<PAGE>
COMBINATION FIXED AND VARIABLE
ANNUITY
THE
CHAIRMAN-TM-
Issued by
The American Franklin
Life Insurance Company
Prospectus Dated December 11, 1996
Fidelity Investments:
Variable Insurance Products Fund and
Variable Insurance Products Fund II
Prospectus Dated April 30, 1996
Principal Office of both Fidelity Funds located at:
82 Devonshire Street
Boston, Massachusetts 02109
MFS Investment Management:
MFS Variable Insurance Trust
Prospectus Dated May 1, 1996
as revised August 1, 1996
Principal Office located at:
500 Boylston Street
Boston, Massachusetts 02116
THESE SECURITIES HAVE NOT BEEN APPROVED
OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE
COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The Chairman is a trademark of The
American Franklin Life Insurance Company
<PAGE>
THE CHAIRMAN-TM-
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACTS
OFFERED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE, SPRINGFIELD, ILLINOIS 62713
(217) 528-2011
The American Franklin Life Insurance Company ("American Franklin") is offering
The Chairman flexible payment deferred individual annuity contracts (the
"Contracts") described in this Prospectus.
Contracts funded by Separate Account VA-1 of American Franklin may be used for a
variable investment return based on one or more of the following mutual fund
portfolios: the Money Market, High Income, Equity-Income, Growth and Overseas
Portfolios of the Variable Insurance Products Fund; the Investment Grade Bond,
Asset Manager, Index 500 and Contrafund Portfolios of the Variable Insurance
Products Fund II; and the MFS Emerging Growth, MFS Research, MFS Growth With
Income, MFS Total Return, MFS Utilities and MFS Value Portfolios of the MFS
Variable Insurance Trust.
American Franklin's guaranteed interest accumulation option is also available
through the Contracts. This option has three different guarantee periods, each
with its own guaranteed interest rate.
This Prospectus is designed to provide information about the Contracts that a
prospective owner should know before investing. This Prospectus should be
read carefully and kept for future reference. Information about certain
aspects of the Contracts, in addition to that found in this Prospectus, has
been filed with the Securities and Exchange Commission in the Statement of
Additional Information (the "Statement of Additional Information"). The
Statement of Additional Information, dated December 11, 1996, is incorporated
by reference into this Prospectus. The "Table of Contents" of the Statement
of Additional Information appears at page 53 of this Prospectus. A free copy
of the Statement of Additional Information may be obtained upon written or
oral request to American Franklin's Administrative Office located at 2727-A
Allen Parkway 3-50, Houston, Texas 77019-2191; mailing address - P.O. Box
4636, Houston, Texas 77210-4636; telephone numbers - (800) 200-3101 or (713)
831-3310.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE RELATED
STATEMENT OF ADDITIONAL INFORMATION (OR ANY SALES LITERATURE APPROVED BY
AMERICAN FRANKLIN) IN CONNECTION WITH THE OFFER CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED. THE CONTRACTS ARE NOT AVAILABLE IN ALL STATES
AND THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER IN ANY JURISDICTION TO ANY
PERSON TO WHOM SUCH OFFER WOULD BE UNLAWFUL THEREIN.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION, NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY
1
<PAGE>
STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE VARIABLE INSURANCE PRODUCTS FUND AND THE VARIABLE INSURANCE PRODUCTS FUND II
AND MFS VARIABLE INSURANCE TRUST.
VARIABLE ANNUITY CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, OR ENDORSED OR
GUARANTEED BY, ANY BANK, NOR ARE THEY FEDERALLY INSURED OR OTHERWISE PROTECTED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY
OTHER AGENCY; THEY ARE SUBJECT TO INVESTMENT RISKS, INCLUDING POSSIBLE LOSS OF
THE PRINCIPAL AMOUNT INVESTED.
Prospectus dated December 11, 1996
The Chairman is a trademark of The American Franklin Life Insurance Company.
2
<PAGE>
CONTENTS
PAGE
----
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
Fee Table. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8
Synopsis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
Financial Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
American Franklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Separate Account VA-1. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Voting Privileges. . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
The Fixed Account. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Contract Issuance and Purchase Payments. . . . . . . . . . . . . . . . . . . 22
Account Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Variable Account Value . . . . . . . . . . . . . . . . . . . . . . . . . 24
Fixed Account Value. . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Transfer, Variable Account Asset Rebalancing, Surrender and
Partial Withdrawal of Account Value. . . . . . . . . . . . . . . . . . . 25
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Variable Account Asset Rebalancing . . . . . . . . . . . . . . . . . . . 27
Surrenders and Partial Withdrawals . . . . . . . . . . . . . . . . . . . 27
Annuity Period and Annuity Payment Options . . . . . . . . . . . . . . . . . 28
Annuity Commencement Date. . . . . . . . . . . . . . . . . . . . . . . . 28
Application of Account Value . . . . . . . . . . . . . . . . . . . . . . 29
Fixed and Variable Annuity Payments. . . . . . . . . . . . . . . . . . . 29
Annuity Payment Options. . . . . . . . . . . . . . . . . . . . . . . . . 30
Transfers. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Use of Gender Based Annuity Tables . . . . . . . . . . . . . . . . . . . 32
Death Benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Charges Under the Contracts. . . . . . . . . . . . . . . . . . . . . . . . . 34
Premium Taxes. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Surrender Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Transfer Charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Annual Contract Fee. . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Charge to Separate Account VA-1. . . . . . . . . . . . . . . . . . . . . 37
Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Systematic Withdrawal Plan . . . . . . . . . . . . . . . . . . . . . . . 38
Reduction in Surrender Charges or Administrative Charges . . . . . . . . 38
Long-Term Care and Terminal Illness. . . . . . . . . . . . . . . . . . . . . 38
Long-Term Care . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Terminal Illness . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Other Aspects of the Contracts . . . . . . . . . . . . . . . . . . . . . . . 39
Owners, Annuitants and Beneficiaries; Assignments. . . . . . . . . . . . 39
Reports. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Modification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Payment and Deferment. . . . . . . . . . . . . . . . . . . . . . . . . . 40
Federal Income Tax Matters . . . . . . . . . . . . . . . . . . . . . . . . . 41
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
American Franklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
The Contracts: Non-Qualified Contracts. . . . . . . . . . . . . . . . . 42
A. Distribution Requirements. . . . . . . . . . . . . . . . . . . . . 43
B. Diversification. . . . . . . . . . . . . . . . . . . . . . . . . . 44
3
<PAGE>
C. Aggregation of Contracts . . . . . . . . . . . . . . . . . . . . . 44
D. Income Tax Withholding . . . . . . . . . . . . . . . . . . . . . . 45
The Contracts: Section 457 Contracts. . . . . . . . . . . . . . . . . . 45
The Contracts: Qualified Contracts. . . . . . . . . . . . . . . . . . . 47
A. Qualified Pension, Profit-Sharing and Annuity Plans. . . . . . . . 47
B. H.R. 10 Plans (Self-Employed Individuals). . . . . . . . . . . . . 48
C. Section 403(b) Annuities . . . . . . . . . . . . . . . . . . . . . 48
D. Individual Retirement Annuities. . . . . . . . . . . . . . . . . . 49
E. Income Tax Withholding . . . . . . . . . . . . . . . . . . . . . . 51
F. Excess Distributions - 15% Tax . . . . . . . . . . . . . . . . . . 52
Distribution Arrangement . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
Other Information on File. . . . . . . . . . . . . . . . . . . . . . . . . . 53
Table of Contents of Statement of Additional Information . . . . . . . . . . 54
4
<PAGE>
GLOSSARY
ACCOUNT VALUE - the sum of an Owner's Fixed Account Value and Variable Account
Value.
ACCUMULATION UNIT - a measuring unit used in calculating an Owner's interest in
a Division of Separate Account VA-1 prior to the Annuity Commencement Date.
ADMINISTRATIVE OFFICE - The AMFLIC Annuity Service Center, to which all Owner
premium payments, requests, directions and other communications should be
directed. The AMFLIC Annuity Service Center is currently located at 2727-A
Allen Parkway 3-50, Houston, Texas 77019-2191; mailing address - P.O. Box
4636, Houston, Texas 77210-4636; telephone numbers - (800) 200-3101 or (713)
831-3310.
AMERICAN FRANKLIN - The American Franklin Life Insurance Company.
ANNUITANT - the person named as such in the application for a Contract and on
whose life annuity payments may be based.
ANNUITY - a series of payments for life, or for life with a minimum number of
payments or a determinable sum guaranteed, or for a joint lifetime and
thereafter during the lifetime of the survivor, or for a designated period.
ANNUITY COMMENCEMENT DATE - the date on which American Franklin begins making
payments under an Annuity Payment Option, unless a lump-sum distribution is
elected instead.
ANNUITY PAYMENT OPTION - one of the several forms in which an Owner can request
American Franklin to make annuity payments.
ANNUITY PERIOD - the period during which American Franklin makes annuity
payments under an Annuity Payment Option.
ANNUITY UNIT - a measuring unit used in calculating the amount of Variable
Annuity Payments.
BENEFICIARY - the person that an Owner designates to receive any proceeds due
under a Contract following the death of an Owner or an Annuitant.
CODE - the Internal Revenue Code of 1986, as amended.
CONTINGENT ANNUITANT - the person so designated by the Owner of a Non-Qualified
Contract who, upon the Annuitant's death prior to the Annuity Commencement Date,
becomes the Annuitant.
CONTINGENT BENEFICIARY - the person so designated by the Owner who, upon the
death of the Beneficiary, becomes the Beneficiary.
CONTRACT - an individual annuity contract offered by this Prospectus.
CONTRACT ANNIVERSARY - each anniversary of the date of issue of the Contract.
CONTRACT YEAR - each year beginning with the date of issue of the Contract and
on each Contract Anniversary thereafter.
DIVISION - one of the different investment options into which Separate Account
VA-1 is divided.
5
<PAGE>
FIXED ACCOUNT - the name of the investment alternative under which purchase
payments are allocated to American Franklin's General Account.
FIXED ACCOUNT VALUE - the amount of an Owner's Account Value which is in the
Fixed Account.
FIXED ANNUITY PAYMENTS - annuity payments that are fixed in amount and do not
vary with the investment experience of any Division of Separate Account VA-1.
FUNDS - Variable Insurance Products Fund, Variable Insurance Products Fund II
and MFS Variable Insurance Trust.
GENERAL ACCOUNT - all assets of American Franklin other than those in Separate
Account VA-1 or any other legally segregated separate account established by
American Franklin.
GUARANTEED INTEREST RATE - the rate of interest American Franklin credits during
any Guarantee Period, on an effective annual basis.
GUARANTEE PERIOD - the period for which a Guaranteed Interest Rate is credited.
HOME OFFICE - American Franklin's office at the following address and phone
number: The American Franklin Life Insurance Company, #1 Franklin Square,
Springfield, Illinois 62713, (217) 528-2011.
INDIVIDUAL RETIREMENT ANNUITY - an annuity contract described in Section 408(b)
of the Code. Individual Retirement Annuities may also qualify as Simplified
Employee Pensions or Simple Retirement Accounts.
1940 ACT - the Investment Company Act of 1940, as amended, a federal law
governing the operations of investment companies such as the Funds and Separate
Account VA-1.
NON-QUALIFIED CONTRACT- a Contract that is not eligible for the special federal
income tax treatment applicable in connection with retirement plans or deferred
compensation plans pursuant to Sections 401, 403, 408 or 457 of the Code.
NON-QUALIFIED PLANS - retirement or deferred compensation plans or arrangements
which do not receive favorable tax treatment under the Code and which are not
Qualified Plans or Section 457 Plans.
OWNER - the holder of record of a Contract, except that the employer or trustee
may be the Owner of a Contract in connection with a retirement plan.
PORTFOLIO - an individual fund or series available for investment under the
Contracts through one of the Divisions. Currently, each Portfolio is a part of
the Funds.
QUALIFIED CONTRACT - a Contract that is eligible for the special federal income
tax treatment applicable in connection with retirement plans pursuant to
Sections 401, 403, or 408 of the Code.
6
<PAGE>
QUALIFIED PLANS - retirement plans of the following types which receive
favorable tax treatment under the Code: a retirement plan qualified under
Section 401(a) or 403(a) of the Code; an annuity purchase plan adopted by a
public school system or certain tax-exempt organizations according to Section
403(b) of the Code; and an Individual Retirement Annuity adopted according to
Section 408 of the Code.
ROLLOVER CONTRIBUTION - a reinvestment of funds pursuant to Sections 402(c)(1),
402(c)(9), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code.
SECTION 457 CONTRACT - a Contract that is issued in connection with a Section
457 Plan.
SECTION 457 PLAN - a deferred compensation plan established under Section 457 of
the Code for employees and certain independent contractors by a state, a
political subdivision of a state, an agency or instrumentality of either a state
or political subdivision or certain tax-exempt organizations.
SEPARATE ACCOUNT VA-1 - the segregated asset account referred to as Separate
Account VA-1 of The American Franklin Life Insurance Company established to
receive and invest purchase payments under the Contracts allocated for
investment in one or more of the Divisions.
SIMPLE RETIREMENT ACCOUNT - an Individual Retirement Annuity which meets the
additional requirements of Section 408(p) of the Code.
SIMPLIFIED EMPLOYEE PENSION - an Individual Retirement Annuity which meets the
additional requirements of Section 408(k) of the Code.
SURRENDER CHARGE - a charge for sales expenses that may be assessed upon
surrenders of and payments of certain other amounts from a Contract.
VALUATION DATE - any day on which American Franklin's Administrative Office
is open for business except, with respect to any Division, a day on which the
related Variable Fund does not value its shares.
VALUATION PERIOD - the period that starts at the close of regular trading on the
New York Stock Exchange on a Valuation Date and ends at the close of regular
trading on the exchange on the next succeeding Valuation Date.
VARIABLE ACCOUNT VALUE - the amount of an Owner's Account Value that is in
Separate Account VA-1.
VARIABLE ANNUITY PAYMENTS - annuity payments that vary in amount based on the
investment experience of one or more of the Divisions of Separate Account VA-1.
7
<PAGE>
FEE TABLE
The purpose of this Fee Table is to assist an Owner in understanding the
various costs and expenses that an Owner will bear directly or indirectly
pursuant to a Contract and in connection with the Portfolios. The table
reflects expenses of Separate Account VA-1 as well as the Portfolios. In
addition to the fees and expenses described below, American Franklin will
deduct an amount to cover any applicable premium taxes. Applicable premium
tax rates depend upon the Owner's then current place of residence.
Applicable rates currently range from 0% to 3.5% and are subject to change.
PARTICIPANT TRANSACTION CHARGES
Front-End Sales Charge Imposed on Purchases 0%
Maximum Surrender Charge (1) 6%
(computed as a percentage of purchase payments withdrawn)
Transfer Fee $ 0 (2)
ANNUAL CONTRACT FEE (3) $30
SEPARATE ACCOUNT VA-1 ANNUAL EXPENSES (as a percentage of
average daily net asset value)
Mortality and Expense Risk Charge 1.25%
Administrative Expense Charge 0.15%
-----
-----
Total Separate Account VA-1 Annual Expenses 1.40%
- ---------------------------------
(1) This charge does not apply or is reduced under certain circumstances. See
"Surrender Charge."
(2) This charge is $25 for each transfer after the twelfth transfer during each
Contract Year prior to the Annuity Commencement Date.
(3) This charge is not imposed during the Annuity Period and currently is not
imposed if cumulative purchase payments are at least $75,000. See "Annual
Contract Fee."
The Portfolios' Annual Expenses For 1995 Fiscal Year (1)
(as a percentage of average net assets)
<TABLE>
<CAPTION>
OTHER
MANAGEMENT EXPENSES AFTER TOTAL PORTFOLIO
FEES AFTER EXPENSE EXPENSE OPERATING
REIMBURSEMENT REIMBURSEMENT EXPENSES
------------------ ---------------- ---------------------
<S> <C> <C> <C>
Money Market. . . . . . . . . 0.24% 0.09% 0.33%
High Income . . . . . . . . . 0.60% 0.11% 0.71%
Investment Grade Bond . . . . 0.45% 0.14% 0.59%
Equity-Income . . . . . . . . 0.51% 0.10% 0.61%
Growth. . . . . . . . . . . . 0.61% 0.09% 0.70%
Overseas. . . . . . . . . . . 0.76% 0.15% 0.91%
Asset Manager . . . . . . . . 0.71% 0.08% 0.79%
Index 500 . . . . . . . . . . 0.00% 0.28% 0.28%
Contrafund. . . . . . . . . . 0.61% 0.11% 0.72%
MFS Emerging Growth . . . . . 0.75% 0.25% (2) 1.00% (2)
MFS Research. . . . . . . . . 0.75% 0.25% (2) 1.00% (2)
MFS Growth With Income. . . . 0.75% 0.25% (2) 1.00% (2)
MFS Total Return. . . . . . . 0.75% 0.25% (2) 1.00% (2)
MFS Utilities . . . . . . . . 0.75% 0.25% (2) 1.00% (2)
MFS Value . . . . . . . . . . 0.75% 0.25% (2) 1.00% (2)
</TABLE>
- -------------------------------------------
(1) If certain voluntary expense reimbursements from the investment advisers
were terminated, management fees and other expenses would have been:
8
<PAGE>
MANAGEMENT OTHER TOTAL
FEES EXPENSES EXPENSES
---------- -------- --------
Money Market. . . . . . . . . 0.24% 0.09% 0.33%
High Income . . . . . . . . . 0.60% 0.11% 0.71%
Investment Grade Bond . . . . 0.45% 0.14% 0.59%
Equity-Income . . . . . . . . 0.51% 0.10% 0.61%
Growth. . . . . . . . . . . . 0.61% 0.09% 0.70%
Overseas. . . . . . . . . . . 0.76% 0.15% 0.91%
Asset Manager . . . . . . . . 0.71% 0.10% 0.81%
Index 500 . . . . . . . . . . 0.28% 0.19% 0.47%
Contrafund. . . . . . . . . . 0.61% 0.12% 0.73%
MFS Emerging Growth . . . . . 0.75% 2.16% 2.91%
MFS Research. . . . . . . . . 0.75% 3.15% 3.90%
MFS Growth With Income. . . . 0.75% 20.69% 21.44%
MFS Total Return. . . . . . . 0.75% 2.02% 2.77%
MFS Utilities . . . . . . . . 0.75% 2.33% 3.08%
MFS Value . . . . . . . . . . 0.75% 1.00% 1.75%
- ---------------------------------------
(2) The investment adviser to the MFS Emerging Growth, MFS Research, MFS
Growth With Income, MFS Total Return, MFS Utilities and MFS Value
Portfolios has agreed to bear, subject to reimbursement, expenses for each
of such Portfolios such that each Portfolio's aggregate operating expenses
shall not exceed, on an annualized basis, 1.00% of the average daily net
assets of the Portfolio from November 2, 1994 through December 31, 1996,
1.25% of the average daily net assets of the Portfolio from January 1, 1997
through December 31, 1998, and 1.50% of the average daily net assets of the
Portfolio from January 1, 1999 through December 31, 2004; provided,
however, that this obligation may be terminated or revised at any time.
EXAMPLE
If an Owner surrenders a Contract or annuitizes under circumstances requiring
the payment of a Surrender Charge at the end of the applicable time period, the
Owner would pay the following expenses on a $1,000 investment, assuming a 5%
annual return on assets and assuming that Portfolio operating expenses will be
constant at their fiscal 1995 levels:
If all amounts are invested
in one of the following -------- --------
Portfolios: 1 YEAR 3 YEARS
- ---------------------------- -------- --------
Money Market . . . . . . . . . . $73 $104
High Income. . . . . . . . . . . 77 116
Investment Grade Bond. . . . . . 76 112
Equity-Income. . . . . . . . . . 76 113
Growth . . . . . . . . . . . . . 77 115
Overseas . . . . . . . . . . . . 79 122
Asset Manager. . . . . . . . . . 78 118
Index 500. . . . . . . . . . . . 73 103
Contrafund . . . . . . . . . . . 77 116
MFS Emerging Growth. . . . . . . 80 125
MFS Research . . . . . . . . . . 80 125
MFS Growth with Income . . . . . 80 125
9
<PAGE>
MFS Total Return . . . . . . . . 80 125
MFS Utilities. . . . . . . . . . 80 125
MFS Value. . . . . . . . . . . . 80 125
EXAMPLE
If an Owner does not surrender a Contract and does not annuitize under
circumstances requiring the payment of a Surrender Charge, a $1,000 investment
would be subject to the following expenses, assuming a 5% annual return on
assets and assuming that Portfolio operating expenses will be constant at their
fiscal 1995 levels:
If all amounts are invested
in one of the following -------- --------
Portfolios: 1 YEAR 3 YEARS
- ---------------------------- -------- --------
Money Market . . . . . . . . . . $19 $59
High Income. . . . . . . . . . . 23 71
Investment Grade Bond. . . . . . 22 67
Equity-Income. . . . . . . . . . 22 68
Growth . . . . . . . . . . . . . 23 70
Overseas . . . . . . . . . . . . 25 77
Asset Manager. . . . . . . . . . 24 73
Index 500. . . . . . . . . . . . 19 58
Contrafund . . . . . . . . . . . 23 71
MFS Emerging Growth. . . . . . . 26 80
MFS Research . . . . . . . . . . 26 80
MFS Growth with Income . . . . . 26 80
MFS Total Return . . . . . . . . 26 80
MFS Utilities. . . . . . . . . . 26 80
MFS Value. . . . . . . . . . . . 26 80
10
<PAGE>
THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. Similarly,
the assumed 5% annual rate of return is not an estimate or a guarantee of future
investment performance.
SYNOPSIS
This synopsis should be read together with the other information set forth
in this Prospectus. Variations due to requirements of a particular state are
described in supplements which are attached to this Prospectus, or in
endorsements to a Contract, as appropriate. The Contracts are designed to
provide retirement benefits through the accumulation of purchase payments on a
fixed or variable basis, and by the application of such accumulations to provide
Fixed or Variable Annuity Payments.
FLEXIBLE PREMIUM PAYMENTS
This Prospectus describes The Chairman combination fixed and variable
annuity contract. After payment of an initial purchase payment of at least
$10,000, the frequency and the amount of purchase payments are determined by the
Contract Owner, subject to certain limits. See "Contract Issuance and Purchase
Payments."
MINIMUM INVESTMENT REQUIREMENTS
The initial purchase payment must be at least $10,000. The amount of any
subsequent purchase payment must be at least $100. If the Account Value for a
Contract falls below $500, American Franklin may cancel the Owner's interest in
the Contract and treat it as a full surrender. American Franklin also may
transfer funds from a Division (other than the VIP Money Market Division) or
Guarantee Period under a Contract without charge to the VIP Money Market
Division if the Account Value of that Division or Guarantee Period falls below
$500. See "Contract Issuance and Purchase Payments."
PURCHASE PAYMENT ACCUMULATION
Purchase payments will be accumulated on a variable or fixed basis until
the Annuity Commencement Date. For variable accumulation, part or all of the
Account Value may be allocated to one or more of the 15 available Divisions of
Separate Account VA-1. Each such Division invests solely in shares of one of 15
corresponding Portfolios. See "The Portfolios." As the value of the
investments in a Portfolio's shares increases or decreases, the value of
accumulated purchase payments allocated to the corresponding Division increases
or decreases, subject to applicable charges and deductions. See "Variable
Account Value."
For fixed accumulation, part or all of the Account Value may be allocated
to one or more of the three Guarantee Periods currently available in the Fixed
Account. Each Guarantee Period is for a different period of time and has a
different Guaranteed Interest Rate. While allocated to a Guarantee Period, the
value of accumulated purchase payments increases at the Guaranteed Interest Rate
applicable to that Guarantee Period. See "The Fixed Account."
11
<PAGE>
FIXED AND VARIABLE ANNUITY PAYMENTS
An Owner may elect to receive Fixed or Variable Annuity Payments, or a
combination thereof, commencing on the Annuity Commencement Date. Fixed Annuity
Payments are periodic payments from American Franklin, the amount of which is
fixed and guaranteed by American Franklin. The amount of the payments will
depend on the Annuity Payment Option chosen, the age and, in some cases, sex of
the Annuitant, and the total amount of Account Value applied to the fixed
Annuity Payment Option.
Variable Annuity Payments are similar to Fixed Annuity Payments, except
that the amount of each periodic payment from American Franklin will vary
reflecting the net investment return of the Division or Divisions chosen in
connection with a variable Annuity Payment Option. If the net investment return
for a given month exceeds the assumed interest rate used in the Contract's
annuity tables, the monthly payment will be greater than the previous payment.
If the net investment return for a month is less than the assumed interest rate,
the monthly payment will be less than the previous payment. The assumed
interest rate used in the Contract's annuity tables is 3.5%. American Franklin
may in the future offer other forms of Contract with a lower assumed interest
rate, and reserves the right to discontinue the offering of the higher interest
rate form of Contract. See "Annuity Period and Annuity Payment Options." Under
current federal income tax law, Variable Annuity Payments may not be available
in connection with Section 457 Plans.
CHANGES IN ALLOCATIONS AMONG DIVISIONS AND GUARANTEE PERIODS
Prior to the Annuity Commencement Date, an election with respect to the
allocation of future purchase payments to each of the various Divisions and
Guarantee Periods may be modified by the Owner, without charge.
In addition, the Account Value may be reallocated by the Owner among the
Divisions and Guarantee Periods prior to the Annuity Commencement Date.
Transfers out of a Guarantee Period, however, are subject to limitations as to
amount. For these and other terms and conditions of transfer, see "Transfer,
Surrender and Partial Withdrawal of Account Value - Transfers."
After the Annuity Commencement Date, transfers may be made among the
Divisions or to a fixed Annuity Payment Option, but transfers from a fixed
Annuity Payment Option may not be made. See "Annuity Period and Annuity Payment
Options - Transfers."
SURRENDERS, WITHDRAWALS AND CANCELLATIONS
A total surrender of or partial withdrawal from a Contract may be made at
any time prior to the Annuity Commencement Date, by written request to
American Franklin at its Administrative Office. A Surrender Charge may be
assessed and some surrenders and withdrawals may be subject to tax penalties.
The maximum Surrender Charge (computed as a percentage of purchase payments
withdrawn) is 6% of purchase payments withdrawn during the first two years
after they were received. See "Surrenders and Partial Withdrawals" and
"Charges Under the Contracts - Surrender Charge."
