 Nichiha Corp. 193,500 2,047,864 193,500 2,047,864 Okumura Corp. 2,093,000 7,781,312 2,093,000 7,781,312 aSiam City Cement Public 1,057,641 4,359,632 1,057,641 4,359,632 Co. Ltd., fgn. ------------ ------------ ---------------- -- 20,675,263 20,675,263 ------------ ------------ ---------------- Business & Public Services 1.4% aComplete Business Solutions Inc. 23,600 423,325 23,600 423,325 a Humana Inc. 250,000 3,234,375 250,000 3,234,375 Kurita Water 387,000 6,938,120 387,000 6,938,120 Industries Ltd. Lex Service PLC 221,020 2,032,804 221,020 2,032,804 Waste Management 135,917 7,305,539 135,917 7,305,539 Inc. ------------ ------------ ---------------- 16,276,463 3,657,700 19,934,163 ------------ ------------ ---------------- Chemicals 1.2% Akzo Nobel NV 195,200 8,213,014 195,200 8,213,014 BASF AG 70,900 3,114,716 70,900 3,114,716 Kemira OY 847,900 5,123,950 847,900 5,123,950 ------------ ------------ ---------------- 8,213,014 8,238,666 16,451,680 ------------ ------------ ---------------- Data Processing & Reproduction 1.6% a 3Com Corp. 215,800 $5,759,163 220,600$5,887,263 436,400 $11,646,426 a Newbridge 274,200 7,883,250 74,000 2,127,500 348,200 10,010,750 Networks Corp. ------------ ------------ ---------------- 13,642,413 8,014,763 21,657,176 ------------ ------------ ---------------- Electrical & Electronics 6.7% a ABB Ltd. 79,406 7,425,049 55,976 5,234,150 135,382 12,659,199 Alcatel SA 78,835 11,097,223 -- -- 78,835 11,097,223 a Antec Corp. 345,500 11,077,594 345,500 11,077,594 Catic Shenzhen Holdings Ltd., H 9,945,000 1,358,668 9,945,000 1,358,668 Dongfang Electrical Machinery Co. Ltd., H -- -- 5,506,000 702,545 5,506,000 702,545 General Electric Co.PLC -- -- 1,160,300 11,796,499 1,160,300 11,796,499 Hitachi Ltd. -- -- 603,500 5,659,059 603,500 5,659,059 Koninklijke 121,532 11,987,765 -- -- 121,532 11,987,765 Electronics NV Motorola Inc. 175,800 16,657,050 100,000 9,475,000 275,800 26,132,050 ------------ ------------ ---------------- 58,244,681 34,225,921 92,470,602 ------------ ------------ ---------------- Electronic Components & Instruments 1.4% BICC PLC -- -- 1,397,152 1,993,037 1,397,152 1,993,037 aNanjing Panda -- -- 17,794,000 1,720,036 17,794,000 1,720,036 Electronics Co. Ltd., H Hewlett 85,000 8,542,500 -- -- 85,000 8,542,500 -Packard Co. Intel Corp. 121,400 7,223,300 -- -- 121,400 7,223,300 ------------ ------------ ---------------- 15,765,800 3,713,073 19,478,873 ------------ ------------ ---------------- Energy Sources 4.1% MOL Magyar Olay-Es Gazipari RT, GDS 144A -- -- 256,358 6,139,774 256,358 6,139,774 Norsk Hydro ASA 185,300 6,990,676 117,000 4,413,973 302,300 11,404,649 Perez Companc 415,400 2,388,789 -- -- 415,400 2,388,789 SA, B a Ranger Oil -- -- 273,050 1,333,999 273,050 1,333,999 Ltd. aRenaissance -- -- 254,800 3,447,243 254,800 3,447,243 Energy Ltd. Shell Transport -- -- 608,900 4,561,327 608,900 4,561,327 & Trading Co. PLC Societe Elf 61,320 8,998,490 67,072 9,842,576 128,392 18,841,066 Aquitaine SA, Br. a Total 67,497 8,707,719 -- -- 67,497 8,707,719 Fina SA, B ------------ ------------ ---------------- 27,085,674 29,738,892 56,824,566 ------------ ------------ ---------------- Financial Services 5.1% AXA SA 57,091 6,964,902 92,702 11,309,319 149,793 18,274,221 Fannie Mae 144,200 9,859,675 -- -- 144,200 9,859,675 ICICI Ltd., -- -- 396,700 4,086,010 396,700 4,086,010 GDR, 144A ING Groep NV 157,637 8,534,539 105,188 5,694,926 262,825 14,229,465 Lend Lease 485,500 6,665,824 -- -- 485,500 6,665,824 Corp. Ltd. Morgan Stanley, Dean Witter & Co. 103,100 10,567,750 103,100 10,567,750 Nomura 623,000 7,293,382 -- -- 623,000 7,293,382 Securities Co. Ltd. ------------ ------------ ---------------- 39,318,322 31,658,005 70,976,327 ------------ ------------ ---------------- Food & Household Products 2.1% Archer-Daniels 434,170 6,702,499 625,065 9,649,441 1,059,235 16,351,940 Midland Co. IBP Inc. -- -- 272,543 6,472,896 272,543 6,472,896 Northern Foods PLC -- -- 2,208,797 4,543,489 2,208,797 4,543,489 Showa Sangyo Co. -- -- 958,000 1,994,514 958,000 1,994,514 ------------ ------------ ---------------- 6,702,499 22,660,340 29,362,839 ------------ ------------ ---------------- Forest Products & Paper 2.7% aAsia 29,000 279,125 -- -- 29,000 279,125 Pulp & Paper Co. Ltd., ADR Assidoman AB -- -- 249,730 3,759,756 249,730 3,759,756 Carter Holt1,155,252 1,383,499 940,712 1,126,571 2,095,964 2,510,070 Harvey Ltd. Georgia 214,800 10,176,150 68,000 3,221,500 282,800 13,397,650 Pacific Corp. Georgia Pacific -- -- 34,000 858,500 34,000 858,500 Timber Group Metsa Serla OY, B -- -- 270,000 2,294,318 270,000 2,294,318 Stora 427,800 4,588,141 559,700 6,002,764 987,500 10,590,905 Enso OYJ, R Stora Enso 313,540 3,392,811 -- -- 313,540 3,392,811 OYJ, R, fgn. ------------ ------------ ---------------- 19,819,726 17,263,409 37,083,135 ------------ ------------ ---------------- Health & Personal Care 3.7% Astrazeneca 152,291 $5,928,996 -- $-- 152,291$ 5,928,99 PLC Medeva PLC2,761,300 4,526,579 1,614,200 2,646,146 4,375,500 7,172,725 Novartis AG 2,236 3,264,968 -- -- 2,236 3,264,968 Nycomed 791,920 5,633,219 -- -- 791,920 5,633,219 Amersham PLC Pharmacia & Upjohn Inc. 218,900 12,436,256 218,900 12,436,256 Rhone- 170,002 7,768,164 -- -- 170,002 7,768,164 Poulenc SA, A a Skyepharma PLC 5,109,873 3,986,928 -- -- 5,109,873 3,986,928 Teva Pharmaceutical Industries Ltd., ADR 107,400 5,262,600 107,400 5,262,600 ------------ ------------ ---------------- 36,371,454 15,082,402 51,453,856 ------------ ------------ ---------------- Industrial Components 1.2% Goodyear Tire & Rubber Co. 99,000 5,822,438 -- -- 99,000 5,822,438 Granges AB379,525 6,428,088 -- -- 379,525 6,428,088 Yamato Kogyo Co. Ltd. 539,000 3,923,158 -- -- 539,000 3,923,158 ------------ ------------ ---------------- 16,173,684 -- 16,173,684 ------------ ------------ ---------------- Insurance 6.2% Ace Ltd. 176,500 4,986,125 121,500 3,432,375 298,000 8,418,500 AXA China Region Ltd. 3,440,000 2,748,861 3,440,000 2,748,861 HIH Insurance Ltd. 2,303,465 2,851,125 2,244,429 2,778,053 4,547,894 5,629,178 Muenchener Rueckversicherungs- Gesellschaft 13,445 2,533,156 -- -- 13,445 2,533,156 aMuenchener Rueckversicherungs-Gesellschaft, 144A 13,445 2,509,585 -- -- 13,445 2,509,585 aMuenchener Rueckversicherungs- Gesellschaft, wts. 419 13,395 -- -- 419 13,395 Partnerre Ltd. 144,400 5,396,950 127,900 4,780,263 272,300 10,177,213 ReliastarFinancial Corp 204,700 8,955,625 48,000 2,100,000 252,700 11,055,625 Torchmark Corp. 113,400 3,869,775 240,000 8,190,000 353,400 12,059,775 XL Capital Ltd., A 92,100 5,203,650 -- -- 92,100 5,203,650 UNUM Corp. 81,100 4,440,225 81,100 4,440,225 Zurich Allied AG 17,000 9,666,795 19,500 11,088,383 6,500 20,755,178 ------------ ------------ ---------------- 48,735,042 36,809,299 85,544,341 ------------ ------------ ---------------- Leisure & Tourism .3% Kuoni Reisen Holding AG, B 1,065 4,106,957 -- -- 1,065 4,106,957 ------------ -------------- ---------------- Machinery & Engineering 3.9% First Tractor Company Ltd., H -- -- 6,860,000 2,033,549 6,860,000 2,033,549 Invensys PLC 1,621,958 7,682,582 2,244,442 10,631,046 3,866,400 18,313,628 KCI Konecranes International PLC -- -- 211,700 7,272,071 211,700 7,272,071 Laird Group PLC -- -- 1,783,700 7,422,477 1,783,700 7,422,477 Makita Corp. -- -- 653,000 7,385,633 653,000 7,385,633 New Holland NV 259,400 4,442,225 -- -- 259,400 4,442,225 VA Technologie AG, Br. -- -- 25,900 2,346,411 25,900 2,346,411 Valmet OY -- -- 392,800 4,455,811 392,800 4,455,811 ------------ ------------ ---------------- 12,124,807 41,546,998 53,671,805 ------------ ------------ ---------------- Merchandising 3.8% Coles Myer Ltd. -- -- 1,070,971 6,231,027 1,070,971 6,231,027 Home Depot Inc. 102,800 6,624,175 -- -- 102,800 6,624,175 Hudson's Bay Co. -- -- 67,100 756,508 67,100 756,508 Marks & Spencer PLC 1,067,200 6,156,729 1,516,900 8,751,070 2,584,100 14,907,799 Matsuzakaya Co. Ltd. -- -- 51,000 219,101 51,000 219,101 Safeway PLC 1,305,220 5,220,510 1,738,498 6,953,499 3,043,718 12,174,009 Sears Roebuck & Co. -- -- 155,900 6,947,294 155,900 6,947,294 Storehouse 2,067,800 4,449,020 -- -- 2,067,800 4,449,020 ------------ ------------ ---------------- 22,450,434 29,858,499 52,308,933 ------------ ------------ ---------------- Metals & Mining 4.9% Anglo American Platinum Corp. Ltd. -- -- 377,265 8,802,537 377,265 8,802,537 Boehler-Uddeholm AG -- -- 93,200 4,612,424 93,200 4,612,424 Companhia Siderurgica Nacional Sid Nacional CSN -- --129,100,000 3,407,061 129,100,000 3,407,061 Metals & Mining (cont.) Iluka Resources Ltd. -- $-- 704,562 $1,523,100 704,562 $ 1,523,100 Industrias Penoles SA -- -- 1,104,000 3,218,281 1,104,000 3,218,281 Iscor Ltd.-- -- 9,558,700 2,993,776 9,558,700 2,993,776 Ispat International NV, A, Reg D 228,000 2,522,250 -- -- 228,000 2,522,250 Outokumpu OY, A -- -- 342,200 3,846,530 342,200 3,846,530 Pechiney SA, A -- -- 84,279 3,622,511 84,279 3,622,511 Pechiney SA, ADR -- -- 112,708 2,409,134 112,708 2,409,134 Pohang Iron & Steel Co. Ltd. -- -- 100,000 12,467,059 100,000 12,467,059 WMC Ltd. 2,183,784 9,380,963 2,150,656 9,238,653 4,334,440 18,619,616 ------------ ------------ ---------------- 11,903,213 56,141,066 68,044,279 ------------ ------------ ---------------- Multi-Industry 5.0% Alfa SA de CV, A 1,743,100 7,286,958 1,743,100 7,286,958 Beijing Datang Power Generation Co. Ltd., H -- -- 6,860,000 2,210,379 6,860,000 2,210,379 Broken Hill Proprietary Co. Ltd. -- -- 867,854 10,052,585 867,854 10,052,585 Cheung Kong Holdings Ltd. 815,000 7,247,852 1,180,000 10,493,823 1,995,000 17,741,675 DESC SA de CV DESC, B 4,018,300 4,419,486 -- -- 4,018,300 4,419,486 DESC SA de CV DESC, C 800 897 -- -- 800 897 Hutchison Whampoa Ltd. 802,100 7,262,355 642,600 5,818,214 1,444,700 13,080,569 La Cemento Nacional SA, GDR, 144A -- -- 3,600 259,200 3,600 259,200 La Cemento Nacional SA, GDR, Reg S -- -- 400 28,800 400 28,800 Pacific Dunlop Ltd. -- -- 2,149,000 3,100,887 2,149,000 3,100,887 Saab AB, B -- -- 296,997 2,305,552 296,997 2,305,552 Saha Union Public Co. Ltd., fgn. -- -- 574,400 257,020 574,400 257,020 Swire Pacific Ltd., A -- -- 1,421,800 7,036,754 1,421,800 7,036,754 Swire Pacific Ltd., B -- -- 1,304,000 974,784 1,304,000 974,784 ------------ ------------ ---------------- 26,217,548 42,537,998 68,755,546 ------------ ------------ ---------------- Real Estate 1.9% China Resources Beijing Land Ltd. -- -- 4,652,000 1,067,241 4,652,000 1,067,241 General Growth Properties -- -- 164,500 5,839,750 164,500 5,839,750 Hang Lung Development Co. Ltd. -- -- 3,624,000 4,483,963 3,624,000 4,483,963 Highwoods Properties Inc. -- -- 164,900 4,524,444 164,900 4,524,444 Inversiones y Representacion SA -- -- 1,156,326 3,561,840 1,156,326 3,561,840 Inversiones y Representacion SA, GDR -- -- 2,374 73,283 2,374 73,283 National Health Investors Inc. 187,700 4,281,906 123,400 2,815,063 311,100 7,096,969 ------------ ------------ ---------------- 22,365,584 26,647,490 ------------ ------------ ---------------- Recreation & Other Consumer Goods .1% aFila Holding SpA, ADR 60,600 715,838 60,600 715,838 60,600 1,431,676 ------------ ------------ ---------------- Telecommunications 8.3% AT&T Corp. -- -- 90,450 5,048,241 90,450 5,048,241 Cia de Telecomunicaciones de Chile SA, ADR 117,300 2,903,175 -- -- 117,300 2,903,175 Embratel Participacoes SA -- -- 27,300,000 205,626 27,300,000 205,626 aGeneral Motors Corp., H -- -- 66,000 3,712,500 66,000 3,712,500 Hong Kong Telecommunications Ltd. 2,504,000 6,502,974 2,905,746 7,546,322 5,409,746 14,049,296 aKorea Telecom Corp., ADR 88,900 3,556,000 -- -- 88,900 3,556,000 aMastec Inc. 340,323 9,614,125 -- -- 340,323 9,614,125 Nippon Telegraph & Telephone Corp. 675 7,863,103 -- -- 675 7,863,103 Nortel Networks Corp. 120,460 10,457,434 138,000 11,980,125 258,460 22,437,559 Telecom Argentina Stet-France SA, ADR -- -- 100,000 2,675,000 100,000 2,675,000 aTelecom Italia SpA 763,200 7,913,763 -- -- 763,200 7,913,763 Telecomunicacoes Brasileiras SA, ADR 41,800 3,769,838 -- -- 41,800 3,769,838 Telefonica De Argentina SA, ADR -- -- 217,000 6,808,375 217,000 6,808,375 aTelefonica SA 142,300 6,854,525 -- -- 142,300 6,854,525 Telefonos de Mexico SA (Telmex), ADR 117,500 9,495,469 92,900 7,507,481 210,400 17,002,950 Telesp Participacoes SA -- --44,600,000 579,991 44,600,000 579,991 ------------ ------------ ---------------- 68,930,406 46,063,661 114,994,067 ------------ ------------ ---------------- Textiles & Apparel .5% Courtaulds Textiles PLC -- $-- 734,300 $1,909,768 734,300 $1,909,768 aFruit of the Loom Inc., A -- -- 136,500 1,330,875 136,500 1,330,875 Yizheng Chemical Fibre Co. Ltd., H -- --13,356,000 3,485,813 13,356,000 3,485,813 ------------ ------------ ---------------- -- 6,726,456 6,726,456 ------------ ------------ ---------------- Transportation 4.1% Air New Zealand Ltd., B 700,100 1,446,833 700,100 1,446,833 British Airways PLC 928,000 6,414,174 1,205,032 8,328,970 2,133,032 14,743,144 Canadian National Railway Co. 113,800 7,690,345 113,800 7,690,345 Firstgroup PLC 592,500 3,236,046 592,500 3,236,046 Koninklijke Frans Maas Groep NV -- -- 160,970 4,813,994 160,970 4,813,994 Koninklijke Nedlloyd Groep NV -- -- 260,670 6,451,562 260,670 6,451,562 Mayne Nickless Ltd., A 1,388,800 4,752,513 -- -- 1,388,800 4,752,513 Peninsular & Oriental Steam Navigation Co. 294,200 4,426,309 -- -- 294,200 4,426,309 Singapore Airlines Ltd., fgn. -- -- 944,600 8,988,264 944,600 8,988,264 ------------ ------------ ---------------- 27,966,220 28,582,790 56,549,010 ------------ ------------ ---------------- Utilities Electrical & Gas 7.3% Bses Ltd., GDR, 144A -- -- 202,200 2,027,055 202,200 2,027,055 Centrais Eletricas Brasileiras SA (Eletrobras), ADR 514,400 4,901,843 -- -- 514,400 4,901,843 Electrabel SA -- -- 23,500 7,585,336 23,500 7,585,336 Entergy Corp. -- -- 283,900 8,871,875 283,900 8,871,875 Evn AG 58,920 8,615,918 35,400 5,176,570 94,320 13,792,488 Hong Kong Electric Holdings Ltd. -- -- 2,944,000 9,485,942 2,944,000 9,485,942 Iberdrola SA, Br. 486,500 7,410,132 744,700 11,342,909 1,231,200 18,753,041 Korea Electric Power Corp. -- -- 186,600 7,754,177 186,600 7,754,177 National Grid Group PLC -- -- 1,075,100 7,477,505 1,075,100 7,477,505 National Power PLC -- -- 747,800 5,430,927 747,800 5,430,927 Transportadora de Gas del Sur SA, ADR -- -- 386,900 3,627,188 386,900 3,627,188 Veba AG 129,600 7,644,756 67,000 3,952,150 196,600 11,596,906 ------------ ----------- --------------- 28,572,649 72,731,634 101,304,283 ------------ ------------ ---------------- Total Common Stocks (Cost $1,012,794,748) 606,068,823 666,478,322 1,272,547,145 ------------ ------------ ---------------- Preferred Stocks 2.8% Banco Bradesco SA, pfd. -- -- 451,500,022 2,318,688 451,500,022 2,318,688 Banco Itau SA, pfd. 6,309,400 3,276,208 6,309,400 3,276,208 Centrais Eletricas Brasileiras SA (Electrobras), ADR, pfd. -- -- 176,400 1,796,713 176,400 1,796,713 Centrais Geradoras Do Sul Do Brasil SA, ADR, pfd. -- -- 17,640 71,466 17,640 71,466 Coteminas Cia Tecidos Norte de Minas, pfd. -- -- 1,952,000 164,848 1,952,000 164,848 Embotelladora Andina SA, B, ADR, pfd. 302,900 4,619,225 302,900 4,619,225 Embratel Participacoes SA, ADR, pfd. -- -- 98,400 1,365,300 98,400 1,365,300 aEmpresa Nacional de Comercio Redito Participacoes, pfd. -- -- 1,952,000 1,682 1,952,000 1,682 News Corp. Ltd., ADR, pfd. 117,000 3,692,812 117,000 3,692,812 News Corp. Ltd., pfd. 265,309 2,021,251 903,781 6,885,438 1,169,090 8,906,689 Tele Celular Sul Participacoes SA, ADR, pfd. -- -- 9,840 213,405 9,840 213,405 Tele Centro Oeste Celular Participacoes SA, ADR, pfd. -- -- 32,799 129,146 32,799 129,146 Tele Centro Sul Participacoes SA, ADR, pfd. -- -- 19,680 1,092,240 19,680 1,092,240 Tele Leste Celular Participacoes SA, ADR, pfd. -- -- 1,968 58,548 1,968 58,548 Tele Nordeste Celular Participacoes SA, ADR, pfd. -- -- 4,920 132,840 4,920 132,840 Tele Norte Celular Participacoes SA, ADR, pfd. -- -- 1,968 53,259 1,968 53,259 Tele Norte Leste Participacoes SA, ADR, pfd. -- $-- 98,400 $1,826,550 98,400 $1,826,550 Tele Sudeste Celular Participacoes SA, ADR, pfd. -- -- 19,680 570,720 19,680 570,720 aTelecomunicacoes Brasileiras SA (Telebras), ADR, pfd. 41,800 2,613 98,400 6,150 140,200 8,763 Telemig Celular Participacoes SA, ADR, pfd. 4,920 121,155 4,920 121,155 Telesp Celular Participacoes SA, ADR, pfd. 39,360 1,052,880 39,360 1,052,880 Telesp Participacoes SA, ADR, pfd. 205,300 4,696,237 98,400 2,250,900 303,700 6,947,137 ------------ ------------ ---------------- Total Preferred Stocks (Cost $36,995,705) 18,308,346 20,111,928 38,420,274 ------------ ------------ ---------------- </TABLE> <TABLE> <CAPTION> PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT* AMOUNT* AMOUNT* ----------- ----------- ----------- Bonds 1.2% Alfa SA de