-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SkTDjLcLUxGKFLKuGobeB4a6ajB46Voq2YyQWmh1QY1Yq0xFT9hRQdWLiuHtmGD2 ZnTGurMPQuBQGLNx+Q6asQ== 0000869313-04-000009.txt : 20041029 0000869313-04-000009.hdr.sgml : 20041029 20041029133728 ACCESSION NUMBER: 0000869313-04-000009 CONFORMED SUBMISSION TYPE: N-CSR PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040831 FILED AS OF DATE: 20041029 DATE AS OF CHANGE: 20041029 EFFECTIVENESS DATE: 20041029 FILER: COMPANY DATA: COMPANY CONFORMED NAME: TEMPLETON CAPITAL ACCUMULATOR FUND CENTRAL INDEX KEY: 0000869313 IRS NUMBER: 593040143 STATE OF INCORPORATION: DE FISCAL YEAR END: 0831 FILING VALUES: FORM TYPE: N-CSR SEC ACT: 1940 Act SEC FILE NUMBER: 811-06198 FILM NUMBER: 041105435 BUSINESS ADDRESS: STREET 1: BROWARD FINANCIAL CENTRE STREET 2: 500 EAST BROWARD BLVD STE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 BUSINESS PHONE: 9545277500 MAIL ADDRESS: STREET 1: BROWARD FINANCIAL CERTRE STREET 2: 500 EAST BROWARD BLVD STE 2100 CITY: FORT LAUDERDALE STATE: FL ZIP: 33394-3091 FORMER COMPANY: FORMER CONFORMED NAME: TEMPLETON CAPITAL ACCUMULATOR FUND INC DATE OF NAME CHANGE: 19920703 N-CSR 1 tcafannualrpt04.txt CAPITAL ACCUMULATOR FUND ANNUAL REPORTS DTD 8/31/04 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM N-CSR CERTIFIED SHAREHOLDER REPORT OF REGISTERED MANAGEMENT INVESTMENT COMPANIES Investment Company Act file number 811-06198 ---------- TEMPLETON CAPITAL ACCUMULATOR FUND -------------------------------------- (Exact name of registrant as specified in charter) 500 EAST BROWARD BLVD., FORT LAUDERDALE, FL 33394-3091 -------------------------------------------------------- (Address of principal executive offices) (Zip code) MURRAY L. SIMPSON, ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906 ----------------------------------------------------------------- (Name and address of agent for service) Registrant's telephone number, including area code: (954) 527-7500 -------------- Date of fiscal year end: 8/31 ---- Date of reporting period: 8/31/04 ------- ITEM 1. REPORTS TO STOCKHOLDERS AUGUST 31, 2004 GRAPHIC OMITTED ANNUAL REPORT AND SHAREHOLDER LETTER GLOBAL Templeton Capital Accumulator Fund GRAPHIC OMITTED [LOGO OMITTED] FRANKLIN(R) TEMPLETON(R) INVESTMENTS Franklin o TEMPLETON o Mutual Series FRANKLIN TEMPLETON INVESTMENTS GAIN FROM OUR PERSPECTIVE Franklin Templeton's distinct multi-manager structure combines the specialized expertise of three world-class investment management groups--Franklin, Templeton and Mutual Series. SPECIALIZED EXPERTISE Each of our portfolio management groups operates autonomously, relying on its own research and staying true to the unique investment disciplines that underlie its success. FRANKLIN. Founded in 1947, Franklin is a recognized leader in fixed income investing and also brings expertise in growth- and value-style U.S. equity investing. TEMPLETON. Founded in 1940, Templeton pioneered international investing and, in 1954, launched what has become the industry's oldest global fund. Today, with research offices in over 25 countries, they offer investors the broadest global reach in the industry. MUTUAL SERIES. Founded in 1949, Mutual Series is dedicated to a unique style of value investing, searching aggressively for opportunity among undervalued stocks, arbitrage situations and distressed companies. TRUE DIVERSIFICATION Because our management groups work independently and adhere to distinctly different investment approaches, Franklin, Templeton and Mutual Series funds typically have a low overlap of securities. That's why our funds can be used to build truly diversified portfolios covering every major asset class. RELIABILITY YOU CAN TRUST At Franklin Templeton Investments, we seek to consistently provide investors with exceptional risk-adjusted returns over the long term, as well as the reliable account services that have helped us become one of the most trusted names in financial services. MUTUAL FUNDS | RETIREMENT PLANS | 529 COLLEGE SAVINGS PLANS | SEPARATE ACCOUNTS [GRAPHIC OMITTED] Not part of the annual report Contents SHAREHOLDER LETTER ............................ 1 ANNUAL REPORT Templeton Capital Accumulator Fund ............ 3 Performance Summary ........................... 6 Your Fund's Expenses .......................... 8 Financial Highlights and Statement of Investments ...................... 10 Financial Statements .......................... 16 Notes to Financial Statements ................. 19 Report of Independent Registered Public Accounting Firm ............................... 26 Tax Designation ............................... 27 Board Members and Officers .................... 29 Shareholder Information ....................... 36 Annual Report Templeton Capital Accumulator Fund YOUR FUND'S GOAL AND MAIN INVESTMENTS: Templeton Capital Accumulator Fund seeks long-term capital growth. Under normal market conditions, the Fund invests in equity securities of companies of any nation. [SIDEBAR] PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURN AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. PLEASE CALL 1-800/632-2301 FOR MOST RECENT MONTH-END PERFORMANCE. We are pleased to bring you Templeton Capital Accumulator Fund's annual report for the fiscal year ended August 31, 2004. PERFORMANCE OVERVIEW For the 12 months under review, Templeton Capital Accumulator Fund delivered a 16.72% cumulative total return. The Fund slightly outperformed its benchmark, the Morgan Stanley Capital International (MSCI) All Country (AC) World Index, which posted a 16.34% total return for the same period. 1 You can find the Fund's long-term performance data in the Performance Summary beginning on page 6. ECONOMIC AND MARKET OVERVIEW The global economy expanded rapidly over the past few quarters, led by strong economic growth in the U.S. and China. As of June 30, 2004, U.S. gross domestic product (GDP) had increased for 11 consecutive quarters. In China, GDP grew at a strong 9.1% pace in 2003. 2 Despite an effort by Chinese authorities to curb this growth, China's economy expanded 9.7% in the first half of 2004, slightly more moderate than the 9.9% rate reported for the fourth quarter of 2003. 2, 3 The continued economic strength reflected strong consumer and business confidence in China, the U.S., Japan and Europe. The 12-nation euro zone lagged other regions in the current recovery. However, the European Central Bank recently projected euro zone growth may be between 1.6% and 2.2% in 2004, compared with 0.5% in 2003. In addition, the outlook for emerging European economies improved, led by double-digit growth in industrial production in Turkey and Poland and steady 1. Source: Standard & Poor's Micropal. The MSCI AC World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets. The index is unmanaged and includes reinvested dividends. One cannot invest directly in an index, nor is an index representative of the Fund's portfolio. 2. Source: www.china.org.cn, "China GDP Speeds up; Pace Seen Continuing." 3. Source: Ministry of Foreign Affairs of the People's Republic of China, www.china-embassy.org, "China's GDP rose 9.7 percent in the first half of 2004," 7/16/04. THE DOLLAR VALUE, NUMBER OF SHARES OR PRINCIPAL AMOUNT, AND NAMES OF ALL PORTFOLIO HOLDINGS ARE LISTED IN THE FUND'S STATEMENT OF INVESTMENTS (SOI). THE SOI BEGINS ON PAGE 11. Annual Report | 3 growth in Russia. In Japan, the economy has been emerging from its decade-long deflation. Japan's consumer and business confidence reached their highest levels since 1991. In Latin America, although growth was slow relative to Asia and the U.S., there was evidence of a rebound in industrial activity. Regarding stock market performance, the global equity rally that began in March 2003 extended into the early part of this year propelled by strong liquidity, reasonably solid economic growth and higher corporate earnings. However, by the second quarter investor focus shifted to the challenges of rising commodity prices, especially oil, Iraqi unrest and a potential slowdown in the Chinese economy. The prospect of higher interest rates also damaged investor confidence. These factors hindered global equity performance, and consequently most stock markets traded within a relatively narrow range in the first eight months of 2004. However, stock market performance in aggregate was positive over the fiscal year. The MSCI AC World Index's total return was 16.34% for the year ended August 31, 2004. 1 INVESTMENT STRATEGY Our investment strategy employs a bottom-up, value-oriented, long-term approach. We focus on the market price of a company's securities relative to our evaluation of the company's long-term earnings, asset value and cash flow potential. As we look worldwide, we consider specific companies, rather than sectors or countries, while doing in-depth research to construct a bargain list from which we buy. MANAGER'S DISCUSSION During the Fund's fiscal year, the energy and utility sectors benefited Fund performance as they each posted gains of about 30%. Conversely, information technology stocks lagged considerably; however, the Fund was underweighted in such stocks compared with the index, which helped relative performance. The Fund benefited from strong stock selection in the health care sector, while poor stock selection in the consumer discretionary sector hindered relative performance. Among the Fund's largest gainers were Aventis (up 74%), Celesio (+65%), Rolls-Royce Group (+63%) and ICICI Bank (+48%). Fund holdings that detracted from performance included Mylan Laboratories (-27%), Volkswagen (-19%) and Electrolux (-14%). [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: Europe 50.0% North America 20.7% Asia 16.6% Australia & New Zealand 4.1% Latin America 1.5% Middle East & Africa 0.7% Short-Term Investments & Other Net Assets 6.4% TOP 10 SECTORS/INDUSTRIES 8/31/04 --------------------------------------------------------- % OF TOTAL NET ASSETS --------------------------------------------------------- Pharmaceuticals 7.4% --------------------------------------------------------- Diversified Telecommunication Services 7.2% --------------------------------------------------------- Insurance 7.2% --------------------------------------------------------- Oil & Gas 7.0% --------------------------------------------------------- Commercial Banks 6.1% --------------------------------------------------------- Media 4.4% --------------------------------------------------------- Health Care Providers & Services 4.2% --------------------------------------------------------- Metals & Mining 4.0% --------------------------------------------------------- Household Durables 3.3% --------------------------------------------------------- Wireless Telecommunication Services 3.2% --------------------------------------------------------- 4 | Annual Report During the reporting period, market dynamics provided us with numerous purchase and sale opportunities. Interestingly, our buy and sell decisions were across many sectors and geographic regions, illustrating our focus on individual stock selection. We established several new positions over the past few months, including Vodafone Group, a large, U.K.-based, global telecommunications company; AMP, a major Australian life insurance and financial services group; and Vestas Wind Systems, a manufacturer of wind-driven, electricity generating equipment based in Denmark. We also added to a number of existing positions, such as Michelin, a leading tire producer with global operations, and Securitas, a Swedish security services provider with strong markets in Europe and the U.S. On the sell side, we benefited from increased corporate merger activity in the health care area during the period. We sold our positions in CellTech and Amersham at a profit when they were the subjects of takeover bids. We also sold some shares of Aventis, another Fund holding subject to a takeover bid, at a profit as part of a tender offer late in the period. Elsewhere, we liquidated our position in Clariant, a Swiss-based chemical company, at a loss because we were concerned that the firm's long-term fundamentals would not meet our prior expectations. We also reduced our positions in several stocks, including Husky Energy and BHP Billiton, after solid price appreciation during the reporting period. Thank you for your continued participation in Templeton Capital Accumulator Fund. We look forward to serving your future investment needs. /S/Gary P. Motyl, CFA Gary P. Motyl, CFA Portfolio Manager Templeton Capital Accumulator Fund THE FOREGOING INFORMATION REFLECTS OUR ANALYSIS, OPINIONS AND PORTFOLIO HOLDINGS AS OF AUGUST 31, 2004, THE END OF THE REPORTING PERIOD. THE WAY WE IMPLEMENT OUR MAIN INVESTMENT STRATEGIES AND THE RESULTING PORTFOLIO HOLDINGS MAY CHANGE DEPENDING ON FACTORS SUCH AS MARKET AND ECONOMIC CONDITIONS. THESE OPINIONS MAY NOT BE RELIED UPON AS INVESTMENT ADVICE OR AN OFFER FOR A PARTICULAR SECURITY. THE INFORMATION IS NOT A COMPLETE ANALYSIS OF EVERY ASPECT OF ANY MARKET, COUNTRY, INDUSTRY, SECURITY OR THE FUND. STATEMENTS OF FACT ARE FROM SOURCES CONSIDERED RELIABLE, BUT THE INVESTMENT MANAGER MAKES NO REPRESENTATION OR WARRANTY AS TO THEIR COMPLETENESS OR ACCURACY. ALTHOUGH HISTORICAL PERFORMANCE IS NO GUARANTEE OF FUTURE RESULTS, THESE INSIGHTS MAY HELP YOU UNDERSTAND OUR INVESTMENT MANAGEMENT PHILOSOPHY. TOP 10 EQUITY HOLDINGS 8/31/04 - --------------------------------------------------------- COMPANY % OF TOTAL SECTOR/INDUSTRY, COUNTRY NET ASSETS - --------------------------------------------------------- Samsung Electronics Co. Ltd. 2.2% SEMICONDUCTORS & SEMICONDUCTOR EQUIPMENT, SOUTH KOREA - --------------------------------------------------------- Shell Transport & Trading Co. PLC, ADR 1.8% OIL & GAS, U.K. - --------------------------------------------------------- BHP Billiton PLC 1.6% METALS & MINING, U.K. - --------------------------------------------------------- E.ON AG 1.6% ELECTRIC UTILITIES, GERMANY - --------------------------------------------------------- Telefonica SA 1.6% DIVERSIFIED TELECOMMUNICATION SERVICES, SPAIN - --------------------------------------------------------- Sanofi-Aventis 1.5% PHARMACEUTICALS, FRANCE - --------------------------------------------------------- AT&T Wireless Services Inc. 1.4% WIRELESS TELECOMMUNICATION SERVICES, U.S. - --------------------------------------------------------- Alcan Inc. 1.3% METALS & MINING, CANADA - --------------------------------------------------------- Vodafone Group PLC 1.3% WIRELESS TELECOMMUNICATION SERVICES, U.K. - --------------------------------------------------------- Abbey National PLC 1.2% COMMERCIAL BANKS, U.K. Annual Report | 5 Performance Summary as of 8/31/04 Your dividend income will vary depending on dividends or interest paid by securities in the Fund's portfolio, adjusted for operating expenses. Capital gain distributions are net profits realized from the sale of portfolio securities. The performance table and graph do not reflect any taxes due on Fund dividends, capital gain distributions, if any, or any realized gains on the sale of Fund shares. Total return reflects the Fund's dividend income, capital gain distributions, if any, and any unrealized gains or losses. PRICE AND DISTRIBUTION INFORMATION
- ------------------------------------------------------------------------------------------------- CHANGE 8/31/04 8/31/03 - ------------------------------------------------------------------------------------------------- Net Asset Value (NAV) +$1.58 $11.76 $10.18 - ------------------------------------------------------------------------------------------------- DISTRIBUTIONS (9/1/03-8/31/04) - ------------------------------------------------------------------------------------------------- Dividend Income $0.1105
PERFORMANCE 1 FUND RETURNS SHOWN IN THE FOLLOWING TABLE DO NOT INCLUDE THE EFFECT OF THE SEPARATE SALES AND CREATION CHARGES ASSESSED THROUGH TEMPLETON CAPITAL ACCUMULATION PLANS. IF THESE CHARGES WERE INCLUDED, THE FUND'S RETURNS WOULD HAVE BEEN LOWER.