A Contract may be canceled by the Owner by delivering it or mailing it
with a written cancellation request to American Franklin's Administrative
Office before the close of business on the tenth day after the Contract is
received. (In some cases, the Contract may provide for a 20 or 30-day,
12
<PAGE>
rather than a ten-day period.) If the foregoing items are sent by mail,
properly addressed and postage prepaid, they will be deemed to be received by
American Franklin on the date of the postmark. If a Contract is canceled during
this period, American Franklin will refund the Account Value plus any premium
taxes and Annual Contract Fee that have been deducted. In states where the law
so requires, however, American Franklin will refund the greater of that amount
or the amount of purchase payments, or, if the law permits, the amount of
purchase payments.
DEATH BENEFIT
In the event that the Annuitant (where there is no surviving Contingent
Annuitant) or Owner dies prior to the Annuity Commencement Date, a benefit is
payable to the Beneficiary. See "Death Benefit."
LIMITATIONS IMPOSED BY EMPLOYEE BENEFIT OR DEFERRED COMPENSATION PLANS
Certain rights the Owner would otherwise have under a Contract may be
limited by the terms of any applicable employee benefit or deferred compensation
plan. These limitations may restrict such things as total and partial
surrenders, the amount or timing of purchase payments that may be made, when
annuity payments must start and the type of annuity options that may be
selected. This Prospectus contains no information concerning any such employee
benefit or deferred compensation plans. Accordingly, the Owner should become
familiar with these and all other aspects of any retirement or deferred
compensation plan in connection with which a Contract is used. Further
information relating to some employee benefit plans may be obtained from the
disclosure documents required to be distributed to employees under the Employee
Retirement Income Security Act of 1974. American Franklin is not responsible
for monitoring or assuring compliance with the provisions of any retirement or
deferred compensation plan.
COMMUNICATIONS TO AMERICAN FRANKLIN
All communications to American Franklin should be directed to its
Administrative Office and should include the Contract number, the Owner's
name and, if different, the Annuitant's name. Communications should NOT be
directed to American Franklin's Home Office.
Except as otherwise specified in this Prospectus, purchase payments or
other communications are deemed received at American Franklin's
Administrative Office on the actual date of receipt there in proper form
unless received (1) after the close of regular trading on the New York Stock
Exchange or (2) on a date that is not a Valuation Date. In either of these
two cases, the date of receipt will be deemed to be the next Valuation Date.
FINANCIAL AND PERFORMANCE INFORMATION
Financial statements of American Franklin are included in the Statement of
Additional Information. See "Table of Contents of Statement of Additional
Information." No financial information is available for Separate Account VA-1
because none of the Divisions available under the Contracts had commenced
operations as of the date of this Prospectus.
13
<PAGE>
From time to time, Separate Account VA-1 may include in advertisements and
other sales materials several types of performance information for the
Divisions, including "average annual total return," "total return," and
"cumulative total return." The VIP II Investment Grade Bond Division and the
VIP High Income Division may also advertise "yield." The VIP Money Market
Division may advertise "yield" and "effective yield."
Each of these figures is based upon historical information and is not
necessarily representative of the future performance of a Division. Moreover,
these performance figures do not represent the actual experience of amounts
invested by a particular Owner. The investment experience for each Division
reflects the investment performance of the separate investment Portfolio
currently funding such Division for the periods stated, except that for periods
prior to the time when the Contract became available, the results were
calculated by applying all applicable charges and fees at the separate account
level for the Contract, as noted below, to the historical Portfolio performance
results for such periods.
Average annual total return, total return, and cumulative total return
calculations measure the net income of a Division plus the effect of any
realized or unrealized appreciation or depreciation of the underlying
investments in the Division for the period in question. Average annual total
return figures are annualized and, therefore, represent the average annual
percentage change in the value of an investment in a Division over the
applicable period. Total return figures are also annualized, but do not, as
described below, include the effect of any applicable Surrender Charge or Annual
Contract Fee. Cumulative total return figures represent the cumulative change
in value of an investment in a Division for various periods.
Yield is a measure of the net dividend and interest income earned over a
specific one month or 30-day period (seven-day period for the VIP Money Market
Division) expressed as a percentage of the value of the Division's Accumulation
Units. Yield is an annualized figure, which means that it is assumed that the
Division generates the same level of net income over a one year period which is
compounded on a semi-annual basis. The effective yield for the VIP Money Market
Division is calculated similarly but includes the effect of assumed compounding.
The VIP Money Market Division's effective yield will be slightly higher than its
yield due to this compounding effect.
Average annual total return figures include the deduction of all recurring
charges and fees applicable under the Contract to all Owner accounts, including
the mortality and expense risk charge, the administrative expense charge, the
applicable Surrender Charge that may be imposed at the end of the period in
question, and a pro-rated portion of the Annual Contract Fee. Yield, effective
yield, total return, and cumulative total return figures do not include the
effect of any Surrender Charge that may be imposed upon the redemption of
Accumulation Units, and thus may be higher than if such charge were deducted.
Total return and cumulative total return figures also do not include the effect
of the Annual Contract Fee. American Franklin may waive or reimburse certain
fees or charges applicable to the Contract and such waivers or reimbursements
will affect each Division's performance results. Additional information
concerning a Division's performance appears in the Statement of Additional
Information.
14
<PAGE>
American Franklin may also advertise its ratings by independent financial
rating services, such as A.M. Best Company, Standard & Poor's, and Duff &
Phelps. The ratings from these three nationally recognized rating organizations
reflect the claims paying ability and financial strength of American Franklin
and are not a rating of investment performance that purchasers of insurance
products have experienced or are likely to experience in the future.
In addition, American Franklin may include in certain advertisements
endorsements in the form of a list of organizations, individuals or other
parties that recommend American Franklin or the Contracts. American Franklin
may occasionally include in advertisements comparisons of currently taxable and
tax-deferred investment programs, based on selected tax brackets, or discussions
of alternative investment vehicles and general economic conditions.
FINANCIAL INFORMATION
The financial statements of American Franklin are located in the Statement
of Additional Information. See the cover page of the Prospectus for information
on how to obtain a copy of the Statement of Additional Information. The
financial statements of American Franklin should be considered only as bearing
on the ability of American Franklin to meet its contractual obligations under
the Contracts; they do not bear on the investment performance of Separate
Account VA-1.
No financial information is available for Separate Account VA-1 because
none of the Divisions available under the Contracts had commenced operations as
of the date of this Prospectus.
AMERICAN FRANKLIN
American Franklin is a legal reserve stock life, accident and health
insurance company organized under the laws of the State of Illinois in 1981.
It is engaged in the writing of term insurance, universal and variable
universal life insurance and single premium whole life insurance and the sale
of disability insurance. American Franklin currently has other separate
accounts which issue interests in variable insurance policies. American
Franklin is presently authorized to write insurance in forty-six states, the
District of Columbia and Puerto Rico. American Franklin's Home Office is
located at #1 Franklin Square, Springfield, Illinois 62713. American
Franklin's Administrative Office is located at 2727-A Allen Parkway 3-50,
Houston, Texas 77019-2191; mailing address - P.O. Box 4636, Houston, Texas
77210-4636.
American Franklin is a wholly-owned subsidiary of The Franklin Life
Insurance Company ("The Franklin"). The Franklin is a legal reserve stock life
insurance company organized under the laws of the State of Illinois in 1884.
The Franklin issues individual life insurance, annuity and accident and health
insurance policies, group annuities and group life and health insurance and
offers a variety of whole life, life, retirement income and level and decreasing
term insurance plans. The Franklin's home office is located at #1 Franklin
Square, Springfield, Illinois 62713.
The Franklin is a wholly-owned subsidiary of AGC Life Insurance Company
("AGC"). American General Corporation ("American General") owns all of the
outstanding shares of common stock of AGC. The address of AGC is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-
15
<PAGE>
2155. American General is the parent company of one of the nation's largest
diversified financial services organizations. American General's operating
subsidiaries are leading providers of retirement annuities, consumer loans and
life insurance. American General was incorporated as a general business
corporation in Texas in 1980 and is the successor to American General Insurance
Company, an insurance company incorporated in Texas in 1926.
SEPARATE ACCOUNT VA-1
Separate Account VA-1 was established on May 22, 1996 and currently
consists of 15 Divisions, all of which are available under the Contracts offered
by this Prospectus. Separate Account VA-1 is registered with the Securities and
Exchange Commission as a unit investment trust under the 1940 Act. This
registration does not involve any supervision by the Securities and Exchange
Commission of the management or investment policies of Separate Account VA-1. A
unit investment trust is a type of investment company. Separate Account VA-1
meets the definition of a "separate account" under federal securities laws.
The operations of each Division of Separate Account VA-1 are part of
American Franklin's general operations and the assets of Separate Account VA-1
belong to American Franklin. Under Illinois law and the terms of the Contracts,
the assets of Separate Account VA-1 will not be chargeable with liabilities
arising out of any other business which American Franklin may conduct, but will
be held exclusively to meet American Franklin's obligations under variable
annuity contracts. Furthermore, the income, gains, and losses, whether or not
realized, from assets allocated to Separate Account VA-1, are, in accordance
with the Contracts, credited to or charged against Separate Account VA-1 without
regard to other income, gains, or losses of American Franklin.
THE PORTFOLIOS
The variable benefits under the Contracts are funded by 15 Divisions of
Separate Account VA-1. These Divisions invest in shares of 15 separate
investment Portfolios of three mutual funds that are sold, without sales
charges, exclusively to insurance company separate accounts and that are not
sold directly to the public. Each of these mutual funds also offers its shares
to variable annuity and variable life insurance separate accounts of insurers
that are not affiliated with American Franklin. American Franklin does not see
any conflict between Owners of Contracts and owners of variable life insurance
policies or variable annuity contracts issued by insurance companies not
affiliated with American Franklin. Nevertheless, the Boards of Trustees of each
of these mutual funds will monitor to identify any material irreconcilable
conflicts that may develop and determine what, if any, action should be taken in
response. If it becomes necessary for any separate account to replace shares of
any Portfolio with another investment, the Portfolio may have to liquidate
securities on a disadvantageous basis.
Any dividends or capital gain distributions attributable to Contracts are
automatically reinvested in shares of the Portfolio from which they are received
at the Portfolio's net asset value on the date of payment. Such dividends and
distributions will have the effect of reducing the net asset value of each share
of the corresponding Portfolio and increasing, by an equivalent value, the
number of shares outstanding of the Portfolio. However, the value of an Owner's
16
<PAGE>
interest in the corresponding Division will not change as a result of any such
dividends and distributions.
Each Portfolio of the Funds has a different investment objective which it
tries to achieve by following separate investment policies. The objectives and
policies of each Portfolio will affect its return and its risks. The investment
objectives, policies, restrictions and risks of the Portfolios of the Funds are
described in detail in the Prospectuses for the Funds, which are attached to
this Prospectus, and in the Funds' Statements of Additional Information. The
policies and objectives of the Portfolios of the Variable Insurance Products
Fund corresponding to the Divisions currently available for investment under the
Contracts may be summarized as follows:
Money Market Portfolio seeks to obtain as high a level of current income as
is consistent with preserving capital and providing liquidity. The
Portfolio will invest only in high-quality U.S. dollar denominated money
market securities of domestic and foreign issuers.
High Income Portfolio seeks to obtain a high level of current income by
investing primarily in high yielding, lower rated fixed-income securities,
while also considering growth of capital. The Portfolio may purchase
lower-quality bonds which provide poor protection for payment of principal
and interest (commonly referred to as "junk bonds"). For a discussion of
the risks of investment in these securities, please see the Prospectus for
the Variable Insurance Products Fund, which is attached to this Prospectus.
Equity-Income Portfolio seeks reasonable income by investing primarily in
income-producing equity securities. In choosing these securities, the
Portfolio will also consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite yield on
the securities comprising the Standard & Poor's 500 Composite Stock Price
Index.
Growth Portfolio seeks to achieve capital appreciation. The Portfolio
normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation may also be
found in other types of securities including bonds and preferred stocks.
Overseas Portfolio seeks long-term growth of capital primarily through
investments in foreign securities. Overseas Portfolio provides a means for
investors to diversify their own portfolios by participating in companies
and economies outside of the United States.
The policies and objectives of the Portfolios of the Variable Insurance
Products Fund II corresponding to the Divisions currently available for
investment under the Contracts may be summarized as follows:
Investment Grade Bond Portfolio seeks as high a level of current income as
is consistent with the preservation of capital by investing in a broad
range of investment-grade fixed-income securities. The Portfolio will
maintain a dollar-weighted average portfolio maturity of ten years or less.
17
<PAGE>
Asset Manager Portfolio seeks a high total return with reduced risk over
the long-term by allocating its assets among domestic and foreign stocks,
bonds and short-term fixed-income instruments.
Index 500 Portfolio seeks investment results that correspond to the total
return (I.E., the combination of capital changes and income) of common
stocks publicly traded in the United States, as represented by Standard &
Poor's 500 Composite Stock Price Index, while keeping transaction costs and
other expenses low.
Contrafund Portfolio seeks to increase the value of investments over the
long term by investing in securities of companies that are undervalued or
out-of-favor.
The policies and objectives of the Portfolios of the MFS Variable Insurance
Trust corresponding to the Divisions currently available for investment under
the Contracts may be summarized as follows:
MFS Emerging Growth Portfolio seeks to provide long-term growth of capital.
MFS Research Portfolio seeks to provide long-term growth of capital and
future income.
MFS Growth With Income Portfolio seeks to provide reasonable current income
and long-term growth of capital and income.
MFS Total Return Portfolio seeks primarily to provide above-average income
(compared to a portfolio invested entirely in equity securities) consistent
with the prudent employment of capital and secondarily to provide a
reasonable opportunity for growth of capital and income.
MFS Utilities Portfolio seeks capital growth and current income (income
above that available from a portfolio invested entirely in equity
securities).
MFS Value Portfolio seeks capital appreciation.
Except for the Money Market, Investment Grade Bond, Index 500 and MFS
Growth With Income Portfolios, the Portfolios may purchase lower-quality bonds
which provide poor protection for payment of principal and interest (commonly
referred to as "junk bonds"). These securities are often in default or are
highly speculative. Lower-quality bonds involve greater risk of default or
price changes than securities assigned a higher quality rating due to changes in
the issuer's creditworthiness. This is an aggressive approach to income
investing. For a discussion of the risks of investment in these securities,
please see the Prospectuses for the Funds, which are attached to this
Prospectus.
There is no guarantee that any Portfolio will achieve its objective. In
addition, the Funds' Prospectuses advise that no single Portfolio constitutes a
balanced investment plan.
Subject to the approval and supervision of the Funds' Boards of Trustees,
Fidelity Management & Research Company ("Fidelity Management") manages the
day-to-day
18
<PAGE>
investment operations of the Variable Insurance Products Fund and the Variable
Insurance Products Fund II and exercises overall responsibility for the
investment and reinvestment of their assets. See the Prospectus of the Variable
Insurance Products Fund and the Variable Insurance Products Fund II for a
description of the experience and qualifications of Fidelity Management. For
managing each portfolio's investments and business affairs, each Portfolio of
the Variable Insurance Products Fund and the Variable Insurance Products Fund II
pays Fidelity Management a monthly fee. See the Prospectus and Statement of
Additional Information of the Variable Insurance Products Fund and the Variable
Insurance Products Fund II for a description of the way in which this fee is
calculated.
Massachusetts Financial Services Company ("MFS") provides the Portfolios of
the MFS Variable Insurance Trust with overall investment advisory and
administrative services, as well as general office facilities. Subject to such
policies as the Board of Trustees may determine, MFS makes investment decisions
for each Portfolio of the MFS Variable Insurance Trust. See the Prospectus of
the MFS Variable Insurance Trust for a description of the experience and
qualifications of MFS. For its services and facilities, MFS receives a monthly
management fee. See the Prospectus and Statement of Additional Information of
the MFS Variable Insurance Trust for a description of the way in which this fee
is calculated.
Before selecting any Division, the Owner should carefully read the
Prospectuses for the Funds, which includes more complete information about each
Portfolio, including investment objectives and policies, charges and expenses.
An Owner may obtain additional copies of the Prospectuses of the Funds by
contacting American Franklin's Administrative Office.
American Franklin may enter into agreements with the investment advisers of
the Funds that provide for the investment adviser to reimburse American Franklin
for certain costs incurred in connection with administering the Funds as
variable funding options for the Contracts. Currently, American Franklin and
MFS have entered into an arrangement whereby MFS or its affiliates will pay a
fee to American Franklin equal, on an annualized basis, to 0.15% of the
aggregate net assets of each of the Portfolios of the MFS Variable Insurance
Trust attributable to the Contracts. This fee will not be paid by the
Portfolios, their shareholders or the Owners.
VOTING PRIVILEGES
The Owner prior to the Annuity Commencement Date and the Annuitant or other
payee during the Annuity Period (or in the case of a Section 457 Contract, the
Owner during the Annuity Period) will be entitled to give American Franklin
instructions as to how Portfolio shares held in the Divisions of Separate
Account VA-1 attributable to his or her Contract should be voted at meetings of
shareholders of the Portfolio. Those persons entitled to give voting
instructions and the number of votes for which they may give directions will be
determined as of the record date for a meeting. Separate Account VA-1 will vote
all shares of each Portfolio that it holds of record in accordance with
instructions received with respect to all American Franklin annuity contracts
participating in that Portfolio.
19
<PAGE>
Separate Account VA-1 will also vote all shares of each Portfolio for which
no instructions have been received for or against any proposition in the same
proportion as the shares for which voting instructions were received.
Prior to the Annuity Commencement Date, the number of votes each Owner is
entitled to direct with respect to a particular Portfolio is equal to (a) the
Owner's Variable Account Value attributable to that Portfolio divided by (b) the
net asset value of one share of that Portfolio. In determining the number of
votes, fractional votes will be recognized. While a variable Annuity Payment
Option is in effect, the number of votes an Annuitant or payee (or in the case
of a Section 457 Contract, the Owner) is entitled to direct with respect to a
particular Portfolio will be computed in a comparable manner, based on American
Franklin's liability for future Variable Annuity Payments with respect to the
Annuitant or payee as of the record date. Such liability for future payments
will be calculated on the basis of the mortality assumptions and the assumed
interest rate used in determining the number of Annuity Units under a Contract
and the applicable value of an Annuity Unit on the record date.
Portfolio shares held by insurance company separate accounts other than
Separate Account VA-1 will generally be voted in accordance with instructions of
participants in such other separate accounts.
American Franklin believes that its voting instruction procedures comply
with current federal securities law requirements and interpretations thereof.
However, American Franklin reserves the right to modify these procedures in any
manner consistent with applicable legal requirements and interpretations as in
effect from time to time.
THE FIXED ACCOUNT
AMOUNTS IN THE FIXED ACCOUNT OR SUPPORTING FIXED ANNUITY PAYMENTS BECOME
PART OF AMERICAN FRANKLIN'S GENERAL ACCOUNT. BECAUSE OF EXEMPTIVE AND
EXCLUSIONARY PROVISIONS, INTERESTS IN THE GENERAL ACCOUNT HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, NOR IS THE GENERAL ACCOUNT
REGISTERED AS AN INVESTMENT COMPANY UNDER THE 1940 ACT. AMERICAN FRANKLIN HAS
BEEN ADVISED THAT THE STAFF OF THE SECURITIES AND EXCHANGE COMMISSION HAS NOT
REVIEWED THE DISCLOSURES IN THIS PROSPECTUS THAT RELATE TO THE FIXED ACCOUNT OR
FIXED ANNUITY PAYMENTS. DISCLOSURES REGARDING THESE MATTERS, HOWEVER, MAY BE
SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS OF THE FEDERAL SECURITIES
LAWS RELATING TO THE ACCURACY AND COMPLETENESS OF STATEMENTS IN PROSPECTUSES.
Obligations with respect to the Fixed Account are legal obligations of
American Franklin and are supported by its General Account assets, which also
support obligations incurred by American Franklin under other insurance and
annuity contracts. Investments purchased with amounts allocated to the Fixed
Account are the property of American Franklin, and Owners have no legal rights
in such investments.
20
<PAGE>
Account Value that is allocated by the Owner to the Fixed Account earns a
Guaranteed Interest Rate commencing with the date of such allocation. This
Guaranteed Interest Rate continues for a number of years selected by the Owner
from among the Guarantee Periods that American Franklin then offers. American
Franklin currently makes available Guarantee Periods of one, three and five
years. Each Guarantee Period has its own Guaranteed Interest Rate, which may
differ from those for other Guarantee Periods. At the end of a Guarantee
Period, the Owner's Account Value in that Guarantee Period, including interest
accrued thereon, will be allocated to a new Guarantee Period of the same length
unless American Franklin has received a written request from the Owner to
allocate this amount to a different Guarantee Period or periods or to one or
more of the Divisions of Separate Account VA-1. American Franklin must receive
this written request at least three Valuation Dates prior to the end of the
Guarantee Period. If the Owner has not provided such written request and the
renewed Guarantee Period extends beyond the scheduled Annuity Commencement Date,
American Franklin will nevertheless contact the Owner regarding the scheduled
Annuity Commencement Date. If the Owner elects to annuitize in this
circumstance, the Surrender Charge may be waived. See "Annuity Payment Options"
and "Surrender Charge." The first day of the new Guarantee Period (or other
reallocation) will be the day after the end of the prior Guarantee Period.
American Franklin will notify the Owner at least 30 days and not more than 60
days prior to the end of any Guarantee Period. If the Owner's Account Value in
a Guarantee Period is less than $500, American Franklin reserves the right,
without charge, automatically to transfer the balance to the VIP Money Market
Division at the end of that Guarantee Period, unless American Franklin has
received in good order written instructions to transfer such balance to a
Division or to allocate such balance to a new Guarantee Period.
American Franklin declares the Guaranteed Interest Rates from time to time
as market conditions dictate. American Franklin advises an Owner of the
Guaranteed Interest Rate for a chosen Guarantee Period at the time a purchase
payment is received, a transfer is effected or a Guarantee Period is renewed. A
different rate of interest may be credited to one Guarantee Period than to
another Guarantee Period because the other Guarantee Period begins on a
different date or is of a different length. Also, different rates of interest
may be credited to a renewed Guarantee Period and a Guarantee Period in respect
of a new Contract, an additional purchase payment or a transfer from the
Variable Account that begin on the same date and are of the same length. The
minimum Guaranteed Interest Rate is an effective annual rate of 3%.
From time to time American Franklin will, at its discretion, change the
Guaranteed Interest Rate for future Guarantee Periods of various lengths. These
changes will not affect the Guaranteed Interest Rates being paid on Guarantee
Periods that have already commenced. Each allocation or transfer of an amount
to a Guarantee Period commences the running of a new Guarantee Period with
respect to that amount, which will earn a Guaranteed Interest Rate that will
continue unchanged until the end of that period. The Guaranteed Interest Rate
will never be less than the minimum Guaranteed Interest Rate stated in each
Contract. American Franklin reserves the right to change the Guarantee Periods
available at any time.
AMERICAN FRANKLIN'S MANAGEMENT MAKES THE FINAL DETERMINATION OF THE
GUARANTEED INTEREST RATES TO BE DECLARED.
21
<PAGE>
AMERICAN FRANKLIN CANNOT PREDICT OR ASSURE THE LEVEL OF ANY FUTURE GUARANTEED
INTEREST RATES IN EXCESS OF THE MINIMUM GUARANTEED INTEREST RATE STATED IN A
CONTRACT.
Information concerning the Guaranteed Interest Rates applicable to the
various Guarantee Periods at any time may be obtained from an American Franklin
sales representative or from American Franklin's Administrative Office.
CONTRACT ISSUANCE AND PURCHASE PAYMENTS
The minimum initial purchase payment is $10,000. The amount of any
subsequent purchase payment allocated to any Division or Guarantee Period must
be at least $100. American Franklin reserves the right to modify these
minimums, in its discretion. American Franklin may waive the minimum initial
purchase payment for Contracts where the average purchase payment for a block of
applicants meets the minimum purchase payment requirement but certain individual
Contracts within the block may not meet this requirement. American Franklin
also may waive this requirement in the event of an exchange offer described
under "Exchange of Other Variable Annuity Contracts."
An application to purchase a Contract must be made by a signed written
application form provided by American Franklin or by such other medium or
format as may be agreed to by American Franklin. When a purchase payment
accompanies an application to purchase a Contract and the application is
properly completed, American Franklin will, within two business days after
receipt of the application at its Administrative Office, either process the
application, credit the purchase payment, and issue the Contract or reject
the application and return the purchase payment.
If the application or other information is incomplete when received,
American Franklin will attempt to contact the applicant to complete the
application or other information. If American Franklin cannot complete that
process within five business days of receipt of the initial purchase payment,
the entire initial purchase payment will be immediately returned unless the
applicant has been informed of the delay and requests that the initial purchase
payment not be returned. American Franklin will credit the balance of the
initial purchase payment, after deduction of any charges and any applicable
premium tax, to the Divisions and/or the Fixed Account selected by the applicant
when the application or other information is complete. Subsequent purchase
payments are credited as of the end of the Valuation Period in which they and
any required written identifying information, are received at American
Franklin's Administrative Office. American Franklin reserves the right to
reject any application or purchase payment for any reason.
If the Owner's Account Value in any Division falls below $500 because of a
partial withdrawal from the Contract, American Franklin reserves the right to
transfer, without charge, the remaining balance to the VIP Money Market
Division. If the Owner's Account Value in any Division falls below $500 because
of a transfer to another Division, Divisions or to the Fixed Account, American
Franklin reserves the right to transfer the remaining balance in that Division,
without charge and pro rata, to the Division, Divisions or Fixed Account to
which the transfer was made. These minimum requirements are waived for
transfers under the Variable Account Asset Rebalancing program. See "Variable
Account Asset Rebalancing." If the Owner's total Account
22
<PAGE>
Value falls below $500, American Franklin may cancel the Contract. Such a
cancellation would be considered a full surrender of the Contract. American
Franklin will provide an Owner with 60 days' advance notice of any such
cancellation.
So long as the Account Value does not fall below $500, an Owner is not
required to make any further purchase payments. Subsequent purchase
payments, however, may be made at any time prior to the Annuity Commencement
Date and while the Owner and Annuitant are still living. Checks for
subsequent purchase payments should be made payable to The American Franklin
Life Insurance Company and forwarded directly to American Franklin's
Administrative Office. American Franklin also accepts purchase payments by
wire or by exchange from another insurance company. An Owner may obtain
further information about how to make purchase payments by either of these
methods from a sales representative or from American Franklin's
Administrative Office. Purchase payments pursuant to salary reduction plans
may be made only with American Franklin's agreement. In the case of a
Qualified Contract issued for use as an Individual Retirement Annuity, annual
purchase payments may not, in general, exceed $2,000. However, if the
Individual Retirement Annuity is a Simplified Employee Pension, annual
purchase payments may not exceed $24,500. In the case of a Section 457
Contract, annual purchase payments may not, in general, exceed $7,500. Since
the minimum initial purchase payment is $10,000, a Contract intended for use
as an Individual Retirement Annuity may be purchased only through a Rollover
Contribution or as a Simplified Employee Pension. Also, it may not be
possible to purchase a Contact intended for use as a Section 457 Contract
with a participant's contributions to a Section 457 Plan for a single year.