CV: <S> <C> <C> <C> <C> <C> <C> <C> cvt., 8.00%, 9/15/00 -- -- $ 1,650,000 1,683,000 1,650,000 1,683,000 cvt., 144A, 8.00%, 9/15/00 -- -- 2,710,000 2,764,200 2,710,000 2,764,200 AXA SA, cvt., 144A, 2.50%, 1/01/14 3,445,200EUR 3,574,026 3,445,200EUR 3,574,026 Government of Italy, cvt., 5.00%, 6/28/01 -- -- 4,950,000 8,167,500 4,950,000 8,167,500 RGC Ltd, zero coupon, 12/31/00 -- -- 1,074,643AUD 284,523 1,074,643AUD 284,523 ------------ ------------ ----------- Total Bonds (Cost $16,745,694) -- 3,574,026 12,899,223 16,473,249 ------------ ---------- ---------------- Short Term Investments .4% Federal National Mortgage Association, 4.71%, 7/13/99 3,585,000 3,579,253 3,585,000 3,579,253 U.S. Treasury Bill, 4.41%, 8/26/99 -- -- 1,407,000 1,397,716 1,407,000 1,397,716 ------------ ------------ --------------- Total Short Term Investments (Cost $4,976,079) 3,579,253 1,397,716 4,976,969 ------------ ------------ ---------------- Total before Repurchase Agreement (Cost $1,071,512,226) 631,530,448 700,887,189 1,332,417,637 ------------ ------------ ---------------- Repurchase Agreements 3.7% Barclays Bank PLC, 4.75%, 7/01/99 (Maturity Value $21,330,814) Collateralized by U.S. Treasury Notes and Bonds -- -- 21,328,000 21,328,000 21,328,000 21,328,000 Deutsche Bank,AG, 4.75%, 7/01/99 (Maturity Value $20,002,639) Collateralized by U.S. Treasury Notes and Bonds -- -- 20,000,000 20,000,000 20,000,000 20,000,000 Paine Webber Group Inc., 4.80%, 6/30/99 (Maturity Value $10,029,337) Collateralized by U.S. Treasury Notes and Bonds 10,028,000 10,028,000 -- -- 10,028,000 10,028,000 ------------ ------------ ---------------- Total Repurchase Agreements (Cost $51,356,000) 10,028,000 41,328,000 51,356,000 ------------ ------------ --------------- Total Investments (Cost $1,122,868,226) 100.1% 640,842,610 742,215,189 1,383,057,799 Other Assets, less Liabilities (.1%) 7,020,893 (8,570,369) (1,549,476) ------------ ------------ ---------------- Total Net Assets 100.0% $647,863,503 $733,644,820 $1,381,508,323 ------------ ------------ --------------- </TABLE> Currency Abbreviations: AUD - Australian Dollar EUR -European Unit*Securities traded in U.S. dollars unless otherwise indicated. See accompanying notes to pro forma combined financial statements. Templeton Variable Products Series Fund - Templeton Stock Fund ("TVP Templeton Stock Fund") Franklin Templeton Variable Insurance Products Trust - Templeton Global Growth Fund ("VIP Templeton Global Growth Fund") Financial Statements Pro forma combined Statements of Assets and Liabilities (unaudited) June 30, 1999. <TABLE> <CAPTION> VIP Templeton VIP Templeton Global TVP Templeton Fund Growth Stock Global Growth Pro Forma Fund Fund Combined -------------------------------------------------------------------------------------------- Assets: Investments in securities: <S> <C> <C> <C> Cost $470,524,685 $600,987,541 $1,071,512,226 -------------------------------------------------------------------------------------------- Value 630,814,610 700,887,189 1,331,701,799 Repurchase Agreements, at value and cost 10,028,000 41,328,000 51,356,000 Cash 1,491,932 1,959,957 3,451,889 Receivables: Investment securities sold 120,620 230,944 351,564 Capital shares sold 3,225,239 749,832 3,975,071 Dividends and interest 2,928,716 3,759,218 6,687,934 -------------------------------------------------------------------------------------------- Total assets 648,609,117 748,915,140 1,397,524,257 Liabilities: Payables: Investment securities purchased -- 14,267,674 14,267,674 Capital shares redeemed -- 408,130 408,130 Affiliates 423,469 498,068 921,537 Custodian fees -- 54,160 54,160 Postage and mailing -- 1,062 1,062 Deffered tax liability (Note 1j) 61,431 -- 61,431 Accrued expenses 260,714 -- 260,714 Other liabilities -- 41,226 41,226 -------------------------------------------------------------------------------------------- Total liabilities 745,614 15,270,320 16,015,394 Net assets, at value $647,863,503 $733,644,820 $28,916,394 Class 1: Net assets, at value $620,428,154 $732,163,775 -------------------------------------------------------------------------------------------- Shares outstanding** 29,158,278 44,256,213 81,766,984 Net asset value and offering price per share $21.28 $16.54 $16.54 Class 2: Net assets, at value $ 27,435,349 $ 1,481,045 $1,332,591,929 -------------------------------------------------------------------------------------------- Shares outstanding** 1,293,337 89,660 1,750,395 Net asset value and offering price per share $21.21 $16.52 $16.52 </TABLE> **See note 2 in the accompanying notes to pro forma combined financial statements. See accompanying notes to pro forma combined financial statements. <TABLE> <CAPTION> TVP Templeton Stock Fund VIP Templeton Global Growth Fund Pro forma combined Statement of Investments, June 30, 1999 (unaudited) VIP TEMPLETON GLOBAL GROWTH FUND TVP TEMPLETON STOCK FUND VIP TEMPLETON GLOBAL GROWTH FUND PRO FORMA COMBINED ----------------------------------------------------------------------------------------------------------------------------------- SHARES VALUE SHARES VALUE SHARES VALUE ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Common Stocks 92.1% Aerospace & Military Technology 2.6% Boeing Co. 182,500 $ 8,064,219 210,769 $ 9,313,355 393,269 $ 17,377,574 a Fairchild Corp., A 204,957 2,613,202 204,957 2,613,202 Raytheon Co., A 230 15,841 222,644 15,334,606 222,874 15,350,447 ------------ ------------ ---------------- 8,080,060 27,261,163 35,341,223 ------------ ------------ ---------------- Appliances & Household Durables 1.5% Guangdong Kelon Electrical Holdings. Ltd., H 1,123,000 1,309,878 1,123,000 1,309,878 Laox Co. Ltd. 725,000 6,289,243 725,000 6,289,243 Sony Corp. 124,100 13,379,916 124,100 13,379,916 ------------ ------------ ---------------- 14,689,794 6,289,243 20,979,037 ------------ ------------ ---------------- Automobiles 4.2% Autoliv Inc., SDR 246,100 7,497,048 246,100 7,497,048 Delphi Automotive Systems Corp. 41,935 778,418 41,935 778,418 Fiat SpA 1,307,680 4,156,203 1,919,720 6,101,451 3,227,400 10,257,654 Ford Motor Co. 117,000 6,603,188 90,000 5,079,375 207,000 11,682,563 General Motors Corp. 60,000 3,960,000 60,000 3,960,000 Volkswagen AG 102,400 6,607,371 63,000 4,065,082 165,400 10,672,453 Volvo AB, B 269,200 7,804,964 171,900 4,983,927 441,100 12,788,891 ------------ ------------ ---------------- 25,171,726 32,465,301 57,637,027 ------------ ------------ ---------------- Banking 4.1% Australia & New Zealand Banking Group Ltd. 542,900 3,991,975 542,900 3,991,975 a Banca Nazionale Del Lavoro SpA 1,781,960 5,619,505 1,781,960 5,619,505 Banque Nationale de Paris 62,054 5,170,633 62,054 5,170,633 Deutsche Bank AG, Br. 100,700 6,137,331 100,700 6,137,331 HSBC Holdings PLC 153,404 5,595,331 223,724 8,160,216 377,128 13,755,547 Kookmin Bank, GDR, 144A 293,927 5,981,414 293,927 5,981,414 Merita AS 320,600 1,821,704 320,600 1,821,704 Shinhan Bank Co. Ltd. 169,682 1,905,711 169,682 1,905,711 a Thai Farmers Bank Public Co. Ltd., fgn. 1,492,300 4,613,483 1,492,300 4,613,483 Unibanco Uniao de Bancos Brasileiros SA, GDR 149,000 3,585,313 149,000 3,585,313 Unidanmark AS, A 69,100 4,611,791 69,100 4,611,791 ------------ ------------ ---------------- 35,740,049 21,454,358 57,194,407 ------------ ------------ ---------------- Broadcasting & Publishing News Corp. Ltd., ADR 112,400 3,969,125 112,400 3,969,125 Television Broadcasts Ltd. 1,023,000 4,799,319 1,023,000 4,799,319 ------------ ------------ ---------------- 8,768,444 -- 8,768,444 ------------ ------------ ---------------- Building Materials & Components 1.5% Caradon PLC 2,752,600 6,486,455 2,752,600 6,486,455 Nichiha Corp. 193,500 2,047,864 193,500 2,047,864 Okumura Corp. 2,093,000 7,781,312 2,093,000 7,781,312 a Siam City Cement Public Co. Ltd., fgn. 1,057,641 4,359,632 1,057,641 4,359,632 ------------ ------------ ---------------- -- 20,675,263 20,675,263 ------------ ------------ ---------------- Business & Public Services 1.4% a Complete Business Solutions Inc. 23,600 423,325 23,600 423,325 a Humana Inc. 250,000 3,234,375 250,000 3,234,375 Kurita Water Industries Ltd. 387,000 6,938,120 387,000 6,938,120 Lex Service PLC 221,020 2,032,804 221,020 2,032,804 Waste Management Inc. 135,917 7,305,539 135,917 7,305,539 ------------ ------------ ---------------- 16,276,463 3,657,700 19,934,163 ------------ ------------ ---------------- Chemicals 1.2% Akzo Nobel NV 195,200 8,213,014 195,200 8,213,014 BASF AG 70,900 3,114,716 70,900 3,114,716 Kemira OY 847,900 5,123,950 847,900 5,123,950 ------------ ------------ ---------------- 8,213,014 8,238,666 16,451,680 ------------ ------------ ---------------- Data Processing & Reproduction 1.6% a 3Com Corp. 215,800 $ 5,759,163 220,600 $ 5,887,263 436,400 $ 11,646,426 a Newbridge Networks Corp. 274,200 7,883,250 74,000 2,127,500 348,200 10,010,750 ------------ ------------ ---------------- 13,642,413 8,014,763 21,657,176 ------------ ------------ ---------------- Electrical & Electronics 6.7% a ABB Ltd. 79,406 7,425,049 55,976 5,234,150 135,382 12,659,199 Alcatel SA 78,835 11,097,223 -- -- 78,835 11,097,223 a Antec Corp. 345,500 11,077,594 345,500 11,077,594 Catic Shenzhen Holdings Ltd., H 9,945,000 1,358,668 9,945,000 1,358,668 Dongfang Electrical Machinery Co. Ltd., H -- -- 5,506,000 702,545 5,506,000 702,545 General Electric Co. PLC -- -- 1,160,300 11,796,499 1,160,300 11,796,499 Hitachi Ltd. -- -- 603,500 5,659,059 603,500 5,659,059 Koninklijke Philips Electronics NV 121,532 11,987,765 -- -- 121,532 11,987,765 Motorola Inc. 175,800 16,657,050 100,000 9,475,000 275,800 26,132,050 ------------ ------------ ---------------- 58,244,681 34,225,921 92,470,602 ------------ ------------ ---------------- Electronic Components & Instruments 1.4% BICC PLC -- -- 1,397,152 1,993,037 1,397,152 1,993,037 a Nanjing Panda Electronics Co. Ltd., H -- -- 17,794,000 1,720,036 17,794,000 1,720,036 Hewlett-Packard Co. 85,000 8,542,500 -- -- 85,000 8,542,500 Intel Corp. 121,400 7,223,300 -- -- 121,400 7,223,300 ------------ ------------ ---------------- 15,765,800 3,713,073 19,478,873 ------------ ------------ ---------------- Energy Sources 4.1% MOL Magyar Olay-Es Gazipari RT, GDS 144A -- -- 256,358 6,139,774 256,358 6,139,774 Norsk Hydro ASA 185,300 6,990,676 117,000 4,413,973 302,300 11,404,649 Perez Companc SA, B 415,400 2,388,789 -- -- 415,400 2,388,789 a Ranger Oil Ltd. -- -- 273,050 1,333,999 273,050 1,333,999 a Renaissance Energy Ltd. -- -- 254,800 3,447,243 254,800 3,447,243 Shell Transport & Trading Co. PLC -- -- 608,900 4,561,327 608,900 4,561,327 Societe Elf Aquitaine SA, Br. 61,320 8,998,490 67,072 9,842,576 128,392 18,841,066 a Total Fina SA, B 67,497 8,707,719 -- -- 67,497 8,707,719 ------------ ------------ ---------------- 27,085,674 29,738,892 56,824,566 ------------ ------------ ---------------- Financial Services 5.1% AXA SA 57,091 6,964,902 92,702 11,309,319 149,793 18,274,221 Fannie Mae 144,200 9,859,675 -- -- 144,200 9,859,675 ICICI Ltd., GDR, 144A -- -- 396,700 4,086,010 396,700 4,086,010 ING Groep NV 157,637 8,534,539 105,188 5,694,926 262,825 14,229,465 Lend Lease Corp. Ltd. 485,500 6,665,824 -- -- 485,500 6,665,824 Morgan Stanley, Dean Witter & Co. 103,100 10,567,750 103,100 10,567,750 Nomura Securities Co. Ltd. 623,000 7,293,382 -- -- 623,000 7,293,382 ------------ ------------ ---------------- 39,318,322 31,658,005 70,976,327 ------------ ------------ ---------------- Food & Household Products 2.1% Archer-Daniels Midland Co. 434,170 6,702,499 625,065 9,649,441 1,059,235 16,351,940 IBP Inc. -- -- 272,543 6,472,896 272,543 6,472,896 Northern Foods PLC -- -- 2,208,797 4,543,489 2,208,797 4,543,489 Showa Sangyo Co. -- -- 958,000 1,994,514 958,000 1,994,514 ------------ ------------ ---------------- 6,702,499 22,660,340 29,362,839 ------------ ------------ ---------------- Forest Products & Paper 2.7% a Asia Pulp & Paper Co. Ltd., ADR 29,000 279,125 -- -- 29,000 279,125 Assidoman AB -- -- 249,730 3,759,756 249,730 3,759,756 Carter Holt Harvey Ltd. 1,155,252 1,383,499 940,712 1,126,571 2,095,964 2,510,070 Georgia Pacific Corp. 214,800 10,176,150 68,000 3,221,500 282,800 13,397,650 Georgia Pacific Timber Group -- -- 34,000 858,500 34,000 858,500 Metsa Serla OY, B -- -- 270,000 2,294,318 270,000 2,294,318 Stora Enso OYJ, R 427,800 4,588,141 559,700 6,002,764 987,500 10,590,905 Stora Enso OYJ, R, fgn. 313,540 3,392,811 -- -- 313,540 3,392,811 ------------ ------------ ---------------- 19,819,726 17,263,409 37,083,135 ------------ ------------ ---------------- Health & Personal Care 3.7% Astrazeneca PLC 152,291 $ 5,928,996 -- $-- 152,291 $ 5,928,996 Medeva PLC 2,761,300 4,526,579 1,614,200 2,646,146 4,375,500 7,172,725 Novartis AG 2,236 3,264,968 -- -- 2,236 3,264,968 Nycomed Amersham PLC 791,920 5,633,219 -- -- 791,920 5,633,219 Pharmacia & Upjohn Inc. 218,900 12,436,256 218,900 12,436,256 Rhone-Poulenc SA, A 170,002 7,768,164 -- -- 170,002 7,768,164 a Skyepharma PLC 5,109,873 3,986,928 -- -- 5,109,873 3,986,928 Teva Pharmaceutical Industries Ltd., ADR 107,400 5,262,600 107,400 5,262,600 ------------ ------------ ---------------- 36,371,454 15,082,402 51,453,856 ------------ ------------ ---------------- Industrial Components 1.2% Goodyear Tire & Rubber Co. 99,000 5,822,438 -- -- 99,000 5,822,438 Granges AB 379,525 6,428,088 -- -- 379,525 6,428,088 Yamato Kogyo Co. Ltd. 539,000 3,923,158 -- -- 539,000 3,923,158 ------------ ------------ ---------------- 16,173,684 -- 16,173,684 ------------ ------------ ---------------- Insurance 6.2% Ace Ltd. 176,500 4,986,125 121,500 3,432,375 298,000 8,418,500 AXA China Region Ltd. 3,440,000 2,748,861 3,440,000 2,748,861 HIH Insurance Ltd. 2,303,465 2,851,125 2,244,429 2,778,053 4,547,894 5,629,178 Muenchener Rueckversicherungs- Gesellschaft 13,445 2,533,156 -- -- 13,445 2,533,156 a Muenchener Rueckversicherungs- Gesellschaft, 144A 13,445 2,509,585 -- -- 13,445 2,509,585 a Muenchener Rueckversicherungs- Gesellschaft, wts. 419 13,395 -- -- 419 13,395 Partnerre Ltd. 144,400 5,396,950 127,900 4,780,263 272,300 10,177,213 Reliastar Financial Corp. 204,700 8,955,625 48,000 2,100,000 252,700 11,055,625 Torchmark Corp. 113,400 3,869,775 240,000 8,190,000 353,400 12,059,775 XL Capital Ltd., A 92,100 5,203,650 -- -- 92,100 5,203,650 UNUM Corp. 81,100 4,440,225 81,100 4,440,225 Zurich Allied AG 17,000 9,666,795 19,500 11,088,383 36,500 20,755,178 ------------ ------------ ---------------- 48,735,042 36,809,299 85,544,341 ------------ ------------ ---------------- Leisure & Tourism .3% Kuoni Reisen Holding AG, B 1,065 4,106,957 -- 1,065 4,106,957 ------------ -- ------------ --------------- Machinery & Engineering 3.9% First Tractor Company Ltd., H -- -- 6,860,000 2,033,549 6,860,000 2,033,549 Invensys PLC 1,621,958 7,682,582 2,244,442 10,631,046 3,866,400 18,313,628 KCI Konecranes International PLC -- -- 211,700 7,272,071 211,700 7,272,071 Laird Group PLC -- -- 1,783,700 7,422,477 1,783,700 7,422,477 Makita Corp. -- -- 653,000 7,385,633 653,000 7,385,633 New Holland NV 259,400 4,442,225 -- -- 259,400 4,442,225 VA Technologie AG, Br. -- -- 25,900 2,346,411 25,900 2,346,411 Valmet OY -- -- 392,800 4,455,811 392,800 4,455,811 ------------ ------------ ---------------- 12,124,807 41,546,998 53,671,805 ------------ ------------ ---------------- Merchandising 3.8% Coles Myer Ltd. -- -- 1,070,971 6,231,027 1,070,971 6,231,027 Home Depot Inc. 102,800 6,624,175 -- -- 102,800 6,624,175 Hudson's Bay Co. -- -- 67,100 756,508 67,100 756,508 Marks & Spencer PLC 1,067,200 6,156,729 1,516,900 8,751,070 2,584,100 14,907,799 Matsuzakaya Co. Ltd. -- -- 51,000 219,101 51,000 219,101 Safeway PLC 1,305,220 5,220,510 1,738,498 6,953,499 3,043,718 12,174,009 Sears Roebuck & Co. -- -- 155,900 6,947,294 155,900 6,947,294 Storehouse 2,067,800 4,449,020 -- -- 2,067,800 4,449,020 ------------ ------------ ---------------- 22,450,434 29,858,499 52,308,933 ------------ ------------ ---------------- Metals & Mining 4.9% Anglo American Platinum Corp. Ltd. -- -- 377,265 8,802,537 377,265 8,802,537 Boehler-Uddeholm AG -- -- 93,200 4,612,424 93,200 4,612,424 Companhia Siderurgica Nacional Sid Nacional CSN -- -- 129,100,000 3,407,061 129,100,000 3,407,061 Metals & Mining (cont.) Iluka Resources Ltd. -- $-- 704,562 $ 1,523,100 704,562 $ 1,523,100 Industrias Penoles SA -- -- 1,104,000 3,218,281 1,104,000 3,218,281 Iscor Ltd. -- -- 9,558,700 2,993,776 9,558,700 2,993,776 Ispat International NV, A, Reg D 228,000 2,522,250 -- -- 228,000 2,522,250 Outokumpu OY, A -- -- 342,200 3,846,530 342,200 3,846,530 Pechiney SA, A -- -- 84,279 3,622,511 84,279 3,622,511 Pechiney SA, ADR -- -- 112,708 2,409,134 112,708 2,409,134 Pohang Iron & Steel Co. Ltd. -- -- 100,000 12,467,059 100,000 12,467,059 WMC Ltd. 