- ----------------------------------------------------------------------------------------------------- FUND RETURNS 1-YEAR 5-YEAR 10-YEAR INCEPTION (3/1/91) - ----------------------------------------------------------------------------------------------------- Cumulative Total Return 2 16.72% 17.51% 115.27% 271.86% Average Annual Total Return 3 16.72% 3.28% 7.97% 10.21% Value of $10,000 Investment 4 $11,672 $11,751 $21,527 $37,186 - ----------------------------------------------------------------------------------------------------- PLAN RETURNS* 1-YEAR 5-YEAR 10-YEAR INCEPTION (3/1/91) - ----------------------------------------------------------------------------------------------------- Average Annual Total Return 3 -41.64% 1.13% 7.42% 9.91%** Avg. Ann. Total Return (9/30/04) 5 -39.75% 2.40% 7.96% 10.10%***
*Plan returns include the effects of the separate sales and creation charges assessed through Templeton Capital Accumulation Plans' $50/month 15-year plan. The rate of deductions decreases proportionately as Plan sizes increase. **Based on pro-rated sales charges from Fund inception through 8/31/04. ***Based on pro-rated sales charges from Fund inception through 9/30/04. PERFORMANCE DATA QUOTED REPRESENTS PAST PERFORMANCE, WHICH DOES NOT GUARANTEE FUTURE RESULTS. INVESTMENT RETURNS AND PRINCIPAL VALUE WILL FLUCTUATE, AND YOU MAY HAVE A GAIN OR LOSS WHEN YOU SELL YOUR SHARES. CURRENT PERFORMANCE MAY DIFFER FROM FIGURES SHOWN. FOR MOST RECENT MONTH-END PERFORMANCE, CALL 1-800/632-2301. For the first year of a Plan, sales and creation charges can amount to 50% of the total amount invested during the year. Since shares of the Fund can only be acquired through Templeton Capital Accumulation Plans, investors should read the Plan prospectus for more complete information on the impact of the sales and creation charges applicable to the Plan. 6 | Annual Report PERFORMANCE SUMMARY (CONTINUED) TOTAL RETURN INDEX COMPARISON FOR HYPOTHETICAL $10,000 INVESTMENT 1 Total return represents the change in value of an investment over the periods shown, assuming reinvestment of distributions at net asset value. It does not include the effect of the separate sales and creation charges assessed through Templeton Capital Accumulation Plans, which may vary as discussed in the Plans' prospectuses. For the first year of a Plan, these charges can amount to 50% of the total amount invested during the year. Total returns would have been lower if these charges had been applied. Please refer to the Templeton Capital Accumulation Plans' prospectuses for information regarding applicable sales charges. The unmanaged index differs from the Fund in composition, does not pay management fees or expenses and includes reinvestment of any income or distributions. One cannot invest directly in an index. The Consumer Price Index (CPI), calculated by the U.S. Bureau of Labor Statistics, is a commonly used measure of the inflation rate. [GRAPHIC OMITTED] EDGAR REPRESENTATION OF DATA POINTS USED IN PRINTED GRAPHIC AS FOLLOWS: Templeton Capital *MSCI AC Accumulator Fund World Index 6 CPI 6 9/1/94 $10,000 $10,000 $10,000 9/30/94 $9,809 $9,765 $10,027 10/31/94 $9,933 $10,015 $10,034 11/30/94 $9,575 $9,581 $10,047 12/31/94 $9,464 $9,614 $10,047 1/31/95 $9,289 $9,418 $10,087 2/28/95 $9,490 $9,519 $10,128 3/31/95 $9,633 $9,955 $10,161 4/30/95 $9,886 $10,317 $10,195 5/31/95 $10,190 $10,431 $10,215 6/30/95 $10,275 $10,433 $10,235 7/31/95 $10,606 $10,938 $10,235 8/31/95 $10,340 $10,698 $10,262 9/30/95 $10,580 $10,993 $10,282 10/31/95 $10,326 $10,809 $10,315 11/30/95 $10,543 $11,149 $10,309 12/31/95 $10,865 $11,485 $10,302 1/31/96 $11,097 $11,740 $10,362 2/29/96 $11,263 $11,789 $10,396 3/31/96 $11,435 $11,970 $10,450 4/30/96 $11,939 $12,263 $10,490 5/31/96 $12,085 $12,275 $10,510 6/30/96 $12,098 $12,343 $10,517 7/31/96 $11,674 $11,882 $10,537 8/31/96 $12,045 $12,028 $10,557 9/30/96 $12,218 $12,473 $10,591 10/31/96 $12,394 $12,522 $10,624 11/30/96 $13,038 $13,192 $10,644 12/31/96 $13,361 $13,001 $10,644 1/31/97 $13,622 $13,219 $10,678 2/28/97 $13,704 $13,399 $10,711 3/31/97 $13,746 $13,131 $10,738 4/30/97 $13,746 $13,553 $10,752 5/31/97 $14,473 $14,361 $10,745 6/30/97 $15,187 $15,096 $10,758 7/31/97 $15,847 $15,779 $10,772 8/31/97 $15,064 $14,672 $10,792 9/30/97 $16,176 $15,454 $10,819 10/31/97 $14,975 $14,534 $10,846 11/30/97 $14,834 $14,757 $10,839 12/31/97 $14,852 $14,950 $10,826 1/31/98 $14,966 $15,279 $10,846 2/28/98 $16,055 $16,325 $10,866 3/31/98 $16,957 $17,021 $10,886 4/30/98 $17,115 $17,181 $10,906 5/31/98 $16,828 $16,855 $10,926 6/30/98 $16,556 $17,158 $10,940 7/31/98 $16,585 $17,164 $10,953 8/31/98 $13,878 $14,759 $10,966 9/30/98 $13,735 $15,053 $10,980 10/31/98 $14,964 $16,428 $11,007 11/30/98 $15,884 $17,425 $11,007 12/31/98 $16,127 $18,234 $11,000 1/31/99 $16,142 $18,607 $11,027 2/28/99 $15,930 $18,139 $11,040 3/31/99 $16,717 $18,955 $11,074 4/30/99 $18,245 $19,774 $11,154 5/31/99 $17,609 $19,075 $11,154 6/30/99 $18,608 $20,025 $11,154 7/31/99 $18,487 $19,943 $11,188 8/31/99 $18,320 $19,919 $11,215 9/30/99 $17,745 $19,704 $11,268 10/31/99 $18,146 $20,702 $11,289 11/30/99 $19,072 $21,346 $11,295 12/31/99 $20,836 $23,124 $11,295 1/31/00 $19,925 $21,877 $11,329 2/29/00 $20,373 $21,951 $11,396 3/31/00 $21,044 $23,394 $11,490 4/30/00 $20,181 $22,345 $11,497 5/31/00 $19,957 $21,765 $11,510 6/30/00 $20,741 $22,502 $11,570 7/31/00 $20,581 $21,841 $11,597 8/31/00 $21,332 $22,520 $11,597 9/30/00 $20,341 $21,284 $11,658 10/31/00 $20,152 $20,867 $11,678 11/30/00 $19,821 $19,574 $11,685 12/31/00 $20,711 $19,901 $11,678 1/31/01 $21,066 $20,405 $11,752 2/28/01 $20,517 $18,688 $11,799 3/31/01 $19,225 $17,430 $11,826 4/30/01 $20,198 $18,699 $11,872 5/31/01 $20,198 $18,491 $11,926 6/30/01 $19,791 $17,924 $11,946 7/31/01 $19,614 $17,642 $11,913 8/31/01 $19,207 $16,831 $11,913 9/30/01 $16,870 $15,294 $11,966 10/31/01 $17,297 $15,619 $11,926 11/30/01 $18,513 $16,579 $11,906 12/31/01 $18,839 $16,735 $11,859 1/31/02 $18,302 $16,276 $11,886 2/28/02 $18,481 $16,156 $11,933 3/31/02 $19,430 $16,886 $12,000 4/30/02 $19,233 $16,351 $12,067 5/31/02 $19,502 $16,374 $12,067 6/30/02 $18,535 $15,375 $12,074 7/31/02 $16,708 $14,086 $12,087 8/31/02 $16,636 $14,122 $12,128 9/30/02 $14,559 $12,573 $12,148 10/31/02 $15,291 $13,499 $12,168 11/30/02 $16,377 $14,237 $12,168 12/31/02 $15,563 $13,559 $12,141 1/31/03 $15,200 $13,163 $12,195 2/28/03 $14,784 $12,932 $12,289 3/31/03 $14,421 $12,883 $12,362 4/30/03 $15,943 $14,034 $12,336 5/31/03 $16,885 $14,851 $12,315 6/30/03 $17,266 $15,136 $12,329 7/31/03 $17,863 $15,472 $12,342 8/31/03 $18,443 $15,839 $12,389 9/30/03 $18,425 $15,940 $12,430 10/31/03 $19,716 $16,907 $12,416 11/30/03 $19,990 $17,166 $12,383 12/31/03 $21,491 $18,255 $12,369 1/31/04 $21,893 $18,567 $12,430 2/29/04 $22,424 $18,910 $12,497 3/31/04 $22,260 $18,809 $12,577 4/30/04 $21,802 $18,378 $12,617 5/31/04 $21,875 $18,533 $12,691 6/30/04 $22,278 $18,907 $12,732 7/31/04 $21,436 $18,307 $12,711 8/31/04 $21,527 $18,426 $12,718 AVERAGE ANNUAL TOTAL RETURN - ------------------------------------- FUND RETURNS 1 8/31/04 - ------------------------------------- 1-Year 16.72% - ------------------------------------- 5-Year 3.28% - ------------------------------------- 10-Year 7.97% ENDNOTES THE FUND INVESTS IN FOREIGN SECURITIES, WHICH CAN INVOLVE EXPOSURE TO CURRENCY VOLATILITY AND POLITICAL, ECONOMIC AND REGULATORY UNCERTAINTY. INVESTMENTS IN DEVELOPING MARKETS INVOLVE HEIGHTENED RISKS RELATED TO THE SAME FACTORS, IN ADDITION TO THOSE ASSOCIATED WITH THEIR RELATIVELY SMALL SIZE AND LESSER LIQUIDITY. THE FUND'S PROSPECTUS ALSO INCLUDES A DESCRIPTION OF THE MAIN INVESTMENT RISKS. 1. Past expense reductions by the Fund's manager increased the Fund's total returns. Without these reductions, the Fund's total returns would have been lower. 2. Cumulative total return represents the change in value of an investment over the periods indicated. 3. Average annual total return represents the average annual change in value of an investment over the periods indicated. 4. These figures represent the value of a hypothetical $10,000 investment in the Fund over the periods indicated. 5. In accordance with SEC rules, we provide standardized average annual total return information through the latest calendar quarter. 6. Source: Standard & Poor's Micropal. The MSCI AC World Index is a free float-adjusted, market capitalization-weighted index designed to measure equity market performance in global developed and emerging markets. Annual Report | 7 YOUR FUND'S EXPENSES As a Fund shareholder, you can incur two types of costs: O Transaction costs, including sales charges (loads) on Fund purchases and redemption fees; and O Ongoing Fund costs, including management fees, distribution and service (12b-1) fees, and other Fund expenses. All mutual funds have ongoing costs, sometimes referred to as operating expenses. The following table shows ongoing costs of investing in the Fund and can help you understand these costs and compare them with those of other mutual funds. The table assumes a $1,000 investment held for the six months indicated. ACTUAL FUND EXPENSES The first line (Actual) for each share class listed in the table below provides actual account values and expenses. The "Ending Account Value" is derived from the Fund's actual return, which includes the effect of Fund expenses. You can estimate the expenses you paid during the period, by following these steps. OF COURSE, YOUR ACCOUNT VALUE AND EXPENSES WILL DIFFER FROM THOSE IN THIS ILLUSTRATION: 1. Divide your account value by $1,000. IF AN ACCOUNT HAD AN $8,600 VALUE, THEN $8,600 / $1,000 = 8.6. 2. Multiply the result by the number under the heading "Expenses Paid During Period." IF EXPENSES PAID DURING PERIOD WERE $7.50, THEN 8.6 X $7.50 = $64.50. In this illustration, the estimated expenses paid this period are $64.50. HYPOTHETICAL EXAMPLE FOR COMPARISON WITH OTHER FUNDS Information in the second line (Hypothetical) for each class in the table can help you compare ongoing costs of investing in the Fund with those of other mutual funds. This information may not be used to estimate the actual ending account balance or expenses you paid during the period. The hypothetical "Ending Account Value" is based on the actual expense ratio for each class and an assumed 5% annual rate of return before expenses, which does not represent the Fund's actual return. The figure under the heading "Expenses Paid During Period" shows the hypothetical expenses your account would have incurred under this scenario. You can compare this figure with the 5% hypothetical examples that appear in shareholder reports of other funds. 8 | Annual Report YOUR FUND'S EXPENSES (CONTINUED) Please note that expenses shown in the table are meant to highlight ongoing costs and do not reflect any transaction costs, such as sales charges or redemption fees. Therefore, the second line for each class is useful in comparing ongoing costs only, and will not help you compare total costs of owning different funds. In addition, if transaction costs were included, your total costs would have been higher. Please refer to the Fund prospectus for additional information on operating expenses.