Purchase payments begin to earn a return in the Divisions of Separate
Account VA-1 or the Guarantee Periods of the Fixed Account as of the date they
are credited to a Contract. The amount of each purchase payment that is to be
allocated to each Division and each Guarantee Period is selected (in whole
percentages) in the application form. These allocation percentages may be
changed at any time by written notice to American Franklin.
EXCHANGE OF OTHER VARIABLE ANNUITY CONTRACTS
American Franklin expects in the future to permit Contracts to be purchased
in exchange for a variable annuity contract issued by Franklin Life Variable
Annuity Fund A ("Franklin Life Fund A"), Franklin Life Variable Annuity Fund B
("Franklin Life Fund B") or Franklin Life Money Market Variable Annuity Fund C
("Franklin Life Fund C" and collectively with Franklin Life Fund A and Franklin
Life Fund B, the "Franklin Life Funds"), separate accounts of The Franklin which
are registered investment companies issuing interests in variable annuity
contracts. In connection with any such exchange, American Franklin may waive
the minimum initial purchase payment limitations of the Contracts. The contract
value on the date of exchange of a contract issued by one of the Franklin Life
Funds would be applied to acquire Accumulation Units or Annuity Units, depending
on whether annuity payments have commenced on the surrendered contract, with an
equal aggregate value, without the imposition of any charge or deduction. For
exchanges of Franklin Life Fund A and Franklin Life Fund B contracts, the
Surrender Charge of the Contract issued in exchange may be waived with respect
to funds so transferred to the Contract and amounts representing the appreciated
value thereof. For
23
<PAGE>
exchanges of a Franklin Life Fund C contract, the contingent deferred surrender
charge that applies to the withdrawal of amounts from a Franklin Life Fund C
contract may be waived to the extent that an exchange might be considered a
withdrawal, and all premium payments made on the Franklin Life Fund C contract
would be treated as though they were purchase payments made on the Contract
issued in exchange on the dates actually made for purposes of determining the
Surrender Charge applicable to the Contract. Upon redemption of a Contract
issued in exchange for a contract issued by one of the Franklin Life Funds,
however, a Surrender Charge would be applied as described below with respect to
any new purchase payments made on the Contract after such exchange is made. The
foregoing exchange privilege would be designed to comply with a regulation of
the Securities and Exchange Commission which permits exchange offers to the
holders of variable annuity contracts issued by an insurance company within the
same group of insurance companies as the company making the offer without prior
approval of the Securities and Exchange Commission.
Code Section 1035 provides generally that no gain or loss is recognized
when an annuity contract is received in exchange for another annuity contract
provided that no cash or other property is received in the exchange transaction
and that the same person or persons are the Owner or Annuitant under the
contract received in the exchange as under the original contract surrendered in
the exchange. An annuity contract issued after January 18, 1985 in exchange for
another annuity contract is treated as a new contract for purposes of the
application of certain rules including the federal income tax penalty and
required distribution rules discussed in "Federal Income Tax Matters-Non-
Qualified Contracts." Special rules apply to an exchange of a contract issued
prior to August 14, 1982. Also, there are additional considerations involved
when the contracts are issued in connection with Qualified Plans. Special rules
and procedures apply in order for an exchange to meet the requirements of
Section 1035. Failure to satisfy these rules and procedures could result in the
recognition of gain or loss for federal income tax purposes and the imposition
of federal tax penalties upon the exchange of a contract issued by a Franklin
Life Fund. Since the income and withholding tax consequences of such redemption
and purchase depend on many factors, any person contemplating exchange of a
contract issued by a Franklin Life Fund for a Contract, if and when permitted by
American Franklin, is advised to consult a qualified tax advisor prior to the
exchange.
ACCOUNT VALUE
Prior to the Annuity Commencement Date, the Account Value under a Contract
is the sum of the Variable Account Value and Fixed Account Value, as discussed
below.
VARIABLE ACCOUNT VALUE
The Variable Account Value as of any Valuation Date prior to the Annuity
Commencement Date is the sum of the Variable Account Values in each Division of
Separate Account VA-1 as of that date. The Variable Account Value in any such
Division is the product of the number of Accumulation Units in that Division
multiplied by the value of one such Accumulation Unit as of that Valuation Date.
There is no guaranteed minimum Variable
24
<PAGE>
Account Value. To the extent that the Account Value is allocated to Separate
Account VA-1, the Owner bears the entire risk of investment losses.
Accumulation Units in a Division are credited when purchase payments are
allocated or amounts are transferred to that Division. Similarly, such
Accumulation Units are canceled to the extent amounts are transferred or
withdrawn from a Division or to the extent necessary to pay certain charges
under the Contract. The crediting or cancellation of Accumulation Units is
based on the value of such Accumulation Units at the end of the Valuation Date
as of which the related amounts are being credited to or charged against the
Variable Account Value.
The value of an Accumulation Unit for a Division on any Valuation Date is
equal to the previous value of that Division's Accumulation Unit multiplied by
that Division's net investment factor for the Valuation Period ending on that
Valuation Date. The value of an Accumulation Unit for each Division at the
commencement of operations is $5.00.
The net investment factor for a Division is determined by dividing (1) the
net asset value per share of the Portfolio shares held by the Division,
determined at the end of the current Valuation Period, plus the per share amount
of any dividend or capital gains distribution made with respect to the Portfolio
shares held by the Division during the current Valuation Period, by (2) the net
asset value per share of the Portfolio shares held in the Division as determined
at the end of the previous Valuation Period, and subtracting from that result a
factor representing the mortality risk, expense risk and administrative expense
charge.
FIXED ACCOUNT VALUE
The Fixed Account Value as of any Valuation Date prior to the Annuity
Commencement Date is the sum of the Fixed Account Value in each Guarantee Period
as of that date. The Fixed Account Value in any Guarantee Period is equal to
the following amounts, in each case increased by accrued interest at the
applicable Guaranteed Interest Rate: (1) the amount of net purchase payments,
renewals and transferred amounts allocated to the Guarantee Period less (2) the
amount of any transfers or withdrawals out of the Guarantee Period, including
withdrawals to pay applicable charges.
Fixed Account Value is guaranteed by American Franklin. Therefore,
American Franklin bears the investment risk with respect to amounts allocated to
the Fixed Account, except to the extent that American Franklin may vary the
Guaranteed Interest Rate for future Guarantee Periods (subject to the minimum
Guaranteed Interest Rate stated in a Contract).
TRANSFER, VARIABLE ACCOUNT ASSET REBALANCING, SURRENDER AND
PARTIAL WITHDRAWAL OF ACCOUNT VALUE
TRANSFERS
Commencing 30 days after the Contract's date of issue and prior to the
Annuity Commencement Date, Account Value may be transferred at any time among
the available Divisions of Separate Account VA-1 and Guarantee Periods, subject
to the conditions described
25
<PAGE>
below. Such transfers will be effective at the end of the Valuation Period in
which American Franklin receives a written or telephone transfer request.
If a transfer would cause the Account Value in any Division or Guarantee
Period to fall below $500, American Franklin reserves the right also to transfer
the remaining balance in that Division or Guarantee Period in the same
proportions as the transfer request.
Prior to the Annuity Commencement Date and after the first 30 days
following the date of issue of the Contract, an Owner may make up to 12
transfers each Contact Year without charge, but each additional transfer will be
subject to a $25 charge. Also, no more than 25% of the Account Value allocated
to a Guarantee Period at its inception may be transferred during any Contract
Year. This 25% limitation does not apply to transfers within 15 days before or
after the end of the Guarantee Period in which the transferred amounts were
being held to the same or another Guarantee Period, or to a renewal at the end
of the Guarantee Period to a Guarantee Period of the same length.
Subject to the above general rules concerning transfers, an automatic
transfer plan may be established, whereby amounts are automatically transferred
by American Franklin from the VIP Money Market Division to one or more other
Divisions on a monthly, quarterly or semi-annual basis. Transfers under such
automatic transfer plan will not count towards the 12 free transfers each
Contract Year, and will not incur a $25 charge. Additional information about
how to establish an automatic transfer program may be obtained from a sales
representative or from American Franklin's Administrative Office.
If the person or persons that are entitled to make transfers have provided
a properly completed Telephone Transfer Privilege form that is on file with
American Franklin, transfers may be made pursuant to telephone instructions,
subject to the terms of the Telephone Transfer Privilege authorization.
American Franklin will honor telephone transfer instructions from any person who
provides the correct information, so there is a risk of possible loss if
unauthorized persons use this service in the Owner's name. Under the Telephone
Transfer Privilege, American Franklin is not liable for any acts or omissions
based upon instructions that it reasonably believes to be genuine, including
losses arising from errors in the communication of transfer instructions.
American Franklin has established procedures for accepting telephone transfer
instructions, which include verification of the Contract number, the identity of
the caller, both the Annuitant's and Owner's names, and a form of personal
identification from the caller. American Franklin will mail to the Owner a
written confirmation of the transaction. If several persons seek to effect
telephone transfers at or about the same time, or if the recording equipment
malfunctions, it may be impossible to make a telephone transfer at the time
desired. If this occurs, the Owner should submit a written transfer request.
Also, if, due to equipment malfunction or other circumstances, the recording of
a telephone request is incomplete or not fully comprehensible, American Franklin
will not process the transaction. The phone number for telephone exchanges is
shown on the cover page of this Prospectus.
26
<PAGE>
The Contracts are not designed for professional market timing organizations
or other entities utilizing programmed and frequent transfers. American
Franklin reserves the right at any time and without prior notice to any party to
terminate, suspend, or modify its policy regarding transfers.
VARIABLE ACCOUNT ASSET REBALANCING
Variable Account Asset Rebalancing permits an Owner to authorize American
Franklin to transfer automatically funds among the Divisions of Separate Account
VA-1 on a quarterly, semi-annual or annual basis, measured from the Contract
Anniversary date, so that the values in each Division on such date correspond to
a percentage allocation of the total Variable Account Value designated by the
Owner. Variable Account Asset Rebalancing may not be used to transfer amounts
to or from any Guarantee Period.
Variable Account Asset Rebalancing is designed to permit the exchange of
Variable Account Value from those Divisions that have increased in value to
those Divisions that have declined in value. Over time, this method of
investing may aid an Owner in purchasing at lower prices and selling at higher
prices, although there can be no assurance of this and this method does not
guarantee that the Owner will experience profits or that the Owner will not
experience losses.
This option is available for Contracts having an Account Value of at least
$25,000 at the time the application to enroll in the Variable Account Asset
Rebalancing Program is received by American Franklin. An Owner may submit an
application to enroll in the program at any time, and once enrolled, an Owner
may discontinue his or her participation in the program at any time effective
after a written notice to such effect is received by American Franklin.
Transfers under the Variable Account Asset Rebalancing Program will not count
towards the twelve free transfers each Contract Year, and will not incur a $25
charge. See "Transfers," immediately above.
SURRENDERS AND PARTIAL WITHDRAWALS
At any time prior to the Annuity Commencement Date and while the Annuitant
is still living, the Owner may make a full surrender of or partial withdrawal
from his or her Contract.
The amount payable to the Owner upon full surrender is the Owner's Account
Value at the end of the Valuation Period in which American Franklin receives a
written surrender request in good order, minus any applicable Surrender Charge,
minus the amount of any uncollected Annual Contract Fee (see "Annual Contract
Fee") and minus any applicable premium tax. American Franklin's current
practice is to require that the Owner return the Contract with any request for a
full surrender. After a full surrender, or if the Owner's Account Value falls
to zero, all rights of the Owner, Annuitant or any other person with respect to
the Contract will terminate. All collateral assignees of record must consent to
any full surrender or partial withdrawal.
A written request for a partial withdrawal should specify the Divisions of
Separate Account VA-1, or the Guarantee Periods of the Fixed Account, from which
the Owner wishes the partial withdrawal to be made. If not specified, or if the
withdrawal cannot be made in accordance with the Owner's specification, to the
extent necessary the withdrawal will be taken pro-rata from the
27
<PAGE>
Divisions and Guarantee Periods, based on the Account Value in each. Partial
withdrawal requests must be for at least $100 or, if less, all of the Account
Value. If the remaining Account Value in a Division or Guarantee Period would
be less than $500 as a result of the withdrawal (except for the VIP Money Market
Division), American Franklin reserves the right to transfer, without charge, the
remaining balance to the VIP Money Market Division. Unless the Owner requests
otherwise, upon a partial withdrawal, the Accumulation Units and Fixed Account
interests that are cancelled will have a total value equal to the amount of the
withdrawal request, and the amount payable to the Owner will be the amount of
the withdrawal request less any Surrender Charge, uncollected Annual Contract
Fee and premium tax if applicable, payable upon the partial withdrawal.
American Franklin also makes available a systematic withdrawal plan under
which automatic partial withdrawals may be made at periodic intervals in a
specified amount, subject to the terms and conditions applicable to other
partial withdrawals. Additional information about how to establish such a
systematic withdrawal program may be obtained from a sales representative or
from American Franklin's Administrative Office. American Franklin reserves
the right to modify or terminate the procedures for systematic withdrawals at
any time.
There are certain restrictions on Section 403(b) tax sheltered annuities.
Contributions to the Contract and any increases in cash value may not be
distributed unless the Owner/employee has (a) attained age 59 1/2,
(b) terminated employment, (c) died, (d) become disabled or (e) experienced
financial hardship. Distributions due to financial hardship or separation from
service may still be subject to a penalty tax of 10%. A payment by American
Franklin pursuant to a full surrender or partial withdrawal may be subject to
federal income tax withholding and federal tax penalties. See "Federal Income
Tax Matters."
Contracts issued to participants in the Texas Optional Retirement Program,
as codified in Chapter 830 of Title 8 of the Government Code of the State of
Texas, may not be redeemed prior to the participant's termination of employment
in the Texas public institutions of higher education or the participant's
retirement, death or attainment of age 70 1/2.
ANNUITY PERIOD AND ANNUITY PAYMENT OPTIONS
ANNUITY COMMENCEMENT DATE
Subject to any limitations in a Qualified Plan or Section 457 Plan, the
Owner may select the Annuity Commencement Date when applying to purchase a
Contract and may change a previously selected date at any time prior to the
beginning of an Annuity Payment Option by submitting a written request, subject
to approval by American Franklin. The Annuity Commencement Date may be any day
of any month up to and including the Annuitant's 99th birthday. See "Federal
Income Tax Matters" for a description of the penalties that may attach to
distributions that are made prior to the Annuitant's attaining age 59 1/2 under
any Contract or that begin later than April 1 of the year following the calendar
year in which the Annuitant attains age 70 1/2 or retires under Qualified
Contracts or Section 457 Contracts.
28
<PAGE>
APPLICATION OF ACCOUNT VALUE
American Franklin will, except in the case of a Section 457 Contract,
automatically apply the Variable Account Value in any Division to provide
Variable Annuity Payments based on that Division and the Fixed Account Value to
provide Fixed Annuity Payments. However, if the Owner gives other written
instructions at least 30 days prior to the Annuity Commencement Date, American
Franklin will apply the Owner's Account Value in different proportions. In the
case of a Section 457 Contract, under current federal income tax rules both the
Variable Account Value in any Division and the Fixed Account Value may be
required to be applied to provide Fixed Annuity Payments.
American Franklin deducts any applicable state and local premium taxes from
the amount of Account Value being applied to an Annuity Payment Option. In some
cases, American Franklin may deduct a Surrender Charge from the amount being
applied. See "Surrender Charge." Subject to any such adjustments, the Owner's
Variable and Fixed Account Value are applied to an Annuity Payment Option, as
discussed below, as of the end of the Valuation Period that contains the tenth
day prior to the Annuity Commencement Date.
FIXED AND VARIABLE ANNUITY PAYMENTS
The amount of the first monthly Fixed or Variable Annuity Payment will be
at least as great as the amount determined from the annuity tables set forth in
the Contract, based on the amount of the Owner's Account Value that is applied
to provide the Fixed or Variable Annuity Payments. Thereafter, the amount of
each monthly Fixed Annuity Payment is fixed and specified by the terms of the
Annuity Payment Option selected.
The Account Value that is applied to provide Variable Annuity Payments is
converted to a number of Annuity Units by dividing the amount of the first
Variable Annuity Payment by the value of an Annuity Unit of the relevant
Division as of the end of the Valuation Period that includes the tenth day prior
to the Annuity Commencement Date. This number of Annuity Units thereafter
remains constant with respect to any Annuitant, and the amount of each
subsequent Variable Annuity Payment is determined by multiplying this number by
the value of an Annuity Unit as of the end of the Valuation Period that contains
the tenth day prior to the date of each payment. If the Variable Annuity
Payments are based on more than one Division, these calculations are performed
separately for each Division. The value of an Annuity Unit at the end of a
Valuation Period is the value of the Annuity Unit at the end of the previous
Valuation Period, multiplied by the net investment factor (see "Variable Account
Value") for the Valuation Period, with an offset for the 3.5% assumed interest
rate used in the Contract's annuity tables. The value of an Annuity Unit for
each Division at the commencement of operations is $5.00.
As a result of the foregoing computations, if the net investment return for
a Division for any month is at an annual rate of more than the assumed interest
rate used in the Contract's annuity tables, any Variable Annuity Payment based
on that Division will be greater than the Variable Annuity Payment based on that
Division for the previous month. If the net investment return for a Division
for any month is at an annual rate of less than the assumed interest rate used
in the Contract's annuity tables, any Variable Annuity Payment based on that
Division will be less than the Variable Annuity Payment based on that Division
for the previous month.
29
<PAGE>
ANNUITY PAYMENT OPTIONS
The Owner may elect to have annuity payments made beginning on the Annuity
Commencement Date under any one of the Annuity Payment Options described below.
American Franklin will notify the Owner 60 to 90 days prior to the scheduled
Annuity Commencement Date that the Contract is scheduled to mature, and request
that an Annuity Payment Option be selected. If the Owner has not selected an
Annuity Payment Option ten days prior to the Annuity Commencement Date, American
Franklin will proceed as follows: (1) if the scheduled Annuity Commencement Date
is any date prior to the Annuitant's 99th birthday, American Franklin will
extend the Annuity Commencement Date to the Annuitant's 99th birthday, subject
to various state limitations; or (2) if the scheduled Annuity Commencement Date
is the Annuitant's 99th birthday, the Account Value less any applicable
Surrender Charge, Annual Contract Fee and premium taxes will be paid in one sum
to the Owner.
The Code imposes minimum distribution requirements that have a bearing on
the Annuity Payment Option and the Annuity Commencement Date that should be
chosen in connection with Non-Qualified Contracts, Qualified Contracts and
Section 457 Contracts and may make certain Annuity Payment Options unavailable.
See "Federal Income Tax Matters," below, and "Limitations on Annuity Payment
Options" in the Statement of Additional Information. American Franklin is not
responsible for monitoring or advising Owners as to whether the minimum
distribution requirements are being met, unless American Franklin has received a
specific written request to do so.
No election of any Annuity Payment Option may be made unless an initial
annuity payment of at least $100 would be provided, where only Fixed or only
Variable Annuity Payments are elected, and $50 on each basis when a combination
of Variable and Fixed Annuity Payments is elected. If these minimums are not
met, American Franklin will first reduce the frequency of annuity payments, and
if the minimums are still not met, American Franklin will make a lump-sum
payment to the Annuitant or other properly designated payee in the amount of the
Owner's Account Value, less any applicable Surrender Charge, any uncollected
Annual Contract Fee, any applicable premium tax and any applicable federal
income tax withholding.
The Owner, or if the Owner has not done so, the Beneficiary may, within 60
days after the death of the Owner or Annuitant, elect that any amount due to the
Beneficiary be applied under any option described below, subject to certain tax
law requirements and the requirements of Qualified Plans and Section 457 Plans.
See "Death Benefit." Thereafter, the Beneficiary will have all the remaining
rights and powers under the Contract and be subject to all the terms and
conditions thereof, except that in the case of Qualified Contracts and Section
457 Contracts, the Owner will retain those rights and powers. The first annuity
payment will be made at the beginning of the second month following the month in
which American Franklin approves the settlement request. Annuity Units will be
credited based on Annuity Unit Values at the end of the Valuation Period that
contains the tenth day prior to the beginning of said second month.
When an Annuity Payment Option becomes effective, the Contract must be
delivered to American Franklin's Administrative Office, in exchange for a
payment contract providing for the option
30
<PAGE>
elected. An Annuity Payment Option may not be terminated once annuity payments
have commenced.
Information about the relationship between the Annuitant's sex and the
amount of annuity payments, including requirements for "uni-sex" annuity rates
in certain states and in connection with certain "employer-related" plans is set
forth under "Use of Gender Based Annuity Tables," below and under "Gender of
Annuitant" in the Statement of Additional Information. See "Table of Contents
of Statement of Additional Information."
FIRST OPTION - LIFE ANNUITY. An annuity payable monthly during the lifetime of
the Annuitant, ceasing with the last annuity payment due prior to the death of
the Annuitant. This Option offers the maximum level of monthly annuity payments
since there is no guarantee of a minimum number of annuity payments or provision
for any continued payments to a Beneficiary upon the death of the Annuitant. It
would be possible under this Option for the Annuitant to receive only one
annuity payment if he or she dies before the second annuity payment, or to
receive only two annuity payments if he or she died after the second annuity
payment but before the third annuity payment, and so forth.
SECOND OPTION - LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS CERTAIN. An
annuity payable monthly during the lifetime of the Annuitant including the
commitment that if, at the death of the Annuitant, annuity payments have been
made for less than 120 months, 180 months, or 240 months (as selected by the
Owner in electing this Option), annuity payments shall be continued during the
remainder of the selected period to the Beneficiary.
THIRD OPTION - JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable monthly
during the joint lifetime of the Annuitant and another payee, and thereafter
during the remaining lifetime of the survivor, ceasing with the last annuity
payment due prior to the death of the survivor. Since there is no minimum
number of guaranteed payments under this Option, it would be possible under this
Option to receive only one annuity payment if both the Annuitant and the other
payee died before the second annuity payment date, or to receive only two
annuity payments if both the Annuitant and the other payee died after the second
annuity payment but before the third annuity payment, and so forth.
FOURTH OPTION - PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly to
the Annuitant or other properly-designated payee, for a number of years which
may be from five to 40 (as selected by the Owner in electing this Option). At
the death of the Annuitant or other payee, payments will be continued to the
Beneficiary for the remaining period. If Variable Annuity Payments are selected
under this Option, the designated period may not exceed the life expectancy of
the Annuitant or other properly-designated payee.
FIFTH OPTION - PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Option is available
only as a Fixed Annuity. The amount due will be paid to the Annuitant in equal
monthly annuity payments of a designated dollar amount (not less than $125 nor
more than $200 per annum per $1,000 of the original amount due) until the
remaining balance is less than the amount of one annuity payment, at which time
such balance will be paid and will be the final annuity payment under this
Option. Upon the death of the Annuitant, payments will be continued to the
31
<PAGE>
Beneficiary until such remaining balance is paid. The remaining balance at the
end of any month is determined by decreasing the balance at the end of the
previous month by the amount of any installment paid during the month and by
adding to the result interest at a rate not less than 3.5% compounded annually.
Under the fourth option there is no mortality guarantee by American
Franklin, even though the value of Accumulation Units and Annuity Units applied
to this option will be reduced as a result of a charge to Separate Account VA-1
which is partially for mortality risks. See "Charge to Separate Account VA-1."
Under federal tax regulations, the election of the fourth or fifth options
may be treated in the same manner as a surrender of the total Account Value.
For tax consequences of such treatment, see "Federal Income Tax Matters." Also,
in such a case, tax-deferred treatment of subsequent earnings may not be
available.
ALTERNATIVE AMOUNT UNDER FIXED LIFE ANNUITY OPTIONS - Each Contract
provides that when Fixed Annuity Payments are to be made under one of the
first three Annuity Payment Options described above, the Owner (or if the
Owner has not elected a payment option, the Beneficiary) may elect monthly
payments to the Annuitant or other properly designated payee equal to the
monthly payment available for an annuitant of the same adjusted age and, if
applicable, the same sex as the Annuitant based on single payment immediate
fixed annuity rates then in use by American Franklin. The purpose of this
provision is to assure the Annuitant that, at retirement, if the fixed
annuity purchase rate then offered by American Franklin for new single
payment immediate annuity contracts is more favorable than the annuity rates
guaranteed by the Contract, the Annuitant or other properly designated payee
will be given the benefit of the new annuity rates.
In lieu of monthly payments, payments may be elected on a quarterly,
semi-annual or annual basis, in which case the amount of each annuity payment
will be determined on a basis consistent with that described above for monthly
payments.
TRANSFERS
After the Annuity Commencement Date, the Annuitant or other properly
designated payee may make one transfer every 180 days among the available
Divisions of Separate Account VA-1 or from the Divisions to a fixed Annuity
Payment Option. No charge will be assessed for such transfer. No transfers
from a fixed to a variable Annuity Payment Option are permitted. If a
transfer would cause the value that is attributable to a Contract in any
Division to fall below $500, American Franklin reserves the right to transfer
the remaining balance in that Division in the same proportion as the transfer
request. Transfers will be effected at the end of the Valuation Period in
which American Franklin receives a written transfer request at American
Franklin's Administrative Office. American Franklin reserves the right to
terminate or restrict transfers at any time.
USE OF GENDER BASED ANNUITY TABLES
Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS, have
held that the use of gender based mortality tables to determine benefits under
"employer-related" plans may
32
<PAGE>
violate Title VII of the Civil Rights Act of 1964 ("Title VII"). These cases
indicate that plans sponsored by employers subject to Title VII generally may
not provide different benefits for similarly-situated men and women.
The Contracts described in this Prospectus incorporate annuity rate tables
which reflect the age and sex of the Annuitant and the Annuity Option selected.