2,183,784 9,380,963 2,150,656 9,238,653 4,334,440 18,619,616 ------------ ------------ ---------------- 11,903,213 56,141,066 68,044,279 ------------ ------------ ---------------- Multi-Industry 5.0% Alfa SA de CV, A 1,743,100 7,286,958 1,743,100 7,286,958 Beijing Datang Power Generation Co. Ltd., H -- -- 6,860,000 2,210,379 6,860,000 2,210,379 Broken Hill Proprietary Co. Ltd. -- -- 867,854 10,052,585 867,854 10,052,585 Cheung Kong Holdings Ltd. 815,000 7,247,852 1,180,000 10,493,823 1,995,000 17,741,675 DESC SA de CV DESC, B 4,018,300 4,419,486 -- -- 4,018,300 4,419,486 DESC SA de CV DESC, C 800 897 -- -- 800 897 Hutchison Whampoa Ltd. 802,100 7,262,355 642,600 5,818,214 1,444,700 13,080,569 La Cemento Nacional SA, GDR, 144A -- -- 3,600 259,200 3,600 259,200 La Cemento Nacional SA, GDR, Reg S -- -- 400 28,800 400 28,800 Pacific Dunlop Ltd. -- -- 2,149,000 3,100,887 2,149,000 3,100,887 Saab AB, B -- -- 296,997 2,305,552 296,997 2,305,552 Saha Union Public Co. Ltd., fgn. -- -- 574,400 257,020 574,400 257,020 Swire Pacific Ltd., A -- -- 1,421,800 7,036,754 1,421,800 7,036,754 Swire Pacific Ltd., B -- -- 1,304,000 974,784 1,304,000 974,784 ------------ ------------ ---------------- 26,217,548 42,537,998 68,755,546 ------------ ------------ ---------------- Real Estate 1.9% China Resources Beijing Land Ltd. -- -- 4,652,000 1,067,241 4,652,000 1,067,241 General Growth Properties -- -- 164,500 5,839,750 164,500 5,839,750 Hang Lung Development Co. Ltd. -- -- 3,624,000 4,483,963 3,624,000 4,483,963 Highwoods Properties Inc. -- -- 164,900 4,524,444 164,900 4,524,444 Inversiones y Representacion SA -- -- 1,156,326 3,561,840 1,156,326 3,561,840 Inversiones y Representacion SA, GDR -- -- 2,374 73,283 2,374 73,283 National Health Investors Inc. 187,700 4,281,906 123,400 2,815,063 311,100 7,096,969 ------------ ------------ ---------------- 22,365,584 26,647,490 ------------ ---------------- Recreation & Other Consumer Goods .1% a Fila Holding SpA, ADR 60,600 715,838 60,600 715,838 60,600 1,431,676 ------------ ------------ ---------------- Telecommunications 8.3% AT&T Corp. -- -- 90,450 5,048,241 90,450 5,048,241 Cia de Telecomunicaciones de Chile SA, ADR 117,300 2,903,175 -- -- 117,300 2,903,175 Embratel Participacoes SA -- -- 27,300,000 205,626 27,300,000 205,626 a General Motors Corp., H -- -- 66,000 3,712,500 66,000 3,712,500 Hong Kong Telecommunications Ltd. 2,504,000 6,502,974 2,905,746 7,546,322 5,409,746 14,049,296 a Korea Telecom Corp., ADR 88,900 3,556,000 -- -- 88,900 3,556,000 a Mastec Inc. 340,323 9,614,125 -- -- 340,323 9,614,125 Nippon Telegraph & Telephone Corp. 675 7,863,103 -- -- 675 7,863,103 Nortel Networks Corp. 120,460 10,457,434 138,000 11,980,125 258,460 22,437,559 Telecom Argentina Stet-France SA, ADR -- -- 100,000 2,675,000 100,000 2,675,000 a Telecom Italia SpA 763,200 7,913,763 -- -- 763,200 7,913,763 Telecomunicacoes Brasileiras SA, ADR 41,800 3,769,838 -- -- 41,800 3,769,838 Telefonica De Argentina SA, ADR -- -- 217,000 6,808,375 217,000 6,808,375 a Telefonica SA 142,300 6,854,525 -- -- 142,300 6,854,525 Telefonos de Mexico SA (Telmex), ADR 117,500 9,495,469 92,900 7,507,481 210,400 17,002,950 Telesp Participacoes SA -- -- 44,600,000 579,991 44,600,000 579,991 ------------ ------------ ---------------- 68,930,406 46,063,661 114,994,067 ------------ ------------ ---------------- Textiles & Apparel .5% Courtaulds Textiles PLC -- $-- 734,300 $ 1,909,768 734,300 $ 1,909,768 a Fruit of the Loom Inc., A -- -- 136,500 1,330,875 136,500 1,330,875 Yizheng Chemical Fibre Co. Ltd., H -- -- 13,356,000 3,485,813 13,356,000 3,485,813 ------------ ------------ ---------------- -- 6,726,456 6,726,456 ------------ ------------ ---------------- Transportation 4.1% Air New Zealand Ltd., B 700,100 1,446,833 700,100 1,446,833 British Airways PLC 928,000 6,414,174 1,205,032 8,328,970 2,133,032 14,743,144 Canadian National Railway Co. 113,800 7,690,345 113,800 7,690,345 Firstgroup PLC 592,500 3,236,046 592,500 3,236,046 Koninklijke Frans Maas Groep NV -- -- 160,970 4,813,994 160,970 4,813,994 Koninklijke Nedlloyd Groep NV -- -- 260,670 6,451,562 260,670 6,451,562 Mayne Nickless Ltd., A 1,388,800 4,752,513 -- -- 1,388,800 4,752,513 Peninsular & Oriental Steam Navigation Co. 294,200 4,426,309 -- -- 294,200 4,426,309 Singapore Airlines Ltd., fgn. -- -- 944,600 8,988,264 944,600 8,988,264 ------------ ------------ ---------------- 27,966,220 28,582,790 56,549,010 ------------ ------------ ---------------- Utilities Electrical & Gas 7.3% Bses Ltd., GDR, 144A -- -- 202,200 2,027,055 202,200 2,027,055 Centrais Eletricas Brasileiras SA (Eletrobras), ADR 514,400 4,901,843 -- -- 514,400 4,901,843 Electrabel SA -- -- 23,500 7,585,336 23,500 7,585,336 Entergy Corp. -- -- 283,900 8,871,875 283,900 8,871,875 Evn AG 58,920 8,615,918 35,400 5,176,570 94,320 13,792,488 Hong Kong Electric Holdings Ltd. -- -- 2,944,000 9,485,942 2,944,000 9,485,942 Iberdrola SA, Br. 486,500 7,410,132 744,700 11,342,909 1,231,200 18,753,041 Korea Electric Power Corp. -- -- 186,600 7,754,177 186,600 7,754,177 National Grid Group PLC -- -- 1,075,100 7,477,505 1,075,100 7,477,505 National Power PLC -- -- 747,800 5,430,927 747,800 5,430,927 Transportadora de Gas del Sur SA, ADR -- -- 386,900 3,627,188 386,900 3,627,188 Veba AG 129,600 7,644,756 67,000 3,952,150 196,600 11,596,906 ------------ ------------ ---------------- 28,572,649 72,731,634 101,304,283 ------------ ------------ ---------------- Total Common Stocks (Cost $1,012,794,748) 606,068,823 666,478,322 1,272,547,145 ------------ ------------ ---------------- Preferred Stocks 2.8% Banco Bradesco SA, pfd. -- -- 451,500,022 2,318,688 451,500,022 2,318,688 Banco Itau SA, pfd. 6,309,400 3,276,208 6,309,400 3,276,208 Centrais Eletricas Brasileiras SA (Electrobras), ADR, pfd. -- -- 176,400 1,796,713 176,400 1,796,713 Centrais Geradoras Do Sul Do Brasil SA, ADR, pfd. -- -- 17,640 71,466 17,640 71,466 Coteminas Cia Tecidos Norte de Minas, pfd. -- -- 1,952,000 164,848 1,952,000 164,848 Embotelladora Andina SA, B, ADR, pfd. 302,900 4,619,225 302,900 4,619,225 Embratel Participacoes SA, ADR, pfd. -- -- 98,400 1,365,300 98,400 1,365,300 a Empresa Nacional de Comercio Redito Participacoes, pfd. -- -- 1,952,000 1,682 1,952,000 1,682 News Corp. Ltd., ADR, pfd. 117,000 3,692,812 117,000 3,692,812 News Corp. Ltd., pfd. 265,309 2,021,251 903,781 6,885,438 1,169,090 8,906,689 Tele Celular Sul Participacoes SA, ADR, pfd. -- -- 9,840 213,405 9,840 213,405 Tele Centro Oeste Celular Participacoes SA, ADR, pfd. -- -- 32,799 129,146 32,799 129,146 Tele Centro Sul Participacoes SA, ADR, pfd. -- -- 19,680 1,092,240 19,680 1,092,240 Tele Leste Celular Participacoes SA, ADR, pfd. -- -- 1,968 58,548 1,968 58,548 Tele Nordeste Celular Participacoes SA, ADR, pfd. -- -- 4,920 132,840 4,920 132,840 Tele Norte Celular Participacoes SA, ADR, pfd. -- -- 1,968 53,259 1,968 53,259 Tele Norte Leste Participacoes SA, ADR, pfd. -- $-- 98,400 $ 1,826,550 98,400 $ 1,826,550 Tele Sudeste Celular Participacoes SA, ADR, pfd. -- -- 19,680 570,720 19,680 570,720 a Telecomunicacoes Brasileiras SA (Telebras), ADR, pfd. 41,800 2,613 98,400 6,150 140,200 8,763 Telemig Celular Participacoes SA, ADR, pfd. 4,920 121,155 4,920 121,155 Telesp Celular Participacoes SA, ADR, pfd. 39,360 1,052,880 39,360 1,052,880 Telesp Participacoes SA, ADR, pfd. 205,300 4,696,237 98,400 2,250,900 303,700 6,947,137 ------------ ------------ ---------------- Total Preferred Stocks (Cost $36,995,705) 18,308,346 20,111,928 38,420,274 ------------ ------------ ---------------- PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT* AMOUNT* AMOUNT* ----------- ----------- ----------- Bonds 1.2% Alfa SA de CV: cvt., 8.00%, 9/15/00 -- -- $ 1,650,000 1,683,000 1,650,000 1,683,000 cvt., 144A, 8.00%, 9/15/00 -- -- 2,710,000 2,764,200 2,710,000 2,764,200 AXA SA, cvt., 144A, 2.50%, 1/01/14 3,445,200 EUR 3,574,026 3,445,200EUR 3,574,026 Government of Italy, cvt., 5.00%, 6/28/01 -- -- 4,950,000 8,167,500 4,950,000 8,167,500 RGC Ltd, zero coupon, 12/31/00 -- 1,074,643 AUD 284,523 1,074,643AUD 284,523 -- ------------ ------------ --------------- Total Bonds (Cost $16,745,694) -- 3,574,026 12,899,223 16,473,249 ------------ ------------ ---------------- Short Term Investments .4% Federal National Mortgage Association, 4.71%, 7/13/99 3,585,000 3,579,253 3,585,000 3,579,253 U.S. Treasury Bill, 4.41%, 8/26/99 -- -- 1,407,000 1,397,716 1,407,000 1,397,716 ------------ ------------ ---------------- Total Short Term Investments (Cost $4,976,079) 3,579,253 1,397,716 4,976,969 ------------ ------------ ---------------- Total before Repurchase Agreement (Cost $1,071,512,226) 631,530,448 700,887,189 1,332,417,637 ------------ ------------ ---------------- Repurchase Agreements 3.7% Barclays Bank PLC, 4.75%, 7/01/99 (Maturity Value $21,330,814) Collateralized by U.S. Treasury Notes and Bonds -- -- 21,328,000 21,328,000 21,328,000 21,328,000 Deutsche Bank,AG, 4.75%, 7/01/99 (Maturity Value $20,002,639) Collateralized by U.S. Treasury Notes and Bonds -- -- 20,000,000 20,000,000 20,000,000 20,000,000 Paine Webber Group Inc., 4.80%, 6/30/99 (Maturity Value $10,029,337) Collateralized by U.S. Treasury Notes and Bonds 10,028,000 10,028,000 -- -- 10,028,000 10,028,000 ------------ ------------ ---------------- Total Repurchase Agreements (Cost $51,356,000) 10,028,000 41,328,000 51,356,000 ------------ ------------ ---------------- Total Investments (Cost $1,122,868,226) 100.1% 640,842,610 742,215,189 1,383,057,799 Other Assets, less Liabilities (.1%) 7,020,893 (8,570,369) (1,549,476) ------------ ------------ ---------------- Total Net Assets 100.0% $647,863,503 $733,644,820 $1,381,508,323 ------------ ------------ ---------------- Currency Abbreviations: AUD - Australian Dollar EUR -European Unit*Securities traded in U.S. dollars unless otherwise indicated. See accompanying notes to pro forma combined financial statements. </TABLE> <TABLE> <CAPTION> Templeton Variable Products Series Fund - Templeton Stock Fund ("TVP Templeton Stock Fund") Franklin Templeton Variable Insurance Products Trust - Templeton Global Growth Fund ("VIP Templeton Global Growth Fund") Financial Statements Pro forma combined Statements of Assets and Liabilities (unaudited) June 30, 1999 VIP Templeton Global Growth TVP Templeton VIP Templeton Fund Stock Global Growth Pro Forma Fund Fund Combined --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> Assets: Investments in securities: Cost $470,524,685 $600,987,541 $1,071,512,226 --------------------------------------------------------------------------------------------------------------- Value 630,814,610 700,887,189 1,331,701,799 Repurchase Agreements, at value and cost 10,028,000 41,328,000 51,356,000 Cash 1,491,932 1,959,957 3,451,889 Receivables: Investment securities sold 120,620 230,944 351,564 Capital shares sold 3,225,239 749,832 3,975,071 Dividends and interest 2,928,716 3,759,218 6,687,934 --------------------------------------------------------------------------------------------------------------- Total assets 648,609,117 748,915,140 1,397,524,257 Liabilities: Payables: Investment securities purchased -- 14,267,674 14,267,674 Capital shares redeemed -- 408,130 408,130 Affiliates 423,469 498,068 921,537 Custodian fees -- 54,160 54,160 Postage and mailing -- 1,062 1,062 Deffered tax liability (Note 1j) 61,431 -- 61,431 Accrued expenses 260,714 -- 260,714 Other liabilities -- 41,226 41,226 --------------------------------------------------------------------------------------------------------------- Total liabilities 745,614 15,270,320 16,015,394 Net assets, at value $647,863,503 $733,644,820 $28,916,394 Class 1: Net assets, at value $620,428,154 $732,163,775 --------------------------------------------------------------------------------------------------------------- Shares outstanding** 29,158,278 44,256,213 81,766,984 Net asset value and offering price per share $21.28 $16.54 $16.54 Class 2: Net assets, at value $ 27,435,349 $ 1,481,045 $1,332,591,929 --------------------------------------------------------------------------------------------------------------- Shares outstanding** 1,293,337 89,660 1,750,395 Net asset value and offering price per share $21.21 $16.52 $16.52 **See note 2 in the accompanying notes to pro forma combined financial statements. See accompanying notes to pro forma combined financial statements. TVP Templeton Stock Fund VIP Templeton Global Growth Fund Financial Statements (continued) Pro forma combined Statements of Operations for the six months ended June 30, 1999 (unaudited) VIP Templeton Global Growth TVP Templeton VIP Templeton Fund Stock Global Growth Proforma Pro Forma Fund Fund Adjustments Combined --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> Investment income:+ Dividends $ 7,766,878 $11,344,030 $-- $ 19,110,908 Interest 193,686 1,288,395 -- 1,482,081 --------------------------------------------------------------------------------------------------------------- Total investment income 7,960,564 12,632,425 -- 20,592,989 Expenses: Management fees 2,219,871 2,983,965 164,004a 5,367,840 Administrative fees 307,861 -- (307,861)b -- Distribution fees - Class 2 30,831 442 (75)c 31,198 Custodian fees 47,000 111,000 -- 158,000 Reports to shareholders 56,000 33,100 -- 89,100 Professional fees 13,400 15,600 -- 29,000 Trustees' fees and expenses -- 2,800 -- 2,800 Other 551 6,134 -- 6,685 --------------------------------------------------------------------------------------------------------------- Total expenses 2,675,514 3,153,041 (143,932) 5,684,623 Net investment loss 5,285,050 9,479,384 (143,932) 14,908,366 Realized and unrealized gains (losses): Net realized gain (loss) from: Investments 17,509,630 17,344,632 -- 34,854,262 Foreign currency transactions (447,977) (506,819) -- (954,796) --------------------------------------------------------------------------------------------------------------- Net realized gain 17,061,653 16,837,813 -- 33,899,466 Net unrealized appreciation (depreciation) on: Investments 53,008,541 54,339,968 -- 107,348,509 Deferred taxes (61,431) -- -- (61,431) --------------------------------------------------------------------------------------------------------------- Net unrealized gain 52,947,110 54,339,968 107,287,078 Net realized and unrealized gain 70,008,763 71,177,781 -- 141,186,544 Net increase in net assets resulting from operations $75,293,813 $80,657,165 $(143,932) $156,094,910 aPro Forma adjustment for difference in Management fee schedule. bPro Forma adjustment for difference in Administrative fee schedule. cPro Forma adjustment for difference in 12B-1 agreement. The 12B-1 fee rate reflected in the Pro Forma Combined is 0.25% of the average net assets. +Net of foreign taxes of $752,149 and $1,090,514 for TVP Templeton Stock Fund and VIP Templeton Global Growth Fund, respectively. </TABLE> See accompanying notes to pro forma combined financial statements. VIP - Templeton Global Growth Fund TVP - Templeton Stock Fund Notes to Pro forma combined Statements (unaudited) 1. Basis of Combination Subject to approval of the proposed Agreement and Plan of Reorganization (the "Agreement and Plan") by the shareholders of the Templeton Variable Products Series Fund - Templeton Stock Fund ("TVP-Templeton Stock Fund"), the Franklin Templeton Variable Insurance Products Trust - Templeton Global Growth Fund ("VIP - Templeton Global Growth Fund") will acquire all the net assets of the TVP - Templeton Stock Class 1 and 2 in exchange for the Classes 1 and 2 shares, respectively, shares of VIP - Templeton Global Growth Fund. The merger will be accounted for by the method of accounting for tax free business combinations of investment companies. The pro forma combined Statement of Assets and Liabilities reflects the financial position of TVP - Templeton Stock Fund June 30, 1999 as though the merger occurred as of that date. The pro forma combined Statement of Operations reflects the results of operations of the TVP - Templeton Stock and VIP - Templeton Global Growth for the period January 1, 1999 to June 30, 1999 as though the merger occurred on January 1, 1999. The pro forma financial statements do not reflect the expenses of either fund in carrying out its obligations under the Agreement and Plan of Reorganization or any adjustment with respect to additional distributions that may be made prior to reorganization. The pro forma financial statements are presented for the information of the reader, and should be read in conjunction with the historical financial statements of the funds. 