- ----------------------------------------------------------------------------------------------------- BEGINNING ACCOUNT ENDING ACCOUNT EXPENSES PAID DURING VALUE 2/29/04 VALUE 8/31/04 PERIOD* 2/29/04-8/31/04 - ----------------------------------------------------------------------------------------------------- Actual $1,000 $960.00 $6.36 - ----------------------------------------------------------------------------------------------------- Hypothetical (5% return before expenses) $1,000 $1,018.65 $6.55
*Expenses are equal to the annualized expense ratio of 1.29% multiplied by the average account value over the period, multiplied by 184/366 to reflect the one-half year period. Annual Report | 9 TEMPLETON CAPITAL ACCUMULATOR FUND FINANCIAL HIGHLIGHTS
--------------------------------------------------------- YEAR ENDED AUGUST 31, 2004 2003 2002 2001 2000 --------------------------------------------------------- PER SHARE OPERATING PERFORMANCE (for a share outstanding throughout the year) Net asset value, beginning of year ............................... $10.18 $9.29 $10.85 $13.34 $12.11 --------------------------------------------------------- Income from investment operations: Net investment income a ......................................... .12 .12 .12 .16 .16 Net realized and unrealized gains (losses) ...................... 1.57 .87 (1.57) (1.45) 1.71 --------------------------------------------------------- Total from investment operations ................................. 1.69 .99 (1.45) (1.29) 1.87 --------------------------------------------------------- Less distributions from: Net investment income ........................................... (.11) (.10) (.11) (.16) (.15) Net realized gains .............................................. -- -- -- (1.04) (.49) --------------------------------------------------------- Total distributions .............................................. (.11) (.10) (.11) (1.20) (.64) --------------------------------------------------------- Net asset value, end of year ..................................... $11.76 $10.18 $9.29 $10.85 $13.34 --------------------------------------------------------- Total return b ................................................... 16.72% 10.86% (13.38)% (9.96)% 16.44% RATIOS/SUPPLEMENTAL DATA Net assets, end of year (000's) .................................. $596,015 $457,645 $354,042 $364,236 $370,029 Ratios to average net assets: Expenses ........................................................ 1.21% 1.12% 1.11% 1.05% 1.03% Net investment income ........................................... 1.04% 1.35% 1.13% 1.35% 1.24% Portfolio turnover rate .......................................... 12.93% 21.32% 14.28% 22.37% 32.13%
aBased on average daily shares outstanding. bTotal return is not annualized for periods less than one year. 10 | See notes to financial statements. | Annual Report TEMPLETON CAPITAL ACCUMULATOR FUND STATEMENT OF INVESTMENTS, AUGUST 31, 2004
- --------------------------------------------------------------------------------------------------------------------------- INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS 93.0% AUSTRALIA 3.5% Alumina Ltd. ........................... Metals & Mining 1,054,060 $ 4,041,681 AMP Ltd. ............................... Insurance 1,126,860 4,973,325 National Australia Bank Ltd. ........... Commercial Banks 362,220 6,816,580 Qantas Airways Ltd. .................... Airlines 1,276,080 3,072,764 WMC Resources Ltd. ..................... Metals & Mining 600,000 2,084,554 --------------- 20,988,904 --------------- BERMUDA 1.5% ACE Ltd. ............................... Insurance 137,470 5,299,469 XL Capital Ltd., A ..................... Insurance 50,300 3,531,060 --------------- 8,830,529 --------------- BRAZIL .6% Embraer-Empresa Brasileira de Aeronautica SA, ADR ............................... Aerospace & Defense 125,985 3,344,902 --------------- CANADA 3.7% Alcan Inc. ............................. Metals & Mining 159,160 6,893,220 Alcan Inc. (EUR Traded) ................ Metals & Mining 23,940 1,038,017 BCE Inc. ............................... Diversified Telecommunication Services 325,460 6,755,716 a Celestica Inc. ......................... Electronic Equipment & Instruments 204,530 2,921,413 Husky Energy Inc. ...................... Oil & Gas 205,420 4,362,213 --------------- 21,970,579 --------------- CHILE .1% Cia de Telecomunicaciones de Chile SA, ADR ................................... Diversified Telecommunication Services 55,325 681,604 --------------- CHINA .4% a BYD Co. Ltd., H ........................ Electrical Equipment 923,000 2,502,766 --------------- DENMARK .4% a Vestas Wind Systems AS ................. Electrical Equipment 124,170 1,612,874 a Vestas Wind Systems AS, 144A ........... Electrical Equipment 41,390 537,625 --------------- 2,150,499 --------------- FINLAND .8% Stora Enso OYJ, R (EUR/FIM Traded) ...................... Paper & Forest Products 203,900 2,723,325 Stora Enso OYJ, R (SEK Traded) ......... Paper & Forest Products 145,997 1,943,310 --------------- 4,666,635 --------------- FRANCE 5.4% Accor SA ............................... Hotels Restaurants & Leisure 61,110 2,577,071 AXA SA ................................. Insurance 210,901 4,303,422 Michelin SA, B ......................... Auto Components 137,430 7,260,320 Sanofi-Aventis ......................... Pharmaceuticals 130,141 9,236,588 Suez SA ................................ Multi-Utilities & Unregulated Power 201,170 3,894,607 Total SA, B ............................ Oil & Gas 26,062 5,070,884 --------------- 32,342,892 ---------------
Annual Report | 11 TEMPLETON CAPITAL ACCUMULATOR FUND STATEMENT OF INVESTMENTS, AUGUST 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) GERMANY 6.2% BASF AG ................................ Chemicals 80,690 $ 4,364,776 Bayer AG, Br. .......................... Chemicals 111,770 2,859,315 Celesio AG ............................. Health Care Providers & Services 105,466 6,959,802 Deutsche Post AG ....................... Air Freight & Logistics 335,080 6,658,108 E. ON AG ............................... Electric Utilities 134,070 9,515,444 Muenchener Rueckversicherungs- Gesellschaft .......................... Insurance 18,960 1,792,679 Muenchener Rueckversicherungs- Gesellschaft, 144A .................... Insurance 5,417 512,181 Volkswagen AG .......................... Automobiles 107,970 4,159,556 --------------- 36,821,861 --------------- HONG KONG 1.8% Cheung Kong Holdings Ltd. .............. Real Estate 436,000 3,759,127 China Mobile (Hong Kong) Ltd., fgn. ............................ Wireless Telecommunication Services 1,230,500 3,588,981 Hutchison Whampoa Ltd. ................. Industrial Conglomerates 247,650 1,944,700 Swire Pacific Ltd., A .................. Real Estate 190,000 1,345,842 Swire Pacific Ltd., B .................. Real Estate 112,500 137,741 --------------- 10,776,391 --------------- INDIA 1.2% ICICI Bank Ltd. ........................ Commercial Banks 325,519 1,892,569 ICICI Bank Ltd., ADR ................... Commercial Banks 80,185 978,257 Satyam Computers Services Ltd. ......... IT Services 394,520 2,890,479 Satyam Computers Services Ltd., ADR .................... IT Services 71,700 1,406,754 --------------- 7,168,059 --------------- ISRAEL .7% a Check Point Software Technologies Ltd. ..................... Software 234,490 4,112,955 --------------- ITALY 1.7% Eni SpA ................................ Oil & Gas 339,760 6,941,040 Riunione Adriatica di S icurta SpA ............................ Insurance 177,381 3,125,790 --------------- 10,066,830 --------------- JAPAN 7.7% East Japan Railway Co. ................. Road & Rail 581 3,250,572 Hitachi Ltd. ........................... Electronic Equipment & Instruments 955,000 5,986,970 Komatsu Ltd. ........................... Machinery 771,000 4,714,028 NEC Corp. .............................. Computers & Peripherals 447,000 2,855,228 Nintendo Co. Ltd. ...................... Software 32,000 3,440,703 Nippon Telegraph & Telephone Corp. ....................... Diversified Telecommunication Services 1,118 4,828,757 Nomura Holdings Inc. ................... Capital Markets 206,000 2,830,635 Seiko Epson Corp. ...................... Computers & Peripherals 117,500 4,807,280 Sompo Japan Insurance Inc. ............. Insurance 682,000 6,363,552 Sony Corp. ............................. Household Durables 109,900 3,785,339 Takeda Pharmaceutical Co. Ltd. ......... Pharmaceuticals 62,800 2,826,844 --------------- 45,689,908 ---------------
12 | Annual Report TEMPLETON CAPITAL ACCUMULATOR FUND STATEMENT OF INVESTMENTS, AUGUST 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) MEXICO .8% Telefonos de Mexico SA de CV (Telmex), L, ADR ................................ Diversified Telecommunication Services 151,360 $ 4,902,550 --------------- NETHERLANDS 3.4% IHC Caland NV .......................... Energy Equipment & Services 80,950 3,885,962 ING Groep NV ........................... Diversified Financial Services 271,600 6,618,030 Koninklijke Philips Electronics NV ........................ Household Durables 317,267 7,302,801 Wolters Kluwer NV ...................... Media 150,890 2,482,926 --------------- 20,289,719 --------------- NORWAY 1.3% Norsk Hydro ASA ........................ Oil & Gas 89,890 5,595,191 Norske Skogindustrier ASA, A ........... Paper & Forest Products 145,300 2,418,792 --------------- 8,013,983 --------------- PORTUGAL .9% Portugal Telecom SGPS SA ............... Diversified Telecommunication Services 553,710 5,632,386 --------------- SINGAPORE .7% DBS Group Holdings Ltd. ................ Commercial Banks 484,900 4,417,320 --------------- SOUTH KOREA 4.3% a Kookmin Bank ........................... Commercial Banks 110,304 3,524,059 Korea Electric Power Corp. ............. Electric Utilities 101,110 1,777,556 KT Corp., ADR .......................... Diversified Telecommunication Services 140,600 2,463,312 LG Electronics Inc. .................... Household Durables 104,610 4,995,051 Samsung Electronics Co. Ltd. ........... Semiconductors & Semiconductor Equipment 32,810 12,846,560 --------------- 25,606,538 --------------- SPAIN 3.3% Endesa SA .............................. Electric Utilities 82,930 1,533,949 Iberdrola SA, Br. ...................... Electric Utilities 225,770 4,606,823 Repsol YPF SA .......................... Oil & Gas 191,120 3,948,569 Telefonica SA .......................... Diversified Telecommunication Services 656,090 9,313,027 --------------- 19,402,368 --------------- SWEDEN 5.0% Atlas Copco AB, A ...................... Machinery 169,810 6,012,334 Electrolux AB, B ....................... Household Durables 208,170 3,809,948 Foreningssparbanken AB, A .............. Commercial Banks 159,350 3,033,097 Nordea Bank AB, FDR .................... Commercial Banks 684,060 5,229,130 Securitas AB, B ........................ Commercial Services & Supplies 379,700 4,712,893 Volvo AB, B ............................ Machinery 198,470 6,776,109 --------------- 29,573,511 --------------- SWITZERLAND 2.7% Adecco SA .............................. Commercial Services & Supplies 81,100 3,754,245 Lonza Group AG ......................... Chemicals 70,850 3,140,073 Nestle SA .............................. Food Products 17,390 4,107,334 Swiss Reinsurance Co. .................. Insurance 88,990 5,031,807 --------------- 16,033,459 ---------------
Annual Report | 13 TEMPLETON CAPITAL ACCUMULATOR FUND STATEMENT OF INVESTMENTS, AUGUST 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) TAIWAN .4% Chunghwa Telecom Co. Ltd., ADR ......... Diversified Telecommunication Services 152,310 $ 2,598,409 --------------- UNITED KINGDOM 18.9% Abbey National PLC ..................... Commercial Banks 685,240 7,371,618 Alliance Unichem ....................... Health Care Providers & Services 333,080 4,035,572 Amvescap PLC ........................... Capital Markets 213,052 1,111,482 BAE Systems PLC ........................ Aerospace & Defense 1,017,850 3,671,277 BHP Billiton PLC ....................... Metals & Mining 1,028,277 9,674,550 BP PLC ................................. Oil & Gas 586,250 5,196,710 Brambles Industries PLC ................ Commercial Services & Supplies 878,378 3,831,882 a British Airways PLC .................... Airlines 835,990 3,368,744 British Sky Broadcasting Group PLC ............................. Media 640,000 5,503,346 Cadbury Schweppes PLC .................. Food Products 574,410 4,603,505 GlaxoSmithKline PLC .................... Pharmaceuticals 358,150 7,286,962 Hanson PLC ............................. Construction Materials 495,621 3,374,695 Kidde PLC .............................. Electrical Equipment 1,340,880 2,840,337 National Grid Transco PLC .............. Multi-Utilities & Unregulated Power 562,790 4,722,989 Pearson PLC ............................ Media 472,140 5,261,760 Rolls-Royce Group PLC .................. Aerospace & Defense 1,117,630 4,659,473 Shell Transport & Trading Co. PLC, ADR .............................. Oil & Gas 242,900 10,760,470 a Shire Pharmaceuticals Group PLC ........ Pharmaceuticals 373,550 3,239,028 Smiths Group PLC ....................... Industrial Conglomerates 253,380 3,163,376 Standard Chartered PLC ................. Commercial Banks 185,080 3,139,714 Unilever PLC ........................... Food Products 631,940 5,411,302 Vodafone Group PLC ..................... Wireless Telecommunication Services 3,346,670 7,600,869 WPP Group PLC .......................... Media 336,000 2,998,057 --------------- 112,827,718 --------------- UNITED STATES 15.6% Abbott Laboratories .................... Pharmaceuticals 167,650 6,989,328 American International Group Inc. ............................ Insurance 72,920 5,194,821 AmerisourceBergen Corp. ................ Health Care Providers & Services 78,610 4,252,801 a AMR Corp. .............................. Airlines 424,060 3,791,096 a AT&T Wireless Services Inc. ............ Wireless Telecommunication Services 558,840 8,170,241 a BMC Software Inc. ...................... Software 165,810 2,482,176 Boise Cascade Corp. .................... Specialty Retail 120,710 3,777,016 Bristol-Myers Squibb Co. ............... Pharmaceuticals 143,620 3,408,103 CIGNA Corp. ............................ Health Care Providers & Services 53,200 3,540,992 a DIRECTV Group Inc. ..................... Media 390,840 6,202,631 Electronic Data Systems Corp. .......... IT Services 2,240 43,053 a Hospira Inc. ........................... Health Care Equipment & Supplies 16,765 464,390 International Paper Co. ................ Paper & Forest Products 121,830 4,875,637 Kraft Foods Inc., A .................... Food Products 122,940 3,845,563 a Maxtor Corp. ........................... Computers & Peripherals 261,960 1,100,232 Mylan Laboratories Inc. ................ Pharmaceuticals 377,220 6,571,172 Pfizer Inc. ............................ Pharmaceuticals 141,342 4,617,643 SBC Communications Inc. ................ Diversified Telecommunication Services 229,350 5,914,937 a Synopsys Inc. .......................... Software 103,940 1,658,882
14 | Annual Report TEMPLETON CAPITAL ACCUMULATOR FUND STATEMENT OF INVESTMENTS, AUGUST 31, 2004 (CONTINUED)
- --------------------------------------------------------------------------------------------------------------------------- INDUSTRY SHARES VALUE - --------------------------------------------------------------------------------------------------------------------------- COMMON STOCKS (CONT.) UNITED STATES (CONT.) Target Corp. ........................... Multiline Retail 118,990 $ 5,304,574 a Tenet Healthcare Corp. ................. Health Care Providers & Services 604,970 6,303,787 a Western Digital Corp. .................. Computers & Peripherals 226,410 1,689,019 Willis Group Holdings Ltd. ............. Insurance 75,990 2,657,370 --------------- 92,855,464 --------------- TOTAL COMMON STOCKS (COST $452,462,603) 554,268,739 --------------- PREFERRED STOCKS (COST $2,850,934) .6% AUSTRALIA .6% News Corp. Ltd., pfd. .................. Media 510,060 3,781,878 --------------- SHORT TERM INVESTMENTS (COST $37,361,578) 6.3% MONEY FUND b Franklin Institutional FiduciaryTrust Money Market Portfolio ...................... 37,361,578 37,361,578 --------------- TOTAL INVESTMENTS (COST $492,675,115) 99.9% ............. 595,412,195 OTHER ASSETS, LESS LIABILITIES .1% ..... 602,753 --------------- NET ASSETS 100.0% ...................... $ 596,014,948 ---------------
CURRENCY ABBREVIATIONS: | EUR - Euro | FIM - Finnish Markka | SEK - Swedish Krona
aNon-income producing. bSee Note 7 regarding investments in the Franklin Institutional Fiduciary Trust Money Market Portfolio. Annual Report | See notes to financial statements. | 15 TEMPLETON CAPITAL ACCUMULATOR FUND FINANCIAL STATEMENTS STATEMENT OF ASSETS AND LIABILITIES August 31, 2004 Assets: Investments in securities: Cost - Unaffiliated issuers ................................ $455,313,537 Cost - Sweep money fund (Note 7) ........................... 37,361,578 ------------- Value - Unaffiliated issuers ............................... 558,050,617 Value - Sweep money fund (Note 7) .......................... 37,361,578 Foreign currency, at value (cost $3,949) .................... 3,950 Receivables: Investment securities sold ................................. 583,932 Capital shares sold ........................................ 58,141 Dividends .................................................. 1,320,709 ------------- Total assets ........................................... 597,378,927 ------------- Liabilities: Payables: Investment securities purchased ............................ 107,347 Capital shares redeemed .................................... 88,929 Affiliates ................................................. 486,843 Deferred tax liability (Note 1f) ........................... 123,362 Funds advanced by custodian ................................ 274,174 Other liabilities .......................................... 283,324 ------------- Total liabilities ...................................... 1,363,979 ------------- Net assets, at value ................................. $596,014,948 ------------- Net assets consist of: Undistributed net investment income ......................... $ 5,103,354 Net unrealized appreciation (depreciation) .................. 102,622,687 Accumulated net realized gain (loss) ........................ (10,880,450) Capital shares .............................................. 499,169,357 ------------- Net assets, at value ................................. $596,014,948 ------------- Shares outstanding ........................................... 50,674,788 ------------- Net asset value and maximum offering price per share ......... $11.76 ------------- 16 | See notes to financial statements. | Annual Report TEMPLETON CAPITAL ACCUMULATOR FUND FINANCIAL STATEMENTS (CONTINUED) STATEMENT OF OPERATIONS for the year ended August 31, 2004