Such sex-distinct tables continue to be appropriate for use, for example, under
Contracts which are not purchased in connection with an "employer-related" plan
subject to NORRIS (such as Individual Retirement Annuities not sponsored by an
employer). However, in order to enable subject employers to comply with NORRIS,
American Franklin will provide Contracts incorporating "unisex" annuity rate
tables for use in connection with "employer-related" plans. Persons
contemplating purchase of a Contract, as well as current Owners, should consult
a legal advisor regarding the applicability and implications of NORRIS in
connection with their purchase and ownership of a Contract.
DEATH BENEFIT
The Contracts provide that in the event the Annuitant dies before the
Annuity Commencement Date, the Contingent Annuitant, if one was named in the
application for the Contract, will become the Annuitant. If the Annuitant
dies before the Annuity Commencement Date and either (a) there is no
designated Contingent Annuitant or (b) the Contingent Annuitant predeceases
the Annuitant, the Beneficiary will receive the Death Benefit as determined
on the date of receipt of due proof of death by American Franklin at its
Administrative Office. The Contracts also provide for payment of a Death
Benefit to the Beneficiary if the Owner (including the first to die in the
case of joint Owners) of a Non-Qualified Contract dies. However, if the
designated Beneficiary is the Owner's surviving spouse, the designated
Beneficiary may elect to continue the Contract as described below. The Death
Benefit, prior to the deduction of any applicable premium taxes, will equal
the greater of the Account Value or the sum of all net purchase payments
minus amounts surrendered or withdrawn.
Death Benefit proceeds will remain invested in the Fixed Account and
Separate Account VA-1 in accordance with the purchase payment allocation
instructions given by the Owner until the proceeds are paid or American Franklin
receives new instructions from the Beneficiary. The death benefit may be taken
in one sum, to be paid within 7 days after the date due proof of death and a
written request in good order from the Beneficiary as to the manner of payment
are received (except when American Franklin is permitted to defer such payment
under the 1940 Act, or under any of the Annuity Payment Options then being
offered by American Franklin). The proceeds due on the death may be applied to
provide Variable Annuity Payments, Fixed Annuity Payments, or a combination of
Variable and Fixed Annuity Payments.
If the Owner has not already done so, the Beneficiary may, within 60 days
after the date the Death Benefit becomes payable, elect to receive the Death
Benefit in one sum or under any of the available Annuity Payment Options. If
American Franklin receives no request as to the manner of payment, payment will
be made in one sum, based on values determined at that time. If an Annuity
Payment Option is selected, unless directed otherwise at least 30 days prior to
the Annuity
33
<PAGE>
Commencement Date, American Franklin will apply the Fixed Account Value to
provide Fixed Annuity Payments and the Variable Account Value to provide
Variable Annuity Payments, except that in the case of a Section 457 Contract,
all Account Value will be applied to provide Fixed Annuity Payments.
If the Owner is not an individual, the Death Benefit payable upon the death
of the Annuitant prior to the Annuity Commencement Date will be payable only as
one sum or under the same Annuity Options and in the same manner as if an
individual Owner died on the date of the Annuitant's death.
The payment of the Death Benefit may be delayed for any period during which
(a) the New York Stock Exchange is closed other than customary holiday or
weekend closings, or trading on the New York Stock Exchange is restricted as
determined by the Securities and Exchange Commission; (b) the Securities and
Exchange Commission determines that an emergency exists making valuation or
disposal of securities not reasonably practicable; or (c) the Securities and
Exchange Commission by order permits the delay for the protection of Owners.
If the Owner under a Non-Qualified Contract dies prior to the Annuity
Commencement Date, the Code requires that all amounts payable under the
Contract be distributed (a) within five years of the date of death or (b) as
annuity payments beginning within one year of the date of death and
continuing over a period not extending beyond the life expectancy of the
designated Beneficiary. If the designated Beneficiary is the Owner's
surviving spouse, the spouse may elect to continue the Contract as the new
Owner and, if the original Owner was the Annuitant, as the new Annuitant. If
the Owner is not a natural person, these requirements apply upon the death of
the primary Annuitant within the meaning of the Code. Failure to satisfy
these Code distribution requirements may result in serious adverse tax
consequences. Under parallel provisions of the Code, similar requirements
apply to retirement and deferred compensation plans in connection with which
Qualified Contracts and Section 457 Contracts are issued.
Once American Franklin has paid the Death Benefit, the Contract terminates
and American Franklin has no further obligations thereunder.
CHARGES UNDER THE CONTRACTS
PREMIUM TAXES
When applicable, American Franklin will deduct an amount to cover premium
taxes. Such deduction will be made, in accordance with applicable state law:
(1) from purchase payment(s) when received; or
(2) from the Owner's Account Value at the time annuity payments begin; or
(3) from the amount of any partial withdrawal; or
34
<PAGE>
(4) from proceeds payable upon termination of the Contract for any other
reason, including death of the Annuitant or Owner, or surrender of the
Contract.
If premium tax is paid, American Franklin may reimburse itself for such tax
when deduction is being made under paragraphs 2, 3, or 4 above calculated by
multiplying the sum of purchase payments being withdrawn by the applicable
premium tax percentage.
Applicable premium tax rates depend upon the Owner's then current place of
residence. Applicable rates currently range from 0% to 3.5% and are subject to
change. American Franklin will not make a profit on this charge.
SURRENDER CHARGE
The Surrender Charge reimburses American Franklin for part of its expenses
related to distributing the Contracts. American Franklin believes, however,
that the amount of such expenses will exceed the amount of revenues generated by
the Surrender Charge. American Franklin will pay such excess out of its general
surplus, which might include profits from the charge for the assumption of
mortality and expense risks and the Annual Contract Fee.
Unless a withdrawal is exempt from the Surrender Charge (as discussed
below), the Surrender Charge is a percentage of the amount of each purchase
payment that is withdrawn during the first seven years after it was received.
The percentage declines depending on how many years have passed since the
withdrawn purchase payment was originally credited to Account Value, as follows:
Year of
Purchase Surrender Charge as a
Payment Percentage of Purchase
Withdrawal Payment Withdrawn
---------- ----------------
1st 6%
2nd 6%
3rd 5%
4th 5%
5th 4%
6th 4%
7th 2%
Thereafter 0%
Only for the purpose of computing the Surrender Charge, the earliest
purchase payments are deemed to be withdrawn first, and purchase payments are
deemed to be withdrawn before any amounts in excess of purchase payments are
withdrawn from Account Value. The following transactions will be considered as
withdrawals, for purposes of assessing the Surrender Charge: total surrender,
partial withdrawal, commencement of an Annuity Payment Option, and termination
due to insufficient Account Value.
35
<PAGE>
Nevertheless, the Surrender Charge will not apply to withdrawals in the
following circumstances:
- The amount of withdrawals that exceeds the cumulative amount of purchase
payments;
- Death of the Annuitant, at any age, after the Annuity Commencement Date;
- Death of the Annuitant, at any age, prior to the Annuity Commencement
Date, provided no Contingent Annuitant survives;
- Death of the Owner, including the first to die in the case of joint
Owners, of a Non-Qualified Contract, unless the Contract is being continued
under the special rule for a surviving spouse (see "Death Benefit");
- Annuitization under an Annuity Payment Option involving payments for at
least 10 years, or annuitization under an Annuity Payment Option involving a
life contingency if the life expectancy is at least 10 years;
- If the Owner or Annuitant has been confined to a long-term care facility
or is subject to a terminal illness (to the extent that the riders for these
matters are available in the applicable state), after the first Contract Year as
set forth under "Long-Term Care and Terminal Illness."
The Surrender Charge also may be waived with respect to the surrender of a
Contract, or to the withdrawal of Account Value (limited to the Variable Account
Value and the one year Guarantee Period) of a Contract, issued to Owners who are
bona-fide full-time employees of American Franklin, The Franklin or Franklin
Financial Services Corporation, the principal underwriter of the Contracts.
These waivers of Surrender Charge would be based upon the Contract Owner's
status at the time the Contract was purchased.
In addition, the Surrender Charge does not apply to the portion of a first
withdrawal or total surrender in any Contract Year that does not exceed 10% of
the amount of purchase payments that (a) have not previously been withdrawn and
(b) have been credited to the Contract for at least one year, but not more than
seven years. If multiple withdrawals are made during a Contract Year, the
amount eligible for the free withdrawal will be recalculated at the time of each
withdrawal. After the first Contract Year, non-automatic and automatic
withdrawals may be made in the same Contract Year subject to the 10% limitation.
For withdrawals under a systematic withdrawal plan, purchase payments credited
for 30 days or more are eligible for the 10% free withdrawal privilege.
The Surrender Charge will not apply to any amounts withdrawn which are in
excess of the amount permitted by the 10% free withdrawal privilege, described
above, if such amounts are required to be withdrawn to obtain or retain
favorable tax treatment. This exception is subject to American Franklin's
approval.
A free withdrawal pursuant to any of the foregoing Surrender Charge
exceptions is not deemed to be a withdrawal of purchase payments, except for
purposes of computing the 10% free withdrawal described in the preceding
paragraphs. A federal tax penalty may be imposed on
36
<PAGE>
distributions if the recipient is under age 59 1/2. In addition, distributions
may be subject to federal income tax withholding. See "Federal Income Tax
Matters."
TRANSFER CHARGES
The charges to defray the expense of effecting transfers are described
under "Transfer, Variable Account Asset Rebalancing, Surrender and Partial
Withdrawal of Account Value - Transfers" and "Annuity Period and Annuity Payment
Options - Transfers." These charges are designed not to yield a profit to
American Franklin.
ANNUAL CONTRACT FEE
An Annual Contract Fee of $30 will be deducted from each Owner's Account
Value on each Contract Anniversary prior to the Annuity Commencement Date. This
fee is for administrative expenses (which do not include expenses of
distributing the Contracts), and American Franklin does not expect that the
revenues derived from this fee will exceed such expenses. The fee will be
allocated among the Guarantee Periods and Divisions in proportion to the Account
Value in each. If a full surrender of a Contract occurs on a date other than a
Contract Anniversary, the entire fee for the Contract Year during which the
surrender occurs will be deducted from the proceeds. This Annual Contract Fee
is currently waived if cumulative purchase payments are at least $75,000.
American Franklin reserves the right to waive the Annual Contract Fee under
other circumstances.
CHARGE TO SEPARATE ACCOUNT VA-1
To offset other administrative expenses not covered by the Annual Contract
Fee discussed above, and to compensate American Franklin for assuming mortality
and expense risks under the Contracts, Separate Account VA-1 will incur a daily
charge at an annualized rate of 1.40% of the average daily net asset value of
Separate Account VA-1 attributable to the Contracts. Of this amount, .15% on an
annual basis is for administrative expenses and 1.25% on an annual basis is for
the assumption of mortality and expense risks. American Franklin does not
expect to earn a profit on that portion of the charge which is for
administrative expenses, but does expect to derive a profit from the portion
which is for the assumption of mortality and expense risks. There is no
necessary relationship between the amount of administrative charges imposed on a
given Contract and the amount of expenses actually attributable to that
Contract.
In assuming the mortality risk, American Franklin is subject to the risk
that its actuarial estimate of mortality rates may prove erroneous and that
Annuitants will live longer than expected, or that more Owners or Annuitants
than expected will die at a time when the death benefit guaranteed by American
Franklin is higher than the net surrender value of their interests in the
Contracts. In assuming the expense risk, American Franklin is subject to the
risk that the revenues from the expense charges under the Contracts (which
charges are guaranteed not to be increased) will not cover its expense of
administering the Contracts.
37
<PAGE>
MISCELLANEOUS
Charges and expenses are paid out of the assets of each Portfolio, as
described in the prospectus relating to that Portfolio. American Franklin
reserves the right to impose charges or establish reserves for any federal,
state or local taxes incurred or that may be incurred by American Franklin, and
that may be deemed attributable to the Contracts.
SYSTEMATIC WITHDRAWAL PLAN
Automatic partial withdrawals, with minimum payments of $100, may be made
at periodic intervals through a systematic withdrawal program. The Owner may
choose monthly, quarterly, semi-annual or annual payment schedules and may
start, stop, increase or decrease payments, subject to the minimum payment
limit. Withdrawals may start as early as 30 days after the issue date of the
Contract and may be taken from the Fixed Account or any Division, as specified
by the Owner. Systematic withdrawals are subject to the terms and conditions
applicable to other partial withdrawals, including Surrender Charges and
exceptions to Surrender Charges and may be subject to federal tax penalties and
federal income tax withholding.
REDUCTION IN SURRENDER CHARGES OR ADMINISTRATIVE CHARGES
American Franklin may reduce the Surrender Charges or administrative
charges imposed under certain Qualified Contracts and Section 457 Contracts in
connection with employer-sponsored plans. Any such reductions will reflect
differences in costs or services (due to such factors as reduced sales expenses
or administrative efficiencies relating to serving a large number of employees
of a single employer and functions assumed by the employer that American
Franklin otherwise would have to perform) and will not be unfairly
discriminatory as to any person.
LONG-TERM CARE AND TERMINAL ILLNESS
THE RIDERS DESCRIBED BELOW ARE NOT AVAILABLE IN ALL STATES, AND AN OWNER
SHOULD THEREFORE CONSULT A SALES REPRESENTATIVE OR AMERICAN FRANKLIN'S
ADMINISTRATIVE OFFICE TO DETERMINE WHETHER THEY WILL APPLY. THERE IS NO
SEPARATE CHARGE FOR THESE RIDERS.
LONG-TERM CARE
Pursuant to a special Contract rider, after the first Contract Year, no
Surrender Charge will apply during any period of time that the Annuitant or
Owner is confined for 30 days or more (or within 30 days after discharge) in a
hospital or state licensed in-patient nursing facility. American Franklin must
receive satisfactory written proof of such confinement.
TERMINAL ILLNESS
This rider provides that, after the first Contract Year, no Surrender
Charge will apply if American Franklin has received a physician's written
certification that the Owner or Annuitant is terminally ill and not expected to
live more than twelve months and American Franklin has waived
38
<PAGE>
its right to a second physician's opinion or obtained a confirmatory opinion
from a second physician.
OTHER ASPECTS OF THE CONTRACTS
Only an officer of American Franklin can agree to change or waive the
provisions of any Contract. The Contracts are non-participating and are not
entitled to share in any dividends, profits or surplus of American Franklin.
OWNERS, ANNUITANTS, AND BENEFICIARIES; ASSIGNMENTS
The Owner of a Contract is the Annuitant, unless an Owner other than the
Annuitant is designated in the application for the Contract. In the case of
joint ownership, both Owners must join in the exercise of any rights or
privileges under the Contract. The Annuitant and any Contingent Annuitant are
designated in the application for a Contract and may not thereafter be changed.
The Beneficiary and any Contingent Beneficiary are designated by the
Owner in the application for a Contract. Subject to applicable limitations
under the Code and any governing Qualified Plan, a Beneficiary or Contingent
Beneficiary may be changed by the Owner prior to the Annuity Commencement
Date, while the Annuitant is still alive, and, except in the case of a
Section 457 Contract, by the payee following the Annuity Commencement Date.
Any designation of a new Beneficiary or Contingent Beneficiary is effective
as of the date it is signed but will not affect any payments American
Franklin makes or action American Franklin takes before receiving the written
request. American Franklin also needs the written consent of any
irrevocably-designated Beneficiary or Contingent Beneficiary before making a
change. Under certain retirement programs, spousal consent may be required
to designate a Beneficiary other than the spouse or to change a Beneficiary
to a person other than the spouse. American Franklin is not responsible for
the validity of any designation of a Beneficiary or Contingent Beneficiary.
If no designated Beneficiary or Contingent Beneficiary is living at the
time any payment is to be made, the Owner will be the Beneficiary, or if the
Owner is not then living, the Owner's estate will be the Beneficiary.
Rights under a Qualified Contract may be assigned only in certain narrow
circumstances referred to therein. Owners and other payees may assign their
rights under Non-Qualified Contracts, including their ownership rights.
Rights under a Section 457 Contract may only be assigned by the Owner thereof
and not by the Annuitant or other payee. American Franklin takes no
responsibility for the validity of any assignment. A change in ownership
rights must be made in writing and a copy must be sent to American Franklin's
Administrative Office. The change will be effective on the date it was made,
although American Franklin is not bound by a change until the date American
Franklin records it. The rights under a Contract are subject to any
assignment of record at American Franklin's Administrative Office. An
assignment or pledge of a Contract may have adverse tax consequences. See
"Federal Income Tax Matters."
39
<PAGE>
REPORTS
American Franklin will mail to Owners (or persons receiving payments
following the Annuity Commencement Date), at their last known address of record,
any reports and communications required by applicable law or regulation.
Therefore, prompt written notice of any address change should be given to
American Franklin at its Administrative Office.
MODIFICATION
American Franklin reserves the right to modify the Contract, but only if
such modification: (i) is necessary to make the Contract or Separate Account
VA-1 comply with any law or regulation issued by a governmental agency to which
American Franklin is subject; or (ii) is necessary to assure continued
qualification of the Contract under the Code or other federal or state laws
relating to retirement annuities or Annuity contracts; or (iii) is necessary to
reflect a change in the operation of Separate Account VA-1 or the Division(s) or
(iv) provides additional Separate Account options or (v) withdraws Separate
Account options. In the event of any such modification, American Franklin will
provide notice to the Owner or to the payee(s) during the Annuity Period.
American Franklin may also make appropriate endorsements in the Contract to
reflect such modification.
PAYMENT AND DEFERMENT
Amounts surrendered or withdrawn from a Contract will normally be paid
within seven calendar days after the end of the Valuation Period in which
American Franklin receives the written surrender or withdrawal request in good
order. In the case of payment of a Death Benefit, if American Franklin does not
receive a written request as to the manner of payment within 60 days after the
Death Benefit becomes payable, any death benefit proceeds will be paid as a lump
sum, normally within seven calendar days after the end of the Valuation Period
that contains the last day of said 60 day period. American Franklin reserves
the right, however, to defer payment or transfers of amounts out of the Fixed
Account for up to six months. Also, American Franklin reserves the right to
defer payment of that portion of Account Value that is attributable to a
purchase payment made by check for a reasonable period of time (not to exceed 15
days) to allow the check to clear the banking system.
Finally, American Franklin reserves the right to delay payment of any
surrender and annuity payment amounts or Death Benefit amounts of any portion of
the Variable Account Value for any period during which (a) the New York Stock
Exchange is closed other than customary weekend and holiday closings, or trading
on the New York Stock Exchange is restricted as determined by the Securities and
Exchange Commission; (b) the Securities and Exchange Commission determines that
an emergency exists making valuation or disposal of securities not reasonably
practicable; or (c) the Securities and Exchange Commission by order permits the
delay for the protection of Owners. Transfers and allocations of Account Value
among the Divisions and the Fixed Account may also be postponed under these
circumstances.
40
<PAGE>
FEDERAL INCOME TAX MATTERS
INTRODUCTION
The federal income tax treatment of the Contracts and payments received
thereunder depends on various factors, including, among other factors, the tax
status of American Franklin, whether the Contracts have been issued in
connection with a retirement or deferred compensation plan or program, and if
so, the type of such retirement or deferred compensation plan or program and the
form in which payments are received. The discussion of federal income taxes
contained in this Prospectus, which focuses on rules applicable to Contracts
purchased under this Prospectus, is general in nature and is based on existing
federal income tax law, which is subject to change. The tax discussion is not
intended as tax advice. The applicable federal income tax law is complex and
contains many special rules and exceptions in addition to the general rules
summarized herein. For these reasons, various questions about the applicable
rules exist. American Franklin does not guarantee the tax status of the
Contracts. Purchasers bear the complete risk that the Contracts may not be
treated as "annuity contracts" under federal income tax laws. Accordingly, each
person contemplating the purchase of a Contract is advised to consult with a
qualified tax advisor concerning federal income taxes and any other federal,
state or local taxes that may be applicable.
AMERICAN FRANKLIN
American Franklin is taxed as a "life insurance company" under the Code.
Since the operations of Separate Account VA-1 are part of the overall operations
of American Franklin, Separate Account VA-1 is subject to tax as part of
American Franklin for federal income tax purposes. Thus, Separate Account VA-1
is not taxed separately as a "regulated investment company" under the Code.
Under the Code a life insurance company like American Franklin is generally
taxed at regular corporate rates, under a single-phase system, on its specially-
computed life insurance company taxable income. Some special rules continue to
apply, however, in the case of segregated asset accounts like Separate Account
VA-1.
Investment income and realized capital gains on the assets of Separate
Account VA-1 are reinvested by American Franklin for the benefit of Separate
Account VA-1 and are taken into account in determining the value of Accumulation
Units and Annuity Units. As a result, such income and gains are applied to
increase reserves applicable to Separate Account VA-1. Under the Code, no
federal income tax is payable by American Franklin on such investment income or
on realized capital gains of Separate Account VA-1 on assets held in Separate
Account VA-1.
Certain Portfolios may elect to pass through to American Franklin any taxes
withheld by foreign taxing jurisdictions on foreign source income. Such an
election will result in additional taxable income and income tax to American
Franklin. The amount of additional income tax, however, may be more than offset
by credits for the foreign taxes withheld which are also passed through. These
credits may provide a benefit to American Franklin.
41
<PAGE>
THE CONTRACTS: NON-QUALIFIED CONTRACTS
In the case of a Non-Qualified Contract issued in connection with a
Non-Qualified Plan, the provisions of the Non-Qualified Plan determine the tax
treatment of participants. For example, contributions to, or deferred
compensation in connection with, Non-Qualified Plans may or may not be currently
taxable to participants.
Payments received under a Non-Qualified Contract are subject to tax under
Section 72 of the Code. Under the Code, an increase in the value of an Owner's
Contract ordinarily is not taxable to the Owner until such amount is received as
annuity payments, a lump sum or a partial redemption. A special rule, however,
applies to certain annuity contracts held by a person (such as a corporation,
partnership, trust or estate) which is not a natural person. With respect to a
Contract held by a non-natural person, the Contract is not treated as an
"annuity contract" for certain federal income tax purposes and the income on the
Contract for any taxable year is treated as ordinary income taxable to the Owner
during such year. This special rule, however, does not apply to any Contract
which, among other exceptions: (1) is an immediate Annuity that is purchased
with a single premium or Annuity consideration that has an Annuity starting date
commencing no later than one year from the date of the purchase of the Contract
and which provides for a series of substantially equal periodic payments (to be
made not less frequently than annually) during the Annuity period; (2) is
acquired by the estate of a decedent by reason of the decedent's death; or
(3) is held by a trust or other entity as an agent for a natural person. Non-
natural persons contemplating the purchase of a Contract are advised to consult
a qualified tax advisor concerning the tax consequences of such holding and
purchase.
If payments under a Contract are received in the form of an Annuity, then,
in general, each payment is taxable as ordinary income to the extent that such
payment exceeds the portion of the cost basis of the Contract that is allocable
to that payment. If the Annuitant's life span exceeds his or her life
expectancy, the cost basis in the Contract will eventually be recovered, and any
payments made after that point will be fully taxable. If, however, the Annuity
payments cease after the Annuity Commencement Date by reason of the death of the
Annuitant, the amount of any unrecovered cost basis in the Contract will
generally be allowed as a deduction to the Annuitant for his or her last taxable
year.
Payment of the proceeds of a Contract in a lump sum either before or at the
Annuity Commencement Date is taxable as ordinary income to the extent the lump
sum exceeds the cost basis of the Contract. A payment received on account of a
partial withdrawal from a Contract generally is taxable as ordinary income in
whole or in part. Also, if prior to the Annuity Commencement Date, (i) a
Contract is assigned or pledged, or (ii) a Contract issued after April 22, 1987
is transferred without adequate consideration, then the amount assigned, pledged
or transferred may similarly be taxable. Special rules may apply with respect
to investments in a Contract obtained by a tax-free exchange of an annuity
contract purchased prior to August 14, 1982. Because the applicable tax
treatment is complex, a qualified tax advisor should be consulted prior to a
partial withdrawal, assignment, pledge or Contract transfer.
42
<PAGE>
Further, in general, a penalty may be imposed equal to 10% of the taxable
portion of any payment received under a Non-Qualified Contract. However, the
10% penalty does not apply in various circumstances. For example, the
penalty is generally inapplicable to payments that are: (i) made on or after
age 59 1/2 of the Owner; (ii) made on or after the death of the Owner (or
when the Owner is not an individual, the death of the Annuitant); (iii) made
incident to disability; (iv) part of a series of substantially equal periodic
payments made (not less frequently than annually) for the life (or the life
expectancy) of the Annuitant or the joint lives (or joint life expectancies)
of the Annuitant and his or her designated beneficiary; (v) allocable to
investments in the Contract before August 14, 1982; or (vi) made under a
Contract purchased with a single premium and which has an Annuity
Commencement Date no later than one year from the purchase date of the
Contract and which provides for a series of substantially equal periodic
payments (to be made not less frequently than annually) during the Annuity
payment period.
A. DISTRIBUTION REQUIREMENTS
In general, certain distribution requirements are imposed by the Code in
the case of annuity contracts issued after January 18, 1985 in order for the
contracts to qualify as "annuity contracts" under the Code. Certain questions
exist about the application of these rules to distributions from the Contracts
and their effect on Annuity Payment Option availability thereunder.
Under these distribution requirements, if the Owner of a Non-Qualified
Contract issued after January 18, 1985 dies on or after the Annuity
Commencement Date but before the entire interest in the Contract has been
distributed, then the remaining portion of such interest must be distributed
at least as rapidly as under the method of distribution being used as of the
date of his or her death. Also, if the Owner of such a Contract dies before
the Annuity Commencement Date, then the entire interest in the Contract must
be distributed within five years after the date of death. Under a special
exception, this five-year distribution rule is deemed satisfied if (i) any
portion of the Owner's interest is payable to an individual who is designated
as the Beneficiary in the Contract, (ii) that portion is distributed to the
designated Beneficiary over the life of such Beneficiary (or over a period
not extending beyond the Beneficiary's life expectancy) and (iii) such
distributions begin not later than one year after the death of the Owner. If
the designated Beneficiary is the surviving spouse of the Owner, the
surviving spouse will be treated as the Owner for purposes of these
distribution rules. Also, if the Owner is not an individual, a change in the
Annuitant shall be treated as the death of the Owner for purposes of these
distribution rules.
The effect of the distribution requirements described above is that, in the
case of Non-Qualified Contracts issued after January 18, 1985, Annuity Payment
Option availability will be limited as necessary to comply with the applicable
distribution rules. For example, under these rules, it appears that the first
option (Life Annuity) would not be available to a designated Beneficiary under
such a Contract unless distributions to the Beneficiary begin not later than one
year after the date of the Owner's death. Other Annuity Payment Options may be
restricted or unavailable as well under the distribution rules. All Annuity
Options under the Contracts are offered subject to the limitations of the
distribution rules. Persons contemplating the purchase of
43
<PAGE>
a Contract should consult a qualified tax advisor concerning the effect of the
distribution rules on the Annuity Payment Option or Options he or she is
contemplating.