2. Capital Shares: The number of Class 1 and 2 shares issued was calculated by dividing the Class 1 and 2 net assets of the TVP - Templeton Stock at June 30, 1999 by the Class 1 and 2 net asset value per share of the VIP - Templeton Global Growth , respectively at June 30, 1999. << TVP Templeton Asset Allocation Fund VIP Templeton Global Asset Allocation Fund Pro forma combined Statement of Investments, June 30, 1999 (unaudited) <TABLE> <CAPTION> VIP Templeton TVP Templeton VIP Templeton Global Asset Allocation Fund Asset Allocation Fund Global Asset Allocation Fund Pro Forma Combined --------------------------------------------------------------------------------------------------------------- SHARES VALUE SHARES VALUE SHARES VALUE --------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Common Stocks 74.5%>> << Aerospace & Military Technology 1.0% Alvis Plc. -- $-- 140,990 $ 382,243 140,990 $ 382,243 Boeing Co. -- -- 21,217 937,526 21,217 937,526 Hong Kong Aircraft Engineering Co. Ltd. -- -- 363,200 702,166 363,200 702,166 Kaman Corp., A -- -- 40,300 632,206 40,300 632,206 Raytheon Co., A -- -- 17,615 1,213,233 17,615 1,213,233 Rolls-Royce PLC 770,000 3,261,838 121,085 512,935 891,085 3,774,773 ------------ ------------ ---------------- 3,261,838 4,380,309 7,642,147 ------------ ------------ ---------------- Appliances & Household Durables 1.4% Laox Co. Ltd. -- -- 70,000 607,237 70,000 607,237 Sony Corp. 92,400 9,962,161 -- -- 92,400 9,962,161 ------------ ------------ ---------------- 9,962,161 607,237 10,569,398 ------------ ------------ ---------------- Automobiles 4.6% Autoliv Inc. 246,900 7,468,725 -- -- 246,900 7,468,725 Autoliv Inc., SDR 129,000 3,929,781 -- -- 129,000 3,929,781 Delphi Automotive Systems Corp. 1,887 35,030 1,887 35,030 Fiat SpA 2,361,700 7,506,197 -- -- 2,361,700 7,506,197 Ford Motor Co. 84,000 4,740,750 -- -- 84,000 4,740,750 General Motors Corp. 40,000 2,640,000 2,700 178,200 42,700 2,818,200 Volvo AB, B 260,000 7,538,226 -- -- 260,000 7,538,226 ------------ ------------ ---------------- 33,823,679 213,230 34,036,909 ------------ ------------ ---------------- Banking 4.8% *Banca Nazionale Del Lavoro SpA 225,160 710,054 225,160 710,054 *Bangkok Bank Public Co. Ltd., fgn. 193,400 723,775 193,400 723,775 Canadian Imperial Bank of Commerce 140,000 3,357,704 -- -- 140,000 3,357,704 Den Norske Bank 2,178,900 7,196,113 -- -- 2,178,900 7,196,113 Deutsche Bank AG, Br. 121,400 7,398,928 -- -- 121,400 7,398,928 Foreningssparbanken AB, A 170,700 2,409,315 -- -- 170,700 2,409,315 Merita AS 2,453,000 13,938,362 -- -- 2,453,000 13,938,362 ------------ ------------ ---------------- 34,300,422 1,433,829 35,734,251 ------------ ------------ ---------------- Broadcasting & Publishing .2% South China Morning Post Ltd. 2,821,000 1,581,594 -- -- 2,821,000 1,581,594 ------------ ------------ ---------------- Building Materials & Components .5% Caradon PLC -- -- 295,300 695,869 295,300 695,869 Gujarat Ambuja Cements Ltd. -- -- 200 1,476 200 1,476 Gujarat Ambuja Cements Ltd., GDR, 144A -- -- 14,600 119,720 14,600 119,720 Pioneer International Ltd. 969,005 2,469,334 969,005 2,469,334 Plettac AG -- -- 5,192 263,428 5,192 263,428 ------------ ------------ ---------------- 2,469,334 1,080,493 3,549,827 ------------ ------------ ---------------- Business & Public Services 1.6% Columbia HCA Healthcare Corp. -- -- 13,600 310,250 13,600 310,250 a Humana Inc. -- -- 18,200 235,463 18,200 235,463 Kurita Water Industries Ltd. 432,000 7,744,878 -- -- 432,000 7,744,878 Laidlaw Inc. 549,130 4,049,834 -- -- 549,130 4,049,834 a Lifepoint Hospitals Inc. -- -- 716 9,618 716 9,618 a Triad Hospitals Inc. -- -- 715 9,653 715 9,653 ------------ ------------ ---------------- 11,794,712 564,984 12,359,696 ------------ ------------ ---------------- Chemicals 1.7% Akzo Nobel NV 98,800 4,156,997 12,105 509,316 110,905 4,666,313 DSM NV, Br. 25,000 2,681,242 -- -- 25,000 2,681,242 Hoechst AG 118,200 5,326,740 -- -- 118,200 5,326,740 Shanghai Petrochemical Co. Ltd., H 834,000 196,707 834,000 196,707 ------------ ------------ ---------------- 12,164,979 706,023 12,871,002 ------------ ------------ ---------------- Data Processing & Reproduction .9% a 3Com Corp. 240,800 6,426,350 25,400 677,863 266,200 7,104,213 ------------ ------------ ---------------- Electrical & Electronics 4.7% Alcatel SA 92,119 $ 12,967,148 92,119 $ 12,967,148 Alcatel SA, ADR 185,738 5,270,316 185,738 5,270,316 General Electric Co. PLC 101,500 $ 1,031,927 101,500 1,031,927 Koninklijke Philips Electronics NV 56,856 5,608,205 10,396 1,025,448 67,252 6,633,653 Motorola Inc. 94,000 8,906,500 4,310 408,373 98,310 9,314,873 ------------ ------------ ---------------- 32,752,169 2,465,748 35,217,917 ------------ ------------ ---------------- Electronic Components & Instruments 2.6% Hewlett-Packard Co. 106,000 10,653,000 -- -- 106,000 10,653,000 Intel Corp. 144,000 8,568,000 -- -- 144,000 8,568,000 ------------ ------------ ---------------- 19,221,000 -- 19,221,000 ------------ ---------------- Energy Equipment & Services .1% Sunoco Inc. -- -- 17,500 528,281 17,500 528,281 ------------ ------------ ---------------- Energy Sources 4.3% a Consol Energy 584,000 7,008,000 -- -- 584,000 7,008,000 a Ranger Oil Ltd. 1,153,490 5,695,357 -- -- 1,153,490 5,695,357 a Rao Gazprom, Reg S, ADR -- -- 14,201 160,116 14,201 160,116 a Renaissance Energy Ltd. 549,350 7,432,272 -- -- 549,350 7,432,272 MOL Magyar Olay-Es Gazipari RT, GDS 144A -- -- 12,107 289,963 12,107 289,963 Shell Transport & Trading Co. PLC 1,525,600 11,428,413 1,525,600 11,428,413 Societe Elf Aquitaine SA, Br. -- -- 1,805 264,877 1,805 264,877 ------------ ------------ ---------------- 31,564,042 714,956 32,278,998 ------------ ------------ ---------------- Financial Services 5.1% AXA SA 97,600 11,906,858 11,271 1,375,022 108,871 13,281,880 ING Groep NV 222,100 12,024,595 13,432 727,215 235,532 12,751,810 Nomura Securities Co. Ltd. 1,000,600 11,713,898 -- -- 1,000,600 11,713,898 ------------ ------------ ---------------- 35,645,351 2,102,237 37,747,588 ------------ ------------ ---------------- Food & Household Products .1% Archer-Daniels Midland Co. -- -- 29,547 456,132 29,547 456,132 ------------ ------------ ---------------- Forest Products & Paper 1.5% Assidoman AB 90,000 1,761,468 90,000 1,761,468 Cartiere Burgo SpA -- -- 34,500 221,615 34,500 221,615 Georgia Pacific Corp. -- -- 5,000 236,875 5,000 236,875 International Paper Co. 50,000 2,525,000 -- -- 50,000 2,525,000 Mo Och Domsjoe AB, B -- -- 9,575 222,989 9,575 222,989 Stora Enso OYJ, R 225,000 2,413,117 -- -- 225,000 2,413,117 Stora Enso OYJ, R, fgn. 326,569 3,533,798 -- -- 326,569 3,533,798 ------------ ------------ ---------------- 10,233,383 681,479 10,914,862 ------------ ------------ ---------------- Health & Personal Care 4.7% Medeva PLC 4,572,675 7,495,952 -- -- 4,572,675 7,495,952 Ono Pharmaceutical Co Ltd. 247,000 8,427,875 -- -- 247,000 8,427,875 Rhone-Poulenc SA, A 201,800 9,221,159 9,870 451,005 211,670 9,672,164 Teva Pharmaceutical Industries Ltd., ADR 197,200 9,662,800 -- -- 197,200 9,662,800 ------------ ------------ ---------------- 34,807,786 451,005 35,258,791 ------------ ------------ ---------------- Industrial Components .3% Goodyear Tire & Rubber Co. -- -- 3,600 211,725 3,600 211,725 Madeco Manufacturera de Cobre SA, ADR 162,500 1,645,313 18,685 189,186 181,185 1,834,499 Weir Group PLC -- -- 123,370 517,266 123,370 517,266 ------------ ------------ ---------------- 1,645,313 918,177 2,563,490 ------------ ------------ ---------------- Insurance 5.0% Ace Ltd. -- -- 25,200 711,900 25,200 711,900 Aetna Inc. 16,700 1,493,606 7,190 643,056 23,890 2,136,662 Allstate Corp. 80,000 2,870,000 -- -- 80,000 2,870,000 AXA China Region Ltd. -- -- 489,000 390,754 489,000 390,754 Partnerre Ltd. -- -- 17,500 654,063 17,500 654,063 Reinsurance Australia Corp. Ltd. 829,055 691,428 375,684 313,319 1,204,739 1,004,747 Insurance (cont.) Reliastar Financial Corp. -- $-- 18,310 $ 801,063 18,310 $ 801,063 SCOR SA -- -- 18,000 892,853 18,000 892,853 Torchmark Corp. 90,000 3,071,250 22,400 764,400 112,400 3,835,650 UNUM Corp. 18,530 1,014,518 18,530 1,014,518 Waddell & Reed Financial Inc., B 5,485 148,095 5,485 148,095 XL Capital Ltd., A 179,400 10,136,100 -- -- 179,400 10,136,100 Zurich Allied AG 20,400 11,600,154 1,390 790,403 21,790 12,390,557 ------------ ------------ ---------------- 29,862,538 7,124,424 36,986,962 ------------ ------------ ---------------- Leisure & Tourism .1% Mandarin Oriental International Ltd. -- -- 524,000 461,120 524,000 461,120 ------------ ------------ ---------------- Machinery & Engineering .3% Invensys PLC -- -- 186,454 883,160 186,454 883,160 Makita Corp. -- -- 59,000 667,308 59,000 667,308 Mckechnie Group PLC -- -- 101,800 779,041 101,800 779,041 ------------ ------------ ---------------- -- 2,329,509 2,329,509 ------------ ------------ ---------------- Merchandising 2.4% Best Denki Co. Ltd. 24,000 190,549 24,000 190,549 Dairy Farm International Holdings Ltd. 1,000,000 1,200,000 1,000,000 1,200,000 David Jones Ltd. 345,909 338,857 345,909 338,857 Marks & Spencer PLC 1,232,600 7,110,930 1,232,600 7,110,930 Matsuzakaya Co. Ltd. 115,000 494,052 115,000 494,052 Sears Roebuck & Co. 42,000 1,871,625 -- -- 42,000 1,871,625 Storehouse 3,079,116 6,624,938 -- -- 3,079,116 6,624,938 ------------ ------------ ---------------- 16,807,493 1,023,458 17,830,951 ------------ ------------ ---------------- Metals & Mining 1.8% Anglo American Platinum Corp. Ltd. -- 402 9,380 402 9,380 British Steel PLC, ADR 394,300 10,276,444 394,300 10,276,444 Companhia Siderurgica Nacional Sid Nacional CSN -- -- 16,300,000 430,171 16,300,000 430,171 Companhia Siderurgica Nacional Sid Nacional CSN, ADR -- -- 7,700 202,125 7,700 202,125 Elkem ASA, A -- -- 49,700 883,836 49,700 883,836 Industrias Penoles SA -- -- 168,200 490,321 168,200 490,321 Pohang Iron & Steel Co. Ltd. -- -- 6,690 834,046 6,690 834,046 ------------ ------------ ---------------- 10,276,444 2,849,879 13,126,323 ------------ ------------ ---------------- Misc Materials & Commodities .6% Agrium Inc. 517,000 4,556,063 -- -- 517,000 4,556,063 ------------ ------------ ---------------- Multi-Industry 3.5% Alfa SA de CV, A 1,150,000 4,807,528 127,251 531,968 1,277,251 5,339,496 Broken Hill Proprietary Co. Ltd. -- -- 75,894 879,100 75,894 879,100 Cheung Kong Holdings Ltd. 600,000 5,335,842 89,500 795,930 689,500 6,131,772 Elementis PLC -- -- 82,194 136,683 82,194 136,683 Hunting PLC -- -- 261,410 607,767 261,410 607,767 Hutchison Whampoa Ltd. -- -- 79,000 715,280 79,000 715,280 Pilkington PLC -- -- 454,300 643,977 454,300 643,977 Saab AB, B -- -- 54,400 422,301 54,400 422,301 Swire Pacific Ltd., A 2,200,000 10,888,212 -- -- 2,200,000 10,888,212 Swire Pacific Ltd., B -- 945,000 706,419 945,000 706,419 ------------ ------------ ---------------- 21,031,582 5,439,425 26,471,007 ------------ ------------ ---------------- Real Estate .3% Highwoods Properties Inc. -- -- 16,600 455,463 16,600 455,463 Hon Kwok Land Investment Co. Ltd. -- -- 1,226,456 126,458 1,226,456 126,458 New World Development Co. Ltd. 303,543 909,590 -- -- 303,543 909,590 Rouse Co. -- -- 13,500 342,563 13,500 342,563 Summit Properties Inc. -- -- 15,000 296,250 15,000 296,250 Union du Credit Bail Immobilier Unibail -- -- 2,500 319,944 2,500 319,944 ------------ ------------ ---------------- 909,590 1,540,678 2,450,268 ------------ ------------ ---------------- Recreation & Other Consumer Goods .1% Yue Yuen Industrial (Holdings) Ltd. -- -- 190,140 438,661 190,140 438,661 ------------ ------------ ---------------- Telecommunications 9.7% AT&T Corp. 181,500 $ 10,129,969 -- $-- 181,500 $ 10,129,969 a Cable & Wireless Optus Ltd., 144A 2,768,640 6,304,025 -- -- 2,768,640 6,304,025 Hong Kong Telecommunications Ltd. 2,588,400 6,722,164 291,700 757,555 2,880,100 7,479,719 a Korea Telecom Corp., ADR 97,400 3,896,000 -- -- 97,400 3,896,000 Nippon Telegraph & Telephone Corp. 860 10,018,176 -- -- 860 10,018,176 PT Indosat, ADR 159,400 3,108,300 -- -- 159,400 3,108,300 a Rostelecom, ADR -- -- 25,300 248,256 25,300 248,256 Telecom Argentina Stet-France SA, ADR -- -- 4,000 107,000 4,000 107,000 a Telecom Italia SpA, di Risp 1,200,000 6,527,792 -- -- 1,200,000 6,527,792 Telefonica de Argentina SA, ADR 315,000 9,883,125 -- -- 315,000 9,883,125 Telefonica de Argentina SA, B, ADR 13,120 411,640 13,120 411,640 Telefonica del Peru SA, ADR 131,800 1,993,475 -- -- 131,800 1,993,475 Telefonos de Mexico SA (Telmex), ADR 142,800 11,540,025 -- -- 142,800 11,540,025 Telefonos de Mexico SA (Telmex), L, ADR -- -- 6,709 542,171 6,709 542,171 Telesp Celular Participacoes SA 22,228,000 120,494 22,228,000 120,494 Telesp Participacoes SA 22,228,000 289,059 22,228,000 289,059 ------------ ------------ ---------------- 70,532,604 2,066,622 72,599,226 ------------ ------------ ---------------- Textiles & Apparel .3% a Fruit of the Loom Inc., A 160,000 1,560,000 12,450 121,388 172,450 1,681,388 Yizheng Chemical Fibre Co. Ltd., H -- -- 1,332,000 347,642 1,332,000347,642 ------------ ------------ ---------------- 1,560,000 469,030 2,029,030 ------------ ------------ ---------------- Transportation 4.4% Air New Zealand Ltd., B 274,000 566,251 274,000 566,251 British Airways PLC 1,808,900 12,502,800 71,020 490,878 1,879,920 12,993,678 a Fritz Cos. Inc. 350,000 3,762,500 -- -- 350,000 3,762,500 Mayne Nickless Ltd., A 1,730,400 5,921,477 -- -- 1,730,400 5,921,477 Peninsular & Oriental Steam Navigation Co. 580,000 8,726,238 -- -- 580,000 8,726,238 Singapore Airlines Ltd., fgn. 102,000 970,573 102,000 970,57 ------------ ------------ ---------------- 31,479,266 1,461,451 32,940,717 ------------ ------------ ---------------- Utilities Electrical & Gas 5.9% Centrica PLC 2,880,000 6,775,322 -- -- 2,880,000 6,775,322 Endesa SA 122,000 2,601,794 -- -- 122,000 2,601,794 Endesa SA, ADR 88,000 1,870,000 -- -- 88,000 1,870,000 Gener SA, ADR 287,050 5,095,138 -- -- 287,050 5,095,138 Hong Kong Electric Holdings Ltd. 2,001,500 6,449,087 130,000 418,877 2,131,500 6,867,964 Iberdrola SA, Br. 85,000 1,294,679 85,000 1,294,679 Korea Electric Power Corp. 196,000 8,144,795 19,280 801,182 215,280 8,945,977 National Grid Group PLC 79,730 554,536 79,730 554,536 Veba AG 173,800 10,251,995 -- -- 173,800 10,251,995 ------------ ------------ ---------------- 42,482,810 1,774,595 44,257,405 ------------ ------------ ---------------- Total Common Stocks (Cost $465,856,909) 511,152,503 44,960,835 556,113,338 ------------ ------------ ---------------- Preferred Stocks 4.3% Banco Bradesco SA, pfd. 767,000,000 3,938,944 121,758,350 625,293 888,758,350 4,564,237 Cia Energetica de Minas Gerais Cemig, ADR, pfd. -- -- 9,178 193,825 9,178 193,825 Cia Vale do Rio Doce, A, pfd. -- -- 13,400 266,088 13,400 266,088 Cia Vale do Rio Doce, A, ADR, pfd. 371,400 7,375,019 15,100 299,846 386,500 7,674,865 Coteminas Cia Tecidos Norte de Minas, pfd. -- -- 599,000 50,586 599,000 50,586 Embratel Participacoes SA, ADR, pfd. 121,000 1,678,875 121,000 1,678,875 a Empresa Nacional de Comercio Redito Participacoes, pfd. -- -- 275,000 237 275,000 237 Moebel Walther AG, pfd. 119,092 1,848,339 -- -- 119,092 1,848,339 News Corp. Ltd., pfd. 850,000 6,475,708 -- -- 850,000 6,475,708 Petroleo Brasileiro SA, pfd. 36,000,000 5,649,073 -- -- 36,000,000 5,649,073 Telesp Celular Participacoes SA, pfd. 40,981,336 434,952 -- -- 40,981,336 434,952 Telesp Participacoes SA, ADR, pfd. 110,000 $ 2,516,250 110,000 2,516,250 Telesp Participacoes SA, pfd. 40,981,336 970,457 40,981,336 970,457 ------------ ------------ ---------------- Total Preferred Stocks (Cost $37,947,109) 30,887,617 $ 1,435,875 32,323,492 ------------ ------------ ---------------- </TABLE> <TABLE> <CAPTION> PRINCIPAL PRINCIPAL PRINCIPAL AMOUNT* AMOUNT* AMOUNT* --------- --------- --------- <S> <C> <C> <C> <C> <C> <C> Bonds 12.8% Australian Government, 10.00%, 10/15/07 4,184,000 AUD 3,435,239 4,184,000AUD 3,435,239 Buoni Poliennali del Tesoro, 10.50%, 7/15/00 -- -- 581,013EUR 643,626 581,013EUR 643,626 Essar Steel Ltd., Reg S, FRN, 7.635%, 7/20/99 445,000 300,375 445,000 300,375 Fannie Mae, 5.25%, 1/15/09 -- -- 495,000 452,862 495,000 452,862 Federal Republic of Germany, Series 118, 5.25%, 2/21/01 710,696EUR 756,986 613,550EUR 653,513 1,324,246EUR 1,410,499 Government of Australia, 10.00%, 10/15/07 -- -- 988,000AUD 811,189 988,000AUD 811,189 Government of Canada: 7.00%, 12/01/06 1,140,000CAD 849,528 470,000CAD 350,244 1,610,000CAD 1,199,772 6.00%, 6/01/08 2,812,000CAD 1,990,881 -- -- 2,812,000CAD 1,990,881 Government of France, 6.50%, 10/25/06 6,309,000EUR 7,410,489 -- -- 6,309,000EUR 7,410,489 Government of Italy: cvt., 5.00%, 6/28/01 640,000 1,056,000 640,000 1,056,000 7.75%, 11/01/06 5,685,153EUR 7,037,113 723,038EUR 894,981 6,408,191EUR 7,932,094 Government of Netherlands, 5.75%, 2/15/07 3,484,000EUR 3,895,383 -- -- 3,484,000EUR 3,895,383 Government of New Zealand, 7.00%, 7/15/09 3,614,000NZD 