Investment income: (net of foreign taxes of $1,432,822) Dividends: Dividends - Unaffiliated issuers ............................................. $12,333,197 Sweep money fund (Note 7) .................................................... 259,874 Interest ...................................................................... 6,924 ------------ Total investment income .................................................. 12,599,995 ------------ Expenses: Management fees (Note 3) ...................................................... 4,083,289 Administrative fees (Note 3) .................................................. 785,444 Distribution fees (Note 3) .................................................... 658,115 Transfer agent fees (Note 3) .................................................. 895,500 Custodian fees (Note 4) ....................................................... 173,001 Reports to shareholders ....................................................... 75,000 Registration and filing fees .................................................. 4,700 Professional fees ............................................................. 59,200 Trustees' fees and expenses ................................................... 28,000 Other ......................................................................... 23,300 ------------ Total expenses ........................................................... 6,785,549 Expense reductions (Note 4) .............................................. (50) ------------ Net expenses ........................................................... 6,785,499 ------------ Net investment income ................................................ 5,814,496 ------------ Realized and unrealized gains (losses): Net realized gain (loss) from: Investments .................................................................. 16,952,318 Foreign currency transactions ................................................ (287,715) ------------ Net realized gain (loss).................................................. 16,664,603 Net unrealized appreciation (depreciation) on: Investments .................................................................. 55,388,033 Translation of assets and liabilities denominated in foreign currencies ...... 11,104 Deferred taxes (Note 1f) ..................................................... (123,362) ------------ Net unrealized appreciation (depreciation) ............................... 55,275,775 ------------ Net realized and unrealized gain (loss) ........................................ 71,940,378 ------------ Net increase (decrease) in net assets resulting from operations ................ $77,754,874 ------------
Annual Report | See notes to financial statements. | 17 TEMPLETON CAPITAL ACCUMULATOR FUND FINANCIAL STATEMENTS (CONTINUED) STATEMENTS OF CHANGES IN NET ASSETS for the years ended August 31, 2004 and 2003
-------------------------------- 2004 2003 -------------------------------- Increase (decrease) in net assets: Operations: Net investment income (loss) ........................................................... $ 5,814,496 $ 5,009,213 Net realized gain (loss) from investments and foreign currency transactions ................................................................. 16,664,603 (15,913,177) Net unrealized appreciation (depreciation) on investments, translation of assets and liabilities denominated in foreign currencies, and deferred taxes ..................... 55,275,775 58,425,390 -------------------------------- Net increase (decrease) in net assets resulting from operations .................... 77,754,874 47,521,426 Distributions to shareholders from net investment income ................................. (5,087,057) (3,882,934) Capital share transactions (Note 2) ...................................................... 65,702,058 59,964,520 -------------------------------- Net increase (decrease) in net assets .............................................. 138,369,875 103,603,012 Net assets: Beginning of year ....................................................................... 457,645,073 $354,042,061 -------------------------------- End of year ............................................................................. $596,014,948 $457,645,073 -------------------------------- Undistributed net investment income included in net assets: End of year ............................................................................. $ 5,103,354 $ 4,612,910 --------------------------------
18 | See notes to financial statements. | Annual Report TEMPLETON CAPITAL ACCUMULATOR FUND NOTES TO FINANCIAL STATEMENTS 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES Templeton Capital Accumulator Fund (the Fund) is registered under the Investment Company Act of 1940 as a diversified, open-end investment company. Shares of the Fund are offered to the general public only through Templeton Capital Accumulation Plans. The Fund seeks long term capital growth. Under normal market conditions, the Fund invests in equity securities of companies of any nation. The following summarizes the Fund's significant accounting policies. A. SECURITY VALUATION Securities listed or traded on a recognized national exchange are valued at the last reported sales price. Securities listed or traded on NASDAQ are valued at their official closing price. Over-the-counter securities and listed securities for which no sale is reported are valued within the range of the latest quoted bid and asked prices by independent pricing services or recognized dealers in such securities. Foreign securities are valued at the close of trading of the foreign exchange or the NYSE, whichever is earlier. If events occur that materially affect the values of securities after the prices or foreign exchange rates are determined, but prior to 4:00 p.m. Eastern time or the close of trading on the NYSE, whichever is earlier, or if market quotations are deemed not readily available or reliable, the securities will be valued at fair value. Investments in open-end mutual funds are valued at the closing net asset value. All security valuation procedures are approved by the Board of Trustees. B. FOREIGN CURRENCY TRANSLATION Portfolio securities and other assets and liabilities denominated in foreign currencies are translated into U.S. dollars based on the exchange rate of such currencies against U.S. dollars on the date of valuation. Purchases and sales of securities, income and expense items denominated in foreign currencies are translated into U.S. dollars at the exchange rate in effect on the transaction date. The Fund does not separately report the effect of changes in foreign exchange rates from changes in market prices on securities held. Such changes are included in net realized and unrealized gain or loss from investments. Realized foreign exchange gains or losses arise from sales of foreign currencies, currency gains or losses realized between the trade and settlement dates on securities transactions and the difference between the recorded amounts of dividends, interest and foreign withholding taxes, and the U.S. dollar equivalent of the amounts actually received or paid. Net unrealized foreign exchange gains and losses arise from changes in foreign exchange rates on foreign denominated assets and liabilities other than investments in securities held at the end of the reporting period. C. FOREIGN CURRENCY CONTRACTS When the Fund purchases or sells foreign securities it may enter into foreign exchange contracts to minimize foreign exchange risk from the trade date to the settlement date of the transactions. A foreign exchange contract is an agreement between two parties to exchange different currencies at an agreed upon exchange rate on a specified date. Realized and unrealized gains and losses are included in the Statement of Operations. Annual Report | 19 TEMPLETON CAPITAL ACCUMULATOR FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) C. FOREIGN CURRENCY CONTRACTS (CONTINUED) The risks of these contracts include movement in the values of the foreign currencies relative to the U.S. dollar and the possible inability of the counterparties to fulfill their obligations under the contracts. D. INCOME TAXES No provision has been made for income taxes because the Fund's policy is to qualify as a regulated investment company under the Internal Revenue Code and to distribute substantially all of its taxable income. Fund distributions to shareholders are determined on a tax basis and may differ from net investment income and realized gains for financial reporting purposes. E. SECURITY TRANSACTIONS, INVESTMENT INCOME, EXPENSES AND DISTRIBUTIONS Security transactions are accounted for on trade date. Realized gains and losses on security transactions are determined on a specific identification basis. Certain income from foreign securities is recorded as soon as information is available. Interest income and estimated expenses are accrued daily. Dividend income and distributions to shareholders are recorded on the ex-dividend date. F. DEFERRED TAXES The Fund is subject to a tax imposed on net realized gains of securities of certain foreign countries. The Fund records an estimated deferred tax liability for net unrealized gains on these securities as reflected in the accompanying financial statements. G. ACCOUNTING ESTIMATES The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the amounts of income and expenses during the reporting period. Actual results could differ from those estimates. H. REDEMPTION FEES Effective June 1, 2004, redemptions and exchanges of Fund shares held five trading days or less may be subject to the Fund's redemption fee, which is 2% of the amount redeemed. Such fees are retained by the Fund and accounted for as additional paid-in capital. There were no redemption fees for the year. I. GUARANTEES AND INDEMNIFICATIONS Under the Fund's organizational documents, its officers and trustees are indemnified against certain liability arising out of the performance of their duties to the Fund. Additionally, in the normal course of business, the Fund enters into contracts with service providers that contain general indemnification clauses. The Fund's maximum exposure under these arrangements is unknown as this would involve future claims that may be made against the Fund that have not yet occurred. However, based on experience, the Fund expects the risk of loss to be remote. 20 | Annual Report TEMPLETON CAPITAL ACCUMULATOR FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) 2. SHARES OF BENEFICIAL INTEREST At August 31, 2004, there were an unlimited number of shares of beneficial interest authorized (without par value). Transactions in the Fund's shares were as follows:
------------------------------------------------------------------ YEAR ENDED AUGUST 31, 2004 2003 SHARES AMOUNT SHARES AMOUNT ------------------------------------------------------------------ Shares sold ....................... 7,671,485 $88,767,548 8,128,145 $71,679,495 Shares issued in reinvestment of distributions .................... 472,305 5,019,603 451,611 3,825,788 Shares redeemed ................... (2,407,696) (28,085,093) (1,739,114) (15,540,763) ------------------------------------------------------------------ Net increase (decrease) ........... 5,736,094 $65,702,058 6,840,642 $59,964,520 ------------------------------------------------------------------
3. TRANSACTIONS WITH AFFILIATES Certain officers of the Fund are also officers or directors of the following entities:
- ---------------------------------------------------------------------------------------------------- ENTITY AFFILIATION - ---------------------------------------------------------------------------------------------------- Templeton Investment Counsel, LLC (TIC) Investment manager Franklin Templeton Services, LLC (FT Services) Administrative manager Franklin Templeton/Distributors, Inc. (Distributors) Principal underwriter Franklin Templeton Investor Services, LLC (Investor Services) Transfer agent
The Fund paid transfer agent fees of $895,500, of which $4,087 was paid to Investor Services. A. MANAGEMENT FEE The Fund pays an investment management fee to TIC based on the Fund's average daily net assets as follows: - -------------------------------------------------------------------------------- ANNUALIZED FEE RATE NET ASSETS - -------------------------------------------------------------------------------- 0.750% Up to and including $1 billion 0.730% Over $1 billion, up to and including $5 billion 0.710% Over $5 billion, up to and including $10 billion 0.690% Over $10 billion, up to and including $15 billion 0.670% Over $15 billion, up to and including $20 billion 0.650% Over $20 billion Prior to June 1, 2004, the Fund paid an investment management fee to TIC of 0.75% per year of the average daily net assets of the Fund. Annual Report | 21 TEMPLETON CAPITAL ACCUMULATOR FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) 3. TRANSACTIONS WITH AFFILIATES (CONTINUED) B. ADMINISTRATIVE FEES The Fund pays an administrative fee to FT Services based on the Fund's average daily net assets as follows: - ------------------------------------------------------------------------------ ANNUALIZED FEE RATE NET ASSETS 0.150% First $200 million 0.135% Over $200 million, up to and including $700 million 0.100% Over $700 million, up to and including $1.2 billion 0.075% In excess of $1.2 billion C. DISTRIBUTION FEES The Fund reimburses Distributors up to 0.30% per year of its average daily net assets for costs incurred in marketing the Fund's shares under a Rule 12b-1 plan. Under the distribution plan, costs and expenses exceeding the maximum for the current plan year may be reimbursed in subsequent periods. At August 31, 2004, Distributors advised the Fund unreimbursed costs were $680,835. D. SALES CHARGES/UNDERWRITING AGREEMENTS Distributors has advised the Fund of the following commission transactions related to the sale of the Fund's shares for the year: Sales charges received ...................................... $754,699 4. EXPENSE OFFSET ARRANGEMENT The Fund has entered into an arrangement with its custodian whereby credits realized as a result of uninvested cash balances are used to reduce a portion of the Fund's custodian expenses. During the year ended August 31, 2004, the custodian fees were reduced as noted in the Statement of Operations. 5. INCOME TAXES At August 31, 2004, the Fund had tax basis capital losses which may be carried over to offset future capital gains. Such losses expire as follows: Capital loss carryovers expiring in: 2010 ...................................................... $ 3,847,447 2011 ...................................................... 5,327,434 2012 ...................................................... 1,654,849 ----------- $10,829,730 ----------- 22 | Annual Report TEMPLETON CAPITAL ACCUMULATOR FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) 5. INCOME TAXES (CONTINUED) At August 31, 2004, the Fund had deferred currency losses occurring subsequent to October 31, 2003 of $50,720. For tax purposes, such losses will be reflected in the year ending August 31, 2005. At August 31, 2004, the cost of investments, net unrealized appreciation (depreciation) and undistributed ordinary income for income tax purposes were as follows: Cost of investments ........................................... $492,675,115 ------------- Unrealized appreciation ....................................... $125,409,009 Unrealized depreciation ....................................... (22,671,929) ------------- Net unrealized appreciation (depreciation) .................... $102,737,080 ------------- Distributable earnings--undistributed ordinary income ......... $5,103,354 ------------- The tax character of distributions paid during the years ended August 31, 2004 and 2003, was as follows: -------------------------- 2004 2003 -------------------------- Distributions paid from: Ordinary income ........................... $5,087,057 $3,882,934 Net investment income (loss) and net realized gains (losses) differ for financial statements and tax purposes primarily due to differing treatment of foreign currency transactions. 6. INVESTMENT TRANSACTIONS Purchases and sales of investments (excluding short-term securities) for the year ended August 31, 2004 aggregated $179,912,675and 67,677,557, respectively. 