B. DIVERSIFICATION
A Non-Qualified Contract will not be treated as an "annuity contract" for
purposes of certain Code sections, including Section 72, for any period (and any
subsequent period) for which the investments made by Separate Account VA-1
attributable to such Non-Qualified Contract are not adequately diversified in
accordance with Treasury Department regulations. Although American Franklin
does not control the Funds, the investment advisers to the Funds have undertaken
to use their best efforts to operate the Funds in compliance with these
diversification requirements. If a Contract is not treated as an annuity
contract, the Owner would be required to treat the income on the Contract during
the period of nondiversification and any subsequent periods as ordinary income
received or accrued during those periods and to include such income in gross
income for federal income tax purposes. For this purpose, the income on the
Contract is defined as the difference between (1) the increase in the net
surrender value of the Contract during the period of nondiversification and
subsequent periods and (2) the purchase payments made during such periods. The
Owner would also be required to treat the previously untaxed income on the
Contract for all taxable years prior to the first year of nondiversification as
ordinary income received or accrued in the first year of nondiversification and
to include such income in gross income for federal income tax purposes for such
first year of nondiversification.
Prior to the issuance of the final Treasury Department regulations
regarding the diversification requirements, the Treasury Department stated that
it anticipated issuing regulations or rulings prescribing the circumstances
under which the ability of an Owner to direct his or her investments to
particular Funds may cause the Owner, rather than American Franklin to be
treated as the owner of the assets in Separate Account VA-1. If an Owner were
treated as the owner of assets of Separate Account VA-1, the income and gains
from Separate Account VA-1 would be included in the Owner's income for federal
income tax purposes, prior to receipt of payments under the Contract. Due to
the uncertainty in this area, American Franklin reserves the right to modify the
Contracts in an attempt to maintain favorable tax treatment.
C. AGGREGATION OF CONTRACTS
Under a provision of the federal tax law effective for annuity contracts
entered into after October 21, 1988, all annuity contracts (including Section
457 Contracts but excluding Qualified Contracts) issued by the same company (or
affiliates) to the same contract owner during any calendar year will generally
be treated as one annuity contract for the purpose of determining the amount of
any distribution, not in the form of an annuity, that is includable in gross
income. An annuity contract received in a tax-free exchange for another annuity
contract or life insurance contract may be treated as a new contract for this
purpose. This rule may have the effect of causing more rapid taxation of the
distributed amounts from such combination of contracts. It is not certain how
this rule will be applied or interpreted by the Internal Revenue Service. In
particular, it is not clear if or how this rule applies to immediate variable
annuity contracts or "split" annuity arrangements. Accordingly, a qualified tax
advisor should be consulted about the application and effect of this rule.
44
<PAGE>
D. INCOME TAX WITHHOLDING
Withholding of federal income tax is generally required from distributions
from the Non-Qualified Contracts to the extent the distributions are taxable and
are not otherwise subject to withholding as wages ("Distributions"). See "The
Contracts: Non-Qualified Contracts" above, regarding the taxation of such
Distributions. However, except in the case of certain payments delivered
outside the United States or any possession of the United States, no withholding
is required from any Distribution if the payee properly elects, in accordance
with prescribed procedures, not to have withholding apply.
In the absence of a proper election not to have withholding apply, the
amount to be withheld from a Distribution depends on the type of payment being
made. Generally, in the case of periodic payments, the amount to be withheld
from each payment is the amount that would be withheld therefrom under specified
wage withholding tables as if the taxable portion of the payment were a payment
of wages for the appropriate payroll period. In the case of most other
Distributions, including partial redemptions and lump sum payments, the amount
to be withheld is equal to 10% of the taxable portion of the Distribution.
THE CONTRACTS: SECTION 457 CONTRACTS
Section 457 of the Code permits a State (for this purpose, "State" means a
State, political subdivision of a State, agency or instrumentality of a State or
a political subdivision of a State) and certain tax-exempt organizations to
maintain deferred compensation plans for their individual employees and certain
of their individual independent contractors.
If the requirements of Section 457 and the employer's plan are satisfied,
amounts contributed to such a plan by eligible employees and independent
contractors, and any gains thereon, are not, subject to certain limitations,
taxable to the participants until distributed to the participants. If payments
under a Section 457 Contract are received in the form of an annuity pursuant to
the terms of a qualified Section 457 Plan, such payments are taxable to the
recipient as ordinary income in the year in which received or made available.
Section 457 limits the annual amount of contributions a participant may
make to a Section 457 Plan to 33-1/3% of the participant's includable
compensation for the year or $7,500 (adjusted for inflation beginning in
1997), whichever is less. In addition, if the participant did not contribute
the maximum amount permitted under the plan and Section 457 in prior years,
the plan may also provide, under certain circumstances, for additional
contributions by the participant during the last three taxable years ending
before the normal retirement age of the participant, up to a total per year
for such three years not to exceed the lesser of $15,000 or the participant's
compensation for that year. The foregoing contribution limitations may be
reduced under certain circumstances if the participant contributes to more
than one deferred compensation plan or tax qualified retirement plan (whether
or not such plans are maintained by the same employer).
Generally, distributions under a Section 457 Contract must commence no
later than April 1 following the later of the calendar year in which the
Annuitant attains age 70-1/2 or the calendar year in which the Annuitant
retires. Distributions under a Section 457 Plan maintained by a State may be
further deferred if the Annuitant remains
45
<PAGE>
employed. The entire interest of an Annuitant in a Section 457 Plan must be
distributed either (a) no later than the required beginning date described above
or (b) beginning by such date, over the life of the Annuitant, the lives of the
Annuitant and a designated Beneficiary, or a period certain not extending beyond
the life expectancy of the Annuitant or the joint life expectancies of the
Annuitant and a designated Beneficiary. The distributions must also satisfy
certain minimum distribution rules which are similar to minimum incidental
benefit requirements set forth in proposed regulations. Further, any
distribution payable over a period of more than one year may only be made in
substantially non-increasing amounts no less frequently than annually. If the
amount distributed for a calendar year is less than the minimum required to be
distributed for the year, a penalty tax equal to 50% of the amount which should
have been distributed will be imposed.
If the Annuitant dies on or after the Annuity Commencement Date but
before the entire interest in the Contract has been distributed, then the
remaining portion of such interest must be distributed at least as rapidly as
under the method of distribution being used as of the date of the Annuitant's
death. Also, if the Annuitant dies before the Annuity Commencement Date, then
the entire interest in the Contract must be distributed within five years
after the date of death. Under a special exception, this five-year
distribution rule is deemed satisfied if (i) any portion of the Annuitant's
interest is payable to an individual who is designated as the Beneficiary in
the Contract, (ii) that interest is distributed beginning no later than one
year after the death of the Annuitant and (iii) such distributions to the
designated Beneficiary are made over the life of such Beneficiary (or over a
period not extending beyond the Beneficiary's life expectancy) so long as the
period does not exceed fifteen years unless the designated Beneficiary is the
surviving spouse of the Annuitant. If the designated Beneficiary is the
surviving spouse of the Annuitant, payments are not required to begin until
the date on which the Annuitant would have attained age 70-1/2 and must be
payable over a period not to exceed the life expectancy of the surviving
spouse. In addition, if the designated Beneficiary is the surviving spouse
of the Annuitant and such surviving spouse dies before Annuity payments to
the surviving spouse commence, the surviving spouse will be treated as the
Annuitant under the foregoing rules.
Various questions exist about the application of the distribution rules to
distributions from the Contracts and their effect on Annuity Option availability
thereunder. The effect of the distribution requirements described above is that
Annuity Option availability will be limited as necessary to comply with the
applicable distribution rules. All Annuity Options under the Contracts are
offered subject to the limitations of the distribution rules. Persons
contemplating the purchase of a Contract should consult a qualified tax advisor
concerning the effect of the distribution rules on the Annuity Payment Option or
Options he or she is contemplating.
A participant in a qualified Section 457 deferred compensation plan
should understand that (i) his or her rights and benefits are governed
strictly by the terms of the plan, and (ii) in the case of a plan maintained
by a tax-exempt organization and, in certain circumstances, by a State until
December 31, 1998 (A) he or she is in fact a general creditor of the employer
under the terms of the plan, (B) the employer is the legal owner of any
Contract issued with respect to the plan and (C) the employer as Owner of the
Contract retains all voting and redemption rights which may accrue to the
Contract issued with respect to the plan. The participant should look to the
terms of his or her plan for any charges in regard to participating therein
other than those disclosed in this Prospectus.
46
<PAGE>
Since, in the case of an employer which is a tax-exempt organization, the
Owner of a Section 457 Contract will be the employer tax-exempt organization,
such a Section 457 Contract will not be treated as an "annuity contract" for
certain federal income tax purposes and the income on such a Contract for any
taxable year will be treated as ordinary income of the Owner during such
year. Under recently enacted legislation, while it is not clear, it is
likely that a Section 457 Contract purchased by an employer State will also
be subject to the foregoing characterization and income inclusion rules,
because the Owner of the Contract will most likely be a trust. Employers
contemplating the purchase of a Section 457 Contract are advised to consult a
qualified tax advisor concerning the tax consequences of such holding and
purchase.
The 10% penalty tax on early withdrawals described under "Non-Qualified
Contracts" also applies to payments made to participants under Section 457
Contracts. In addition, the rules on aggregation of annuity contracts and
federal income tax withholding described under "Non-Qualified Contracts" also
apply to Section 457 Contracts.
THE CONTRACTS: QUALIFIED CONTRACTS
The manner in which payments received under a Qualified Contract are
taxed for federal income tax purposes depends on the form of payment. If
payments are received in the form of an annuity, then, in general, under
Section 72 of the Code, each payment is taxable to the recipient as ordinary
income to the extent that such payment exceeds the portion, if any, of the
cost basis of the Contract that is allocable to that payment. In general, an
Annuitant will be deemed to have recovered the cost basis of a Contract when
the Annuitant has received a number of payments determined under Section 72(d)
of the Code (the number of payments will vary among Annuitants), and any
payments made after that point will be fully taxable. For Individual
Retirement Annuities, however, the recovery of the cost basis generally
extends over the entire payment period, even if the life expectancy is
exceeded. If, however, the Annuity payments cease after the Annuity
Commencement Date by reason of the death of the Annuitant, the amount of any
unrecovered cost basis in the Qualified Contract will generally be allowed as
a deduction to the Annuitant for his or her last taxable year. A payment
received on account of partial redemption of an annuity contract generally is
taxable in whole or part. The taxation of a partial redemption is governed by
complex rules and a qualified tax advisor should be consulted prior to a
proposed partial redemption.
Generally, payment of the proceeds of a Qualified Contract in a lump sum
instead of in the form of an annuity, either at or before maturity, also is
taxable as ordinary income to the extent the lump sum exceeds the cost basis of
the Qualified Contract. Taxation may be deferred, however, to the extent, if
any, that "rollover" treatment is available and elected for a particular
distribution.
The Qualified Contracts are designed for use in connection with several
types of Qualified Plans, as described generally below.
A. QUALIFIED PENSION, PROFIT-SHARING AND ANNUITY PLANS
Under pension and profit-sharing plans that qualify under Section 401(a) of
the Code and annuity purchase plans that qualify under Section 403(a) of the
Code (collectively "Corporate Qualified Plans"), amounts contributed by an
employer to the Corporate Qualified Plan on behalf of an employee and any gains
thereon are not, in general, taxable to the employee until distribution.
Generally, the cost basis of an employee under a Corporate Qualified Plan will
47
<PAGE>
equal the amount of non-deductible contributions, if any, that the employee made
to the Corporate Qualified Plan.
The Code imposes an additional tax of 10% on the taxable portion of any
early withdrawal from a Corporate Qualified Plan made by an Annuitant before
age 59 1/2, death, or disability. The additional income tax on early
withdrawals will not apply, however, to certain distributions including (a)
distributions beginning after separation from service that are part of a
series of substantially equal periodic payments made at least annually for
the life or life expectancy of the Annuitant or the joint lives or joint life
expectancies of the Annuitant and his or her designated Beneficiary, and (b)
distributions made to Annuitants after separating from service after
attaining age 55. Further, additional penalties may apply to distributions
made on behalf of a "5-percent owner" (as defined by Section 416(i)(1)(B) of
the Code).
If a lump sum payment of the proceeds of a Contract qualifies as a "lump
sum distribution" under the Code, special tax rules (including limited capital
gain and income averaging treatment in some circumstances) may apply.
B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS)
Self-employed persons (including members of partnerships) are permitted to
establish and participate in Corporate Qualified Plans under Sections 401(a) and
403(a) of the Code. Corporate Qualified Plans in which self-employed persons
participate are commonly referred to as "H.R. 10 Plans."
The tax treatment of annuity payments and lump sum payments received in
connection with an H.R. 10 Plan is, in general, subject to the same rules
described in "Qualified Pension, Profit-Sharing and Annuity Plans," immediately
above. Some special rules apply, however, in the case of self-employed persons
which, for example, affect certain "lump sum distribution" rules.
C. SECTION 403(b) ANNUITIES
Section 403(b) of the Code permits public schools and other tax-exempt
organizations described in Section 501(c)(3) of the Code to purchase annuity
contracts for their employees subject to special tax rules.
Subject to certain conditions and limitations set forth in the Code,
amounts contributed by an employer to purchase a Section 403(b) annuity contract
and any gains thereon are excludable from the gross income of the employee in
the year in which contributed and are not taxable to the employee until
distributed to the employee. In general, the amount of employer contributions
excludable from the gross income of the employee is limited to an "exclusion
allowance" for such year. The amount of the "exclusion allowance" generally is
20% of the employee's includible compensation from the employer multiplied by
such employee's years of service and reduced by amounts contributed on behalf of
such employee by the employer in prior plan years. Certain exceptions apply in
calculating the "exclusion allowance", for example there are alternate methods
of calculating the "exclusion allowance" and a minimum exclusion allowance
applies to
48
<PAGE>
certain church employees. In addition to the "exclusion allowance", employer
contributions to purchase a Section 403(b) annuity contract are subject to
other limitations set forth in the Code, including for example the
limitations under Code Section 401(a)(17) and 415(c). In addition, elective
deferrals in a year made pursuant to a salary reduction agreement to purchase
a Section 403(b) annuity contract are subject to a $7,000 limitation,
adjusted for inflation ($9,500 in 1996 and 1997). Eligible employees of
certain organizations who have completed at least 15 years of service may
make elective deferrals in excess of the $7,000 limitation, adjusted for
inflation, of up to $3,000. Amounts of employer contributions in excess of
the excludable amounts generally are includable in the gross income of the
employee in the year in which such amounts are substantially vested. In
addition, in certain cases, employees may make non-deductible contributions
to purchase Section 403(b) annuity contracts. Generally, the cost basis of an
employee under a Section 403(b) annuity contract will equal the amount of any
non-deductible contributions the employee made toward the contract plus any
employer contributions that were taxable to the employee because they
exceeded excludable amounts.
Federal tax law imposes limitations on distributions from Section 403(b)
annuity contracts. Withdrawals of amounts attributable to contributions made
pursuant to a salary reduction agreement in connection with a Section 403(b)
annuity contract will be permitted only (1) when an employee attains age 59 1/2,
separates from service, dies or becomes totally and permanently disabled or
(2) in the case of hardship. A withdrawal made in the case of hardship may not
include income attributable to the contributions. However, these limitations
generally do not apply to distributions which are attributable to assets held as
of December 31, 1988. In general, therefore, contributions made prior to
January 1, 1989, and earnings on such contributions through December 31, 1988,
are not subject to these limitations. In addition, these limitations do not
apply to contributions made other than by a salary reduction agreement. A
number of questions exist concerning the application of these rules. Anyone
considering a withdrawal from a Contract issued in connection with a Section
403(b) annuity plan should consult a qualified tax advisor.
The 10% penalty tax on early withdrawals described under "Qualified
Pension, Profit-Sharing and Annuity Plans," also applies to Section 403(b)
annuity contracts.
D. INDIVIDUAL RETIREMENT ANNUITIES
1. Section 408(b) Individual Retirement Annuities
Under Sections 408(b) and 219 of the Code, special tax rules apply to
Individual Retirement Annuities. As described below, certain contributions to
such annuities (other than Rollover Contributions) are deductible within certain
limits and the gains on contributions (including Rollover Contributions) are not
taxable until distributed. Generally, the cost basis of an Individual
Retirement Annuity will equal the amount of non-deductible contributions, if
any, made to the Individual Retirement Annuity. Under special rules, all
individual retirement plans will be treated as one plan for purposes of these
rules.
Section 408(b) sets forth various requirements that an annuity contract
must satisfy before it will be treated as an Individual Retirement Annuity.
Although final regulations that interpret
49
<PAGE>
some of these requirements have been adopted, other regulations have been
proposed that interpret the additional requirement that, under a Section 408(b)
Individual Retirement Annuity, the premiums may not be fixed. These proposed
regulations, which contain certain ambiguities, may, of course, be changed
before they are issued in final form. Accordingly, while American Franklin
believes that the Contracts offered by this Prospectus meet the requirements of
Section 408(b), the final regulations and the currently proposed regulations
thereunder, there can be no assurance that the Contracts qualify as Individual
Retirement Annuities under Section 408(b) pending the issuance of complete final
regulations under that Code section.
Individuals who are not "active participants" in an employer-related
retirement plan described in Section 219(g) of the Code will, in general, be
allowed to contribute to an Individual Retirement Annuity and to deduct a
maximum of $2,000 annually (or 100% of the individual's compensation if less).
In addition, this deduction will be allowed for unmarried individuals (and
married individuals filing separate returns) who are active participants in
Qualified Plans and who have annual adjusted gross income that is not above
$25,000 ($40,000 for married individuals filing a joint return). This deduction
will be phased out for unmarried individuals (and married individuals filing
separate returns) who are active participants in Qualified Plans with annual
adjusted gross income between $25,000 and $35,000 ($40,000 and $50,000 for
married individuals filing a joint return), and will not be allowed for such
unmarried individuals (and married individuals filing separate returns) with
annual adjusted gross income above $35,000 ($50,000 for married individuals
filing a joint return). For married individuals filing a joint return, the
active participant status of both spouses is taken into account in determining
the deductible limit. An individual will not be considered married for a year
in which the individual and the individual's spouse (1) file separate returns
and (2) did not live together at any time during the year. Individuals who may
not make deductible contributions to an Individual Retirement Annuity may,
instead, make non-deductible contributions (up to the applicable maximums
described above) on which earnings will accumulate on a tax-deferred basis. If
the Individual Retirement Annuity includes non-deductible contributions,
distributions will be divided on a pro rata basis between taxable and non-
taxable amounts. Special rules apply if, for example, an individual contributes
to an Individual Retirement Annuity for his or her own benefit and to another
Individual Retirement Annuity for the benefit of his or her spouse.
The 10% penalty tax on early withdrawals described under "Qualified
Pension, Profit-Sharing and Annuity Plans," above, also applies to Individual
Retirement Annuities, except that the circumstances in which the penalty tax
will not apply are different in certain respects. Further, for any year in
which an Owner borrows any money under or by use of the Individual Retirement
Annuity, the Contract ceases to qualify under Section 408(b), and an amount
equal to the fair market value of the Contract as of the first day of such year
is includable in the Owner's gross income for such year.
2. Section 408(k) Simplified Employee Pensions
An Individual Retirement Annuity described in Section 408(b) of the Code
that also meets the special requirements of Section 408(k) qualifies as a
Simplified Employee Pension. Under a Simplified Employee Pension, employers may
contribute to the Individual Retirement
50
<PAGE>
Annuities of their employees. An employee may exclude from gross income,
subject to certain limitations, the employer's contribution on his or her
behalf to a Simplified Employee Pension. If a Simplified Employee Plan
permits elective deferrals, the deferrals are subject to a $7,000 limitation,
adjusted for inflation ($9,500 for 1996 and 1997). In general, the employee
may also contribute and possibly deduct an additional amount not in excess of
the lesser of (a) $2,000 or (b) 100% of compensation if the employee meets
the qualifications for an Individual Retirement Annuity. However, annual
purchase payments from all sources may not exceed $24,500.
In general, except as stated in this section, the rules discussed in
"Section 408(b) Individual Retirement Annuities," immediately above, also apply
to a Simplified Employee Pension.
After December 31, 1996, an employer may no longer establish a Simplified
Employee Pension which permits (or modify an existing Simplified Employee
Pension to permit) elective salary reduction deferrals.
3. Section 408(p) Simple Retirement Accounts
Starting with taxable years beginning after December 31, 1996, an
Individual Retirement Annuity described in Section 408(b) of the Code that
also meets the special requirements of Section 408(p) qualifies as a Simple
Retirement Account. Under a Simple Retirement Account, employers must make
certain matching contributions to the Individual Retirement Annuities of
their employees. An employee may exclude from gross income, subject to
certain limitations, the employer's contribution on his or her behalf to a
Simple Retirement Account. Elective deferrals under a Simple Retirement
Account are subject to a $6,000 limitation, adjusted for inflation. In
general, the employee may also contribute and possibly deduct an additional
amount not in excess of the lesser of (a) $2,000 or (b) 100% of compensation
if the employee meets the qualifications for an Individual Retirement Annuity.
In general, the 10% penalty tax on early withdrawals described under
"Qualified Pension, Profit-Sharing and Annuity Plans," above, also applies to
Simple Retirement Accounts, except that the circumstances in which the
penalty will not apply are different in certain respects. Further, if a
withdrawal is made from a Simple Retirement Account during the two-year
period beginning on the date the employee first began participating in the
plan which would be subject to the penalty tax, the penalty tax is increased
to 25% (rather than 10%).
In general, except as stated in this section, the rules discussed in
"Section 408(b) Individual Retirement Annuities," above, also apply to a
Simple Retirement Account.
E. INCOME TAX WITHHOLDING
Withholding of federal income tax is generally required from distributions
from Qualified Plans and Contracts issued in connection therewith, to the extent
the distributions are taxable and are not otherwise subject to withholding as
wages ("Distributions"). See "The Contracts: Qualified Contracts," above,
regarding the taxation of Distributions.
Federal income tax is generally required to be withheld from all or any
portion of a Distribution that constitutes an "eligible rollover
distribution." An "eligible rollover distribution" generally includes the
taxable portion of any distribution from a qualified trust described in
Section 401(a) of the Code, a qualified annuity plan described in Section
403(a) of the Code or a qualified annuity contract described in Section
403(b) of the Code, except for (i) a distribution which is one of a series of
substantially equal periodic installments payable at least annually for the
life (or the life expectancy) of the Annuitant or for the joint lives (or the
joint life expectancies) of the Annuitant and his or her designated
Beneficiary, or for a specified period of 10 years or more or (ii) a minimum
distribution required by Section 401(a)(9) of the Code. Any eligible rollover
distribution which is not rolled over directly from a Section 401(a)
qualified trust, a Section 403(a) qualified annuity plan or a Section 403(b)
qualified annuity contract to an "eligible retirement plan" is subject to
mandatory federal income tax withholding in an amount equal to 20% of the
eligible rollover distribution. An "eligible retirement plan" generally
includes a qualified trust described in Section 401(a) of the Code, a
qualified annuity plan described in Section 403(a) of the Code, an individual
retirement account described in Section 408(a) of the Code or an Individual
Retirement Annuity described in Section 408(b) of the Code. Mandatory
federal income tax withholding is required even if the Annuitant receives an
eligible rollover distribution and rolls it over within 60 days to an
eligible retirement plan. Federal income tax is not required to be withheld
from any eligible rollover distribution that is rolled over directly from a
qualified trust described in Section 401(a) of the Code, a qualified annuity
plan described in Section 403(a) of the Code or a qualified annuity contract
described in Section 403(b) of the Code to an eligible retirement plan.
Except with respect to certain payments delivered outside the United States
or any possession of the United States, federal income tax is not required to be
withheld from any Distribution which does not constitute an eligible rollover
distribution, if the Annuitant or Beneficiary properly elects in accordance with
the prescribed procedures not to have withholding
51
<PAGE>
apply. In the absence of a proper election not to have withholding apply, the
amount to be withheld from a Distribution which is not an eligible rollover
distribution depends upon the type of payment being made. Generally, in the
case of a periodic payment which is not an eligible rollover distribution, the
amount to be withheld from such payment is the amount that would be withheld
therefrom under specified wage withholding tables if the taxable portion of the
payment were a payment of wages for the appropriate payroll period. In the case
of a nonperiodic payment which is not an eligible rollover distribution, the
amount to be withheld is generally equal to 10% of the amount of the taxable
portion of the Distribution.
The applicable federal law pertaining to income tax withholding from
Distributions is complex and contains many special rules and exceptions in
addition to the general rules summarized above. Special rules apply, for
example, if the Distribution is made to the surviving spouse of an Annuitant or
if the Distribution is an eligible rollover distribution from a qualified
annuity contract under Section 403(b) of the Code. Any Annuitant or Beneficiary
considering a Distribution should consult a qualified tax advisor.
F. EXCESS DISTRIBUTIONS - 15% TAX
Certain persons, particularly those who participate in more than one
tax-qualified retirement plan, may be subject to an additional tax of 15% on
certain excess aggregate distributions from those plans. In general, excess
distributions are taxable distributions for all tax qualified plans in excess of
a specified annual limit for payments ($155,000 in 1996, as adjusted for
inflation) or five times the annual limit for lump-sum distributions (if special
averaging is elected). Under recent legislation, this 15% penalty tax does
not apply to distributions made during years beginning after December 31,
1996 and before January 1, 2000.
DISTRIBUTION ARRANGEMENT
Franklin Financial Services Corporation ("Franklin Financial"), a Delaware
corporation and a wholly-owned subsidiary of The Franklin, is the principal
underwriter, as defined by the 1940 Act, of the Contracts under a Sales
Agreement between Franklin Financial and Separate Account VA-1. Franklin
Financial's principal executive office is at #1 Franklin Square, Springfield,
Illinois 62713. Pursuant to the Sales Agreement, Franklin Financial has agreed
to pay certain sales expenses in connection with the distribution of the
Contracts, such as sales literature preparation and related costs. Amounts
collected pursuant to the Surrender Charge will be paid to Franklin Financial as
a means to recover sales expenses. Such amounts collected pursuant to the
Surrender Charge are not necessarily related to Franklin Financial's actual
sales expenses in any particular year. To the extent sales expenses are not
covered by amounts collected pursuant to the Surrender Charge, Franklin
Financial will cover them from other assets.