1,983,362 540,000NZD 296,352 4,154,000NZD 2,279,714 Government of Spain, 7.35%, 3/31/07 3,201,000EUR 3,891,078 -- -- 3,201,000EUR 3,891,078 Hypothekenbank In Essen AG, Seriese 5.25%, 1/22/08 4,834,265EUR 5,145,847 1,242,439EUR 1,322,518 6,076,704EUR 6,468,365 Kingdom of Belgium, 6.25%, 3/28/07 3,968,208EUR 4,539,070 677,989EUR 775,524 4,646,197EUR 5,314,594 Kingdom of Denmark, 7.00%, 11/15/07 17,701,000DKK 2,838,633 2,867,000DKK 459,768 20,568,000DKK3,298,401 Kingdom of Sweden, 6.00%, 2/09/05 22,400,000SEK 2,802,898 5,500,000 SEK 688,212 27,900,000SEK 3,491,110 Protexa Construcciones SA de CV, 144A, 12.125%, 7/24/02 -- -- 100,000 80,500 100,000 80,500 PT Indah Kiat Finance Mauritius Ltd., 10.00%, 7/01/07 -- -- 300,000 204,000 300,000 204,000 Republic of Argentina: 10.95%, 11/01/99 1,025,000 1,035,250 1,025,000 1,035,250 Reg S, 11.75%, 2/12/07 -- -- 100,000 ARS 80,383 100,000 ARS 80,383 Republic of Ecuador: Reg S, 11.25%, 4/25/02 -- -- 450,000 280,125 450,000 280,125 144A, 11.25%, 4/25/02 -- -- 275,000 171,188 275,000 171,188 Republic of Panama, 8.875%, 9/30/27 960,000 796,800 -- -- 960,000 796,800 Republic of Peru, FRN, 4.50%, 3/07/17 1,560,000 962,333 -- -- 1,560,000 962,333 Republic of Turkey, 12.375%, 6/15/09 1,130,000 1,121,525 35,000 34,738 1,165,000 1,156,263 Republic of Venezuela: 144A, 9.125%, 6/18/07 1,540,000 1,170,400 100,000 76,000 1,640,000 1,246,400 Reg S, 9.125%, 6/18/07 -- -- 600,000 456,000 600,000 456,000 SEI Holdings IX Inc., 144A, 11.00%, 11/30/00 -- -- 170,000 176,800 170,000 176,800 Treuhandanstalt, 7.50%, 9/09/04 511,292 EUR 610,682 511,292 610,682 U.S. Treasury Notes: 8.50%, 2/15/00 -- -- 880,000 898,150 880,000 898,150 6.25%, 8/31/00 -- -- 1,010,000 1,019,469 1,010,000 1,019,469 4.50%, 1/31/01 5,890,000 5,803,494 2,000,000 1,970,626 7,890,000 7,774,120 7.25%, 8/15/04 576,000 612,000 576,000 612,000 5.25%, 11/15/28 5,000,000 4,426,565 2,000,000 1,770,626 7,000,000 6,197,191 United Kingdom: 6.50%, 12/07/03 -- $-- 880,000 GBP $ 1,476,284 880,000 GBP $ 1,476,284 7.50%, 12/07/06 3,685,000 GBP 6,549,033 280,000 GBP 497,620 3,965,000 GBP 7,046,653 United Mexican States: 9.75%, 2/06/01 2,895,000 3,017,314 620,000 646,195 3,515,000 3,663,509 11.375%, 9/15/16 -- -- 430,000 462,465 430,000 462,465 6.25%, 12/31/19 5,050,000 3,743,313 5,050,000 3,743,313 11.50%, 5/15/26 -- -- 220,000 245,843 220,000 245,843 ------------ ------------ ---------------- Total Bonds (Cost $118,784,832) 76,113,591 19,563,801 95,677,392 ------------ ------------ ---------------- Short Term Investments 6.6% Chase Securities Inc., 5.00%, 6/30/99, Time Deposit 19,226,000 19,226,000 19,226,000 19,226,000 Fannie Mae, 4.85%, 7/19/99 10,000,000 9,975,950 10,000,000 9,975,950 Sallie Mae, 4.85%, 7/19/99 10,000,000 10,000,000 10,000,000 10,000,000 U.S. Treasury Bills, 4.48% to 4.72% with maturities to 10/21/99 10,195,000 10,114,323 10,195,000 10,114,323 ------------ ------------ ---------------- Total Short Term Investments (Cost $30,085,569) 49,316,273 -- 49,316,273 ------------ ------------ ---------------- Total Investments before Repurchase Agreements (Cost $652,674,419) 667,469,984 65,960,511 733,430,495 ------------ ------------ ---------------- gRepurchase Agreements .6% CIBC Oppenheimer Corp., 4.80%, 7/01/99 (Maturity Value $2,100,280) Collateralized by U.S. Treasury Notes and Bonds -- -- 2,100,000 2,100,000 2,100,000 2,100,000 Deutsche Bank AG, 4.75%, 7/01/99 (Maturity Value $2,120,280) Collateralized by U.S. Treasury Notes and Bonds -- -- 2,120,000 2,120,000 2,120,000 2,120,000 ------------ ------------ ---------------- Total Repurchase Agreements (Cost $4,220,000) -- 4,220,000 4,220,000 ------------ ------------ ---------------- Total Investments (Cost $656,894,419) 98.8% 667,469,984 70,180,511 737,650,495 Net Equity in Forward Contracts 21,151 5,130 26,281 Other Assets, Less Liabilities 1.2% 8,890,544 410,604 9,301,148 ------------ ------------ ---------------- Total Net Assets 100.0% $676,381,679 $70,596,245 $746,977,924 ------ ------ -------- Currency Abbreviations: ARS - Argentine Peso AUD - Australian Dollar AD - Canadian Dollar DKK - Danish Krone EUR - European Unit GBP - British Pound NZD - New Zealand Dollar SEK - Swedish Krone *Securities traded in U.S. dollars unless otherwise indicated. aNon-income producing.>> </TABLE> PART C ITEM 15. INDEMNIFICATION Insofar as indemnification for liabilities arising under the Securities Act of 1933 (the "1933 Act") may be permitted to Trustees, officers and controlling persons of the Fund, pursuant to the foregoing provisions, or otherwise, the Fund has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the 1933 Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Fund of expenses incurred or paid by a Trustee, officer or controlling person of the Fund in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with securities being registered, the Fund will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court or appropriate jurisdiction the question whether such indemnification is against public policy as expressed in the 1933 Act and will be governed by the final adjudication of such issue. ITEM 16. EXHIBITS 1. ARTICLES OF INCORPORATION. (i) Agreement and Declaration of Trust, dated April 20, 1988, incorporated by reference to Post-Effective Amendment No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (ii) Certificate of Amendment of Agreement and Declaration of Trust, dated October 21, 1988, incorporated by reference to Post-Effective Amendment No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (iii) Certificate of Amendment of Agreement and Declaration of Trust, dated October 16, 1998, incorporated by reference to Post-Effective Amendment No. 26 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: November 30, 1998 2. BYLAWS. (i) Bylaws of Registrant, dated April 20, 1988, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (ii) Certificate of Amendment to Bylaws, dated May 16, 1995, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 3. VOTING TRUST AGREEMENTS. Not Applicable 4. AGREEMENT OF ACQUISITION OR REORGANIZATION. (i) Form of Agreement and Plan of Reorganization by and between the Templeton Variable Products Series Fund and the Registrant, filed herewith as Exhibit 1 to the Combined Proxy Statement/Prospectus included as Part A of this Registration Statement. 5. INSTRUMENTS DEFINE RIGHTS OF SECURITY HOLDERS Not Applicable 6. INVESTMENTS ADVISORY CONTRACTS. (i) Management Agreement, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (ii) Addendum to Investment Management Agreement, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (iii) Management Agreement with respect to Templeton International Equity Fund, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (iv) Subadvisory Agreement with respect to Templeton International Equity Fund, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (v) Form of proposed Management Agreement with respect to Templeton International Equity Fund, filed herewith as Exhibit 5 to the Combined Proxy Statement/Prospectus included as Part A of this Registration Statement (vi) Investment Management Agreement with respect to Templeton Global Growth Fund, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (vii) Subadvisory Agreement with respect to Global Income Securities Fund, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (viii) Investment Management Agreement with respect to Templeton Global Asset Allocation Fund, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (ix) Subadvisory Agreement with respect to Templeton Global Asset Allocation Fund, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (x) Form of proposed Management Agreement with respect to Templeton Global Asset Allocation Fund, filed herewith as Exhibit 3 to the Combined Proxy Statement/Prospectus included as Part A of this Registration Statement (xi) Management Agreement with respect to Franklin Small Cap Fund, incorporated by reference to Post-Effective No. 20 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 30, 1996 (xii) Investment Management Agreement with respect to Templeton Developing Markets Equity Fund, incorporated by reference to Post-Effective No. 17 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: October 27, 1995 (xiii) Form of proposed Management Agreement with respect to Templeton Developing Markets Equity Fund, filed herewith as Exhibit 4 to the Combined Proxy Statement/Prospectus included as Part A of this Registration Statement (xiv) Amendment to Investment Management Agreement with respect to Templeton Developing Markets Equity Fund, incorporated by reference to Post-Effective No. 23 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: February 12, 1998 (xv) Addendum to Investment Management Agreement with respect to Templeton Developing Markets Equity Fund, incorporated by reference to Post-Effective No. 24 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: April 30, 1998 (xvi) Management Agreement with respect to Capital Growth Fund, incorporated by reference to Post-Effective No. 18 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: February 14, 1996 (xvii) Amendment to Management Agreement with respect to Capital Growth Fund, incorporated by reference to Post-Effective No. 20 to Registration Statement on Form N-1A File No. 33-23493, Filing Date: August 30, 1996 (xviii) Management Agreement with respect to Mutual Shares Securities Fund, incorporated by reference to Post-Effective No. 22 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: February 28, 1997 (xix) Form of Investment Management Agreement with respect to Franklin S&P Index Fund, filed herewith. (xx) Form of Investment Management Agreement with respect to Franklin Strategic Income Securities Fund, filed herewith. 7. UNDERWRITING CONTRACTS. (i) Distribution Agreement between the Registrant and Franklin/Templeton Distributors, Inc., dated September 24, 1998, incorporated by reference to Post-Effective No. 26 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: November 30, 1998 8. BONUS OR PROFIT SHARING CONTRACTS. Not Applicable 9. CUSTODIAN AGREEMENTS. (i) Foreign Exchange Netting Agreement with respect to the International Equity Fund, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (ii) Custody Agreement with respect to the Templeton Developing Markets Equity Fund and the Templeton Global Growth Fund, incorporated by reference to Post-Effective No. 16 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: August 19, 1995 (iii) Master Custody Agreement, incorporated by reference to Post-Effective No. 19 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: April 24, 1996 (iv) Terminal Link Agreement, incorporated by reference to Post-Effective No. 19 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: April 24, 1996 (v) Amendment to Global Custody Agreement, incorporated by reference to Post-Effective No. 23 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: April 29, 1997 (vi) Amendment to Master Custody, incorporated by reference to Post-Effective No. 23 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: April 29, 1997 (vii) Letter Agreement, incorporated by reference to Post-Effective No. 19 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: April 24, 1996 (viii) Custody Agreement with respect to Mutual Shares Securities Fund, incorporated by reference to Post-Effective No. 23 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: April 29, 1997 10. RULE 12b-1 PLAN. (i) Class 2 Plan of Distribution pursuant to Rule 12b-1, incorporated by reference to Post-Effective No. 26 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: November 30, 1998 (ii) Multiple Class Plan pursuant to Rule 18f-3 for all series of the Registrant, incorporated by reference to Post-Effective No. 26 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: November 30, 1998 11. LEGAL OPINION. (i) Legal Opinion, Securities Act of 1933, dated February 5, 1999 Filing: Post-Effective No. 27 to Registration Statement on Form N-1A File No. 33-23493 Filing Date: February 25, 1999 12. OPINION REGARDING TAX MATTERS. (i) Form of Opinion of Jorden Burt Boros Cicchetti Berenson & Johnson LLP regarding tax matters and consequences. 13. OTHER MATERIAL CONTRACTS. Not Applicable 14. OTHER OPINIONS. (i) Consent of Independent Auditors with respect to Registrant. (ii) Consent of Independent Auditors with respect to Templeton Variable Products Series Trust. 15. OMITTED FINANCIAL STATEMENTS. Not Applicable 16. POWER OF ATTORNEY. (i) 17. OTHER EXHIBITS (i) Forms of Voting Instruction Cards. (ii) Forms of Proxy Cards for Participating Insurance Companies ITEM 17. UNDERTAKINGS The undersigned Registrant agrees that prior to any public reoffering of the securities registered through the use of a prospectus which is part of this Registration Statement by any person or party who is deemed to be an underwriter within the meaning of Rule 145 of the Securities Act of 1933 (the "1933 Act"), the reoffering prospectus will contain the information called for by the applicable form for reofferings by persons who may be deemed underwriters, in addition to the information called for by the items of the applicable form. The undersigned Registrant agrees that every prospectus that is filed under paragraph (1) above will be filed as part of an amendment to the Registration Statement and will not be used until the amendment is effective, and that, in determining any liability under the 1933 Act, each post-effective amendment for the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering of them. SIGNATURES As required by the Securities Act of 1933, this Registration Statement has been signed on behalf of the Registrant, in the City of San Mateo, and the State of California, on the 2nd day of November, 1999. FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST By /S/ CHARLES E. JOHNSON* Charles E. Johnson, Principal Executive Officer and Trustee As required by the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities on the dates indicated. CHARLES E. JOHNSON* Principal Executive Officer and Trustee Charles E. Johnson Dated: November 2, 1999 MARTIN L. FLANAGAN* Principal Financial Officer Martin L. Flanagan Dated: November 2, 1999 DIOMEDES LOO-TAM* Principal Accounting Officer Diomedes Loo-Tam Dated: November 2, 1999 FRANK H. ABBOTT III* Trustee Frank H. Abbott III Dated: November 2, 1999 HARRIS J. ASHTON* Trustee Harris J. Ashton Dated: November 2, 1999 EDWARD J. BONACH Trustee Edward J. Bonach Dated: November 2, 1999 S. JOSEPH FORTUNATO* Trustee S. Joseph Fortunato Dated: November 2, 1999 ROBERT F. CARLSON* Trustee Robert F. Carlson Dated: November 2, 1999 CHARLES B. JOHNSON* Trustee Charles B. Johnson Dated: November 2, 1999 RUPERT H. JOHNSON, JR.* Trustee Rupert H. Johnson, Jr. Dated: November 2, 1999 FRANK W. T. LAHAYE* Trustee Frank W. T. LaHaye Dated: November 2, 1999 GORDON S. MACKLIN* Trustee Gordon S. Macklin Dated: November 2, 1999 * By /s/ KAREN L. SKIDMORE, ATTORNEY-IN-FACT (Pursuant to Power of Attorney attached) FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST N-14 REGISTRATION STATEMENT EXHIBITS INDEX EXHIBIT NO DESCRIPTION LOCATION EX-16.4(i) Form of Agreement and Plan of Reorganization * EX-16.6(v) Form of proposed Management Agreement with respect to Templeton International Equity Fund. * EX-16.6(x) Form of Investment Management Agreement with respect Templeton Global Asset Allocation Fund * EX-16.6(xiii)Form of proposed Investment Management Agreement with respect to Templeton Developing Markets Equity Fund * EX-16.6(xix) Form of Investment Management Agreement with respect to Franklin S&P 500 Index Fund Attached EX-16.6(xx) Form of Investment Management Agreement with respect to Franklin Strategic Income Securities Fund Attached EX-16.12(i) Opinion of Jorden Burt Boros Cicchetti Berenson & Johnson LLP regarding tax matters and consequences. ** EX-16.14 (i) Consent of Independent Auditors with respect to Registrant Attached EX-16.14(ii) Consent of Independent Auditors with respect to Templeton Variable Products Series Trust. Attached EX-16.17 (i) Forms of Voting Instruction Cards. Attached EX-16.17(ii) Forms of Proxy Cards for Participating Insurance Companies Attached *Included as an exhibit to the Combined Proxy/Prospectus included as Part A of this Registration Statement **To be filed by amendment