7. INVESTMENTS IN FRANKLIN INSTITUTIONAL FIDUCIARY TRUST MONEY MARKET PORTFOLIO The Fund may invest in the Franklin Institutional Fiduciary Trust Money Market Portfolio (the Sweep Money Fund), an open-end investment company managed by Franklin Advisers Inc., (an affiliate of the investment manager). Management fees paid by the Fund are reduced on assets invested in the Sweep Money Fund, in an amount not to exceed the management fees paid by the Sweep Money Fund. 8. REGULATORY MATTERS MASSACHUSETTS ADMINISTRATIVE PROCEEDING On September 20, 2004, Franklin Resources, Inc. (Franklin Resources, Inc. and its subsidiaries are referred to collectively as the "Company") announced that an agreement has been reached by two of its subsidiaries, Franklin Advisers, Inc. ("Franklin Advisers") and Franklin Templeton Alternative Strategies, Inc. ("FTAS"), with the Securities Division of the Office of the Secretary of the Commonwealth of Massachusetts (the "State of Massachusetts") related to an administrative complaint filed on February 4, 2004. The administrative complaint addressed one instance of market timing that was also a subject of the August 2, 2004 settlement that Franklin Advisers reached with the SEC, as described below. Annual Report | 23 TEMPLETON CAPITAL ACCUMULATOR FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. REGULATORY MATTERS (CONTINUED) Under the terms of the settlement consent order issued by the State of Massachusetts, Franklin Advisers and FTAS have consented to the entry of a cease-and-desist order and agreed to pay a $5 million administrative fine to the State of Massachusetts. The consent order has multiple sections, including "Statements of Fact" and "Violations of Massachusetts Securities Laws." The Company admitted the "Statements of Fact." The Company did not admit or deny the "Violations of the Massachusetts Securities Laws." While Franklin Advisers and FTAS did not admit or deny engaging in any wrongdoing, the Company believes that it is in its best interest and the interests of its funds' shareholders to settle this issue now and move forward. U.S. SECURITIES AND EXCHANGE COMMISSION (SEC) SETTLEMENT On August 2, 2004, the Company announced that an agreement has been reached by Franklin Advisers with the SEC that resolves the issues resulting from the SEC's investigation of market timing activity and the SEC issued an "Order instituting administrative and cease-and-desist proceedings pursuant to sections 203(e) and 203(k) of the Investment Advisers Act of 1940 and sections 9(b) and 9(f) of the Investment Company Act of 1940, making findings and imposing remedial sanctions and a cease-and-desist order" (the "Order"). The SEC's Order concerns the activities of a limited number of third parties that ended in 2000 and those that are the subject of the Massachusetts administrative complaint described above. Under the terms of the SEC's Order, pursuant to which Franklin Advisers neither admits nor denies any wrongdoing, Franklin Advisers has agreed to pay $50 million, of which $20 million is a civil penalty, to be distributed to shareholders of certain funds in accordance with a plan to be developed by an Independent Distribution Consultant. At this time, it is unclear which funds will receive distributions or which shareholders of any particular fund will receive distributions. The SEC Order also requires Franklin Advisers to, among other things, enhance and periodically review compliance policies and procedures. OTHER GOVERNMENTAL INVESTIGATIONS As part of ongoing investigations by the SEC, the U.S. Attorney for the Northern District of California, the New York Attorney General, the California Attorney General, the U.S. Attorney for the District of Massachusetts, the Florida Department of Financial Services and the Commissioner of Securities, the West Virginia Attorney General, the Vermont Department of Banking, Insurance, Securities, and Health Care Administration and the National Association of Securities Dealers, relating to certain practices in the mutual fund industry, including late trading, market timing and payments to securities dealers who sell fund shares, the Company and its subsidiaries, as well as certain current or former executives and employees of the Company, have received requests for information and/or subpoenas to testify or produce documents. The Company and its current employees have been providing documents and information in response to these requests and subpoenas. In addition, the Company has responded to requests for similar kinds of information from regulatory authorities in some of the foreign countries where the Company conducts its global asset management business. 24 | Annual Report TEMPLETON CAPITAL ACCUMULATOR FUND NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. REGULATORY MATTERS (CONTINUED) OTHER GOVERNMENTAL INVESTIGATIONS (CONTINUED) The staff of the SEC has also informed the Company that it is considering recommending a civil action or proceeding against Franklin Advisers and Franklin Templeton Distributors, Inc. ("FTDI") concerning payments to securities dealers who sell fund shares (commonly referred to as "revenue sharing"). The staff of the California Attorney General's Office ("CAGO") also has advised the Company that the California Attorney General is authorized to bring a civil action against the Company and FTDI arising from the same events. Even though the Company currently believes that the charges the SEC staff and CAGO staff are contemplating are unwarranted, it also believes that it is in the best interest of the Company's and funds' shareholders to resolve these issues voluntarily, to the extent the Company can reasonably do so. The Company continues to have discussions towards resolving these governmental investigations. OTHER LEGAL PROCEEDINGS The Fund, in addition to other entities within Franklin Templeton Investments, including the Company and certain of its subsidiaries, other funds, and current and former officers, employees, and directors have been named in multiple lawsuits in different federal courts in Nevada, California, Illinois, New York and Florida, alleging violations of various federal securities laws and seeking, among other things, monetary damages and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain funds managed by Company subsidiaries, resulting in alleged market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the Massachusetts administrative complaint described above. The lawsuits are styled as class actions or derivative actions on behalf of either the named funds or the Company. Various subsidiaries of the Company have also been named in multiple lawsuits filed in state courts in Illinois alleging breach of duty with respect to valuation of the portfolio securities of certain funds managed by such subsidiaries. In addition, the Company and certain of its subsidiaries, as well as certain current and former officers, employees, and directors have been named in multiple lawsuits alleging violations of various securities laws and pendent state law claims relating to the disclosure of directed brokerage payments and/or payment of allegedly excessive advisory, commission, and distribution fees. These lawsuits are styled as class actions and derivative actions brought on behalf of certain funds. The Company's management strongly believes that the claims made in each of these lawsuits are without merit and intends to vigorously defend against them. The Company cannot predict with certainty the eventual outcome of the foregoing governmental investigations or class actions or other lawsuits. If the Company finds that it bears responsibility for any unlawful or inappropriate conduct that caused losses to the Fund, it is committed to making the Fund or its shareholders whole, as appropriate. Annual Report | 25 TEMPLETON CAPITAL ACCUMULATOR FUND REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM TO THE BOARD OF TRUSTEES AND SHAREHOLDERS OF TEMPLETON CAPITAL ACCUMULATOR FUND In our opinion, the accompanying statement of assets and liabilities, including the statement of investments, and the related statements of operations and of changes in net assets and the financial highlights present fairly, in all material respects, the financial position of the Templeton Capital Accumulator Fund (the "Fund") at August 31, 2004, the results of its operations for the year then ended, the changes in its net assets for each of the two years in the period then ended and the financial highlights for each of the five years in the period then ended, in conformity with accounting principles generally accepted in the United States of America. These financial statements and financial highlights (hereafter referred to as "financial statements") are the responsibility of the Fund's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits, which included confirmation of securities at August 31, 2004 by correspondence with the custodian and brokers, provide a reasonable basis for our opinion. PricewaterhouseCoopers LLP San Francisco, California October 13, 2004 26 | Annual Report TEMPLETON CAPITAL ACCUMULATOR FUND TAX DESIGNATION (UNAUDITED) Under Section 854(b)(2) of the Internal Revenue Code (Code), the Fund hereby designates up to a maximum of $13,159,851 as qualified dividends for purposes of the maximum rate under Section 1(h)(11) of the Code for the fiscal year ended August 31, 2004. In January 2005, shareholders will receive Form 1099-DIV which will include their share of qualified dividends distributed during the calendar year 2004. Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their individual income tax returns. Under Section 854(b)(2) of the Code, the Fund hereby designates 28.07% of the ordinary income dividends as income qualifying for the dividends received deduction for the fiscal year ended August 31, 2004. At August 31, 2004, more than 50% of the Fund's total assets were invested in securities of foreign issuers. In most instances, foreign taxes were withheld from dividends paid to the Fund on these investments. As shown in the table below, the Fund hereby designates to shareholders the foreign source income and foreign taxes paid, pursuant to Section 853 of the Code. This designation will allow shareholders of record on October 21, 2004, to treat their proportionate share of foreign taxes paid by the Fund as having been paid directly by them. The shareholder shall consider these amounts as foreign taxes paid in the tax year in which they receive the Fund distribution. The following table provides a detailed analysis, by country, of foreign tax paid, foreign source income, foreign qualified dividends, and adjusted foreign source income as designated by the Fund to shareholders of record. As a service to individual shareholders filing Form 1116, "Adjusted Foreign Source Income per Share" in column 4 below reports foreign source income with the required adjustments to foreign source qualified dividends. This information is provided to simplify your reporting of foreign source income for line 1 of Form 1116.
- ------------------------------------------------------------------------------------------------------------- CLASS A ADJUSTED FOREIGN TAX FOREIGN FOREIGN FOREIGN PAID SOURCE INCOME QUALIFIED DIVIDENDS SOURCE INCOME COUNTRY PER SHARE PER SHARE PER SHARE PER SHARE - ------------------------------------------------------------------------------------------------------------- Australia .................................. 0.0003 0.0056 0.0056 0.0024 Bermuda .................................... 0.0000 0.0020 0.0017 0.0010 Brazil ..................................... 0.0003 0.0009 0.0009 0.0004 Canada ..................................... 0.0014 0.0047 0.0047 0.0020 Chile ...................................... 0.0000 0.0001 0.0001 0.0000 Finland .................................... 0.0005 0.0017 0.0009 0.0012 France ..................................... 0.0028 0.0102 0.0100 0.0045 Germany .................................... 0.0031 0.0123 0.0123 0.0053 Hong Kong .................................. 0.0000 0.0022 0.0000 0.0022 India ...................................... 0.0000 0.0004 0.0004 0.0002 Italy ...................................... 0.0013 0.0044 0.0044 0.0019 Japan ...................................... 0.0006 0.0036 0.0036 0.0015 Mexico ..................................... 0.0000 0.0015 0.0015 0.0006 Netherlands ................................ 0.0020 0.0067 0.0067 0.0029 Norway ..................................... 0.0008 0.0027 0.0027 0.0012 Portugal ................................... 0.0004 0.0014 0.0014 0.0006 Singapore .................................. 0.0004 0.0010 0.0000 0.0010 South Korea ................................ 0.0021 0.0065 0.0065 0.0028 Spain ...................................... 0.0015 0.0068 0.0061 0.0033 Sweden ..................................... 0.0039 0.0141 0.0141 0.0060 Switzerland ................................ 0.0008 0.0027 0.0027 0.0012 Taiwan ..................................... 0.0008 0.0020 0.0020 0.0009 United Kingdom ............................. 0.0048 0.0301 0.0300 0.0130 - ------------------------------------------------------------------------------------------------------------- TOTAL ...................................... $0.0278 $0.1236 $0.1183 $0.0561 - -------------------------------------------------------------------------------------------------------------
Annual Report | 27 TEMPLETON CAPITAL ACCUMULATOR FUND TAX DESIGNATION (UNAUDITED) (CONTINUED) Foreign Tax Paid per Share (Column 1) is the amount per share available to you, as a tax credit or deduction (assuming you held your shares in the Fund for a minimum of 16 days during the 30-day period beginning 15 days before the ex-dividend date of the Fund's distribution to which the foreign taxes relate). Foreign Source Income per Share (Column 2) is the amount per share of income dividends paid to you that is attributable to foreign securities held by the Fund, plus any foreign taxes withheld on these dividends. The amounts reported include foreign source qualified dividends without adjustment for the lower U.S. tax rates. Generally, this is the foreign source income to be reported by certain trusts and corporate shareholders. Foreign Qualified Dividends per Share (Column 3) is the amount per share of foreign source qualified dividends the Fund paid to you, plus any foreign taxes withheld on these dividends. These amounts represent the portion of the Foreign Source Income reported to you in column 2 that were derived from qualified foreign securities held by the Fund. If you are an individual shareholder who does not meet the qualified dividend holding period requirements, you may find this information helpful to calculate the foreign source income adjustment needed to complete line 1 of Form 1116. Adjusted Foreign Source Income per Share (Column 4) is the adjusted amount per share of foreign source income the Fund paid to you. These amounts reflect the Foreign Source Income reported in column 2 adjusted for the tax rate differential on foreign source qualified dividends that may be required for certain individual shareholders pursuant to Internal Revenue Code 904(b)(2)(B). If you are an individual shareholder who meets the qualified dividend holding period requirements, generally, these Adjusted Foreign Source Income amounts may be reported directly on line 1 of Form 1116 without additional adjustment. In January 2005, shareholders will receive Form 1099-DIV which will include their share of taxes paid and foreign source income distributed during the calendar year 2004. The Foreign Source Income reported on Form 1099-DIV has been reduced to take into account the tax rate differential on foreign source qualified dividend income pursuant to Internal Revenue Code 904(b)(2)(B). Shareholders are advised to check with their tax advisors for information on the treatment of these amounts on their 2004 individual income tax returns. 28 | Annual Report BOARD MEMBERS AND OFFICERS The name, age and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of U.S. registered portfolios overseen in the Franklin Templeton Investments fund complex are shown below. Each board member will serve until that person's successor is elected and qualified. INDEPENDENT BOARD MEMBERS
- --------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - --------------------------------------------------------------------------------------------------------------------------- HARRIS J. ASHTON (72) Trustee Since 1992 140 Director, Bar-S Foods (meat 500 East Broward Blvd. packing company). Suite 2100 Fort Lauderdale, FL 33394-3091 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various companies; and FORMERLY, Director, RBC Holdings, Inc. (bank holding company) (until 2002); and President, Chief Executive Officer and Chairman of the Board, General Host Corporation (nursery and craft centers) (until 1998). - -------------------------------------------------------------------------------------------------------------------------- FRANK J. CROTHERS (60) Trustee Since 2000 21 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Island Corporate Holdings Ltd. (Vice Chairman 1996-2003); Vice Chairman, Caribbean Utilities Co. Ltd.; Director and President, Provo Power Company Ltd.; Director, Caribbean Electric Utility Services Corporation (Chairman until 2002); director of various other business and nonprofit organizations; and FORMERLY, Chairman, Atlantic Equipment & Power Ltd. (1977-2003). - -------------------------------------------------------------------------------------------------------------------------- S. JOSEPH FORTUNATO (72) Trustee Since 1992 141 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Attorney; and FORMERLY, member of the law firm of Pitney, Hardin, Kipp & Szuch. - -------------------------------------------------------------------------------------------------------------------------- EDITH E. HOLIDAY (52) Trustee Since 2000 96 Director, Amerada Hess 500 East Broward Blvd. Corporation (exploration and Suite 2100 refining of oil and gas); H.J. Fort Lauderdale, FL 33394-3091 Heinz Company (processed foods and allied products); RTI International Metals, Inc. (manufacture and distribution of titanium); and Canadian National Railway (railroad). - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director or Trustee of various companies and trusts; and FORMERLY, Assistant to the President of the United States and Secretary of the Cabinet (1990-1993); General Counsel to the United States Treasury Department (1989-1990); and Counselor to the Secretary and Assistant Secretary for Public Affairs and Public Liaison-United States Treasury Department (1988-1989). - --------------------------------------------------------------------------------------------------------------------------
Annual Report | 29