Commissions earned by registered representatives of Franklin Financial on
the sale of the Contracts range up to 5% of purchase payments. Pursuant to an
Agreement between American Franklin and Franklin Financial, American Franklin
has agreed to pay such commissions and Franklin Financial has agreed to remit to
American Franklin the excess of all surrender charges paid to Franklin Financial
over the sales and promotional expenses incurred by Franklin Financial to the
extent necessary to reimburse American Franklin for commissions or other
remuneration paid in connection with sales of the Contracts. Such Agreement
also provides that the amount of such commissions and other remuneration not so
reimbursed shall be deemed to
52
<PAGE>
have been contributed by American Franklin to the capital of Franklin Financial.
Commissions and other remuneration will be paid by American Franklin from other
sources, including the mortality and expense risk charge or other charges in
connection with the Contracts, or from its general account to the extent it does
not receive reimbursement from Franklin Financial.
Franklin Financial is registered with the Securities and Exchange
Commission as a broker-dealer under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc. Franklin
Financial also acts as principal underwriter for Franklin Life Variable Annuity
Funds A and B and Franklin Life Money Market Variable Annuity Fund C, separate
accounts of The Franklin which are registered investment companies issuing
interests in variable annuity contracts. Franklin Financial also acts as
principal underwriter for Separate Account VUL and Separate Account VUL-2 of The
American Franklin Life Insurance Company, separate accounts of American Franklin
which are registered investment companies issuing interests in variable life
insurance contracts.
From time to time, American Franklin may pay or permit other promotional
incentives, in cash or credit or other compensations.
LEGAL MATTERS
The legality of the Contracts described in this Prospectus has been passed
upon by Elizabeth E. Arthur, Esq., Assistant Secretary of American Franklin.
Chadbourne & Parke LLP, New York, New York, has advised American Franklin on
certain federal securities law matters.
OTHER INFORMATION ON FILE
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933 with respect to the Contracts
discussed in this Prospectus. Not all of the information set forth in the
Registration Statement and exhibits thereto has been included in this
Prospectus. Statements contained in this Prospectus concerning the Contracts
and other legal instruments are intended to be summaries. For a complete
statement of the terms of these documents, reference should be made to the
instruments filed with the Securities and Exchange Commission.
A Statement of Additional Information is available from us on request. Its
contents are as follows:
53
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Regulation and Reserves. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Independent Auditors and Accountants . . . . . . . . . . . . . . . . . . . 3
Principal Underwriter. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Administration of the Contracts. . . . . . . . . . . . . . . . . . . . . . 3
Limitations on Annuity Payment Options . . . . . . . . . . . . . . . . . . 4
A. Limitations on Choice of Annuity Payment Option. . . . . . . . . . 4
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
A. Gender of Annuitant. . . . . . . . . . . . . . . . . . . . . . . . 6
B. Misstatement of Age or Sex and Other Errors. . . . . . . . . . . . 7
Change of Investment Adviser or Investment Policy. . . . . . . . . . . . . 7
Performance Data for the Divisions . . . . . . . . . . . . . . . . . . . . 7
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . F-1
54
<PAGE>
THE CHAIRMAN-TM-
INDIVIDUAL RETIREMENT ANNUITY (IRA)
DISCLOSURE STATEMENT
INTRODUCTION
THIS DISCLOSURE STATEMENT IS DESIGNED FOR PRESENT OWNERS OF IRAs ISSUED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY.
This Disclosure Statement is not part of a contract but contains general
and standardized information which must be furnished to each person who is
issued an Individual Retirement Annuity. Please refer to the contract to
determine specific rights and obligations thereunder.
REVOCATION
If you are purchasing a new or rollover IRA, then if for any reason you, as
a recipient of this Disclosure Statement, decide within 20 days from the date
your policy is delivered to you that you do not desire to retain your IRA,
written notification to the Company must be mailed, together with your policy,
within that period. If such notice is mailed within 20 days, all contributions,
without adjustments for any applicable sales commissions or administrative
expenses, will be refunded.
MAIL NOTIFICATION OF REVOCATION AND YOUR CONTRACT TO:
The American Franklin Life Insurance Company
AMFLIC Annuity Service Center
P.O. Box 4636
Houston, Texas 77210-4636
(Phone No. (800) 200-3101).
ELIGIBILITY
Under Internal Revenue Code ("Code") Section 219, for taxable years
ending on or before December 31, 1996 if neither you, nor your spouse, is an
active participant (see A. below), you may make a contribution of up to the
lesser of $2,000 (or $2,250 in the case of a Spousal IRA) or 100% of
compensation and take a deduction for the entire amount contributed. For
taxable years beginning after December 31, 1996, if neither you, nor your
spouse, is an active participant, you may make a combined contribution of up
to the lesser of $4,000 ($2,000 in each IRA) or 100% of your combined
compensation and take a deduction for the entire amount contributed. If you
are an active participant, but have an adjusted gross income (AGI) below a
certain level (see B. below), you may still make a deductible contribution.
If, however, you or your spouse is an active participant and your combined
AGI is above the specified level, the amount of the deductible contribution
you may make to an IRA will be phased down and eventually eliminated.
A. ACTIVE PARTICIPANT
You are an "active participant" for a year if you are covered by a
retirement plan. You are covered by a "retirement plan" for a year if your
employer or union has a retirement plan under which money is added to your
account or you are eligible to earn retirement credits. For
1
<PAGE>
example, if you are covered under a profit-sharing plan, certain government
plans, a salary reduction arrangement (such as a tax sheltered annuity
arrangement or a 401(k) plan), a Simplified Employee Pension program (SEP) or a
plan which promises you a retirement benefit which is based upon the number of
years of service you have with the employer, you are likely to be an active
participant. Your Form W-2 for the year should indicate your participation
status.
You are an active participant for a year even if you are not yet vested in
your retirement benefit. Also, if you make required contributions or voluntary
employee contributions to a retirement plan, you are an active participant. In
certain plans, you may be an active participant even if you were only with the
employer for part of the year.
You are not considered an active participant if you are covered in a plan
only because of your service as 1) an Armed Forces Reservist for less than 90
days of active service, or 2) a volunteer firefighter covered for firefighting
service by a government plan. Of course, if you are covered in any other plan,
these exceptions do not apply.
If you are married, filed a separate tax return, and did not live with your
spouse at any time during the year, your spouse's active participation will not
affect your ability to make deductible contributions.
B. ADJUSTED GROSS INCOME (AGI)
If you are an active participant, you must look at your Adjusted Gross
Income for the year (if you and your spouse file a joint tax return, you use
your combined AGI) to determine whether you can make a deductible IRA
contribution. Your tax return will show you how to calculate your AGI for this
purpose. If you are at or below a certain AGI level, called the Threshold
Level, you are treated as if you were not an active participant and can make a
deductible contribution under the same rules as a person who is not an active
participant.
If you are single, your Threshold AGI Level is $25,000. The Threshold
Level if you are married and file a joint tax return is $40,000, and if you are
married but file a separate tax return, the Threshold Level is $0.
If your AGI is less than $10,000 above your Threshold Level, you will
still be able to make a deductible contribution, but it will be limited in
amount. The amount by which your AGI exceeds your Threshold Level (AGI -
Threshold Level) is called your Excess AGI. For taxable years ending on or
before December 31, 1996, the Maximum Allowable Deduction is $2,000 (or
$2,250 for a Spousal IRA). For taxable years beginning after December 31,
1996, the Maximum Allowable Deduction per individual is $2,000. You can
estimate your Deduction Limit as follows:
(Your Deduction Limit may be slightly higher if you use this formula rather
than the table provided by the IRS.)
2
<PAGE>
$10,000 - Excess AGI
-------------------------- x Maximum Allowable Deduction = Deduction
Limit
$10,000
You must round up the result to the next highest $10 level (the next highest
number which ends in zero). For example, if the result is $1,525, you must
round it up to $1,530. If the final result is below $200 but above zero, your
Deduction Limit is $200. Your Deduction Limit cannot, in any event, exceed 100%
of your compensation.
Example 1: Ms. Smith, a single person, is an active participant and has an
AGI of $31,619. She calculates her deductible IRA contribution
as follows:
Her AGI is $31,619
Her Threshold Level is $25,000
Her Excess AGI is (AGI - Threshold Level) or ($31,619-$25,000) = $6,619
Her Maximum Allowable Deduction is $2,000
So, her IRA deduction limit is:
$10,000 - $6,619
--------------------- x $2,000 = $676 (rounded to $680)
$10,000
Example 2: Mr. and Mrs. Young file a joint tax return. Each spouse earns
more than $2,000 and one is an active participant. They have a
combined AGI of $44,255. They may each contribute to an IRA and
calculate their deductible contributions to each IRA as follows:
Their AGI is $44,255
Their Threshold Level is $40,000
Their Excess AGI is (AGI - Threshold Level) or ($44,255 - $40,000) = $4,255
The Maximum Allowable Deduction for each spouse is $2,000
So, each spouse may compute his or her IRA deduction limit as follows:
$10,000 - 4,255
----------------- x $2,000 = $1,149 (rounded to $1,150)
$10,000
Example 3: For taxable years ending on or before December 31, 1996, if, in
Example 2, Mr. Young did not earn any compensation, or elected to
be treated as earning no compensation, Mrs. Young could establish
a Spousal IRA (consisting of an account for herself and one for
her husband). The amount of deductible contributions which could
be made to the two IRAs is calculated using a Maximum Allowable
Deduction of $2,250 rather than $2,000.
3
<PAGE>
$10,000 - $4,255
------------------ x $2,250 = $1,293 (rounded to $1,300)
$10,000
The $1,300 can be divided between the two accounts, but neither IRA may receive
a deductible contribution of more than $1,150.
Example 4: For taxable years beginning after December 31, 1996, if, in
Example 2, Mr. Young did not earn any compensation, or elected
to be treated as earning no compensation, Mr. Young could still
establish an IRA for himself and Mrs. Young could establish an
IRA for herself. The amount of deductible contributions which
could be made to the two IRAs is calculated using a Maximum
Allowable Deduction of $4,000 rather than $2,000.
$10,000 - $4,255
------------------ x $4,000 = $2,298 (rounded to $2,300)
$10,000
The $2,300 can be divided between the two accounts, but neither IRA may
receive a deductible contribution of more than $2,000.
Example 5: Mr. Jones, a married person, files a separate tax return and is
an active participant. He has $1,500 of compensation and wishes
to make a deductible contribution to an IRA.
His AGI is $1,500
His Threshold Level is $0
His Excess AGI is ((AGI - Threshold Level) or $1,500-$0) = $1,500
His Maximum Allowable Deduction is $2,000
So, his IRA deduction limit is:
$10,000 - $1,500
------------------ x $2,000 = $1,700
$10,000
Even though his IRA deduction limit under the formula is $1,700, Mr. Jones may
not deduct an amount in excess of his compensation, so, his actual deduction is
limited to $1,500.
SPOUSAL IRAs
As noted in Example 3 above, for taxable years ending on or before
December 31, 1996 under the Act you may contribute to a Spousal IRA even if
your spouse has earned some compensation during the year. Provided your
spouse does not make a contribution to an IRA, you may set up a Spousal IRA
consisting of an annuity for your spouse as well as an annuity for yourself.
The total maximum deductible amount to your IRA and a Spousal IRA is the
lesser of $2,250 or 100% of compensation. As noted in Example 4 above, for
taxable years beginning after December 31, 1996, the total maximum deductible
amount to your IRA and your spouse's IRA is the lesser of $4,000 (up to
$2,000 per IRA) or 100% of your combined compensation.
NON-DEDUCTIBLE CONTRIBUTIONS TO IRAs
Even if you are above the Threshold Level and thus may not make a
deductible contribution of $2,000 ($2,250 if a Spousal IRA is involved in the
case of a taxable year ending on or before December 31, 1996), you may still
contribute up to the lesser of 100% of compensation or $2,000 to an IRA
($2,250 for a Spousal IRA in the case of a taxable year ending on or before
December 31, 1996). The amount of your contribution which is not deductible
will be a non-deductible contribution to the IRA. You may also choose to
make a contribution non-deductible even if you could have deducted part or
all of the contribution. Interest or other earnings on your IRA
contribution, whether from deductible or non-deductible contributions, will
not be taxed until taken out of your IRA and distributed to you.
If you make a non-deductible contribution to an IRA, you must report the
amount of the non-deductible contribution to the IRS on Form 8606 as a part of
your tax return for the year.
4
<PAGE>
You may make a $2,000 contribution at any time during the year, if your
compensation for the year will be at least $2,000, without having to know how
much will be deductible. When you fill out your return, you may then figure out
how much is deductible.
You may withdraw an IRA contribution made for a year any time before April
15 of the following year. If you do so, you must also withdraw the earnings
attributable to that portion and report the earnings as income for the year for
which the contribution was made. If some portion of your contribution is not
deductible, you may decide either to withdraw the non-deductible amount, or to
leave it in the IRA and designate that portion as a non-deductible contribution
on your tax return.
IRA DISTRIBUTIONS
Generally, IRA distributions which are not rolled over (see "Rollover IRA
Rules," below) are included in your gross income in the year they are received.
Non-deductible IRA contributions, however, are made using income which has
already been taxed (that is, they are not deductible contributions). Thus, the
portion of the IRA distributions consisting of non-deductible contributions will
not be taxed again when received by you. If you make any non-deductible IRA
contributions, each distribution from your IRA(s) will consist of a non-taxable
portion (return of non-deductible contributions) and a taxable portion (return
of deductible contributions, if any, and account earnings). Special tax rules
applicable to lump sum distributions from tax qualified retirement plans are not
applicable to IRA distributions.
Thus, you may not take a distribution which is entirely tax-free. The
following formula is used to determine the non-taxable portion of your
distributions for a taxable year:
Remaining Non-Deductible Contributions
-------------------------------------- x Total Distributions = Nontaxable
Year-End Total IRA Balances (for the year) Distributions
(for the year)
To figure the year-end total IRA balance, you treat all of your IRAs as a
single IRA. This includes all regular IRAs (whether accounts or annuities), as
well as Simplified Employee Pension (SEP) IRAs, and Rollover IRAs. You also add
back the distributions taken during the year.
Example: An individual makes the following contributions to his or her IRA(s).
Year Deductible Non-Deductible
---- ---------- --------------
1986 $2,000 0
1987 1,800 0
1990 1,000 $1,000
1992 600 1,400
------ ------
$5,400 $2,400
Deductible Contributions: $5,400
5
<PAGE>
Non-Deductible Contributions: 2,400
Earnings on IRAs: 1,200
------
Total Account Balance of IRA(s) as of 12/31/95
(including distributions in 1995): $9,000
In 1995, the individual takes a distribution of $3,000. The total account
balance in the IRAs on 12/31/95 plus 1995 distributions is $9,000. The non-
taxable portion of the distributions for 1995 is figured as follows:
Total non-deductible contributions $2,400
-------- x $3,000 = $810
Total account balance in the IRAs, plus distributions $9,000
Thus, $810 of the $3,000 distribution in 1995 will not be included in the
individual's taxable income. The remaining $2,190 will be taxable for 1995.
ROLLOVER IRA RULES
1. IRA TO IRA
You may withdraw, tax-free, all or part of the assets from an IRA and
reinvest or rollover such assets in one or more IRAs. The rollover must be
completed within 60 days of the withdrawal. No IRA deduction is allowed for the
rollover. If you make such a rollover, you may not make another rollover from
an IRA to another IRA for at least one year after the original rollover is made.
Amounts required to be distributed because the individual has reached age 70 1/2
may not be rolled over.
2. EMPLOYER PLAN DISTRIBUTIONS TO IRA
All taxable distributions (known as "eligible rollover distributions") from
qualified pension, profit-sharing, stock bonus and tax sheltered annuity plans
may be rolled over to an IRA, with the exception of (1) annuities paid over a
life or life expectancy, (2) installments for a period of ten years or more, and
(3) required minimum distributions under Code Section 401(a)(9).
Rollovers may be accomplished in two ways. First, you may elect to have an
eligible rollover distribution paid directly to an IRA (a "direct rollover").
Second, you may receive the distribution directly and then, within 60 days of
receipt, roll the amount over to an IRA. However, any amount that you elect not
to have distributed as a direct rollover will be subject to 20 percent income
tax withholding, and, if you are younger than age 59 1/2, may result in a 10%
excise tax on any amount of the distribution that is included in income.
Questions regarding distribution options should be directed to your Plan Trustee
or Plan Administrator, or may be answered by consulting IRS Regulations Sections
1.401(a)(31)-1, 1.402(c)-2 and 31.3405(c)-1.
PENALTIES FOR PREMATURE DISTRIBUTIONS
6
<PAGE>
If you receive a distribution from your IRA before you reach age 59 1/2, an
additional tax of 10 percent will be imposed under Code Section 72(t), unless
the distribution (a) occurs because of your death or disability, (b) is received
as a part of a series of substantially equal payments over your life or life
expectancy, (c) is received as a part of a series of substantially equal
payments over the lives or life expectancy of you and your designated
beneficiary, or (d) is contributed to a rollover IRA or a qualified plan.
7
<PAGE>
MINIMUM DISTRIBUTIONS
Under the rules set forth in Code Section 408(b)(3) and Section
401(a)(9), you may not leave the funds in your contract indefinitely.
Certain minimum distributions are required. These required distributions may
be taken in one of two ways: (a) by withdrawing the balance of your contract
by a "required beginning date," usually April 1 of the year following the
date at which you reach age 70 1/2; or (b) by withdrawing periodic
distributions of the balance in your contract by the required beginning date.
These periodic distributions may be taken over (a) your life; (b) the lives
of you and your designated beneficiary; (c) a period not extending beyond
your life expectancy; or (d) a period not extending beyond the joint life
expectancy of you and your designated beneficiary.
If you do not satisfy the minimum distribution requirements, then, pursuant
to Code Section 4974, you may have to pay a 50% excise tax on the amount not
distributed as required that year.
The foregoing minimum distribution rules are discussed in detail in IRS
Publication 590, "Individual Retirement Arrangements."
REPORTING
You are required to report penalty taxes due on excess contributions,
excess accumulations, excess distributions, premature distributions, and
prohibited transactions. Currently, IRS Form 5329 is used to report such
information to the Internal Revenue Service.
PROHIBITED TRANSACTIONS
Neither you nor your beneficiary may engage in a prohibited transaction, as
that term is defined in Code Section 4975. If you or your beneficiary engage in
a prohibited transaction with respect to your IRA, the account will lose its tax
exemption and you will be required to include the fair market value of your IRA
in gross income for the taxable year in which you or your beneficiary engage in
such a prohibited transaction.
Borrowing any money from (or by use of) this IRA would, under Code Section
408(e)(3), cause the contract to cease to be an Individual Retirement Annuity
and would result in the fair market value of the annuity being included in the
owner's gross income in the taxable year in which such loan is made.
Use of this contract as security for a loan, if such loan were otherwise
permitted, would, under Code Section 408(e)(4), cause the portion so used to be
treated as a taxable distribution includable in your gross income for the year
during which the contract is so used.
8
<PAGE>
EXCESS CONTRIBUTIONS
Code Section 4973 imposes a six percent excise tax as a penalty for an
excess contribution to an IRA. An excess contribution is the excess of the
deductible and nondeductible amounts contributed by the Owner to an IRA for
that year over the lesser of his or her taxable compensation or $2,000.
(Different limits apply in the case of a spousal IRA arrangement for taxable
years ending on or before December 31, 1996.) If the excess contribution
plus any net income attributable thereto is not withdrawn by the due date of
your tax return (including extensions) you will be subject to the penalty.
IRS APPROVAL
Your contract and IRA endorsement have been approved by the Internal
Revenue Service as a tax qualified Individual Retirement Annuity. Such
approval by the Internal Revenue Service is a determination only as to the
form of the annuity and does not represent a determination of the merits of
such annuity.
This disclosure statement is intended to provide an overview of the
applicable tax laws relating to Individual Retirement Annuities. It is not
intended to constitute a comprehensive explanation as to the tax consequences of
your IRA. As with all significant transactions such as the establishment or
maintenance of, or withdrawal from an IRA, appropriate tax and legal counsel
should be consulted. Further information may also be acquired by contacting
your IRS District Office or consulting IRS Publication 590.
FINANCIAL DISCLOSURE (THE CHAIRMAN COMBINATION FIXED AND VARIABLE
ANNUITY)
This Financial Disclosure is applicable to IRAs using The Chairman
combination fixed and variable annuity purchased from The American Franklin Life
Insurance Company ("American Franklin") on or after [December 1, 1996].
Earnings under the variable investment options are not guaranteed, and
depend on the performance of the underlying mutual funds that you select. The
value of the underlying mutual funds is determined each day that the New York
Stock Exchange is open for trading. You bear the risk of investment losses with
respect to the variable investment options. As such, earnings cannot be
projected. You may also allocate purchase payments to fixed investment options,
which earn interest for one-year, three-year or five-year periods, as you
select, at guaranteed rates established by American Franklin from time to time.
Set forth below are the charges associated with such annuities.
CHARGES:
(a) Annual contract fee of $30 deducted at the end of each contract year.
(b) A maximum charge of $25 for each transfer, in excess of 12 free
transfers annually, of contract value among divisions of the Separate Account
and the Guarantee Periods.
9
<PAGE>
(c) To compensate for mortality and expense risks assumed by American
Franklin under the contract, variable divisions only will incur a daily charge
at an annualized rate of 1.25% of the average Separate Account Value of the
contract during both the Accumulation and the Payout Phase.
(d) Premium taxes, if applicable, may be charged against Accumulation
Value at time of annuitization, a full or partial surrender or upon the death of
the Annuitant. If a jurisdiction imposes premium taxes at the time purchase
payments are made, the Company may deduct a charge at that time.
(e) If the contract is surrendered, or if a withdrawal is made, there may
be a Surrender Charge. The Surrender Charge equals the sum of the following:
6% of purchase payments for surrenders and withdrawals made during the
first and second contract years following receipt of the purchase
payments surrendered;
5% of purchase payments for surrenders and withdrawals made during the
third and fourth contract years following receipt of the purchase
payments surrendered;
4% of purchase payments for surrenders and withdrawals made during the
fifth and sixth contract years following receipt of the purchase
payments surrendered; and
2% of purchase payments for surrenders and withdrawals made during the
seventh contract year following receipt of the purchase payments
surrendered.
There will be no charge imposed for surrenders and withdrawals made
after the seventh contract year following receipt of the purchase
payments surrendered.
Under certain circumstances described in the contract, portions of a
partial withdrawal may be exempt from the Surrender Charge.
(f) To compensate for administrative expenses, a daily charge will be
incurred at an annualized rate of .15% of the average Separate Account Value of
the contract during the Accumulation and the Payout Phase.
(g) Each variable division will be charged a fee for asset management and
other expenses deducted directly from the underlying fund during the
Accumulation and Payout Phase. For funds managed by Fidelity Management &
Research Company, the fee will range between 0.28% and 0.91%. For funds managed
by Massachusetts Financial Services Company, the fee will range between 1.00%
and 1.50%.
10
<PAGE>
PROSPECTUS
THE CHAIRMAN-TM-
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACTS
OFFERED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
Complete and return this form to:
The American Franklin Life Insurance Company
AMFLIC Annuity Service Center
P.O. Box 4636
Houston, Texas 77210-4636
(800) 200-3101
Please send me the Statement of Additional Information dated December 11,
1996 for Separate Account VA-1.
----------------------------------------------------------
(Name)
----------------------------------------------------------
(Street)
----------------------------------------------------------
(City) (State) (Zip Code)
<PAGE>
COMBINATION FIXED AND VARIABLE
ANNUITY
THE
CHAIRMAN-TM-
Issued by
[LOGO] The
American FRANKLIN
Life Insurance Company
-----------------------------
* An American General Company
Administrative Office:
AMFLIC Annuity Service Center
P.O. Box 4636
Houston, Texas 77210-4636
The Chairman is a trademark of The
American Franklin Life Insurance Company
<PAGE>
SEPARATE ACCOUNT VA-1 OF
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THE CHAIRMAN-TM-
Combination Fixed And Variable Annuity Contracts
Offered by
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
#1 Franklin Square, Springfield, Illinois 62713
(217) 528-2011
STATEMENT OF ADDITIONAL INFORMATION
Dated December 11, 1996
This Statement of Additional Information is not a prospectus. It should
be read with the Prospectus for Separate Account VA-1 of The American
Franklin Life Insurance Company ("Separate Account VA-1") concerning The
Chairman flexible payment deferred individual annuity Contracts investing in
certain mutual fund portfolios of the Variable Insurance Products Fund, the
Variable Insurance Products Fund II and MFS Variable Insurance Trust, dated
December 11, 1996. A copy of the Prospectus for the Contracts, and any
supplements thereto, may be obtained by contacting The American Franklin Life
Insurance Company ("American Franklin") at its Administrative Office located
at 2727-A Allen Parkway 3-50, Houston, Texas 77019-2191; mailing address -
P.O. Box 4636, Houston, Texas 77210-4636; telephone numbers - (800) 200-3101
or (713) 831-3310. An Owner has the option of receiving benefits on a fixed
basis through American Franklin's Fixed Account or through American
Franklin's Separate Account VA-1. Terms used in this Statement of Additional
Information have the same meanings as are defined in the Prospectus under the
heading "Glossary."
TABLE OF CONTENTS
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Regulation and Reserves. . . . . . . . . . . . . . . . . . . . . . . . . 2
Independent Auditors and Accountants . . . . . . . . . . . . . . . . . . 3
Principal Underwriter. . . . . . . . . . . . . . . . . . . . . . . . . . 3
Administration of the Contracts. . . . . . . . . . . . . . . . . . . . . 3
Limitations on Annuity Payment Options . . . . . . . . . . . . . . . . . 4
A. Limitations on Choice of Annuity Payment Option. . . . . . . . . 4
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
A. Gender of Annuitant. . . . . . . . . . . . . . . . . . . . . . . 6
B. Misstatement of Age or Sex and Other Errors. . . . . . . . . . . 7
Change of Investment Adviser or Investment Policy. . . . . . . . . . . . 7
Performance Data for the Divisions . . . . . . . . . . . . . . . . . . . 7
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . . F-1
<PAGE>
GENERAL INFORMATION
American Franklin is a legal reserve stock life, accident and health
insurance company organized under the laws of the State of Illinois in 1981.