EXHIBIT 6 (xiv) FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST on behalf of FRANKLIN S&P 500 INDEX FUND FORM OF 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: A. INVESTMENT ADVISORY SERVICES. (a) The Adviser shall manage the Fund's assets subject to and in accordance with the investment objectives and policies of the Fund and any directions which the Trust's Board of Trustees may issue from time to time. In pursuance of the foregoing, the Adviser shall make all determinations with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, and shall take such steps as may be necessary to implement the same. Such determinations and services shall include determining the manner in which any voting rights, rights to consent to corporate action and any other rights pertaining to the Fund's investment securities shall be exercised. The Adviser shall render or cause to be rendered regular reports to the Trust, at regular meetings of its Board of Trustees and at such other times as may be reasonably requested by the Trust's Board of Trustees, of (i) the decisions made with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, (ii) the reasons for such decisions and (iii) the extent to which those decisions have been implemented. (b) The Adviser, subject to and in accordance with any directions which the Trust's Board of Trustees may issue from time to time, shall place, in the name of the Fund, orders for the execution of the Fund's securities transactions. When placing such orders, the Adviser shall seek to obtain the best net price and execution for the Fund, but this requirement shall not be deemed to obligate the Adviser to place any order solely on the basis of obtaining the lowest commission rate if the other standards set forth in this section have been satisfied. The parties recognize that there are likely to be many cases in which different brokers are equally able to provide such best price and execution and that, in selecting among such brokers with respect to particular trades, it is desirable to choose those brokers who furnish research, statistical, quotations and other information to the Fund and the Adviser in accordance with the standards set forth below. Moreover, to the extent that it continues to be lawful to do so and so long as the Board of Trustees determines that the Fund will benefit, directly or indirectly, by doing so, the Adviser may place orders with a broker who charges a commission for that transaction which is in excess of the amount of commission that another broker would have charged for effecting that transaction, provided that the excess commission is reasonable in relation to the value of "brokerage and research services" (as defined in Section 28(e) (3) of the Securities Exchange Act of 1934) provided by that broker. Accordingly, the Trust and the Adviser agree that the Adviser shall select brokers for the execution of the Fund's transactions from among: (i) Those brokers and dealers who provide quotations and other services to the Fund, specifically including the quotations necessary to determine the Fund's net assets, in such amount of total brokerage as may reasonably be required in light of such services; and (ii) Those brokers and dealers who supply research, statistical and other data to the Adviser or its affiliates which the Adviser or its affiliates may lawfully and appropriately use in their investment advisory capacities, which relate directly to securities, actual or potential, of the Fund, or which place the Adviser in a better position to make decisions in connection with the management of the Fund's assets and securities, whether or not such data may also be useful to the Adviser and its affiliates in managing other portfolios or advising other clients, in such amount of total brokerage as may reasonably be required. Provided that the Trust's officers are satisfied that the best execution is obtained, the sale of shares of the Fund may also be considered as a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. (c) When the Adviser has determined that the Fund should tender securities pursuant to a "tender offer solicitation," Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as the "tendering dealer" so long as it is legally permitted to act in such capacity under the federal securities laws and rules thereunder and the rules of any securities exchange or association of which Distributors may be a member. Neither the Adviser nor Distributors shall be obligated to make any additional commitments of capital, expense or personnel beyond that already committed (other than normal periodic fees or payments necessary to maintain its corporate existence and membership in the National Association of Securities Dealers, Inc.) as of the date of this Agreement. This Agreement shall not obligate the Adviser or Distributors (i) to act pursuant to the foregoing requirement under any circumstances in which they might reasonably believe that liability might be imposed upon them as a result of so acting, or (ii) to institute legal or other proceedings to collect fees which may be considered to be due from others to it as a result of such a tender, unless the Trust on behalf of the Fund shall enter into an agreement with the Adviser and/or Distributors to reimburse them for all such expenses connected with attempting to collect such fees, including legal fees and expenses and that portion of the compensation due to their employees which is attributable to the time involved in attempting to collect such fees. (d) The Adviser shall render regular reports to the Trust, not more frequently than quarterly, of how much total brokerage business has been placed by the Adviser, on behalf of the Fund, with brokers falling into each of the categories referred to above and the manner in which the allocation has been accomplished. (e) The Adviser agrees that no investment decision will be made or influenced by a desire to provide brokerage for allocation in accordance with the foregoing, and that the right to make such allocation of brokerage shall not interfere with the Adviser's paramount duty to obtain the best net price and execution for the Fund. (f) Decisions on proxy voting shall be made by the Adviser unless the Board of Trustees determines otherwise. Pursuant to its authority, Adviser shall have the power to vote, either in person or by proxy, all securities in which the Fund may be invested from time to time, and shall not be required to seek or take instructions from the Fund with respect thereto. Adviser shall not be expected or required to take any action other than the rendering of investment-related advice with respect to lawsuits involving securities presently or formerly held in the Fund, or the issuers thereof, including actions involving bankruptcy. Should Adviser undertake litigation against an issuer on behalf of the Fund, the Fund agrees to pay its portion of any applicable legal fees associated with the action or to forfeit any claim to any assets Adviser may recover and, in such case, agrees to hold Adviser harmless for excluding the Fund from such action. In the case of class action suits involving issuers held in the Fund, Adviser may include information about the Fund for purposes of participating in any settlements. B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser, its officers and employees will make available and provide accounting and statistical information required by the Fund in the preparation of registration statements, reports and other documents required by federal and state securities laws and with such information as the Fund may reasonably request for use in the preparation of such documents or of other materials necessary or helpful for the underwriting and distribution of the Fund's shares. C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its officers and employees available to the Board of Trustees and officers of the Trust for consultation and discussions regarding the administration and management of the Fund and its investment activities. D. AUTHORITY TO DELEGATE. The Adviser may, at its expense, select and contract with one or more investment advisers registered under the Investment Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the services for a Fund for which it is responsible under this Agreement. The Adviser will compensate any Sub-Adviser for its services to the Fund. The Adviser may terminate the services of any Sub-Adviser at any time in its sole discretion, and shall at such time assume the responsibilities of such Sub-Adviser unless and until a successor Sub-Adviser is selected and the requisite approval of a Fund's shareholders is obtained. The Adviser will continue to have responsibility for all advisory services furnished by any Sub-Adviser. 3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of its own expenses other than those expressly assumed by the Adviser herein, which expenses payable by the Fund shall include: A. Fees and expenses paid to the Adviser as provided herein; B. Expenses of all audits by independent public accountants; C. Expenses of transfer agent, registrar, custodian, dividend disbursing agent and shareholder record-keeping services, including the expenses of issue, repurchase or redemption of its shares; D. Expenses of obtaining quotations for calculating the value of the Fund's net assets; E. Salaries and other compensations of executive officers of the Trust who are not officers, directors, stockholders or employees of the Adviser or its affiliates; F. Taxes levied against the Fund; G. Brokerage fees and commissions in connection with the purchase and sale of securities for the Fund; H. Costs, including the interest expense, of borrowing money; I. Costs incident to meetings of the Board of Trustees and shareholders of the Fund, reports to the Fund's shareholders, the filing of reports with regulatory bodies and the maintenance of the Fund's and the Trust's legal existence; J. Legal fees, including the legal fees related to the registration and continued qualification of the Fund's shares for sale; K. Trustees' fees and expenses to trustees who are not directors, officers, employees or stockholders of the Adviser or any of its affiliates; L. Costs and expense of registering and maintaining the registration of the Fund and its shares under federal and any applicable state laws; including the printing and mailing of prospectuses to its shareholders; M. Trade association dues; N. The Fund's pro rata portion of fidelity bond, errors and omissions, and trustees and officer liability insurance premiums; and O. The Fund's portion of the cost of any proxy voting service used on its behalf. 4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in cash to the Adviser based upon a percentage of the value of the Fund's net assets, calculated as set forth below, as compensation for the services rendered and obligations assumed by the Adviser, during the preceding month, on the first business day of the month in each year. A. For purposes of calculating such fee, the value of the net assets of the Fund shall be determined in the same manner as that Fund uses to compute the value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in the Fund's current prospectus and statement of additional information. The rate of the management fee payable by the Fund shall be calculated daily at the annual rate of 0.15% of the value of the Fund's net assets. B. The advisory fee payable by the Fund shall be reduced or eliminated to the extent that Distributors has actually received cash payments of tender offer solicitation fees less certain costs and expenses incurred in connection therewith and to the extent necessary to comply with the limitations on expenses which may be borne by the Fund as set forth in the laws, regulations and administrative interpretations of those states in which the Fund's shares are registered. The Adviser may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in purchase price of its services. The Adviser shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of the Fund's expenses, as if such waiver or limitation were full set forth herein. C. If this Agreement is terminated prior to the end of any month, the accrued advisory fee shall be paid to the date of termination. 5. ACTIVITIES OF THE ADVISER. The services of the Adviser to the Fund hereunder are not to be deemed exclusive, and the Adviser and any of its affiliates shall be free to render similar services to others. Subject to and in accordance with the Agreement and Declaration of Trust and By-Laws of the Trust and Section 10(a) of the 1940 Act, it is understood that trustees, officers, agents and shareholders of the Trust are or may be interested in the Adviser or its affiliates as directors, officers, agents or stockholders; that directors, officers, agents or stockholders of the Adviser or its affiliates are or may be interested in the Trust as trustees, officers, agents, shareholders or otherwise; that the Adviser or its affiliates may be interested in the Fund as shareholders or otherwise; and that the effect of any such interests shall be governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act. 6. LIABILITIES OF THE ADVISER. A. In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Trust or the Fund or to any shareholder of the Fund for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Fund. B. Notwithstanding the foregoing, the Adviser agrees to reimburse the Trust for any and all costs, expenses, and counsel and trustees' fees reasonably incurred by the Trust in the preparation, printing and distribution of proxy statements, amendments to its Registration Statement, holdings of meetings of its shareholders or trustees, the conduct of factual investigations, any legal or administrative proceedings (including any applications for exemptions or determinations by the Securities and Exchange Commission) which the Trust incurs as the result of action or inaction of the Adviser or any of its affiliates or any of their officers, directors, employees or stockholders where the action or inaction necessitating such expenditures (i) is directly or indirectly related to any transactions or proposed transaction in the stock or control of the Adviser or its affiliates (or litigation related to any pending or proposed or future transaction in such shares or control) which shall have been undertaken without the prior, express approval of the Trust's Board of Trustees; or, (ii) is within the control of the Adviser or any of its affiliates or any of their officers, directors, employees or stockholders. The Adviser shall not be obligated pursuant to the provisions of this Subparagraph 6(B), to reimburse the Trust for any expenditures related to the institution of an administrative proceeding or civil litigation by the Trust or a shareholder seeking to recover all or a portion of the proceeds derived by any stockholder of the Adviser or any of its affiliates from the sale of his shares of the Adviser, or similar matters. So long as this Agreement is in effect, the Adviser shall pay to the Trust the amount due for expenses subject to this Subparagraph 6(B) within 30 days after a bill or statement has been received by the Adviser therefor. This provision shall not be deemed to be a waiver of any claim the Trust may have or may assert against the Adviser or others for costs, expenses or damages heretofore incurred by the Trust or for costs, expenses or damages the Trust may hereafter incur which are not reimbursable to it hereunder. C. No provision of this Agreement shall be construed to protect any trustee or officer of the Trust, or director or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the 1940 Act. 7. RENEWAL AND TERMINATION. A. This Agreement shall become effective on the date written below and shall continue in effect for two (2) years thereafter, unless sooner terminated as hereinafter provided and shall continue in effect thereafter for periods not exceeding one (1) year so long as such continuation is approved at least annually (i) by a vote of a majority of the outstanding voting securities of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of the Trust who are not parties to the Agreement (other than as Trustees of the Trust), cast in person at a meeting called for the purpose of voting on the Agreement. B. This Agreement: (i) may at any time be terminated without the payment of any penalty either by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund on 60 days' written notice to the Adviser; (ii) shall immediately terminate with respect to the Fund in the event of its assignment; and (iii) may be terminated by the Adviser on 60 days' written notice to the Fund. C. As used in this Paragraph the terms "assignment," "interested person" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth for any such terms in the 1940 Act. D. Any notice under this Agreement shall be given in writing addressed and delivered, or mailed post-paid, to the other party at any office of such party. 8. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. 9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and effective on the XX 2000. FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST on behalf of Franklin S&P 500 Index Fund By: _________________________ FRANKLIN ADVISERS, INC. By
