<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
JUNE 30, 1998
SEMI-ANNUAL REPORT
SEPARATE ACCOUNT VA-1 FUNDING
THE CHAIRMAN-Trade Mark-
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACTS
PRINCIPAL OFFICE LOCATED AT:
#1 Franklin Square
Springfield, Illinois 62713
Semi-Annual Report Dated June 30, 1998
- --------------------------------------------------------------------------------
JUNE 30, 1998
SEMI-ANNUAL REPORTS
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
PRINCIPAL OFFICE OF BOTH FIDELITY FUNDS LOCATED AT:
82 Devonshire Street
Boston, Massachusetts 02109
MFS VARIABLE INSURANCE TRUST
PRINCIPAL OFFICE LOCATED AT:
500 Boylston Street
Boston, Massachusetts 02116
SEMI-ANNUAL REPORTS DATED JUNE 30, 1998
The Semi-Annual Report of Separate Account VA-1 is prepared and provided by The
American Franklin Life Insurance Company. The Semi-Annual Reports of the
Variable Insurance Products Fund and the Variable Insurance Products Fund II are
prepared by Fidelity Investments. The Semi-Annual Report of MFS Variable
Insurance Trust is prepared by MFS Investment Management.
- --------------------------------------------------------------------------------
This Semi-Annual Report is not to be construed as an offering for sale of any
American Franklin Life contract. No offering is made except in conjunction with
a prospectus which must precede or accompany this report.
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
-------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
ASSETS DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments in Funds at fair value:
(cost: see below) $ 4,734,569 $ 13,216,155 $ 9,885,587 $ 1,801,364 $ 2,416,872
Dividends receivable 18,679 - - - -
Due from (to) general account 547 1,521 1,137 - 278
-------------------------------------------------------------------------------
NET ASSETS $ 4,753,795 $ 13,217,676 $ 9,886,724 $ 1,801,364 $ 2,417,150
-------------------------------------------------------------------------------
Unit value, at June 30, 1998 $ 5.24 $ 6.68 $ 6.82 $ 6.34 $ 6.11
-------------------------------------------------------------------------------
Units outstanding, at June 30, 1998 907,567 1,978,841 1,449,987 284,034 395,394
-------------------------------------------------------------------------------
Cost of investments $ 4,734,569 $ 12,639,898 $ 9,364,126 $ 1,759,285 $ 2,480,346
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
1
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
----------------------------------------------------------------
VIPII VIPII VIPII VIPII MFS
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
ASSETS DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments in Funds at fair value:
(cost: see below) $ 1,427,386 $ 3,481,566 $ 13,655,694 $ 6,275,134 $ 6,245,439
Dividends receivable - - - - -
Due from (to) general account (320) 401 1,571 722 719
-------------------------------------------------------------------------------
NET ASSETS $ 1,427,066 $ 3,481,967 $ 13,657,265 $ 6,275,856 $ 6,246,158
-------------------------------------------------------------------------------
Unit value, at June 30, 1998 $ 5.49 $ 6.33 $ 7.36 $ 6.85 $ 6.82
-------------------------------------------------------------------------------
Units outstanding, at June 30, 1998 259,956 549,668 1,854,440 916,723 915,247
-------------------------------------------------------------------------------
Cost of investments $ 1,413,732 $ 3,474,324 $ 12,422,651 $ 5,809,325 $ 5,557,306
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
-------------------------------------------------------------------------------
MFS
MFS GROWTH MFS MFS MFS
RESEARCH WITH INCOME TOTAL RETURN UTILITIES VALUE
ASSETS DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments in Funds at fair value:
(cost: see below) $ 9,997,000 $ 4,534,987 $ 8,652,832 $ 2,780,055 $ 2,274,556
Dividends receivable - - - - -
Due from (to) general account 1,150 522 996 320 261
-------------------------------------------------------------------------------
NET ASSETS $ 9,998,150 $ 4,535,509 $ 8,653,828 $ 2,780,375 $ 2,274,817
-------------------------------------------------------------------------------
Unit value, at June 30, 1998 $ 6.72 $ 7.15 $ 6.25 $ 6.67 $ 7.21
-------------------------------------------------------------------------------
Units outstanding, at June 30, 1998 1,486,917 634,033 1,383,929 416,939 315,357
-------------------------------------------------------------------------------
Cost of investments $ 9,023,537 $ 4,154,906 $ 8,273,657 $ 2,691,847 $ 2,145,908
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
-------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends $ 82,284 $ 96,737 $ 27,383 $ 22,675 $ 94,119
Capital Gains - 344,271 716,274 66,830 59,805
Expenses
Mortality and expense risk charge 20,412 60,118 45,341 9,841 11,828
-------------------------------------------------------------------------------
Net investment income (expense) 61,872 380,890 698,316 79,664 142,096
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain - 5,933 6,092 8,563 5,871
Net unrealized appreciation
(depreciation)
Beginning of period - 181,643 (7,936) (47,635) 42,794
End of period - 576,257 521,461 42,079 (63,474)
-------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period - 394,614 529,397 89,714 (106,268)
-------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments - 400,547 535,489 98,277 (100,397)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $ 61,872 $ 781,437 $ 1,233,805 $ 177,941 $ 41,699
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