American Franklin is a wholly-owned subsidiary of The Franklin Life Insurance
Company ("The Franklin"). The Franklin is a legal reserve stock life insurance
company organized under the laws of the State of Illinois in 1884. The Franklin
issues individual life insurance, annuity and accident and health insurance
policies, group annuities and group life and health insurance and offers a
variety of whole life, life, retirement income and level and decreasing term
insurance plans. Its home office is located at #1 Franklin Square, Springfield,
Illinois 62713.
REGULATION AND RESERVES
American Franklin is subject to regulation and supervision by the insurance
departments of the states in which it is licensed to do business. This
regulation covers a variety of areas, including benefit reserve requirements,
adequacy of insurance company capital and surplus, various operational
standards, and accounting and financial reporting procedures. American
Franklin's operations and accounts are subject to periodic examination by
insurance regulatory authorities.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for insurance contract losses,
if covered, incurred by insolvent companies. The amount of any future
assessments of American Franklin under these laws cannot be reasonably
estimated. Most of these laws do provide, however, that an assessment may be
excused or deferred if it would threaten an insurer's own financial strength.
Although the federal government generally has not directly regulated the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal measures that may adversely affect the insurance
business include employee benefit regulation, tax law changes affecting the
taxation of insurance companies or of insurance products, changes in the
relative desirability of various personal investment vehicles, and removal of
impediments on the entry of banking institutions into the business of insurance.
Also, both the executive and legislative branches of the federal government have
under consideration various insurance regulatory matters, which could ultimately
result in direct federal regulation of some aspects of the insurance business.
It is not possible to predict whether this will occur or, if so, what the effect
on American Franklin would be.
Pursuant to state insurance laws and regulations, American Franklin is
obligated to carry on its books, as liabilities, reserves to meet its
obligations under outstanding insurance contracts. These reserves are based on
assumptions about, among other things, future claims experience and investment
returns. Neither the reserve requirements nor the other aspects of state
insurance regulation provide absolute protection to holders of insurance
contracts, including the Contracts, if American Franklin were to incur claims or
expenses at rates significantly higher than expected, for example, due to
acquired immune deficiency syndrome or other infectious diseases or
catastrophes, or significant unexpected losses on its investments.
2
<PAGE>
INDEPENDENT AUDITORS AND ACCOUNTANTS
Ernst & Young LLP, independent auditors, will perform an annual audit
of Separate Account VA-1. The balance sheet as of December 31, 1995, and the
related statements of operations, shareholder's equity and cash flows for the
eleven months ended December 31, 1995 and for the one month ended January 31,
1995, of American Franklin included in this Statement of Additional
Information have been audited by Ernst & Young LLP, independent auditors, as
set forth in their report thereon appearing elsewhere herein. The balance
sheet as of December 31, 1994, and the related statements of operations,
shareholder's equity and cash flows for each of the two years in the period
then ended, of American Franklin included in this Statement of Additional
Information have been audited by Coopers & Lybrand L.L.P., independent
accountants, as set forth in their report thereon appearing elsewhere herein.
Such financial statements referred to above are included in this Statement
of Additional Information in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing. Ernst & Young
LLP is located at 233 South Wacker Drive, Chicago, Illinois 60606, and
Coopers & Lybrand L.L.P. is located at 203 North LaSalle Street, Chicago,
Illinois 60601.
During the audit of American Franklin's financial statements for the year
ended December 31, 1994, there was no disagreement between American Franklin and
Coopers & Lybrand L.L.P. on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which
disagreement, if not resolved to the satisfaction of Coopers & Lybrand L.L.P.,
would have caused Coopers & Lybrand L.L.P. to make reference in connection with
its report to the subject matter of the disagreement.
The report of Coopers & Lybrand L.L.P. on the financial statements of
American Franklin for the year ended December 31, 1994 did not contain an
adverse opinion or a disclaimer of opinion nor was such report qualified as to
uncertainty, audit scope, or accounting principles.
PRINCIPAL UNDERWRITER
Franklin Financial Services Corporation ("FFSC") is the principal
underwriter with respect to the Contracts. FFSC also serves as principal
underwriter to Franklin Life Variable Annuity Fund A, Franklin Life Variable
Annuity Fund B, Franklin Life Money Market Variable Annuity Fund C, which offer
interests in variable annuities, and Separate Account VUL and Separate Account
VUL-2 of The American Franklin Life Insurance Company, which offer interests in
flexible premium variable life insurance policies, each of which is an
investment company registered under the Investment Company Act of 1940. FFSC, a
Delaware corporation, is a wholly-owned subsidiary of The Franklin and a member
of the National Association of Securities Dealers, Inc.
The securities offered pursuant to the Contracts are offered on a
continuous basis.
ADMINISTRATION OF THE CONTRACTS
While American Franklin has primary responsibility for all administration
of the Contracts, American General Life Insurance Company ("AGL") has agreed
pursuant to a services agreement among American General Corporation and
almost all of its subsidiaries to provide all administrative services in
connection with the Contracts, including the issuance of the Contracts and
the maintenance of Owners' records. American Franklin and AGL, as
wholly-owned subsidiaries of American General Corporation, are parties to the
services agreement. Pursuant to such agreement, American Franklin reimburses
AGL for the costs and expenses which AGL incurs in providing such
administrative services in connection with the Contracts, but neither
American Franklin nor AGL incurs a loss or realizes a profit by reason
thereof. AGL is a stock life insurance company organized under the laws of
Texas and is also engaged in the writing and sale of life insurance and
annuity contracts. American Franklin's ability to administer the Contracts
could be adversely affected should AGL terminate or be unable to continue
providing administrative services pursuant to the services agreement.
3
<PAGE>
LIMITATIONS ON ANNUITY PAYMENT OPTIONS
A. LIMITATIONS ON CHOICE OF ANNUITY PAYMENT OPTION
Described below are certain limitations on Annuity Payment Options based on
American Franklin's current understating of the distribution rules generally
applicable to Non-Qualified Contracts, Section 457 Contracts and to Qualified
Contracts. Various questions exist, however, about the application of the
distribution rules to distributions from the Contracts and their effect on
Annuity Payment Option availability thereunder.
The Internal Revenue Service has proposed regulations relating to required
distributions from Section 457 Plans and Qualified Plans. These proposed
regulations may limit the availability of the Annuity Payment Options for
Contracts issued in connection with such plans. The proposed regulations are
generally effective for calendar years after 1984; persons contemplating the
purchase of a Contract should consult a qualified tax advisor concerning the
effect of the proposed regulations on the Annuity Payment Option or Options he
or she is contemplating.
FIRST OPTION--LIFE ANNUITY. Under Qualified Contracts, if the Annuitant
dies before Annuity payments have commenced, this Annuity Payment Option is
available to the Beneficiary only if the Beneficiary is an individual
designated in the Contract and distributions to the Beneficiary begin not
later than one year after the date of the Annuitant's death (except that
distributions to a designated Beneficiary who is the surviving spouse of the
Annuitant need not commence earlier than the date on which the Annuitant
would have attained age 70 1/2). If the surviving spouse of the Annuitant is
the designated Beneficiary and such surviving spouse dies before Annuity
payments to such spouse have commenced, the surviving spouse generally will
be treated as the Annuitant for purposes of the distribution requirements.
Under Non-Qualified Contracts, if any Owner dies before Annuity payments
have commenced, this Annuity Payment Option is available to a non-spouse
designated Beneficiary only if the Beneficiary is an individual designated in
the Contract and distributions to the designated Beneficiary begin not later
than one year after the date of the Owner's death (or the substituted
surviving spouse's death, as the case may be). If the surviving spouse of
the Owner is the designated Beneficiary, the distribution requirements are
applied as if the surviving spouse was the Owner.
Under Section 457 Contracts, if the Annuitant dies before Annuity
payments have commenced, this Annuity Payment Option is not available to the
Beneficiary unless the designated Beneficiary is the surviving spouse of the
Annuitant and distributions to the designated Beneficiary begin not later
than the later of (i) one year after the date of the Annuitant's death or
(ii) the date on which the Annuitant would have attained age 70 1/2.
SECOND OPTION--LIFE ANNUITY WITH PAYMENT FOR A FIXED TERM OF YEARS. Under
Qualified Contracts, this Annuity Payment Option is available only if the
selected period does not extend beyond the life expectancy of the Annuitant
(or the joint life expectancies of the Annuitant and his or her designated
Beneficiary). Further, if the Annuitant dies before Annuity payments have
commenced, this Annuity Payment Option is not available to a Beneficiary
unless (i) the Beneficiary is an individual designated in the Contract, (ii)
the selected period does not extend beyond the life expectancy of the
designated Beneficiary and (iii) the
4
<PAGE>
distribution to the designated Beneficiary commences not later than one year
after the date of the Annuitant's death (except that distributions to a
designated Beneficiary who is the surviving spouse of the Annuitant need not
commence earlier than the date on which the Annuitant would have attained age
70 1/2). If the surviving spouse of the Annuitant is the designated
Beneficiary and the surviving spouse dies before Annuity payments to such
spouse have commenced, the surviving spouse generally will be treated as the
Annuitant for purposes of the distribution requirements. This Annuity
Payment Option is available in connection with Individual Retirement
Annuities or in connection with Section 403(b) annuity purchase plans only if
certain minimum distribution incidental benefit requirements of the proposed
regulations are met.
Under Non-Qualified Contracts, if any Owner dies before Annuity payments
have commenced, this Annuity Payment Option is available to a non-spouse
designated Beneficiary only if the Beneficiary is an individual designated in
the Contract, distributions to the designated Beneficiary begin not later
than one year after the date of the Owner's death (or the substituted
surviving spouse's death, as the case may be), and the selected period does
not extend beyond the life expectancy of the designated Beneficiary. If the
surviving spouse of the deceased Owner is the designated Beneficiary, the
distribution requirements are applied as if the surviving spouse was the
Owner.
Under Section 457 Contracts, this Annuity Payment Option is not available
unless the selected period does not extend beyond the life expectancy of the
Annuitant (or the joint life expectancy of the Annuitant and his or her
designated Beneficiary who is an individual designated in the Contract).
Further, if the Annuitant dies before Annuity payments have commenced, this
Annuity Payment Option is not available to the Beneficiary unless (a) the
designated Beneficiary is the surviving spouse of the Annuitant, (b) the
selected period does not extend beyond the life expectancy of the designated
Beneficiary and (c) distributions to the designated Beneficiary begin not
later than the later of (i) one year after the date of the Annuitant's death
or (ii) the date on which the Annuitant would have attained age 70 1/2. This
Annuity Payment Option is also not available under Section 457 Contracts
unless certain minimum distribution rules similar to the minimum distribution
incidental benefit requirements of proposed regulations are met.
THIRD OPTION--JOINT AND LAST SURVIVOR LIFE ANNUITY. Under Section 457
Contracts and Qualified Contracts, this Annuity Payment Option is available only
if the secondary annuitant is the spouse of the Annuitant or if certain minimum
distribution incidental benefit requirements of the proposed regulations are
met. Further, if the Annuitant dies before Annuity payments have commenced,
this Annuity Payment Option is not available to a Beneficiary. Under Non-
Qualified Contracts, if any Owner dies before Annuity payments have commenced,
this Annuity Payment Option is available only if the designated Beneficiary is
the surviving spouse of the deceased Owner.
FOURTH OPTION--INCOME PAYMENTS FOR A FIXED TERM OF YEARS. Under
Qualified Contracts, this Annuity Payment Option is available only if the
limitations described in the Second Option, above, applicable to such
Qualified Contracts, are satisfied, except that this Annuity Payment Option
is otherwise available to a designated Beneficiary where the Annuitant dies
before Annuity payments have commenced if the designated period does not
exceed a period that terminates five years after the death of the Annuitant
or the substituted surviving spouse, as the
5
<PAGE>
case may be. In addition, this Annuity Payment Option is not available if the
number of years in the selected period over which Annuity payments would
otherwise be paid plus the attained age of the Annuitant at the Annuity
Commencement Date would exceed 95.
Under Non-Qualified Contracts this Annuity Payment Option is not available
to a Beneficiary where the Annuitant dies before Annuity payments have
commenced, unless either the limitations described in the Second Option, above,
applicable to such Non-Qualified Contracts are satisfied, or the selected period
does not exceed a period that terminates five years after the death of the
Annuitant or the substituted surviving spouse, as the case may be.
Under Section 457 Contracts this Annuity Payment Option is not available
unless the limitations described in the Second Option, above, applicable to
Section 457 Contracts, are satisfied. This Annuity Payment Option is also
available to a designated Beneficiary where the Annuitant dies before Annuity
payments have commenced if the designated period does not exceed a period
that terminates five years after the death of the Annuitant. If the
surviving spouse of the Annuitant is the designated Beneficiary and the
surviving spouse dies before Annuity payments to such spouse have commenced,
the surviving spouse will be treated as the Annuitant for purposes of the
preceding sentence. In addition, this Annuity Payment Option is not
available if the number of years in the selected period over which Annuity
payments would otherwise be paid plus the attained age of the Annuitant at
the Annuity Commencement Date would exceed 95.
FIFTH OPTION -- PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Annuity Payment
Option is not available to a Beneficiary under a Non-Qualified Contract where
the Annuitant dies before Annuity payments have commenced, unless the amount
selected results in a distribution period which either satisfies the limitations
described in the Second Option, above, applicable to Non-Qualified Contracts, or
which terminates not more than five years after the death of the Annuitant or
the substitute surviving spouse, as the case may be.
ANNUITY PAYMENTS
A. GENDER OF ANNUITANT
When annuity payments are based on life expectancy, the amount of each
annuity payment ordinarily will be higher if the Annuitant or other measuring
life is a male, as compared with a female under an otherwise identical Contract.
This is because, statistically, females tend to have longer life expectancies
than males.
However, there will be no differences between males and females in any
jurisdiction, including Montana, where such differences are not permitted.
American Franklin will also make available Contracts with no such differences in
connection with certain employer-sponsored benefit plans. Employers should be
aware that, under most such plans, Contracts that make distinctions based on
gender are prohibited by law.
6
<PAGE>
B. MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS
If the age or sex of an Annuitant has been misstated to American Franklin,
the benefits payable will be those which the purchase payments paid would have
purchased at the correct age and sex. If American Franklin made any
overpayments because of incorrect information about age or sex, or any error or
miscalculation, American Franklin will deduct the overpayment from the next
payment or payments due. American Franklin will add any underpayments to the
next payment. The amount of any adjustment will be credited or charged with
interest at the assumed interest rate used in the Contract's annuity tables.
CHANGE OF INVESTMENT ADVISER OR INVESTMENT POLICY
Unless otherwise required by law or regulation, neither the investment
adviser to any Fund nor any investment policy may be changed without the consent
of American Franklin. If required, approval of or change of any investment
objective will be filed with the insurance department of each state where a
Contract has been delivered. The Owner (or, after annuity payments start, the
payee) will be notified of any material investment policy change that has been
approved. Owners will be notified of any investment policy change prior to its
implementation by Separate Account VA-1 if such Owners' consent or vote is
required for such change.
PERFORMANCE DATA FOR THE DIVISIONS
American Franklin may provide investment results for each of the available
Divisions of Separate Account VA-1. Such results are not an estimate or
guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Owner. The investment experience
for each Division will reflect the investment performance of the separate
investment Fund then funding such Division for the periods stated.
AVERAGE ANNUAL TOTAL RETURN CALCULATIONS
Each Division's average annual total return quotation will be computed in
accordance with a standard method prescribed by the Securities and Exchange
Commission. The average annual total return for a Division for a specific
period is found by first taking a hypothetical $1,000 investment in the
Division's Accumulation Units on the first day of the period at the maximum
offering price, which is the Accumulation Unit value per unit ("initial
investment"), and computing the ending redeemable value ("redeemable value") of
that investment at the end of the period. The redeemable value reflects the
effect of the applicable Surrender Charge that may be imposed at the end of the
period as well as all other recurring charges and fees applicable under the
Contract to all Owner accounts. Such other charges and fees include the
mortality and expense risk charge, the administrative expense charge, and a pro
rata portion of the Annual Contract Fee for the relevant period. Any premium
taxes will not be reflected. The redeemable value is then divided by the
initial investment and this quotient is taken to the Nth root (N represents the
number of years in the period) and 1 is subtracted from the result, which is
then expressed as a percentage.
7
<PAGE>
TOTAL RETURN CALCULATIONS (WITHOUT SURRENDER CHARGE)
Each Division may also advertise its non-standardized total return, which
will be calculated in the same manner and for the same time periods as the
standardized average annual total returns described immediately above, except
that the redeemable value will not reflect the deduction of any applicable
Surrender Charge that may be imposed at the end of the period, since it is
assumed that the Contract will continue through the end of each period, or the
deduction of the Annual Contract Fee. If reflected, these charges would reduce
the performance results presented.
CUMULATIVE TOTAL RETURN CALCULATIONS
No standardized formula has been prescribed by the Securities and Exchange
Commission for calculating cumulative total return performance. Cumulative
total return performance is the compound rate of return on a hypothetical
initial investment of $1,000 in each Division's Accumulation Units on the first
day of the period at the maximum offering price, which is the Accumulation Unit
value per unit ("initial investment"). Cumulative total return figures (and the
related "Growth of a $1,000 Investment" figures) will not include the effect of
any premium taxes or any applicable Surrender Charge or the Annual Contract Fee.
Cumulative total return quotations will reflect changes in Accumulation Unit
value and will be calculated by finding the cumulative rates of return of the
hypothetical initial investment over various periods, according to the following
formula, and then expressing that as a percentage:
C = (ERV/P) - 1
Where:
C = cumulative total return
P = a hypothetical initial investment of $1,000
ERV = ending redeemable value is the value at the end of the applicable
period of a hypothetical $1,000 investment made at the beginning of
the applicable period.
YIELD CALCULATIONS
The yields for the VIP High Income Division and the VIP II Investment Grade
Bond Division will each be computed in accordance with a standard method
prescribed by the Securities and Exchange Commission. The yield quotation will
be computed by dividing the net investment income per Accumulation Unit earned
during the specified one month or 30-day period by the Accumulation Unit values
on the last day of the period, according to the following formula that assumes a
semi-annual reinvestment of income:
a - b
YIELD = 2[(------- +1) 6 - 1]
cd
a = net dividends and interest earned during the period by the Fund
attributable to the Division
8
<PAGE>
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of Accumulation Units outstanding during the
period
d = the Accumulation Unit value per unit on the last day of the period
The yield of each Division will reflect the deduction of all recurring
fees and charges applicable to each Division, such as the mortality and expense
risk charge, the administrative expense charge, and a pro rata portion of the
Annual Contract Fee for the relevant period, but will not reflect the deduction
of Surrender Charges or premium taxes.
VIP MONEY MARKET DIVISION YIELD AND EFFECTIVE YIELD CALCULATIONS
The VIP Money Market Division's yield will be computed in accordance with a
standard method prescribed by the Securities and Exchange Commission. Under
that method, the current yield quotation is based on a seven-day period and
computed as follows: the net change in the Accumulation Unit value during the
period is divided by the Accumulation Unit value at the beginning of the period
to obtain the base period return; the base period return is then multiplied by
the fraction 365/7 to obtain the current yield figure, which is carried to the
nearest one-hundredth of one percent. Realized capital gains or losses and
unrealized appreciation or depreciation of the Division's Fund are not included
in the calculation.
The VIP Money Market Division's effective yield will be determined by
taking the base period return (computed as described above) and calculating the
effect of assumed compounding. The formula for the effective yield is:
(base period return + 1) 365/7-1.
Yield and effective yield will not reflect the deduction of Surrender
Charges or premium taxes that may be imposed upon the redemption of Accumulation
Units.
PERFORMANCE COMPARISONS
The performance of each or all of the available Divisions of Separate
Account VA-1 may be compared in advertisements and sales literature to the
performance of other variable annuity issuers in general or to the performance
of particular types of variable annuities investing in mutual funds, or series
of mutual funds, with investment objectives similar to each of the Divisions of
Separate Account VA-1. Lipper Analytical Services, Inc. ("Lipper") and the
Variable Annuity Research and Data Service ("VARDS(R)") are independent services
which monitor and rank the performance of variable annuity issuers in each of
the major categories of investment objectives on an industry-wide basis.
Lipper's rankings include variable life issuers as well as variable annuity
issuers. VARDS(R) rankings compare only variable annuity issuers. The
performance analyses prepared by Lipper and VARDS(R) rank such issuers on the
basis of total return, assuming reinvestment of dividends and distributions, but
do not take sales charges, redemption fees or certain expense deductions at the
separate account level into consideration. In addition, VARDS(R) prepares risk
adjusted rankings, which consider the effects of market risk on total return
performance.
9
<PAGE>
In addition, each Division's performance may be compared in advertisements
and sales literature to the following benchmarks: (1) the Standard & Poor's 500
Composite Stock Price Index, an unmanaged weighted index of 500 leading domestic
companies that represent approximately 80% of the market capitalization of the
United States equity market; (2) the Dow Jones Industrial Average, an unmanaged
unweighted average of thirty blue chip industrial corporations listed on the New
York Stock Exchange that is generally considered to be representative of the
United States stock market; (3) the Consumer Price Index, published by the U.S.
Bureau of Labor Statistics, a statistical measure of change, over time, in the
prices of goods and services in major expenditure groups that is generally
considered to be a measure of inflation; (4) the Lehman Brothers Government and
Domestic Income Index, the Salomon Brothers High Grade Domestic Income Index,
and the Merrill Lynch Government/Corporate Master Index, unmanaged indices that
are generally considered to be representative of the performance of intermediate
and long term bonds during various market cycles; and (5) the Morgan Stanley
Capital International Europe Australia Far East Index, an unmanaged index that
is generally considered to be representative of major non-United States stock
markets.
FINANCIAL STATEMENTS
The financial statements of American Franklin that are included in this
Statement of Additional Information should be considered only as bearing on the
ability of American Franklin to meet its obligations under the Contracts.
10
<PAGE>
INDEX TO
FINANCIAL STATEMENTS
Page No.
--------
I. SEPARATE ACCOUNT VA-1 FINANCIAL STATEMENTS
This Statement of Additional Information contains no financial
statements of Separate Account VA-1 because Separate Account
VA-1 has not yet commenced operations, has no assets or liabilities
and has received no income, nor incurred any expenses as of the
date of this Statement of Additional Information. The financial
statements of Separate Account VA-1 will be prepared on a calendar
year basis.
II. AMERICAN FRANKLIN FINANCIAL STATEMENTS
Report of Independent Auditors. . . . . . . . . . . . . . . . . . . . .F-2
Report of Independent Accountants . . . . . . . . . . . . . . . . . . .F-3
Audited Financial Statements:
Balance Sheet, December 31, 1995 and 1994. . . . . . . . . .F-4 - F-5
Statement of Operations for the eleven months ended
December 31, 1995, one month ended January 31, 1995 and
years ended December 31, 1994 and 1993 . . . . . . . . . . . . .F-6
Statement of Shareholder's Equity for the eleven months
ended December 31, 1995, one month ended January 31, 1995
and years ended December 31, 1994 and 1993 . . . . . . . . . . .F-7
Statement of Cash Flows for the eleven months ended
December 31, 1995, one month ended January 31, 1995 and
years ended December 31, 1994 and 1993 . . . . . . . . . . . . .F-8
Notes to Financial Statements. . . . . . . . . . . . . . . F-9 - F-27
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
______________________________
Board of Directors
and Shareholder
The American Franklin Life Insurance Company
We have audited the accompanying balance sheet of The American Franklin Life
Insurance Company (a wholly-owned subsidiary of The Franklin Life Insurance
Company, which is a wholly-owned subsidiary of American Franklin Company) as of
December 31, 1995, and the related statements of operations, shareholder's
equity and cash flows for the eleven months ended December 31, 1995 and the one
month ended January 31, 1995. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The American Franklin Life
Insurance Company at December 31, 1995, and the results of its operations and
its cash flows for the eleven months ended December 31, 1995 and the one month
ended January 31, 1995 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Chicago, Illinois
March 15, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
__________________________________
To the Board of Directors
and Shareholder of
The American Franklin Life Insurance Company
We have audited the accompanying balance sheet of The American Franklin Life
Insurance Company (a wholly-owned subsidiary of The Franklin Life Insurance
Company) as of December 31, 1994, and the related statements of operations,
shareholder's equity and cash flows for each of the two years in the period
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The American Franklin Life
Insurance Company as of December 31, 1994, and the results of its operations and
its cash flows for each of the two years in the period ended December 31, 1994
in conformity with generally accepted accounting principles.
As discussed in the Notes to Financial Statements, in 1993 the Company changed
its methods of accounting for reinsurance contracts and certain investments in
debt and equity securities.
COOPERS & LYBRAND L.L.P.