EXHIBIT 6 (xx) FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST on behalf of FRANKLIN STRATEGIC INCOME SECURITIES FUND FORM OF 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: A. INVESTMENT ADVISORY SERVICES. (a) The Adviser shall manage the Fund's assets subject to and in accordance with the investment objectives and policies of the Fund and any directions which the Trust's Board of Trustees may issue from time to time. In pursuance of the foregoing, the Adviser shall make all determinations with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, and shall take such steps as may be necessary to implement the same. Such determinations and services shall include determining the manner in which any voting rights, rights to consent to corporate action and any other rights pertaining to the Fund's investment securities shall be exercised. The Adviser shall render or cause to be rendered regular reports to the Trust, at regular meetings of its Board of Trustees and at such other times as may be reasonably requested by the Trust's Board of Trustees, of (i) the decisions made with respect to the investment of the Fund's assets and the purchase and sale of its investment securities, (ii) the reasons for such decisions and (iii) the extent to which those decisions have been implemented. (b) The Adviser, subject to and in accordance with any directions which the Trust's Board of Trustees may issue from time to time, shall place, in the name of the Fund, orders for the execution of the Fund's securities transactions. When placing such orders, the Adviser shall seek to obtain the best net price and execution for the Fund, but this requirement shall not be deemed to obligate the Adviser to place any order solely on the basis of obtaining the lowest commission rate if the other standards set forth in this section have been satisfied. The parties recognize that there are likely to be many cases in which different brokers are equally able to provide such best price and execution and that, in selecting among such brokers with respect to particular trades, it is desirable to choose those brokers who furnish research, statistical, quotations and other information to the Fund and the Adviser in accordance with the standards set forth below. Moreover, to the extent that it continues to be lawful to do so and so long as the Board of Trustees determines that the Fund will benefit, directly or indirectly, by doing so, the Adviser may place orders with a broker who charges a commission for that transaction which is in excess of the amount of commission that another broker would have charged for effecting that transaction, provided that the excess commission is reasonable in relation to the value of "brokerage and research services" (as defined in Section 28(e) (3) of the Securities Exchange Act of 1934) provided by that broker. Accordingly, the Trust and the Adviser agree that the Adviser shall select brokers for the execution of the Fund's transactions from among: (i) Those brokers and dealers who provide quotations and other services to the Fund, specifically including the quotations necessary to determine the Fund's net assets, in such amount of total brokerage as may reasonably be required in light of such services; and (ii) Those brokers and dealers who supply research, statistical and other data to the Adviser or its affiliates which the Adviser or its affiliates may lawfully and appropriately use in their investment advisory capacities, which relate directly to securities, actual or potential, of the Fund, or which place the Adviser in a better position to make decisions in connection with the management of the Fund's assets and securities, whether or not such data may also be useful to the Adviser and its affiliates in managing other portfolios or advising other clients, in such amount of total brokerage as may reasonably be required. Provided that the Trust's officers are satisfied that the best execution is obtained, the sale of shares of the Fund may also be considered as a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. (c) When the Adviser has determined that the Fund should tender securities pursuant to a "tender offer solicitation," Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as the "tendering dealer" so long as it is legally permitted to act in such capacity under the federal securities laws and rules thereunder and the rules of any securities exchange or association of which Distributors may be a member. Neither the Adviser nor Distributors shall be obligated to make any additional commitments of capital, expense or personnel beyond that already committed (other than normal periodic fees or payments necessary to maintain its corporate existence and membership in the National Association of Securities Dealers, Inc.) as of the date of this Agreement. This Agreement shall not obligate the Adviser or Distributors (i) to act pursuant to the foregoing requirement under any circumstances in which they might reasonably believe that liability might be imposed upon them as a result of so acting, or (ii) to institute legal or other proceedings to collect fees which may be considered to be due from others to it as a result of such a tender, unless the Trust on behalf of the Fund shall enter into an agreement with the Adviser and/or Distributors to reimburse them for all such expenses connected with attempting to collect such fees, including legal fees and expenses and that portion of the compensation due to their employees which is attributable to the time involved in attempting to collect such fees. (d) The Adviser shall render regular reports to the Trust, not more frequently than quarterly, of how much total brokerage business has been placed by the Adviser, on behalf of the Fund, with brokers falling into each of the categories referred to above and the manner in which the allocation has been accomplished. (e) The Adviser agrees that no investment decision will be made or influenced by a desire to provide brokerage for allocation in accordance with the foregoing, and that the right to make such allocation of brokerage shall not interfere with the Adviser's paramount duty to obtain the best net price and execution for the Fund. (f) Decisions on proxy voting shall be made by the Adviser unless the Board of Trustees determines otherwise. Pursuant to its authority, Adviser shall have the power to vote, either in person or by proxy, all securities in which the Fund may be invested from time to time, and shall not be required to seek or take instructions from the Fund with respect thereto. Adviser shall not be expected or required to take any action other than the rendering of investment-related advice with respect to lawsuits involving securities presently or formerly held in the Fund, or the issuers thereof, including actions involving bankruptcy. Should Adviser undertake litigation against an issuer on behalf of the Fund, the Fund agrees to pay its portion of any applicable legal fees associated with the action or to forfeit any claim to any assets Adviser may recover and, in such case, agrees to hold Adviser harmless for excluding the Fund from such action. In the case of class action suits involving issuers held in the Fund, Adviser may include information about the Fund for purposes of participating in any settlements. B. PROVISION OF INFORMATION NECESSARY FOR PREPARATION OF SECURITIES REGISTRATION STATEMENTS, AMENDMENTS AND OTHER MATERIALS. The Adviser, its officers and employees will make available and provide accounting and statistical information required by the Fund in the preparation of registration statements, reports and other documents required by federal and state securities laws and with such information as the Fund may reasonably request for use in the preparation of such documents or of other materials necessary or helpful for the underwriting and distribution of the Fund's shares. C. OTHER OBLIGATIONS AND SERVICES. The Adviser shall make its officers and employees available to the Board of Trustees and officers of the Trust for consultation and discussions regarding the administration and management of the Fund and its investment activities. D. AUTHORITY TO DELEGATE. The Adviser may, at its expense, select and contract with one or more investment advisers registered under the Investment Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the services for a Fund for which it is responsible under this Agreement. The Adviser will compensate any Sub-Adviser for its services to the Fund. The Adviser may terminate the services of any Sub-Adviser at any time in its sole discretion, and shall at such time assume the responsibilities of such Sub-Adviser unless and until a successor Sub-Adviser is selected and the requisite approval of a Fund's shareholders is obtained. The Adviser will continue to have responsibility for all advisory services furnished by any Sub-Adviser. 3. EXPENSES OF THE FUND. It is understood that the Fund will pay all of its own expenses other than those expressly assumed by the Adviser herein, which expenses payable by the Fund shall include: A. Fees and expenses paid to the Adviser as provided herein; B. Expenses of all audits by independent public accountants; C. Expenses of transfer agent, registrar, custodian, dividend disbursing agent and shareholder record-keeping services, including the expenses of issue, repurchase or redemption of its shares; D. Expenses of obtaining quotations for calculating the value of the Fund's net assets; E. Salaries and other compensations of executive officers of the Trust who are not officers, directors, stockholders or employees of the Adviser or its affiliates; F. Taxes levied against the Fund; G. Brokerage fees and commissions in connection with the purchase and sale of securities for the Fund; H. Costs, including the interest expense, of borrowing money; I. Costs incident to meetings of the Board of Trustees and shareholders of the Fund, reports to the Fund's shareholders, the filing of reports with regulatory bodies and the maintenance of the Fund's and the Trust's legal existence; J. Legal fees, including the legal fees related to the registration and continued qualification of the Fund's shares for sale; K. Trustees' fees and expenses to trustees who are not directors, officers, employees or stockholders of the Adviser or any of its affiliates; L. Costs and expense of registering and maintaining the registration of the Fund and its shares under federal and any applicable state laws; including the printing and mailing of prospectuses to its shareholders; M. Trade association dues; N. The Fund's pro rata portion of fidelity bond, errors and omissions, and trustees and officer liability insurance premiums; and O. The Fund's portion of the cost of any proxy voting service used on its behalf. 4. COMPENSATION OF THE ADVISER. The Fund shall pay an advisory fee in cash to the Adviser based upon a percentage of the value of the Fund's net assets, calculated as set forth below, as compensation for the services rendered and obligations assumed by the Adviser, during the preceding month, on the first business day of the month in each year. A. For purposes of calculating such fee, the value of the net assets of the Fund shall be determined in the same manner as that Fund uses to compute the value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in the Fund's current prospectus and statement of additional information. The rate of the management fee payable by the Fund shall be calculated daily at the following annual rates: o 0.425% of the value of net assets up to $500 million; o 0.325% of the value of net assets over $500 million up to and including $1 billion; o 0.280% of the value of net assets over $1 billion up to and including $1.5 billion; o 0.235% of the value of net assets over $1.5 billion up to and including $6.5 billion; o 0.215% of the value of net assets over $6.5 billion up to and including $11.5 billion; o 0.200% of the value of net assets over $11.5 billion up to and including $16.5 billion; o 0.190% of the value of net assets over $16.5 billion up to and including $19 billion; o 0.180% of the value of net assets over $19 billion up to and including $21.5 billion; and o 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 officers, directors, employees or stockholders where the action or inaction necessitating such expenditures (i) is directly or indirectly related to any transactions or proposed transaction in the stock or control of the Adviser or its affiliates (or litigation related to any pending or proposed or future transaction in such shares or control) which shall have been undertaken without the prior, express approval of the Trust's Board of Trustees; or, (ii) is within the control of the Adviser or any of its affiliates or any of their officers, directors, employees or stockholders. The Adviser shall not be obligated pursuant to the provisions of this Subparagraph 6(B), to reimburse the Trust for any expenditures related to the institution of an administrative proceeding or civil litigation by the Trust or a shareholder seeking to recover all or a portion of the proceeds derived by any stockholder of the Adviser or any of its affiliates from the sale of his shares of the Adviser, or similar matters. So long as this Agreement is in effect, the Adviser shall pay to the Trust the amount due for expenses subject to this Subparagraph 6(B) within 30 days after a bill or statement has been received by the Adviser therefor. This provision shall not be deemed to be a waiver of any claim the Trust may have or may assert against the Adviser or others for costs, expenses or damages heretofore incurred by the Trust or for costs, expenses or damages the Trust may hereafter incur which are not reimbursable to it hereunder. C. No provision of this Agreement shall be construed to protect any trustee or officer of the Trust, or director or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the 1940 Act. 7. RENEWAL AND TERMINATION. A. This Agreement shall become effective on the date written below and shall continue in effect for two (2) years thereafter, unless sooner terminated as hereinafter provided and shall continue in effect thereafter for periods not exceeding one (1) year so long as such continuation is approved at least annually (i) by a vote of a majority of the outstanding voting securities of each Fund or by a vote of the Board of Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of the Trust who are not parties to the Agreement (other than as Trustees of the Trust), cast in person at a meeting called for the purpose of voting on the Agreement. B. This Agreement: (i) may at any time be terminated without the payment of any penalty either by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Fund on 60 days' written notice to the Adviser; (ii) shall immediately terminate with respect to the Fund in the event of its assignment; and (iii) may be terminated by the Adviser on 60 days' written notice to the Fund. C. As used in this Paragraph the terms "assignment," "interested person" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth for any such terms in the 1940 Act. D. Any notice under this Agreement shall be given in writing addressed and delivered, or mailed post-paid, to the other party at any office of such party. 8. SEVERABILITY. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby. 9. GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and effective on the 1st day of July, 1999. FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST on behalf of Franklin Strategic Income Securities Fund By: FRANKLIN ADVISERS, INC. By:
EXHIBIT 14(i) CONSENT OF INDEPENDENT AUDITORS We consent to the use of our report dated February 4, 1999 on the financial statements of Franklin Valuemark Funds, now Franklin Templeton Variable Insurance Products Trust. referred to therein, which is incorporated by reference in the Registration Statement on Form N-14 of Registrant, File No. 33-23493 being filed with the Securities and Exchange Commission. MCGLADREY & PULLEN, LLP San Francisco, California October 28, 1999