----------------------------------------------------------------
VIPII VIPII VIPII VIPII MFS
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends $ 23,299 $ 57,958 $ 63,920 $ 22,244 $ -
Capital Gains 2,764 173,875 148,050 163,653 35,970
Expenses
Mortality and expense risk charge 5,035 15,491 54,890 27,934 24,971
-------------------------------------------------------------------------------
Net investment income (expense) 21,028 216,342 157,080 157,963 10,999
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain 1,332 5,028 1,259 15,505 6,756
Net unrealized appreciation (depreciation)
Beginning of period 10,658 38,856 146,733 12,404 (379)
End of period 13,654 7,242 1,233,043 465,809 688,133
-------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period 2,996 (31,614) 1,086,310 453,405 688,512
-------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 4,328 (26,586) 1,087,569 468,910 695,268
-------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $ 25,356 $ 189,756 $ 1,244,649 $ 626,873 $ 706,267
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
-------------------------------------------------------------------------------
MFS
MFS GROWTH MFS MFS MFS
RESEARCH WITH INCOME TOTAL RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends $ 12,306 $ - $ 89,940 $ 20,082 $ -
Capital Gains 161,384 - 105,751 91,306 -
Expenses
Mortality and expense risk charge 45,780 17,707 37,970 10,099 8,883
-------------------------------------------------------------------------------
Net investment income (expense) 127,910 (17,707) 157,721 101,289 (8,883)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain 3,089 10,051 33,387 4,032 3,609
Net unrealized appreciation (depreciation)
Beginning of period 13,147 9,772 131,700 70,551 (65,257)
End of period 973,463 380,081 379,175 88,208 128,648
-------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period 960,316 370,309 247,475 17,657 193,905
-------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 963,405 380,360 280,862 21,689 197,514
-------------------------------------------------------------------------------
Net increase (decrease) in net assets resulting
from operations $ 1,091,315 $ 362,653 $ 438,583 $ 122,978 $ 188,631
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
-------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 61,872 $ 380,890 $ 698,316 $ 79,664 $ 142,096
Net realized gain on investments - 5,933 6,092 8,563 5,871
Net change in unrealized appreciation
(depreciation) on investments - 394,614 529,397 89,714 (106,268)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 61,872 781,437 1,233,805 177,941 41,699
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 4,249,858 6,671,330 4,433,275 640,005 1,140,839
Withdrawals (24,646) (137,052) (129,349) (5,665) (9,904)
Transfers between Separate Account
VA-1 divisions, net (1,667,333) 241,819 79,763 (85,670) 147,679
-------------------------------------------------------------------------------
Net increase in net assets from contract
related transactions 2,557,879 6,776,097 4,383,689 548,670 1,278,614
-------------------------------------------------------------------------------
Increase in net assets 2,619,751 7,557,534 5,617,494 726,611 1,320,313
Net assets, beginning of period 2,134,044 5,660,142 4,269,230 1,074,753 1,096,837
-------------------------------------------------------------------------------
Net assets, end of period $ 4,753,795 $ 13,217,676 $ 9,886,724 $ 1,801,364 $ 2,417,150
-------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1997
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 33,936 $ (21,790) $ (14,200) $ (5,551) $ (4,705)
Net realized gain on investments - 7,054 19,623 4,079 1,744
Net change in unrealized appreciation
(depreciation) on investments - 181,643 (7,936) (47,635) 42,794
-------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 33,936 166,907 (2,513) (49,107) 39,833
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 3,051,376 5,425,325 4,237,375 1,070,074 1,058,464
Withdrawals (6,825) (47,105) (25,073) (1,162) (500)
Transfers between Separate Account
VA-1 divisions, net (944,443) 115,015 59,441 54,948 (960
-------------------------------------------------------------------------------)
Net increase in net assets from contract
related transactions 2,100,108 5,493,235 4,271,743 1,123,860 1,057,004
-------------------------------------------------------------------------------
Increase in net assets 2,134,044 5,660,142 4,269,230 1,074,753 1,096,837
Net assets, beginning of period - - - - -
-------------------------------------------------------------------------------
Net assets, end of period $ 2,134,044 $ 5,660,142 $ 4,269,230 $ 1,074,753 $ 1,096,837
-------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
------------------------------------------------------------------
VIPII VIPII VIPII VIPII MFS
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 21,028 $ 216,342 $ 157,080 $ 157,963 $ 10,999
Net realized gain on investments 1,332 5,028 1,259 15,505 6,756
Net change in unrealized appreciation
(depreciation) on investments 2,996 (31,614) 1,086,310 453,405 688,512
-------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 25,356 189,756 1,244,649 626,873 706,267
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 999,735 1,982,000 7,995,476 3,147,061 3,318,506
Withdrawals (13,733) (32,596) (87,596) (63,555) (31,967)
Transfers between Separate Account
VA-1 divisions, net 32,704 21,549 279,368 39,263 145,759
-------------------------------------------------------------------------------
Net increase in net assets from contract