- --------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - --------------------------------------------------------------------------------------------------------------------------- GORDON S. MACKLIN (76) Trustee Since 1993 140 Director, White Mountains 500 East Broward Blvd. Insurance Group, Ltd. (holding Suite 2100 company); Martek Biosciences Fort Lauderdale, FL 33394-3091 Corporation; MedImmune, Inc. (biotechnology); and Overstock.com (Internet services); and FORMERLY, Director, MCI Communication Corporation (subsequently known as MCI WorldCom, Inc. and WorldCom, Inc.) (communications services) (1988-2002) and Spacehab, Inc. (aerospace services) (1994-2003). - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Deputy Chairman, White Mountains Insurance Group, Ltd. (holding company); and FORMERLY, Chairman, White River Corporation (financial services) (1993-1998) and Hambrecht & Quist Group (investment banking) (1987-1992); and President, National Association of Securities Dealers, Inc. (1970-1987). - -------------------------------------------------------------------------------------------------------------------------- FRED R. MILLSAPS (75) Trustee Since 1990 28 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Director of various business and nonprofit organizations; manager of personal investments (1978-present); and FORMERLY, Chairman and Chief Executive Officer, Landmark Banking Corporation (1969-1978); Financial Vice President, Florida Power and Light (1965-1969); and Vice President, Federal Reserve Bank of Atlanta (1958-1965). - -------------------------------------------------------------------------------------------------------------------------- FRANK A. OLSON (72) Trustee Since 2003 21 Director, Becton, Dickinson 500 East Broward Blvd. and Co. (medical technology); Suite 2100 White Mountains Insurance Fort Lauderdale, FL 33394-3091 Group Ltd. (holding company); and Amerada Hess Corporation (exploration and refining of oil and gas). - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, The Hertz Corporation (car rental) (since 1980) (Chief Executive Officer 1977-1999); and FORMERLY, Chairman of the Board, President and Chief Executive Officer, UAL Corporation (airlines). - -------------------------------------------------------------------------------------------------------------------------- CONSTANTINE D. TSERETOPOULOS (50) Trustee Since 2000 21 None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Physician, Lyford Cay Hospital (1987-present); director of various nonprofit organizations; and FORMERLY, Cardiology Fellow, University of Maryland (1985-1987) and Internal Medicine Resident, Greater Baltimore Medical Center (1982-1985). - --------------------------------------------------------------------------------------------------------------------------
30 | Annual Report INTERESTED BOARD MEMBERS AND OFFICERS
- --------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - --------------------------------------------------------------------------------------------------------------------------- **NICHOLAS F. BRADY (74) Trustee Since 1993 21 Director, Amerada Hess 500 East Broward Blvd. Corporation (exploration and Suite 2100 refining of oil and gas); and Fort Lauderdale, FL 33394-3091 C2, Inc. (operating and investment business); and FORMERLY, Director, H.J. Heinz Company (processed foods and allied products) (1987-1988;1993-2003). - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman, Darby Overseas Investments, Ltd., Darby Emerging Markets Investments LDC and Darby Technology Ventures Group, LLC (investment firms) (1994-present); Director, Templeton Capital Advisors Ltd. and Franklin Templeton Investment Fund; and FORMERLY, Chairman, Templeton Emerging Markets Investment Trust PLC (until 2003), Secretary of the United States Department of the Treasury (1988-1993); Chairman of the Board, Dillon, Read & Co., Inc. (investment banking) (until 1988); and U.S. Senator, New Jersey (April 1982-December 1982). - -------------------------------------------------------------------------------------------------------------------------- **CHARLES B. JOHNSON (71) Trustee, Vice President 140 None One Franklin Parkway Chairman of the since 1992 and San Mateo, CA 94403-1906 Board and Chairman of the Vice President Board and Trustee since 1995 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Chairman of the Board, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President, Franklin Templeton Distributors, Inc.; Director, Fiduciary Trust Company International; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 46 of the investment companies in Franklin Templeton Investments. - -------------------------------------------------------------------------------------------------------------------------- HARMON E. BURNS (59) Vice President Since 1996 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Executive Vice President, Franklin Advisers, Inc.; Director, Franklin Investment Advisory Services, Inc.; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - -------------------------------------------------------------------------------------------------------------------------- JAMES M. DAVIS (52) Chief Since July 2004 Not Applicable None One Franklin Parkway Compliance San Mateo, CA 94403-1906 Officer - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 51 of the investment companies in Franklin Templeton Investments; Director, Global Compliance, Franklin Resources, Inc.; and FORMERLY, Director of Compliance, Franklin Resources, Inc. (1994-2001). - --------------------------------------------------------------------------------------------------------------------------
Annual Report | 31
- --------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - --------------------------------------------------------------------------------------------------------------------------- JEFFREY A. EVERETT (40) Vice President Since 2001 Not Applicable None PO Box N-7759 Lyford Cay, Nassau, Bahamas - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Director, Templeton Global Advisors Limited; officer of 15 of the investment companies in Franklin Templeton Investments; and FORMERLY, Investment Officer, First Pennsylvania Investment Research (until 1989). - -------------------------------------------------------------------------------------------------------------------------- MARTIN L. FLANAGAN (44) Vice President Since 1991 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Co-President and Chief Executive Officer, Franklin Resources, Inc.; Senior Vice President and Chief Financial Officer, Franklin Mutual Advisers, LLC; Executive Vice President, Chief Financial Officer and Director, Templeton Worldwide, Inc.; Executive Vice President and Chief Operating Officer, Templeton Investment Counsel, LLC; President and Director, Franklin Advisers, Inc.; Executive Vice President, Franklin Investment Advisory Services, Inc. and Franklin Templeton Investor Services, LLC; Chief Financial Officer, Franklin Advisory Services, LLC; Chairman, Franklin Templeton Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - -------------------------------------------------------------------------------------------------------------------------- JIMMY D. GAMBILL (57) Senior Vice Since 2002 Not Applicable None 500 East Broward Blvd. President and Suite 2100 Chief Executive Fort Lauderdale, FL 33394-3091 Officer - Finance and Administration - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President, Franklin Templeton Services, LLC; Senior Vice President, Templeton Worldwide, Inc.; and officer of 51 of the investment companies in Franklin Templeton Investments. - -------------------------------------------------------------------------------------------------------------------------- DAVID P. GOSS (57) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Associate General Counsel, Franklin Resources, Inc.; officer and director of one of the subsidiaries of Franklin Resources, Inc.; officer of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, President, Chief Executive Officer and Director, Property Resources Equity Trust (until 1999) and Franklin Select Realty Trust (until 2000). - --------------------------------------------------------------------------------------------------------------------------
32 | Annual Report
- --------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - --------------------------------------------------------------------------------------------------------------------------- BARBARA J. GREEN (56) Vice President Vice President Not Applicable None One Franklin Parkway and Secretary since 2000 San Mateo, CA 94403-1906 and Secretary since 1996 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Deputy General Counsel and Secretary, Franklin Resources, Inc.; Secretary and Senior Vice President, Templeton Worldwide, Inc.; Secretary, Franklin Advisers, Inc., Franklin Advisory Services, LLC, Franklin Investment Advisory Services, Inc., Franklin Mutual Advisers, LLC, Franklin Templeton Alternative Strategies, Inc., Franklin Templeton Investor Services, LLC, Franklin Templeton Services, LLC, Franklin Templeton Distributors, Inc., Templeton Investment Counsel, LLC, and Templeton/Franklin Investment Services, Inc.; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Deputy Director, Division of Investment Management, Executive Assistant and Senior Advisor to the Chairman, Counselor to the Chairman, Special Counsel and Attorney Fellow, U.S. Securities and Exchange Commission (1986-1995); Attorney, Rogers & Wells (until 1986); and Judicial Clerk, U.S. District Court (District of Massachusetts) (until 1979). - -------------------------------------------------------------------------------------------------------------------------- RUPERT H. JOHNSON, JR. (64) Vice President Since 1996 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Member - Office of the Chairman and Director, Franklin Resources, Inc.; Vice President and Director, Franklin Templeton Distributors, Inc.; Director, Franklin Advisers, Inc. and Franklin Investment Advisory Services, Inc.; Senior Vice President, Franklin Advisory Services, LLC; and officer and/or director or trustee, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 49 of the investment companies in Franklin Templeton Investments. - -------------------------------------------------------------------------------------------------------------------------- JOHN R. KAY (64) Vice President Since 1994 Not Applicable None 500 East Broward Blvd. Suite 2100 Fort Lauderdale, FL 33394-3091 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice President, Templeton Worldwide, Inc.; Assistant Vice President, Franklin Templeton Distributors, Inc.; Senior Vice President, Franklin Templeton Services, LLC; and officer of some of the other subsidiaries of Franklin Resources, Inc. and of 35 of the investment companies in Franklin Templeton Investments; and FORMERLY, Vice President and Controller, Keystone Group, Inc. - -------------------------------------------------------------------------------------------------------------------------- DIOMEDES LOO-TAM (65) Treasurer Since March Not Applicable None One Franklin Parkway 2004 San Mateo, CA 94403-1906 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 15 of the investment companies in Franklin Templeton Investments; Consultant, MyVest Corporation (software development company and investment advisory services); and FORMERLY, Director and member of Audit and Valuation Committees, Runkel Funds, Inc. (2002-2003); Treasurer/Controller of most of the investment companies in Franklin Templeton Investments (1985-2000); and Senior Vice President, Franklin Templeton Services, LLC (1997-2000). - --------------------------------------------------------------------------------------------------------------------------
Annual Report | 33
- --------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - --------------------------------------------------------------------------------------------------------------------------- MICHAEL O. MAGDOL (67) Vice President Since 2002 Not Applicable Director, FTI Banque, Arch 600 Fifth Avenue - AML Chemicals, Inc. and Lingnan Rockefeller Center Compliance Foundation New York, NY 10020-2302 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Vice Chairman, Chief Banking Officer and Director, Fiduciary Trust Company International; and officer and/or director, as the case may be, of some of the other subsidiaries of Franklin Resources, Inc. and of 48 of the investment companies in Franklin Templeton Investments. - -------------------------------------------------------------------------------------------------------------------------- GARY P. MOTYL (52) President President Not Applicable None 500 East Broward Blvd. and Chief since 1994 Suite 2100 Executive and Chief Fort Lauderdale, FL 33394-3091 Officer - Executive Investment Officer - Management Investment Management since 2002 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: President and Portfolio Manager, Templeton Investment Counsel, LLC; officer and/or director of other subsidiaries of Franklin Resources, Inc.; and FORMERLY, Research Analyst and Portfolio Manager, Landmark First National Bank (1979-1981); and Security Analyst, Standard & Poor's Corporation (1974-1979). - -------------------------------------------------------------------------------------------------------------------------- MURRAY L. SIMPSON (67) Vice President Since 2000 Not Applicable None One Franklin Parkway San Mateo, CA 94403-1906 - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Executive Vice President and General Counsel, Franklin Resources, Inc.; officer and/or director, as the case may be, of some of the subsidiaries of Franklin Resources, Inc. and of 51 of the investment companies in Franklin Templeton Investments; and FORMERLY, Chief Executive Officer and Managing Director, Templeton Franklin Investment Services (Asia) Limited (until 2000); and Director, Templeton Asset Management Ltd. (until 1999). - --------------------------------------------------------------------------------------------------------------------------
34 | Annual Report
- --------------------------------------------------------------------------------------------------------------------------- NUMBER OF PORTFOLIOS IN LENGTH OF FUND COMPLEX OVERSEEN NAME, AGE AND ADDRESS POSITION TIME SERVED BY BOARD MEMBER* OTHER DIRECTORSHIPS HELD - --------------------------------------------------------------------------------------------------------------------------- GALEN G. VETTER (52) Chief Financial Since May 2004 Not Applicable None 500 East Broward Blvd. Officer and Suite 2100 Chief Fort Lauderdale, FL 33394-3091 Accounting Officer - -------------------------------------------------------------------------------------------------------------------------- PRINCIPAL OCCUPATION DURING PAST 5 YEARS: Officer of 51 of the investment companies in Franklin Templeton Investments; Senior Vice President, Franklin Templeton Services, LLC; and FORMERLY, Managing Director, RSM McGladrey, Inc.; and Partner, McGladrey & Pullen, LLP. - --------------------------------------------------------------------------------------------------------------------------
* We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment adviser or affiliated investment advisers. ** Charles B. Johnson is considered to be an interested person of the Fund under the federal securities laws due to his position as an officer and director and major shareholder of Franklin Resources, Inc. (Resources), which is the parent company of the Fund's adviser and distributor. Nicholas F. Brady is considered to be an interested person of the Fund under the federal securities laws due to his ownership interest in a subsidiary of Resources, as well as his director positions with such company and certain other related companies. Note: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers. THE SARBANES-OXLEY ACT OF 2002 AND RULES ADOPTED BY THE SECURITIES AND EXCHANGE COMMISSION REQUIRE THE FUND TO DISCLOSE WHETHER THE FUND'S AUDIT COMMITTEE INCLUDES AT LEAST ONE MEMBER WHO IS AN AUDIT COMMITTEE FINANCIAL EXPERT WITHIN THE MEANING OF SUCH ACT AND RULES. THE FUND'S BOARD OF TRUSTEES HAS DETERMINED THAT THERE IS AT LEAST ONE SUCH FINANCIAL EXPERT ON THE AUDIT COMMITTEE AND HAS DESIGNATED EACH OF FRED R. MILLSAPS AND FRANK A. OLSON AS AN AUDIT COMMITTEE FINANCIAL EXPERT. THE BOARD BELIEVES THAT MESSRS. MILLSAPS AND OLSON QUALIFY AS SUCH AN EXPERT IN VIEW OF THEIR EXTENSIVE BUSINESS BACKGROUND AND EXPERIENCE. MR. MILLSAPS WHO IS CURRENTLY A DIRECTOR OF VARIOUS BUSINESS AND NONPROFIT ORGANIZATIONS, HAS SERVED AS A MEMBER AND CHAIRMAN OF THE FUND AUDIT COMMITTEE SINCE 1991 AND WAS FORMERLY CHAIRMAN AND CHIEF EXECUTIVE OFFICER OF LANDMARK BANKING CORPORATION AND FINANCIAL VICE PRESIDENT OF FLORIDA POWER AND LIGHT. MR. OLSON WHO CURRENTLY SERVES AS CHAIRMAN OF THE BOARD OF THE HERTZ CORPORATION AND WAS ITS CHIEF EXECUTIVE OFFICER FROM 1977 TO 1999; IS A DIRECTOR AND AUDIT COMMITTEE MEMBER OF AMERADA HESS CORPORATION AND WHITE MOUNTAINS INSURANCE GROUP, LTD. AND A FORMER PRESIDENT AND CHIEF EXECUTIVE OFFICER OF UNITED AIRLINES. AS A RESULT OF SUCH BACKGROUND AND EXPERIENCE, THE BOARD OF TRUSTEES BELIEVES THAT MR. MILLSAPS AND MR. OLSON HAVE EACH ACQUIRED AN UNDERSTANDING OF GENERALLY ACCEPTED ACCOUNTING PRINCIPLES AND FINANCIAL STATEMENTS, THE GENERAL APPLICATION OF SUCH PRINCIPLES IN CONNECTION WITH THE ACCOUNTING ESTIMATES, ACCRUALS AND RESERVES, AND ANALYZING AND EVALUATING FINANCIAL STATEMENTS THAT PRESENT A BREADTH AND LEVEL OF COMPLEXITY OF ACCOUNTING ISSUES GENERALLY COMPARABLE TO THOSE OF THE FUND, AS WELL AS AN UNDERSTANDING OF INTERNAL CONTROLS AND PROCEDURES FOR FINANCIAL REPORTING AND AN UNDERSTANDING OF AUDIT COMMITTEE FUNCTIONS. MESSRS. MILLSAPS AND OLSON ARE INDEPENDENT TRUSTEES AS THAT TERM IS DEFINED UNDER THE APPLICABLE SECURITIES AND EXCHANGE COMMISSION RULES AND RELEASES. THE STATEMENT OF ADDITIONAL INFORMATION (SAI) INCLUDES ADDITIONAL INFORMATION ABOUT THE BOARD MEMBERS AND IS AVAILABLE, WITHOUT CHARGE, UPON REQUEST. SHAREHOLDERS MAY CALL 1-800/DIAL BEN (1-800/342-5236) TO REQUEST THE SAI. Annual Report | 35 TEMPLETON CAPITAL ACCUMULATOR FUND SHAREHOLDER INFORMATION PROXY VOTING POLICIES AND PROCEDURES The Fund has established Proxy Voting Policies and Procedures ("Policies") that the Fund uses to determine how to vote proxies relating to portfolio securities. Shareholders may view the Fund's complete Policies online at franklintempleton.com. Alternatively, shareholders may request copies of the Policies free of charge by calling the Proxy Group collect at 1-954/847-2268 or by sending a written request to: Franklin Templeton Companies, LLC, 500 East Broward Boulevard, Suite 1500, Fort Lauderdale, FL 33394, Attention: Proxy Group. Copies of the Fund's proxy voting records are also made available online at franklintempleton.com and posted on the Securities and Exchange Commission's website at sec.gov and reflect the 12-month period beginning July 1, 2003, and ending June 30, 2004. QUARTERLY STATEMENT OF INVESTMENTS The Fund files a complete statement of investments with the Securities and Exchange Commission for the first and third quarters for each fiscal year on Form N-Q. Shareholders may view the filed Form N-Q by visiting the Commission's website at sec.gov. The filed form may also be viewed and copied at the Commission's Public Reference Room in Washington, DC. Information regarding the operations of the Public Reference Room may be obtained by calling 1-800/SEC-0330. 