CONSENT OF INDEPENDENT AUDITORS We consent to the use of each of our reports dated January 28, 1999 on the financial statements of the series of Templeton Variable Products Series Fund: Franklin Growth Investments Fund, Franklin Small Cap Investments Fund, Mutual Shares Investments Fund, Templeton Asset Allocation Fund, Templeton Bond Fund, Templeton Developing Markets Fund, Templeton International Fund and Templeton Stock Fund. referred to therein, which are incorporated by reference in the Registration Statement on Form N-14 of Franklin Templeton Variable Insurance Products Trust, File No. 33-23493 being filed with the Securities and Exchange Commission. MCGLADREY & PULLEN, LLP New York, New York October 28, 1999
[PRINT NAME OF INSURANCE COMPANY] VOTING INSTRUCTIONS FORM -- TEMPLETON VARIABLE PRODUCTS SERIES FUND Special Meeting of Shareholders To Be Held On February [1], 2000 Indicate your voting instructions below by filling in the appropriate boxes in this manner [ X ] using blue or black ink or dark pencil. This voting instruction card, if properly executed, will be voted by your insurance company in the manner directed by the you. If this voting instruction card is executed and no direction is made, this voting instruction card will be voted for all proposals and, in the discretion of the insurance company, upon such other business as may properly come before the special meeting. By signing below, I instruct the insurance company to vote the shares of the Templeton Variable Products Series Fund related to my contract at the meeting of shareholders to be held at 500 East Broward Boulevard, Fort Lauderdale, Florida 33394-3091, at [time], February [1], 2000 and any adjournment of the meeting as follows: PROPOSAL 1. To approve an Agreement and Plan of Reorganization between Templeton Variable Produts Series Fund ("TVP Trust") and Franklin Templeton Variable Insurance Products Trust ("VIP Trust"), under which: o The TVP Trust will transfer all assets and liabilities of the TVP Trust fund listed below; o The VIP Trust will issue shares of the VIP Trust fund listed below in exchange for the assets and liabilities, o The TVP Trust will distribute shares of the VIP Trust fund to shareholders of the TVP Trust fund, and o The trustees will dissolve the TVP Trust, as described more fully in the combined proxy statement/prospectus. [NAME OF TVP FUND] TO BE COMBINED WITH [NAME OF VIP FUND] [FOR THE TVP TEMPLETON BOND FUND, CLASS 2 SHAREHOLDERS ARE ALSO VOTING TO APPROVE THE CHANGE IN THE RULE 12B-1 FEES FROM .015% TO .025%] For [ ] Against [ ] Abstain [ ] OTHER BUSINESS To vote upon any other business which may legally presented at the meeting or any adjournment thereof. Grant [ ] Withhold [ ] THESE VOTING INSTRUCTIONS ARE SOLICITED BY THE ABOVE-REFERENCED INSURANCE COMPANY IN CONNECTION WITH A SOLICITATION OF PROXIES BY THE TRUSTEES OF TEMPLETON VARIABLE PRODUCTS SERIES FUND. Date: __________ Signature: _______________ If a contract is held jointly, each contract owner should sign. If only one signs, it will be binding. If a contract owner is a business entity, please indicate the title of the person signing. [PRINT NAME OF INSURANCE COMPANY] VOTING INSTRUCTIONS FORM -- FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST Special Meeting of Shareholders To Be Held On February [1], 2000 Indicate your voting instructions below by filling in the appropriate boxes in this manner [ X ] using blue or black ink or dark pencil. This voting instruction card, if properly executed, will be voted by your insurance company in the manner directed by the you. If this voting instruction card is executed and no direction is made, this voting instruction card will be voted for all proposals and, in the discretion of the insurance company, upon such other business as may properly come before the special meeting. By signing below, I instruct the insurance company to vote the shares of the Franklin Templeton Variable Insurance Products Trust [TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND] related to my contract at the meeting of shareholders to be held at 777 Mariners Island Boulevard, San Mateo, California 94404, at [time], February [1], 2000 and any adjournment of the meeting as follows: PROPOSAL 2. To approve the adoption of new investment advisory agreement for the [TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND], as described more fully in the combined proxy statement/prospectus. For [ ] Against [ ] Abstain [ ] PROPOSAL 3. To approve changes in the following fundamental investment restrictions for the [TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND], as described more fully in the combined proxy statement/prospectus. (a) Modification of fundamental investment restriction regarding Diversification For [ ] Against [ ] Abstain [ ] (b) Modification of fundamental investment restriction regarding Borrowing For [ ] Against [ ] Abstain [ ] (c) Modification of fundamental investment restriction regarding Lending For [ ] Against [ ] Abstain [ ] (d) Modification of fundamental investment restriction regarding Underwriting For [ ] Against [ ] Abstain [ ] (e) Modification of fundamental investment restriction regarding Concentration For [ ] Against [ ] Abstain [ ] (f) Modification of fundamental investment restriction regarding Senior Securities For [ ] Against [ ] Abstain [ ] (g) Modification of fundamental investment restrictions regarding Real Estate and Commodities, which would combine these two separate fundamental restrictions For [ ] Against [ ] Abstain [ ] PROPOSAL 4. To approve the elimination of certain fundamental investment restrictions for the [TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND], as described more fully in the combined proxy statement/prospectus. For [ ] Against [ ] Abstain [ ] OTHER BUSINESS To vote upon any other business which may legally presented at the meeting or any adjournment thereof. Grant [ ] Withhold [ ] THESE VOTING INSTRUCTIONS ARE SOLICITED BY THE ABOVE-REFERENCED INSURANCE COMPANY IN CONNECTION WITH A SOLICITATION OF PROXIES BY THE TRUSTEES OF FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST. Date: __________ Signature: _______________ If a contract is held jointly, each contract owner should sign. If only one signs, it will be binding. If a contract owner is a business entity, please indicate the title of the person signing.
PROXY CARD (FOR PARTICIPATING INSURANCE COMPANIES) VOTING INSTRUCTIONS FORM -- TEMPLETON VARIABLE PRODUCTS SERIES FUND Special Meeting of Shareholders To Be Held On February [1], 2000 BY SIGNING AND DATING THE LOWER PORTION OF THIS CARD YOU AUTHORIZE THE PROXIES TO VOTE YOUR SHARES AS MARKED BELOW. THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF TEMPLETON VARIABLE INSURANCE PRODUCTS SERIES FUND. THE UNDERSIGNED APPOINTS , AND , WITH FULL POWER OF SUBSTITUTION, TO VOTE ALL THE SHARES OF THE TEMPLETON VARIABLE PRODUCTS SERIES FUND ATTRIBUTABLE TO HIM OR HER AT THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AT 500 EAST BROWARD BOULEVARD, FORT LAUDERDALE, FLORIDA 33394-3091, AT [TIME], FEBRUARY [1], 2000 AND ANY ADJOURNMENT OF THE MEETING AS FOLLOWS. PROPOSAL 1. To approve an Agreement and Plan of Reorganization between Templeton Variable Products Series Fund ("TVP Trust") and Franklin Templeton Variable Insurance Products Trust ("VIP Trust"), under which: o The TVP Trust will transfer all assets and liabilities of the TVP Trust fund listed below; o The VIP Trust will issue shares of the VIP Trust fund listed below in exchange for the assets and liabilities, o The TVP Trust will distribute shares of the VIP Trust fund to shareholders of the TVP Trust fund, and o The trustees will dissolve the TVP Trust, as described more fully in the combined proxy statement/prospectus. [NAME OF TVP FUND] TO BE COMBINED WITH [NAME OF VIP FUND] [FOR THE TVP TEMPLETON BOND FUND, CLASS 2 SHAREHOLDERS ARE ALSO VOTING TO APPROVE THE CHANGE IN THE RULE 12B-1 FEES FROM .015% TO .025%] For [ ] Against[ ] Abstain [ ] OTHER BUSINESS To vote upon any other business which may be legally presented at the meeting or any adjournment thereof. Grant [ ] Withhold [ ] THE TRUSTEES RECOMMEND VOTING "FOR" THE PROPOSAL AND GRANTING AUTHORITY TO THE PROXY HOLDERS TO VOTE ON OTHER BUSINESS. SIGN HERE: DATE: PLEASE DATE, SIGN AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE PROMPTLY. PROXY CARD (FOR PARTICIPATING INSURANCE COMPANIES) VOTING INSTRUCTIONS FORM -- FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST Special Meeting of Shareholders To Be Held On February [1], 2000 BY SIGNING AND DATING THE LOWER PORTION OF THIS CARD YOU AUTHORIZE THE PROXIES TO VOTE YOUR SHARES AS MARKED BELOW. THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF TEMPLETON VARIABLE INSURANCE PRODUCTS SERIES FUND. THE UNDERSIGNED APPOINTS , AND , WITH FULL POWER OF SUBSTITUTION, TO VOTE ALL THE SHARES OF THE TEMPLETON VARIABLE PRODUCTS SERIES FUND ATTRIBUTABLE TO HIM OR HER AT THE MEETING OF SHAREHOLDERS TO BE HELD AT 777 MARINERS ISLAND BOULEVARD, SAN MATEO, CALIFORNIA 94404, AT [TIME], FEBRUARY 1, 2000 AND ANY ADJOURNMENT OF THE MEETING AS FOLLOWS: PROPOSAL 2. To approve the adoption of new investment advisory agreement for the [TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND], as described more fully in the combined proxy statement/prospectus. For [ ] Against[ ] Abstain [ ] PROPOSAL 3. To approve changes in the following fundamental investment restrictions for the [TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND], as described more fully in the combined proxy statement/prospectus. (a) Modification of fundamental investment restriction regarding Diversification For [ ] Against[ ] Abstain [ ] (b) Modification of fundamental investment restriction regarding Borrowing For [ ] Against[ ] Abstain [ ] (c) Modification of fundamental investment restriction regarding Lending For [ ] Against[ ] Abstain [ ] (d) Modification of fundamental investment restriction regarding Underwriting For [ ] Against[ ] Abstain [ ] (e) Modification of fundamental investment restriction regarding Concentration For [ ] Against[ ] Abstain [ ] (f) Modification of fundamental investment restriction regarding Senior Securities For [ ] Against[ ] Abstain [ ] (g) Modification of fundamental investment restrictions regarding Real Estate and Commodities, which would combine these two separate fundamental restrictions For [ ] Against[ ] Abstain [ ] PROPOSAL 4. To approve the elimination of certain fundamental investment restrictions for the [TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND], as described more fully in the combined proxy statement/prospectus. For [ ] Against[ ] Abstain [ ] OTHER BUSINESS To vote upon any other business which may be legally presented at the meeting or any adjournment thereof. Grant [ ] Withhold [ ] THE TRUSTEES RECOMMEND VOTING "FOR" THE PROPOSALS AND GRANTING AUTHORITY TO THE PROXY HOLDERS TO VOTE ON OTHER BUSINESS. SIGN HERE: DATE: PLEASE DATE, SIGN AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE PROMPTLY. PROXY CARD (FOR PARTICIPATING INSURANCE COMPANIES) VOTING INSTRUCTIONS FORM -- TEMPLETON VARIABLE PRODUCTS SERIES FUND Special Meeting of Shareholders To Be Held On February [1], 2000 BY SIGNING AND DATING THE LOWER PORTION OF THIS CARD YOU AUTHORIZE THE PROXIES TO VOTE YOUR SHARES AS MARKED BELOW. THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF TEMPLETON VARIABLE INSURANCE PRODUCTS SERIES FUND. THE UNDERSIGNED APPOINTS , AND , WITH FULL POWER OF SUBSTITUTION, TO VOTE ALL THE SHARES OF THE TEMPLETON VARIABLE PRODUCTS SERIES FUND ATTRIBUTABLE TO HIM OR HER AT THE SPECIAL MEETING OF SHAREHOLDERS TO BE HELD AT 500 EAST BROWARD BOULEVARD, FORT LAUDERDALE, FLORIDA 33394-3091, AT [TIME], FEBRUARY [1], 2000 AND ANY ADJOURNMENT OF THE MEETING AS FOLLOWS. PROPOSAL 1. To approve an Agreement and Plan of Reorganization between Templeton Variable Products Series Fund ("TVP Trust") and Franklin Templeton Variable Insurance Products Trust ("VIP Trust"), under which: o The TVP Trust will transfer all assets and liabilities of the TVP Trust fund listed below; o The VIP Trust will issue shares of the VIP Trust fund listed below in exchange for the assets and liabilities, o The TVP Trust will distribute shares of the VIP Trust fund to shareholders of the TVP Trust fund, and o The trustees will dissolve the TVP Trust, as described more fully in the combined proxy statement/prospectus. [NAME OF TVP FUND] TO BE COMBINED WITH [NAME OF VIP FUND] [FOR THE TVP TEMPLETON BOND FUND, CLASS 2 SHAREHOLDERS ARE ALSO VOTING TO APPROVE THE CHANGE IN THE RULE 12B-1 FEES FROM .015% TO .025%] For [ ] Against[ ] Abstain [ ] OTHER BUSINESS To vote upon any other business which may be legally presented at the meeting or any adjournment thereof. Grant [ ] Withhold [ ] THE TRUSTEES RECOMMEND VOTING "FOR" THE PROPOSAL AND GRANTING AUTHORITY TO THE PROXY HOLDERS TO VOTE ON OTHER BUSINESS. SIGN HERE: DATE: PLEASE DATE, SIGN AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE PROMPTLY. PROXY CARD (FOR PARTICIPATING INSURANCE COMPANIES) VOTING INSTRUCTIONS FORM -- FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST Special Meeting of Shareholders To Be Held On February [1], 2000 BY SIGNING AND DATING THE LOWER PORTION OF THIS CARD YOU AUTHORIZE THE PROXIES TO VOTE YOUR SHARES AS MARKED BELOW. THIS PROXY IS SOLICITED BY THE BOARD OF TRUSTEES OF TEMPLETON VARIABLE INSURANCE PRODUCTS SERIES FUND. THE UNDERSIGNED APPOINTS , AND , WITH FULL POWER OF SUBSTITUTION, TO VOTE ALL THE SHARES OF THE TEMPLETON VARIABLE PRODUCTS SERIES FUND ATTRIBUTABLE TO HIM OR HER AT THE MEETING OF SHAREHOLDERS TO BE HELD AT 777 MARINERS ISLAND BOULEVARD, SAN MATEO, CALIFORNIA 94404, AT [TIME], FEBRUARY 1, 2000 AND ANY ADJOURNMENT OF THE MEETING AS FOLLOWS: PROPOSAL 2. To approve the adoption of new investment advisory agreement for the [TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND], as described more fully in the combined proxy statement/prospectus. For [ ] Against[ ] Abstain [ ] PROPOSAL 3. To approve changes in the following fundamental investment restrictions for the [TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND], as described more fully in the combined proxy statement/prospectus. (a) Modification of fundamental investment restriction regarding Diversification For [ ] Against[ ] Abstain [ ] (b) Modification of fundamental investment restriction regarding Borrowing For [ ] Against[ ] Abstain [ ] (c) Modification of fundamental investment restriction regarding Lending For [ ] Against[ ] Abstain [ ] (d) Modification of fundamental investment restriction regarding Underwriting For [ ] Against[ ] Abstain [ ] (e) Modification of fundamental investment restriction regarding Concentration For [ ] Against[ ] Abstain [ ] (f) Modification of fundamental investment restriction regarding Senior Securities For [ ] Against[ ] Abstain [ ] (g) Modification of fundamental investment restrictions regarding Real Estate and Commodities, which would combine these two separate fundamental restrictions For [ ] Against[ ] Abstain [ ] PROPOSAL 4. To approve the elimination of certain fundamental investment restrictions for the [TEMPLETON GLOBAL ASSET ALLOCATION FUND, TEMPLETON DEVELOPING MARKETS EQUITY FUND AND TEMPLETON INTERNATIONAL EQUITY FUND], as described more fully in the combined proxy statement/prospectus. For [ ] Against[ ] Abstain [ ] OTHER BUSINESS To vote upon any other business which may be legally presented at the meeting or any adjournment thereof. Grant [ ] Withhold [ ] THE TRUSTEES RECOMMEND VOTING "FOR" THE PROPOSALS AND GRANTING AUTHORITY TO THE PROXY HOLDERS TO VOTE ON OTHER BUSINESS. SIGN HERE: DATE: PLEASE DATE, SIGN AND RETURN THIS PROXY IN THE ENCLOSED ENVELOPE PROMPTLY. Statement of Additional Information Special Meeting To be held on February 1, 2000 TEMPLETON VARIABLE PRODUCTS SERIES FRANKLIN TEMPLETON VARIABLE FUND INSURANCE PRODUCTS TRUST 500 East Broward Boulevard, Suite 777 Mariners Island Boulevard 2100 San Mateo, California 94404 Fort Lauderdale, Florida 33394-3091 1-(800) 342-3863 1-(800) 774-5001 This Statement of Additional Information is not a prospectus. A combined proxy statement/prospectus, dated December 9, 1999, relating to the above matter may be obtained from the office of Franklin Templeton Variable Insurance Products Trust, 777 Mariners Island Boulevard, San Mateo, California 99404, or by calling 1-(800) 342-3863. This Statement of Additional Information relates to, and should be read in conjunction with the combined proxy statement/prospectus and is incorporated by reference into that document (which means that this statement of additional Information is legally a part of the combined proxy statement/prospectus). Unless otherwise indicated, capitalized terms used herein and not otherwise defined have the same meanings as are given in the combined proxy statement/prospectus. The date of this statement of additional information is December 9, 1999.