203 North LaSalle Street
Chicago, Illinois 60601
February 1, 1995
F-3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
Predecessor
Basis
-------------
December 31
-----------------------------
ASSETS 1995 1994
-----------------------------
<S> <C> <C>
Investments
Fixed maturity securities
Fair value
(amortized cost: $24,333; $2,214) $ 26,578 $ 2,200
Amortized cost (fair value: $20,979) - 22,093
Policy loans 2,427 1,308
-----------------------------
29,005 25,601
Cash and cash equivalents 1,865 2,403
Accrued investment income 493 544
Amounts recoverable from reinsurers 5,308 3395
Deferred policy acquisition costs 4,101 16,540
Cost of insurance purchased 13,621 -
Insurance premiums in course of settlement 505 722
Other assets 1,331 624
Assets held in separate accounts 72,202 40,923
-----------------------------
Total assets $ 128,431 $ 90,752
-----------------------------
-----------------------------
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
Predecessor
Basis
-------------
December 31
-----------------------------
LIABILITIES 1995 1994
-----------------------------
<S> <C> <C>
Insurance liabilities
Policy reserves, contract claims and
other policyholders' funds $ 6,604 $ 2,729
Universal life contracts 27,842 24,122
Unearned revenue 1,913 2,787
Income taxes
Current (461) 20
Deferred (1,172) (517)
Accrued expenses and other liabilities 3,855 2,821
Liabilities related to separate accounts 72,202 40,923
-----------------------------
Total liabilities 110,783 72,885
-----------------------------
SHAREHOLDER'S EQUITY
Common stock ($5 par value; 500,000
shares authorized, issued and outstanding) 2,500 2,500
Paid-in capital 15,373 12,500
Net unrealized gains (losses)
on securities 727 (9)
Retained earnings (deficit) (952) 2,876
-----------------------------
Total shareholder's equity 17,648 17,867
-----------------------------
Total liabilities and shareholder's equity $ 128,431 $ 90,752
-----------------------------
-----------------------------
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
Predecessor Basis
-------------------------------------------
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
-----------------------------------------------------------
1995 1995 1994 1993
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $ 9,472 $ 676 $ 8,074 $ 5,215
Net investment income 2,129 160 2,142 2,181
Realized investment (losses) gains (6) - (4) 229
Other income (expense) 465 842 (26) 642
-----------------------------------------------------------
Total revenues 12,060 1,678 10,186 8,267
-----------------------------------------------------------
Benefits and expenses
Benefits paid or provided 2,597 330 1,415 1,869
Change in policy reserves 458 1,027 (194) (772)
Commissions and allowances 9,323 706 9,246 5,861
Change in deferred policy
acquisition costs and cost
of insurance purchased (4,558) (298) (5,161) (3,729)
Taxes, licenses and fees 988 96 974 605
General insurance expenses 4,713 312 3,676 3,112
-----------------------------------------------------------
Total benefits and expenses 13,521 2,173 9,956 6,946
-----------------------------------------------------------
Income (loss) before income taxes (1,461) (495) 230 1,321
-----------------------------------------------------------
Income tax expense (benefit)
Current 452 34 604 636
Deferred (961) (217) (534) (139)
-----------------------------------------------------------
Total income tax
expense (benefit) (509) (183) 70 497
-----------------------------------------------------------
Net income (loss) $ (952) $ (312) $ 160 $ 824
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
Predecessor Basis
-------------------------------------------
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
-----------------------------------------------------------
1995 1995 1994 1993
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 2,500 $ 2,500 $ 2,500 $ 2,500
Paid-in capital
Balance at beginning of period 15,373 12,500 12,500 12,500
Adjustment for the acquisition - 2,873 - -
-----------------------------------------------------------
Balance at end of period 15,373 15,373 12,500 12,500
-----------------------------------------------------------
Net unrealized gains (losses) on
Securities
Balance at beginning of period - (9) 164 -
Change during the period 1,118 (3) (270) 256
Amounts applicable to deferred
federal income taxes (391) 1 97 (92)
Adjustment for the acquisition - 11 - -
-----------------------------------------------------------
Balance at end of period 727 - (9) 164
-----------------------------------------------------------
Retained earnings (deficit)
Balance at beginning of period - 2,876 2,716 1,892
Net income (loss) (952) (312) 160 824
Adjustment for the acquisition - (2,564) - -
-----------------------------------------------------------
Balance at end of period (952) - 2,876 2,716
-----------------------------------------------------------
Total shareholder's equity
at end of period $ 17,648 $ 17,873 $ 17,867 $ 17,880
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-7
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Predecessor Basis
-------------------------------------------
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
-----------------------------------------------------------
1995 1995 1994 1993
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income (loss) $ (952) $ (312) $ 160 $ 824
Reconciling adjustments to net
cash provided by (used for)
operating activities
Policy reserves, claims and
other policyholders' funds 10,786 1,439 6,017 6,774
Realized investment (gains)
losses (6) - 4 (229)
Deferred policy acquisition
costs and cost of insurance
purchased (4,558) (298) (5,161) (3,729)
Charges on universal life
contracts, net of interest
credited (8,166) (1,248) (5,930) (3,417)
Change in other assets and
liabilities (2,238) (471) (443) (3,338)
-----------------------------------------------------------
Net cash provided by
(used for) operating
activities (5,134) (890) (5,353) (3,115)
-----------------------------------------------------------
Investing activities
Investment purchases
Held-to-maturity - - (968) (7,823)
Available-for-sale (5,859) (41) (532) -
Investment calls, maturities and
sales
Held-to-maturity - 12 2,293 5,694
Available-for-sale 4,426 - - -
Other investments - - - 436
-----------------------------------------------------------
Net cash provided by (used
for) investing activities (1,433) (29) 793 (1,693)
-----------------------------------------------------------
Financing activities
Proceeds from intercompany
borrowings (1,425) - - -
Repayments of intercompany
borrowings (1,335) - - -
Universal life contract deposits 27,956 1,957 25,014 16,537
Universal life contract
withdrawals (21,750) (1,305) (19,933) (11,867)
-----------------------------------------------------------
Net cash provided by
financing activities 6,296 652 5,081 4,670
-----------------------------------------------------------
Net increase (decrease) in cash and
cash equivalents (271) (267) 521 (138)
Cash and cash equivalents at
beginning of period 2,136 2,403 1,882 2,020
-----------------------------------------------------------
Cash and cash equivalents at end of
period $ 1,865 $ 2,136 $ 2,403 1,882
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
See Notes to Financial Statements.
F-8
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies
1.1 NATURE OF OPERATIONS
The American Franklin Life Insurance Company (AMFLIC or the Company),
which is headquartered in Springfield, Illinois, sells and services
variable universal life and universal life insurance products to the
middle income market, primarily in the Midwest.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) and include the
accounts of AMFLIC, a wholly-owned subsidiary of The Franklin Life
Insurance Company (FLIC), which is a wholly-owned subsidiary of
American Franklin Company (AFC). To conform with the 1995
presentation, certain items in the prior years financial statements
and notes have been reclassified.
The preparation of financial statements requires management to make
estimates and assumptions that affect (1) the reported amounts of assets
and liabilities, (2) disclosures of contingent assets and liabilities,
and (3) the reported amounts of revenues and expenses during the
reporting periods. Ultimate results could differ from those estimates.
1.3 ACQUISITION
Prior to January 31, 1995, AFC was a wholly-owned subsidiary of
American Brands, Inc. (American Brands). On January 31, 1995,
American Brands completed the sale of AFC to AGC Life Insurance
Company (AGCL), a subsidiary of American General Corporation
(AGC), for a purchase price of $1.17 billion. The purchase price
consisted of $920 million in cash paid at closing and a $250 million
extraordinary cash dividend paid by AFC to its former parent prior
to closing. The portion of the purchase price allocated to AMFLIC
was $17.9 million. These transactions received the required
regulatory approval from the Illinois and New York Insurance
Departments.
F-9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.3 ACQUISITION (CONTINUED)
The sale was accounted for using the purchase method of accounting in
accordance with the provisions of Accounting Principles Board Opinion
16, "Business Combinations", and other existing accounting literature
pertaining to purchase accounting. Under purchase accounting, the total
purchase cost was allocated to the assets and liabilities acquired based
on a determination of their fair value. AMFLIC'S balance sheet at
December 31, 1995, and its statements of operations, shareholder's
equity and cash flows for the eleven months then ended, are reported
under the purchase method of accounting and, accordingly, are not
consistent with the basis of presentation of the previous periods'
financial statements (Predecessor Basis).
The fair values of AMFLIC's assets and liabilities at January 31, 1995
were as follows (in thousands):
<TABLE>
<CAPTION>
<S> <C>
Fixed maturities $ 24,022
Policy loans 1,342
Short-term investments 1,358
Separate account assets 40,970
Other assets 6,187
Cost of insurance purchased 14,279
Federal income taxes 478
Insurance liabilities (27,530)
Separate account liabilities (40,970)
Other liabilities (2,263)
-----------
Net assets $ 17,873
-----------
-----------
</TABLE>
F-10
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.4 ACCOUNTING CHANGES
Effective December 31, 1993, AMFLIC adopted Statement of
Financial Accounting Standards (SFAS) 115, "Accounting for
Certain Investments in Debt and Equity Securities." This
standard requires that fixed maturity securities be classified
into one of three categories: (1) held-to-maturity, (2)
available-for-sale, or (3) trading. Securities classified as
held-to-maturity are carried at amortized cost, while those
classified as available-for-sale or trading are carried at fair value.
The unrealized gain (loss) on those securities classified as
available-for-sale is recorded as an adjustment to shareholder's
equity, while the unrealized gain (loss) on those securities
classified as trading is recorded as an adjustment to income.
At December 31, 1994 and 1993, AMFLIC classified the
majority of fixed maturity securities as held-to-maturity and a
portion as available-for-sale. The effect of the adoption of SFAS 115
was immaterial.
Effective January 1, 1993, Franklin adopted SFAS 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration
Contracts". The adoption of this statement did not have a material
impact on Franklin's consolidated financial statements.
1.5 INVESTMENTS
FIXED MATURITY SECURITIES. Concurrent with the sale of AMFLIC, and
in conjunction with purchase accounting, effective January 31, 1995,
AMFLIC classified all fixed maturity securities as available-for-sale
and recorded them at fair value. After adjusting related balance sheet
accounts as if the unrealized gains (losses) had been realized, the net
fair value adjustment is recorded in net unrealized gains (losses) on
securities within shareholder's equity. If the fair value of a
security classified as available-for-sale declines below its cost and
this decline is considered to be other than temporary, the security is
reduced to its fair value, and the reduction is recorded as a
realized loss.
POLICY LOANS. Policy loans are reported at unpaid principal
balance and are adjusted periodically for any differences between
face value and unpaid principal balance, and for possible
uncollectible amounts.
INVESTMENT INCOME. Interest on fixed maturity securities is recorded
as income when earned and is adjusted for any amortization of
premium or discount.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses)
are recognized using the specific identification method and include
declines in the fair value of investments below cost that are
considered other than temporary.
1.6 CASH AND CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months
or less are included in cash and cash equivalents. The carrying
amount approximates fair value.
F-11
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.7 DEFERRED POLICY ACQUISITION COSTS (DPAC)
The costs of writing an insurance policy, including agents' commissions
and underwriting and marketing expenses, are deferred and included in
the DPAC asset.
DPAC associated with interest-sensitive life insurance contracts is
charged to expense in relation to the estimated gross profits of
those contracts. DPAC associated with all other insurance contracts
is charged to expense over the premium-paying period or as the premiums
are earned over the life of the contract.
Gross profits include realized investment gains (losses). In addition,
DPAC is adjusted for the impact on estimated future gross profits as if
net unrealized gains (losses) on securities had been realized at the
balance sheet date. The impact of this adjustment is included in net
unrealized gains (losses) on securities within shareholder's equity.
AMFLIC reviews the carrying amount of DPAC on at least an annual basis.
In determining whether the carrying amount is appropriate, AMFLIC
considers estimated future gross profits, or future premiums, as
applicable for the type of contract. In all cases, AMFLIC considers
expected mortality, interest earned and credited rates, persistency,
and expenses.
1.8 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to insurance contracts in force at the acquisition
date is referred to as CIP. CIP is charged to expense using the same
assumptions as DPAC. Interest is accreted on the unamortized balance
of CIP at rates of 6 to 8.5%. CIP is also adjusted for the impact of
net unrealized gains (losses) on securities in the same manner as DPAC.
AMFLIC reviews the carrying amount of CIP on at least an annual basis
using the same methods used to evaluate DPAC.
1.9 SEPARATE ACCOUNTS
Separate accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the holder
of the contract rather than AMFLIC. Consequently, the insurer's
liability for these accounts equals the value of the account assets.
Investment income, realized investment gains (losses), and
policyholder account deposits and withdrawals related to Separate
accounts are excluded from the statements of operations and cash flows.
Assets held in separate accounts are carried at fair value.
F-12
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.10 INSURANCE LIABILITIES
Substantially all of AMFLIC's insurance liabilities relate to
long-duration contracts, which generally require performance
over a period of more than one year. The contract provisions
normally cannot be changed or canceled by AMFLIC during the
contract period.
For interest-sensitive life insurance policies, reserves include the
policy account balance and deferred revenue charges. Reserves
for other types of long-duration contracts are based on estimates
of the cost of future policy benefits to be paid as a result of
present and future claims due to death, disability, surrender of a
policy, or payment of an endowment. Reserves are determined using
the net level premium method. Interest assumptions used to compute
reserves ranged from 4.0% to 9.0% at December 31, 1995.
1.11 PREMIUM RECOGNITION
Receipts for interest-sensitive life insurance policies are
classified as deposits instead of revenues. Revenues for these
contracts consist of the mortality, expense, and surrender
charges assessed against the account balance. Policy changes
that are designed to compensate AMFLIC for future services are
deferred and recognized in income over the period earned,
using the same assumptions used to amortize DPAC. For all other
long-duration contracts, premiums are recognized when due.
1.12 INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in
effect when the temporary differences reverse. The effect of a tax
rate change is recognized in income in the period of enactment.
State income taxes are included in income tax expense.
A change in deferred taxes related to fluctuations in fair value of
available-for-sale securities is included in net unrealized gains
(losses) on securities in shareholder's equity.
F-13
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. Investments
2.1 INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
-----------------------------------------------------------------------
In thousands 1995 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 2,097 $ 168 $ 2,166 $ 2,166
Policy loans 68 8 44 30
Other investments - - 1 47
-----------------------------------------------------------------------
Gross investment income 2,165 176 2,211 2,243
Investment expense 36 16 69 62
-----------------------------------------------------------------------
Net investment income $ 2,129 $ 160 $ 2,142 $ 2,181
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
2.2 REALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) (all related to fixed maturity
securities) and related DPAC and CIP amortization were as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
-----------------------------------------------------------------------
In thousands 1995 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 153 $ - $ 30 $ 231
Gross losses 171 - 34 2
-----------------------------------------------------------------------
Total (18) - (4) 229
-----------------------------------------------------------------------
Adjustment to DPAC and CIP 12 - - -
-----------------------------------------------------------------------
Realized investment gains (losses) $ (6) $ - $ (4) $ 229
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
Voluntary sales of investments resulted in:
<TABLE>
<CAPTION>
Realized
--------------------------------
In thousands Proceeds Gains Losses
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ELEVEN MONTHS ENDED AVAILABLE-FOR-SALE $ 1,517 $ - $ 72
DECEMBER 31, 1995
</TABLE>
F-14
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY SECURITIES
VALUATION. Amortized cost and fair value of available-for-sale and
held-to-maturity fixed maturity securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
--------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In thousands COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Fixed maturity securities
Corporate bonds
Investment grade $ 10,026 $ 1,106 $ - $ 11,132
Below investment grade 798 66 - 864
Public utilities 4,317 542 - 4,859
Mortgage-backed 1,850 190 - 2,040
U.S. Government 7,138 327 - 7,465
States/political subdivisions 204 14 - 218
--------------------------------------------------------
Total available-for-sale
securities $ 24,333 $ 2,245 $ - $ 26,578
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
F-15
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES
Fixed maturity securities
Corporate bonds
Investment grade $ 11,702 $ 281 $ (552) $ 11,431
Below investment grade 2,589 13 (24) 2,578
Public utilities 4,953 32 (486) 4,499
Mortgage-backed 1,963 - (341) 1,622
Foreign governments 399 - (23) 376
U.S. Government 277 - (8) 269
States/political subdivisions 210 - (6) 204
---------------------------------------------------------
Total held-to-maturity
securities $ 22,093 $ 326 $ (1,440) $ 20,979
--------------------------------------------------------
</TABLE>
F-16
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
--------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Fixed maturity securities
U.S. Government $ 2,214 $ 43 $ (57) $ 2,200
-------------------------------------------------------
Total available-for-sale 2,214 43 (57) 2,200
-------------------------------------------------------
Total fixed maturity
securities $ 24,307 $ 369 $ (1,497) $ 23,179
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
MATURITIES. The contractual maturities of fixed maturity securities, at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------
AMORTIZED FAIR
In thousands COST VALUE
- --------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 306 $ 311
Due after one year through five years 4,131 4,430
Due after five years through ten years 15,885 17,328
Due after ten years 2,161 2,469
Mortgage-backed securities 1,850 2,040
------------------------------
Totals $ 24,333 $ 26,578
------------------------------
------------------------------
</TABLE>
Actual maturities may differ from contractual maturities since
borrowers may have the right to call or prepay obligations. Corporate
requirements and investment strategies may result in the sale of
investments before maturity.
F-17
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.4 NET UNREALIZED GAINS (LOSSES) ON SECURITIES
Net unrealized gains (losses) on fixed maturity securities included in
shareholder's equity at December 31 were as follows:
<TABLE>
<CAPTION>
In thousands 1995 1994
--------------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 2,245 $ 43
Gross unrealized losses - (57)
DPAC fair value adjustment (228)
CIP fair value adjustment (899) -
Deferred federal income taxes (391) 5
------------------------------
Net unrealized gains (losses)
on securities $ 727 $ (9)
------------------------------
------------------------------
</TABLE>
2.5 INVESTMENTS ON DEPOSIT
As of December 31, 1995 and 1994, fixed maturity securities carried at
$6,873,000 and $4,039,000, respectively, were on deposit with
regulatory authorities to comply with state insurance laws.
2.6 INVESTMENT RESTRICTIONS
AMFLIC is restricted by the insurance laws of its domiciliary state
as to the amount which it can invest in any entity. At
December 31, 1995 and 1994, AMFLIC's largest investment in any
one entity other than U.S. Government obligations was $450,000.
F-18
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. Fair Value of Financial Instruments
Carrying amounts and fair values for certain of the Company's financial
instruments at December 31 are presented below. Care should be exercised
in drawing conclusions based on fair value, since (1) the fair values
presented do not include the value associated with all of the Company's
assets and liabilities, and (2) the reporting of investments at fair value
without a corresponding revaluation of related policyholder liabilities can
be misinterpreted.
<TABLE>
<CAPTION>
DECEMBER 31 December 31
1995 1994
---------------------------------------------------------------------------
CARRYING FAIR Carrying Fair
In thousands AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Available-for-sale fixed maturity
securities $ 26,578 $ 26,578 $ 2,200 $ 2,200
Held-to-maturity fixed maturity
securities - - 22,093 20,979
</TABLE>
The methods and assumptions used to estimate fair value were as follows:
FIXED MATURITY SECURITIES. Fair values of fixed maturity securities were
based on quoted market prices, where available. For investments not
actively traded, fair values were estimated using values obtained from
independent pricing services or in the case of some private placements, by
discounting expected future cash flows using a current market rate
applicable to yield, credit quality, and the average life of the
investments.
POLICY LOANS. Policy loans have no stated maturity dates and are an
integral part of the related insurance contract. Accordingly, it is not
practicable to estimate a fair value. The weighted average interest rate
charged on policy loan balances during 1995 and 1994 was 7.82%.
F-19
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. Deferred Policy Acquisition Costs (DPAC)
An analysis of the changes in the DPAC asset is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
---------------------------------------------------
In thousands 1995 1995 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ - $ 16,540 $ 11,379 $ 7,650
Capitalization 4,328 445 6,349 4,467
Amortization - (147) (1,188) (738)
Effect of unrealized gains
on securities (228) - - -
Effect of realized investment
losses 1 - - -
Adjustment for the
acquisition (a) - (16,838) - -
---------------------------------------------------
End of period balance $ 4,101 $ - $ 16,540 $ 11,379
---------------------------------------------------
---------------------------------------------------
</TABLE>
(a) Represents the necessary elimination of the historical DPAC asset
required by purchase accounting.
F-20
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP)
An analysis of the changes in the CIP asset is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH
ENDED ENDED
----------------------------------
DECEMBER 31 JANUARY 31
In thousands 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C>
Beginning of period balance $ 14,279 $ -
Interest accretion 1,073 -
Additions 1,844 -
Amortization (2,687) -
Effect of unrealized gains on securities (899) -
Effect of realized investment losses 11 -
Adjustment for the acquisition (a) - 14,279
----------------------------------
End of period balance $ 13,621 $14,279
----------------------------------
----------------------------------
</TABLE>
(a) Represents the amount necessary to recognize the new CIP asset attributable
to the January 31, 1995 acquisition.
CIP amortization, net of accretion, expected to be recorded in each of the next
five years is $2,995,000, $2,616,000, $2,285,000, $2,008,000 and $1,762,000.
F-21
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (Continued)
6. Separate Account
AMFLIC administers two separate accounts in connection with the issue of
its Variable Universal Life products.
7. Income Taxes
AMFLIC is subject to the life insurance company provisions of the federal
tax law. Prior to January 31, 1995, AMFLIC was part of a consolidated
federal income tax return with its former parent company. The method of
allocation of tax expense was based upon separate return calculations with
current credit for net losses and tax credits. Consolidated Alternative
Minimum Tax, if any, was allocated separately. Intercompany tax balances
were to be settled no later than thirty (30) days after the date of filing
the consolidated return.
After January 31, 1995, AMFLIC will be part of a life/life consolidated
return which also includes FLIC. The tax allocation agreement is in the
process of being drafted, executed and approved by the Board of Directors.
7.1 DEFERRED TAXES
Components of deferred tax liabilities and assets at December 31, were as
follows:
<TABLE>
<CAPTION>
In thousands 1995 1994
-----------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of investments $ 605 $ -
DPAC and CIP 3,773 4,121
Other 383 134
----------------------------
Total deferred tax liabilities 4,761 4,255
----------------------------
Deferred tax assets, applicable to:
Policy reserves (5,592) (4484)
Basis differential of investments - (46)
Other (341) (242)
----------------------------
Total deferred tax assets (5,933) (4772)
----------------------------
Net deferred tax assets $ (1,172) $ (517)
----------------------------
----------------------------
</TABLE>
AMFLIC expects adequate future taxable income to realize the net deferred
tax assets. Accordingly, no valuation allowance is considered necessary.
F-22
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7.2 TAX EXPENSE
A reconciliation between the federal income tax rate and the effective
income tax rate follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------
1995 1995 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0 % 35.0 % 35.0 % 35.0 %
State taxes, net (0.4) 0.4 (6.5) 2.2
Invested asset items 0.2 - (1.7) (0.3)
Other - 1.6 3.6 0.7
---------------------------------------------------
Effective tax rate 34.8 % 37.0 % 30.4 % 37.6 %
----------------------------------------------------
----------------------------------------------------
</TABLE>
7.3 TAXES PAID
Federal income taxes paid during the eleven months ended December 31, 1995,
and for the years ended December 31, 1994 and 1993 were $1,031,000,
$745,000, and $551,000, respectively. State income taxes paid (received)
during the eleven months ended December 31, 1995, and for the years ended
December 31,1994, and 1993 were $1,000, $(14,000) and $34,000,
respectively. There were no federal or state income taxes paid during
January 1995.
7.4 TAX RETURN EXAMINATIONS
The Internal Revenue Service (IRS) has completed examinations of AMFLIC's
returns through 1989. All resolved issues have been settled within the
amounts previously provided in the financial statements. Adequate
provision has been made for unresolved issues.
F-23
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
8. Statutory Accounting
State insurance laws prescribe accounting practices for calculating
statutory net income and equity. In addition, state regulators may allow
permitted statutory accounting practices that differ from prescribed
practices.
No significant permitted practices are used to prepare AMFLIC's statutory
financial statements.
At December 31, 1995 and 1994, AMFLIC had statutory stockholder's equity of
$9,912,000 and $11,192,000, respectively. AMFLIC's statutory net loss was
$4,704,000, $4,576,000, and $2,933,000 for the years ended December 31,
1995, 1994 and 1993, respectively.
Generally, AMFLIC is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends, loans
or advances without the approval of the Illinois Insurance Department.
Currently, under these restrictions, no dividends may be paid out and,
loans and advances in excess of $2,478,000 may not be transferred without
the approval of the Illinois Insurance Department.
F-24
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. Statement of cash flows
In addition to the cash activities shown in the statements of cash flows,
the following transactions, in thousands of dollars, occurred:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
--------------------------------------------------
1995 1995 1994 1993
--------------------------------------------------
<S> <C> <C> <C> <C>
Interest added to universal life
contracts $ 1,126 $ 111 $ 1,216 $ 1,120
--------------------------------------------------
--------------------------------------------------
</TABLE>
10. Related Party Transaction
AMFLIC has no full-time employees or office facilities. General and
administrative expenses are allocated to AMFLIC from FLIC, based upon hours
worked by administrative personnel. Allocated expenses for the eleven
months ended December 31, 1995, the one month ended January 1995, and the
years ended December 31, 1994 and 1993 amounted to approximately
$3,277,000, $204,000, $1,655,000, and $1,750,000, respectively.
AMFLIC participates in a program of short-term borrowing with AGC to
maintain its long-term investment commitments. During 1995, AMFLIC
borrowed $1,425,000 and repaid $1,335,000. The remaining balance was
repaid in January 1996. Interest is paid on the outstanding balance based
on the Federal Reserve Board's monthly average H.15 rate for 30-day
commercial paper.
11. Reinsurance
AMFLIC is routinely involved in reinsurance transactions. Ceded
reinsurance becomes a liability of the reinsurer that assumes the risk. If
the reinsurer could not meet its obligations, AMFLIC would reassume the
liability. The likelihood of a material reinsurance liability being
reassumed by AMFLIC is considered to be remote. AMFLIC diversifies the
risk of exposure to reinsurance loss by using a number of life reinsurers
that have strong claims-paying ability ratings. The maximum retention on
one life for individual life insurance is $50,000.
Amounts paid or deemed to have been paid in connection with ceded
reinsurance contracts are recorded as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is recognized over the life
of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
F-25
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance (continued)
Under the provisions of an assumed reinsurance agreement, AMFLIC
recognized, in thousands of dollars, the following:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
--------------------------------------------------------
1995 1995 1994 1993
--------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and other
considerations $ 361 $ 43 $ 523 $ 581
Other income 972 8 152 234
Benefits 1,166 145 303 660
Commission expense 54 6 72 84
Premium taxes 6 6 30 37
</TABLE>
Under the provisions of a modified coinsurance agreement covering their
Variable Universal Life product, AMFLIC ceded, in thousands of dollars, the
following:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
--------------------------------------------------------
1995 1995 1994 1993
--------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and other
considerations $ 2,648 $ 125 $ 1,834 $ 938
Expense allowances 2,463 186 2,246 1,536
Other 579 (6) (134) (50)
</TABLE>
AMFLIC also carries reinsurance for policy risks that exceed the Company's
retention limit of $50,000. AMFLIC ceded, in thousands of dollars, the
following amounts:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
--------------------------------------------------------
1995 1995 1994 1993
--------------------------------------------------------
<S> <C> <C> <C> <C>
Premiums and other
considerations $ 4,129 $ 258 $ 3,051 $ 2,127
Change in policy
reserves 4,155 3,347 3,228 2,010
</TABLE>
F-26
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. State Guaranty Associations
State guaranty fund expense included in operating costs and expenses was
$37,000, $18,000, $57,000 and $28,000 for the eleven months ended December
31, 1995, one month ended January 31, 1995, and the years ended December
31, 1994 and 1993, respectively. Amounts assessed AMFLIC by state life and
health insurance guaranty funds resulting from paid industry insolvencies
were $37,000, $18,000, $57,000 and $28,000 for the eleven months ended
December 31, 1995, one month ended January 31, 1995, and the two years
ended December 31, 1994 and 1993. These assessments are expected to be
partially recovered against the payment of future premium taxes.
There was no liability accrued at December 31, 1995, or prior periods as
these amounts were determined to be immaterial.
F-27