36 | Annual Report LITERATURE REQUEST TO RECEIVE A BROCHURE AND PROSPECTUS, PLEASE CALL US AT 1-800/DIAL BEN(R) (1-800/342-5236) OR VISIT FRANKLINTEMPLETON.COM. INVESTORS SHOULD CAREFULLY CONSIDER A FUND'S INVESTMENT GOALS, RISKS, CHARGES AND EXPENSES BEFORE INVESTING. THE PROSPECTUS CONTAINS THIS AND OTHER INFORMATION. PLEASE CAREFULLY READ THE PROSPECTUS BEFORE INVESTING. TO ENSURE THE HIGHEST QUALITY OF SERVICE, WE MAY MONITOR, RECORD AND ACCESS TELEPHONE CALLS TO OR FROM OUR SERVICE DEPARTMENTS. THESE CALLS CAN BE IDENTIFIED BY THE PRESENCE OF A REGULAR BEEPING TONE. FRANKLIN TEMPLETON INVESTMENTS INTERNATIONAL Mutual European Fund Templeton China World Fund Templeton Developing Markets Trust Templeton Foreign Fund Templeton Foreign Smaller Companies Fund Templeton International (Ex EM) Fund GLOBAL Mutual Discovery Fund Templeton Capital Accumulator Fund Templeton Global Long-Short Fund Templeton Global Opportunities Trust Templeton Global Smaller Companies Fund Templeton Growth Fund Templeton World Fund GROWTH Franklin Aggressive Growth Fund Franklin Capital Growth Fund Franklin Flex Cap Growth Fund Franklin Small Cap Growth Fund II 1 Franklin Small-Mid Cap Growth Fund VALUE Franklin Balance Sheet Investment Fund 2 Franklin Equity Income Fund Franklin Large Cap Value Fund Franklin MicroCap Value Fund 2 Franklin Small Cap Value Fund Mutual Beacon Fund Mutual Qualified Fund Mutual Recovery Fund 3 Mutual Shares Fund BLEND Franklin Blue Chip Fund Franklin Convertible Securities Fund Franklin Growth Fund Franklin Rising Dividends Fund Franklin U.S. Long-Short Fund 4 SECTOR Franklin Biotechnology Discovery Fund Franklin DynaTech Fund Franklin Global Communications Fund Franklin Global Health Care Fund Franklin Gold and Precious Metals Fund Franklin Natural Resources Fund Franklin Real Estate Securities Fund Franklin Technology Fund Franklin Utilities Fund Mutual Financial Services Fund ASSET ALLOCATION Franklin Templeton Corefolio Allocation Fund Franklin Templeton Founding Funds Allocation Fund Franklin Templeton Perspectives Allocation Fund TARGET FUNDS Franklin Templeton Conservative Target Fund Franklin Templeton Growth Target Fund Franklin Templeton Moderate Target Fund INCOME Franklin Adjustable U.S. Government Securities Fund 5 Franklin's AGE High Income Fund Franklin Federal Money Fund 5, 6 Franklin Floating Rate Daily Access Fund Franklin Floating Rate Trust 3 Franklin Income Fund Franklin Limited Maturity U.S. Government Securities Fund 5, 7 Franklin Money Fund 5, 6 Franklin Strategic Income Fund Franklin Strategic Mortgage Portfolio Franklin Templeton Hard Currency Fund Franklin Total Return Fund Franklin U.S. Government Securities Fund 5 Templeton Global Bond Fund TAX-FREE INCOME 8 NATIONAL FUNDS Double Tax-Free Income Fund Federal Tax-Free Income Fund High Yield Tax-Free Income Fund Insured Tax-Free Income Fund 9 Tax-Exempt Money Fund 5, 6 LIMITED-TERM FUNDS California Limited-Term Tax-Free Income Fund Federal Limited-Term Tax-Free Income Fund New York Limited-Term Tax-Free Income Fund INTERMEDIATE-TERM FUNDS California Intermediate-Term Tax-Free Income Fund Federal Intermediate-Term Tax-Free Income Fund New York Intermediate-Term Tax-Free Income Fund STATE-SPECIFIC Alabama Arizona California 10 Colorado Connecticut Florida 10 Georgia Kentucky Louisiana Maryland Massachusetts 9 Michigan 9 Minnesota 9 Missouri New Jersey New York 10 North Carolina Ohio 9 Oregon Pennsylvania Tennessee Virginia INSURANCE FUNDS Franklin Templeton Variable Insurance Products Trust 11 1. The fund is closed to new investors. Existing shareholders can continue adding to their accounts. 2. The fund is only open to existing shareholders and select retirement plans. 3. The fund is a continuously offered, closed-end fund. Shares may be purchased daily; there is no daily redemption. However, each quarter, pending board approval, the fund will authorize the repurchase of 5%-25% of the outstanding number of shares. Investors may tender all or a portion of their shares during the tender period. 4. Upon reaching approximately $350 million in assets, the fund intends to close to all investors. 5. An investment in the fund is neither insured nor guaranteed by the U.S. government or by any other entity or institution. 6. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. 7. Formerly Franklin Short-Intermediate U.S. Government Securities Fund. Effective 9/1/04, the fund's name changed; its investment goal and strategy remained the same. 8. For investors subject to the alternative minimum tax, a small portion of fund dividends may be taxable. Distributions of capital gains are generally taxable. 9. Portfolio of insured municipal securities. 10. These funds are available in two or more variations, including long-term portfolios, portfolios of insured securities, a high-yield portfolio (CA) and limited-term, intermediate-term and money market portfolios (CA and NY). 11. The funds of the Franklin Templeton Variable Insurance Products Trust are generally available only through insurance company variable contracts. 09/04 Not part of the annual report [LOGO OMITTED] FRANKLIN(R) TEMPLETON(R) INVESTMENTS One Franklin Parkway San Mateo, CA 94403-1906 ANNUAL REPORT AND SHAREHOLDER LETTER TEMPLETON CAPITAL ACCUMULATOR FUND INVESTMENT MANAGER Templeton Investment Counsel, LLC PRINCIPAL UNDERWRITER Franklin Templeton Distributors, Inc. 1-800/DIAL BEN(R) franklintempleton.com SHAREHOLDER SERVICES 1-800/632-2301 Authorized for distribution only when accompanied or preceded by a prospectus. Investors should carefully consider a fund's investment goals, risks, charges and expenses before investing. Like any investment in securities, the value of the Fund's portfolio will be subject to the risk of loss from market, currency, economic, political and other factors. The Fund and its investors are not protected from such losses by the Investment Manager. Therefore, investors who cannot accept this risk should not invest in shares of the Fund. The prospectus contains this and other information; please read it carefully before investing. To ensure the highest quality of service, telephone calls to or from our service departments may be monitored, recorded and accessed. These calls can be identified by the presence of a regular beeping tone. TCAP A2004 10/04 ITEM 2. CODE OF ETHICS. (a) The Registrant has adopted a code of ethics that applies to its principal executive officers and principal financial and accounting officer. (c) N/A (d) N/A (f) Pursuant to Item 11(a), the registrant is attaching as an exhibit a copy of its code of ethics that applies to its principal executive officers and principal financial and accounting officer. ITEM 3. AUDIT COMMITTEE FINANCIAL EXPERT. (a)(1) The Registrant has an audit committee financial expert serving on its audit committee. (2) The audit committee financial experts are Fred R. Millsaps and Frank A. Olson, they are "independent" as defined under the relevant Securities and Exchange Commission Rules and Releases. ITEM 4. PRINCIPAL ACCOUNTANT FEES AND SERVICES. (a) Audit Fees The aggregate fees paid to the principal accountant for professional services rendered by the principal accountant for the audit of the registrant's annual financial statements or for services that are normally provided by the principal accountant in connection with statutory and regulatory filings or engagements were $8,980 for the fiscal year ended August 31, 2004 and $29,317 for the fiscal year ended August 31, 2003. (b) Audit-Related Fees There were no fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant that are reasonably related to the performance of the audit of the registrant's financial statements and are not reported under paragraph (a) of Item 4. The aggregate fees paid to the principal accountant for assurance and related services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant that are reasonably related to the performance of the audit of the their financial statements were $45,000 for the fiscal year ended August 31, 2004 and $3,614 for the fiscal year ended August 31, 2003. The services for which these fees were paid included attestation services. (c) Tax Fees There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant for tax compliance, tax advice and tax planning. There were no fees paid to the principal accountant for professional services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant for tax compliance, tax advice and tax planning. (d) All Other Fees The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant not reported in paragraphs (a)-(c) of Item 4 were $233 for the fiscal year ended August 31, 2004 and $0 for the fiscal year ended August 31, 2003. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process. The aggregate fees paid to the principal accountant for products and services rendered by the principal accountant to the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant not reported in paragraphs (a)-(c) of Item 4 were $99,767 for the fiscal year ended August 31, 2004 and $12,994 for the fiscal year ended August 31, 2003. The services for which these fees were paid included review of materials provided to the fund Board in connection with the investment management contract renewal process, subscription fees and a review of an ICI transfer agent survey. (e) (1) The registrant's audit committee is directly responsible for approving the services to be provided by the auditors, including: (i) pre-approval of all audit and audit related services; (ii) pre-approval of all non-audit related services to be provided to the Fund by the auditors; (iii) pre-approval of all non-audit related services to be provided to the registrant by the auditors to the registrant's investment adviser or to any entity that controls, is controlled by or is under common control with the registrant's investment adviser and that provides ongoing services to the registrant where the non-audit services relate directly to the operations or financial reporting of the registrant; and (iv) establishment by the audit committee, if deemed necessary or appropriate, as an alternative to committee pre-approval of services to be provided by the auditors, as required by paragraphs (ii) and (iii) above, of policies and procedures to permit such services to be pre-approved by other means, such as through establishment of guidelines or by action of a designated member or members of the committee; provided the policies and procedures are detailed as to the particular service and the committee is informed of each service and such policies and procedures do not include delegation of audit committee responsibilities, as contemplated under the Securities Exchange Act of 1934, to management; subject, in the case of (ii) through (iv), to any waivers, exceptions or exemptions that may be available under applicable law or rules. (e) (2) None of the services provided to the registrant described in paragraphs (b)-(d) of Item 4 were pre-approved by the audit committee pursuant to paragraph (c)(7)(i)(C) of Rule 2-01 of regulation S-X. (f) No disclosures are required by this Item 4(f). (g) The aggregate non-audit fees paid to the principal accountant for services rendered by the principal accountant to the registrant and the registrant's investment adviser and any entity controlling, controlled by or under common control with the investment adviser that provides ongoing services to the registrant were $145,000 for the fiscal year ended August 31, 2004 and $16,608 for the fiscal year ended August 31, 2003. (h) No disclosures are required by this Item 4(h). ITEM 5. AUDIT COMMITTEE OF LISTED REGISTRANTS. N/A ITEM 6. SCHEDULE OF INVESTMENTS. N/A ITEM 7. DISCLOSURE OF PROXY VOTING POLICIES AND PROCEDURES FOR CLOSED-END MANAGEMENT INVESTMENT COMPANIES. N/A ITEM 8. PURCHASES OF EQUITY SECURITIES BY CLOSED-END MANAGEMENT INVESTMENT COMPANIES AND AFFILIATED PURCHASES. N/A ITEM 9. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS. There have been no changes to the procedures by which shareholders may recommend nominees to the Registrant's Board of Trustees that would require disclosure herein. ITEM 10. CONTROLS AND PROCEDURES. (a) EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. The Registrant maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Registrant's filings under the Securities Exchange Act of 1934 and the Investment Company Act of 1940 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the Securities and Exchange Commission. Such information is accumulated and communicated to the Registrant's management, including its principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure. The Registrant's management, including the principal executive officer and the principal financial officer, recognizes that any set of controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Within 90 days prior to the filing date of this Shareholder Report on Form N-CSR, the Registrant had carried out an evaluation, under the supervision and with the participation of the Registrant's management, including the Registrant's principal executive officer and the Registrant's principal financial officer, of the effectiveness of the design and operation of the Registrant's disclosure controls and procedures. Based on such evaluation, the Registrant's principal executive officer and principal financial officer concluded that the Registrant's disclosure controls and procedures are effective. (b) CHANGES IN INTERNAL CONTROLS. There have been no significant changes in the Registrant's internal controls or in other factors that could significantly affect the internal controls subsequent to the date of their evaluation in connection with the preparation of this Shareholder Report on Form N-CSR. ITEM 11. EXHIBITS (a) Code of Ethics (b)(1) Certifications pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer (b)(2) Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of Jimmy D. Gambill, Chief Executive Officer - Finance and Administration, and Galen G. Vetter, Chief Financial Officer SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. TEMPLETON CAPITAL ACCUMULATOR FUND By /s/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration Date October 29, 2004 Pursuant to the requirements of the Securities Exchange Act of 1934 and the Investment Company Act of 1940, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. By /s/JIMMY D. GAMBILL Chief Executive Officer - Finance and Administration Date October 29, 2004 By /s/GALEN G. VETTER Chief Financial Officer Date October 29, 2004 EX-99.CODE ETH 2 newcoethics0704.txt CODE OF ETHICS - PRINCIPAL EXECUTIVE & SR. FINANCIAL OFFICERS EXHIBIT (A) FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS I. COVERED OFFICERS AND PURPOSE OF THE CODE This code of ethics (the "Code")/1 is for the investment companies within the complex registered with the United States Securities & Exchange Commission ("SEC") (collectively, "FT Funds") applies to each FT Fund's Principal Executive Officers, Principal Financial Officer and Principal Accounting Officer (the "Covered Officers" each of whom are set forth in Exhibit A) for the purpose of promoting: o Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships; o Full, fair, accurate, timely and understandable disclosure in reports and documents that a registrant files with, or submits to, the SEC and in other public communications made by or on behalf of the FT Funds; o Compliance with applicable laws and governmental rules and regulations; o The prompt internal reporting of violations of the Code to an appropriate person or persons identified in the Code; and o Accountability for adherence to the Code. Each Covered Officer should adhere to a high standard of business ethics and should be sensitive to situations that may give rise to actual as well as apparent conflicts of interest. II. COVERED OFFICERS SHOULD HANDLE ETHICALLY ACTUAL AND APPARENT CONFLICTS OF INTEREST OVERVIEW. A "conflict of interest" occurs when a Covered Officer's private interest interferes with the interests of, or his service to, the FT Funds. For example, a conflict of interest would arise if a Covered Officer, or a member of his family, receives improper personal benefits as a result of his position with the FT Funds. Certain conflicts of interest arise out of the relationships between Covered Officers and the FT Funds and already are subject to conflict of interest provisions in the Investment Company Act of 1940 ("Investment Company Act") and the Investment Advisers Act of 1940 ("Investment Advisers Act"). For example, Covered Officers may not individually engage in certain transactions (such as the purchase or sale of securities or other property) with the FT Funds because of their status as "affiliated persons" of the FT Funds. The FT Funds' and the investment advisers' compliance programs and procedures are designed to prevent, or identify and correct, violations of these provisions. This Code does not, and is not intended to, repeat or replace these programs and procedures, and such conflicts fall outside of the parameters of this Code. Although typically not presenting an opportunity for improper personal benefit, conflicts arise from, or as a result of, the contractual relationship between the FT Funds, the investment advisers and the fund administrator of which the Covered Officers are also officers or employees. As a result, this Code recognizes that the Covered Officers will, in the normal course of their duties (whether formally for the FT Funds, for the adviser, the administrator, or for all three), be involved in establishing policies and implementing decisions that will have different effects on the adviser, administrator and the FT Funds. The participation of the Covered Officers in such activities is inherent in the contractual relationship between the FT Funds, the adviser, and the administrator and is consistent with the performance by the Covered Officers of their duties as officers of the FT Funds. Thus, if performed in conformity with the provisions of the Investment Company Act and the Investment Advisers Act, such activities will be deemed to have been handled ethically. In addition, it is recognized by the FT Funds' Boards of Directors ("Boards") that the Covered Officers may also be officers or employees of one or more other investment companies covered by this or other codes. Other conflicts of interest are covered by the Code, even if such conflicts of interest are not subject to provisions in the Investment Company Act and the Investment Advisers Act. The following list provides examples of conflicts of interest under the Code, but Covered Officers should keep in mind that these examples are not exhaustive. The overarching principle is that the personal interest of a Covered Officer should not be placed improperly before the interest of the FT Funds. Each Covered Officer must: o Not use his personal influence or personal relationships improperly to influence investment decisions or financial reporting by the FT Funds whereby the Covered Officer would benefit personally to the detriment of the FT Funds; o Not cause the FT Funds to take action, or fail to take action, for the individual personal benefit of the Covered Officer rather than the benefit the FT Funds; o Not retaliate against any other Covered Officer or any employee of the Funds or their affiliated persons for reports of potential violations that are made in good faith; o Report at least annually the following affiliations or other relationships:/2 o all directorships for public companies and all companies that are required to file reports with the SEC; o any direct or indirect business relationship with any independent directors; o any direct or indirect business relationship with any independent public accounting firm; and o any direct or indirect interest in any transaction with any FT Fund that will benefit the officer (not including benefits derived from the advisory, sub-advisory, distribution or service agreements with affiliates of Franklin Resources). There are some conflict of interest situations that should always be approved in writing by FT's General Counsel or Deputy General Counsel, if material. Examples of these include/3: o Service as a director on the board of any public or private Company; o The receipt of any gifts in excess of $100; o The receipt of any entertainment from any Company with which the FT Funds has current or prospective business dealings unless such entertainment is business related, reasonable in cost, appropriate as to time and place, and not so frequent as to raise any question of impropriety. Notwithstanding the foregoing, the Covered Officers must obtain prior approval for any entertainment with a value in excess of $1000. o Any ownership interest in, or any consulting or employment relationship with, any of the FT Fund's service providers, other than an investment adviser, principal underwriter, administrator or any affiliated person thereof; o A direct or indirect financial interest in commissions, transaction charges or spreads paid by the FT Funds for effecting portfolio transactions or for selling or redeeming shares other than an interest arising from the Covered Officer's employment, such as compensation or equity ownership. FT's General Counsel or Deputy General Counsel will provide a report to the FT Funds Audit Committee of any approvals granted at the next regularly scheduled meeting. III. DISCLOSURE AND COMPLIANCE o Each Covered Officer should familiarize himself with the disclosure requirements generally applicable to the FT Funds; o Each Covered Officer should not knowingly misrepresent, or cause others to misrepresent, facts about the FT Funds to others, whether within or outside the FT Funds, including to the FT Funds' directors and auditors, and to governmental regulators and self-regulatory organizations; o Each Covered Officer should, to the extent appropriate within his area of responsibility, consult with other officers and employees of the FT Funds, the adviser and the administrator with the goal of promoting full, fair, accurate, timely and understandable disclosure in the reports and documents the FT Funds file with, or submit to, the SEC and in other public communications made by the FT Funds; and o It is the responsibility of each Covered Officer to promote compliance with the standards and restrictions imposed by applicable laws, rules and regulations. IV. REPORTING AND ACCOUNTABILITY Each Covered Officer must: o Upon adoption of the Code (or thereafter as applicable, upon becoming a Covered Officer), affirm in writing to the Board that he has received, read, and understands the Code (see Exhibit B); o Annually thereafter affirm to the Board that he has complied with the requirements of the Code; and o Notify FT's General Counsel or Deputy General Counsel promptly if he knows of any violation of this Code. Failure to do so is itself is a violation of this Code. FT's General Counsel and Deputy General Counsel are responsible for applying this Code to specific situations in which questions are presented under it and have the authority to interpret this Code in any particular situation./4/ However, the Independent Directors of the respective fund will consider any approvals or waivers/5/ sought by any Chief Executive Officers of the Funds. The FT Funds will follow these procedures in investigating and enforcing this Code: o FT's General Counsel or Deputy General Counsel will take all appropriate action to investigate any potential violations reported to him; o If, after such investigation, FT's General Counsel or Deputy General Counsel believes that no violation has occurred, FT's General Counsel is not required to take any further action; o Any matter that FT's General Counsel or Deputy General Counsel believes is a violation will be reported to the Independent Directors of the appropriate FT Fund; o If the Independent Directors concur that a violation has occurred, it will inform and make a recommendation to the Board of the appropriate Funds, which will consider appropriate action, which may include review of, and appropriate modifications to, applicable policies and procedures; notification to appropriate personnel of the investment adviser or its board; or a recommendation to dismiss the Covered Officer; o The Independent Directors will be responsible for granting waivers, as appropriate; and o Any changes to or waivers of this Code will, to the extent required, are disclosed as provided by SEC rules. V. OTHER POLICIES AND PROCEDURES This Code shall be the sole code of ethics adopted by the FT Funds for purposes of Section 406 of the Sarbanes-Oxley Act and the rules and forms applicable to registered investment companies there under. Insofar as other policies or procedures of the FT Funds, the FT Funds' advisers, principal underwriter, or other service providers govern or purport to govern the behavior or activities of the Covered Officers who are subject to this Code, they are superseded by this Code to the extent that they overlap or conflict with the provisions of this Code. The FT Code of Ethics and Policy Statement On Insider Trading, adopted by the FT Funds, FT investment advisers and FT Fund's principal underwriter pursuant to Rule 17j-l under the Investment Company Act and more detailed policies and procedures set forth in FT's Employee Handbook are separate requirements applying to the Covered Officers and others, and are not part of this Code. VI. AMENDMENTS Any amendments to this Code, other than amendments to Exhibit A, must be approved or ratified by a majority vote of the FT Funds' Board including a majority of independent directors. VII. CONFIDENTIALITY All reports and records prepared or maintained pursuant to this Code will be considered confidential and shall be maintained and protected accordingly. Except as otherwise required by law or this Code, such matters shall not be disclosed to anyone other than the FT Funds' Board and their counsel. VIII. INTERNAL USE The Code is intended solely for the internal use by the FT Funds and does not constitute an admission, by or on behalf of any FT Funds, as to any fact, circumstance, or legal conclusion. - ------------------------------------- 1 Item 2 of Form N-CSR requires a registered management investment company to disclose annually whether, as of the end of the period covered by the report, it has adopted a code of ethics that applies to the registrant's principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, regardless of whether these officers are employed by the registrant or a third party. If the registrant has not adopted such a code of ethics, it must explain why it has not done so. The registrant must also: (1) file with the SEC a copy of the code as an exhibit to its annual report; (2) post the text of the code on its Internet website and disclose, in its most recent report on Form N-CSR, its Internet address and the fact that it has posted the code on its Internet website; or (3) undertake in its most recent report on Form N-CSR to provide to any person without charge, upon request, a copy of the code and explain the manner in which such request may be made. Disclosure is also required of amendments to, or waivers (including implicit waivers) from, a provision of the code in the registrant's annual report on Form N-CSR or on its website. If the registrant intends to satisfy the requirement to disclose amendments and waivers by posting such information on its website, it will be required to disclose its Internet address and this intention. 2 Reporting of these affiliations or other relationships may be made separately by completing the Directors and Officers Questionnaire and returning to FT's General Counsel or Deputy General Counsel. 3 Any activity or relationship that would present a conflict for a Covered Officer would likely also present a conflict for the Covered Officer if a member of the Covered Officer's immediate family engages in such an activity or has such a relationship. The Cover Person should also obtain written approval by FT's General Counsel in such situations. 4 FT's General Counsel and Deputy General Counsel are authorized to consult, as appropriate, with members of the Audit Committee, counsel to the FT Funds and counsel to the Independent Directors, and are encouraged to do so. 5 Item 2 of Form N-CSR defines "waiver" as "the approval by the registrant of a material departure from a provision of the code of ethics" and "implicit waiver," which must also be disclosed, as "the registrant's failure to take action within a reasonable period of time regarding a material departure from a provision of the code of ethics that has been made known to an executive officer" of the registrant. EXHIBIT A Persons Covered by the Franklin Templeton Funds Code of Ethics FRANKLIN GROUP OF FUNDS Edward B. Jamieson, President and Chief Executive Officer - Investment Management Charles B. Johnson, President and Chief Executive Officer - Investment Management Gregory E. Johnson, President and Chief Executive Officer - Investment Management Rupert H. Johnson, Jr. President and Chief Executive Officer - Investment Management William J. Lippman, President and Chief Executive Officer - Investment Management Christopher Molumphy, President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter, Chief Financial Officer and Chief Accounting Officer James M. Davis, Chief Compliance Officer Laura F. Fergerson, Treasurer FRANKLIN MUTUAL SERIES FUNDS David Winters, Chairman of the Board, President, Chief Executive Officer-Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer- Finance and Administration Galen G. Vetter, Chief Financial Officer and Chief Accounting Officer James M. Davis, Chief Comlpliance Officer Michael Morantz, Treasurer TEMPLETON GROUP OF FUNDS Jeffrey A. Everett, President and Chief Executive Officer - Investment Management Martin L. Flanagan, President and Chief Executive Officer - Investment Management Mark Mobius, President and Chief Executive Officer - Investment Management Christopher J. Molumphy, President and Chief Executive Officer - Investment Management Gary P. Motyl, President and Chief Executive Officer - Investment Management Donald F. Reed, President and Chief Executive Officer - Investment Management Jimmy D. Gambill, Senior Vice President and Chief Executive Officer - Finance and Administration Galen G. Vetter, Chief Financial officer and Chief Accounting Officer James M. Davis, Chief Compliance Officer Diomedes Loo-Tam, Treasurer & Chief Financial Officer EXHIBIT B ACKNOWLEDGMENT FORM FRANKLIN TEMPLETON FUNDS CODE OF ETHICS FOR PRINCIPAL EXECUTIVE AND SENIOR FINANCIAL OFFICERS. INSTRUCTIONS: 1. Complete all sections of this form. 2. Print the completed form, sign, and date. 3. Submit completed form to FT's General Counsel within 10 days of becoming a Covered Officer and by January 30th of each subsequent year. INTER-OFFICE MAIL: Murray Simpson, General Counsel, Legal SM-920/2 TELEPHONE: (650) 312-7331 Fax: (650) 312-2221 E-MAIL: Simpson, Murray (internal address); mlsimpson@frk.com (external address) - ---------------------------------------------------------------------------- COVERED OFFICER'S NAME: - ---------------------------------------------------------------------------- TITLE: - ---------------------------------------------------------------------------- DEPARTMENT: - ---------------------------------------------------------------------------- LOCATION: - ---------------------------------------------------------------------------- CERTIFICATION FOR YEAR ENDING: - ---------------------------------------------------------------------------- TO: FT GENERAL COUNSEL, LEGAL DEPARTMENT I hereby acknowledge receipt of a copy of Franklin Templeton Fund's code of ethics for Principal Executive Officers and Senior Financial Officers (the "Code") that I have read and understand. I will comply fully with all provisions of the Code to the extent they apply to me during the period of my employment. I further understand and acknowledge that any violation of the Code may subject me to disciplinary action, including termination of employment - ---------------------------- ---------------------- Signature Date signed PLEASE RETURN TO: STEPHANIE HARWOOD, SUPERVISOR, PRECLEARANCE LEGAL COMPLIANCE DEPARTMENT, 920/2ND FLOOR 650-525-8016 (PHONE) 650-312-5646 (FAX) EX-99.CERT 3 tcaf804-302.txt CERTIFICATION PURSUANT TO SECTION 302 EXHIBIT B (1) I, Jimmy D. Gambill, certify that: 1. I have reviewed this report on Form N-CSR of Templeton Capital Accumulator Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. October 21, 2004 /s/JIMMY D. GAMBILL Jimmy D. Gambill Chief Executive Officer - Finance and Administration I, Galen G. Vetter, certify that: 1. I have reviewed this report on Form N-CSR of Templeton Capital Accumulator Fund; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, changes in net assets, and cash flows (if the financial statements are required to include a statement of cash flows) of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Rule 30a-3(c) under the Investment Company Act of 1940) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of a date within 90 days prior to the filing date of this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal half-year (the registrant's second fiscal half-year in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize, and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. October 21, 2004 /s/GALEN G. VETTER Galen G. Vetter Chief Financial Officer EX-99.906 CERT 4 tcaf804-906.txt CERTIFICATION PURSUANT TO SECTION 906 EXHIBIT B(2) CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Jimmy D. Gambill, Chief Executive Officer of the TEMPLETON CAPITAL ACCUMULATOR FUND (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 08/31/04 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: October 21, 2004 /s/JIMMY D. GAMBILL Jimmy D. Gambill Chief Executive Officer - Finance and Administration A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO REGISTRANT AND WILL BE RETAINED BY REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURUSANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 I, Galen G. Vetter, Chief Financial Officer of the TEMPLETON CAPITAL ACCUMULATOR FUND (the "Registrant"), certify, pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to my knowledge: 1. The periodic report on Form N-CSR of the Registrant for the period ended 08/31/04 (the "Form N-CSR") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and 2. The information contained in the Form N-CSR fairly presents, in all material respects, the financial condition and results of operations of the Registrant. Dated: October 21, 2004 /s/GALEN G. VETTER Galen G. Vetter Chief Financial Officer A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, OR OTHER DOCUMENT AUTHENTICATING, ACKNOWLEDGING, OR OTHERWISE ADOPTING THE SIGNATURE THAT APPEARS IN TYPED FORM WITHIN THE ELECTRONIC VERSION OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906, HAS BEEN PROVIDED TO REGISTRANT AND WILL BE RETAINED BY REGISTRANT AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. -----END PRIVACY-ENHANCED MESSAGE-----