related transactions 1,018,706 1,970,953 8,187,248 3,122,769 3,432,298
-------------------------------------------------------------------------------
Increase in net assets 1,044,062 2,160,709 9,431,897 3,749,642 4,138,565
Net assets, beginning of period 383,004 1,321,258 4,225,368 2,526,214 2,107,593
-------------------------------------------------------------------------------
Net assets, end of period $ 1,427,066 $ 3,481,967 $ 13,657,265 $ 6,275,856 $ 6,246,158
-------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1997
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ (1,400) $ (5,278) $ (16,370) $ (9,586) $ (11,724)
Net realized gain on investments 146 4,336 14,060 14,623 21,859
Net change in unrealized appreciation
(depreciation) on investments 10,658 38,856 146,733 12,404 (379)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 9,404 37,914 144,423 17,441 9,756
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 357,852 1,306,246 3,951,222 2,432,361 2,064,214
Withdrawals (312) (846) (15,675) (6,995) (6,359)
Transfers between Separate Account
VA-1 divisions, net 16,060 (22,056) 145,398 83,407 39,982
-------------------------------------------------------------------------------
Net increase in net assets from contract
related transactions 373,600 1,283,344 4,080,945 2,508,773 2,097,837
-------------------------------------------------------------------------------
Increase in net assets 383,004 1,321,258 4,225,368 2,526,214 2,107,593
Net assets, beginning of period - - - - -
-------------------------------------------------------------------------------
Net assets, end of period $ 383,004 $ 1,321,258 $ 4,225,368 $ 2,526,214 $ 2,107,593
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
-------------------------------------------------------------------------------
MFS MFS
MFS GROWTH TOTAL MFS MFS
RESEARCH WITH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 127,910 $ (17,707) $ 157,721 $ 101,289 $ (8,883)
Net realized gain on investments 3,089 10,051 33,387 4,032 3,609
Net change in unrealized appreciation
(depreciation) on investments 960,316 370,309 247,475 17,657 193,905
-------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 1,091,315 362,653 438,583 122,978 188,631
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 4,511,192 2,662,540 4,698,178 1,550,694 1,288,344
Withdrawals (110,235) (44,117) (107,899) (44,640) (9,622)
Transfers between Separate Account
VA-1 divisions, net 123,821 164,023 35,296 239,096 202,862
-------------------------------------------------------------------------------
Net increase in net assets from contract
related transactions 4,524,778 2,782,446 4,625,575 1,745,150 1,481,584
-------------------------------------------------------------------------------
Increase in net assets 5,616,093 3,145,099 5,064,158 1,868,128 1,670,215
Net assets, beginning of period 4,382,057 1,390,410 3,589,670 912,247 604,602
-------------------------------------------------------------------------------
Net assets, end of period $ 9,998,150 $ 4,535,509 $ 8,653,828 $ 2,780,375 $ 2,274,817
-------------------------------------------------------------------------------
FOR THE PERIOD ENDED DECEMBER 31, 1997
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ (20,141) $ 27,416 $ (13,566) $ (3,183) $ 77,282
Net realized gain on investments 7,944 9,844 10,482 380 12,630
Net change in unrealized appreciation
(depreciation) on investments 13,147 9,772 131,700 70,551 (65,257)
-------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 950 47,032 128,616 67,748 24,655
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 4,376,126 1,342,706 3,492,360 844,009 540,032
Withdrawals (16,740) (6,853) (8,529) (726) (957)
Transfers between Separate Account
VA-1 divisions, net 21,721 7,525 (22,777) 1,216 40,872
-------------------------------------------------------------------------------
Net increase in net assets from contract
related transactions 4,381,107 1,343,378 3,461,054 844,499 579,947
-------------------------------------------------------------------------------
Increase in net assets 4,382,057 1,390,410 3,589,670 912,247 604,602
Net assets, beginning of period - - - - -
-------------------------------------------------------------------------------
Net assets, end of period $ 4,382,057 $ 1,390,410 $ 3,589,670 $ 912,247 $ 604,602
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
1. NATURE OF OPERATIONS
The American Franklin Life Insurance Company (American Franklin) is a
wholly-owned subsidiary of The Franklin Life Insurance Company. American
Franklin established Separate Account VA-1 (Account) as a unit investment
trust registered under the Investment Company Act of 1940. The Account,
which consists of fifteen investment divisions, was established on May 22,
1996 in conformity with Illinois Insurance Law. The assets in each
division are invested in units of beneficial interest (shares) of a
designated portfolio (Portfolio) of three mutual funds, sponsored by
Fidelity Investments (Variable Insurance Products Fund and Variable
Insurance Products Fund II) and MFS Investment Management (MFS Variable
Insurance Trust) (Funds). The Money Market, Equity-Income, Growth,
Overseas, and High Income Divisions of the Account are invested in shares
of a corresponding Portfolio of Variable Insurance Products Fund; the
Investment Grade Bond, Asset Manager, Index 500, and Contrafund Divisions
of the Account are invested in shares of a corresponding Portfolio of
Variable Insurance Products Fund II; and the MFS Emerging Growth, MFS
Research, MFS Growth With Income, MFS Total Return, MFS Utilities, and MFS
Value Divisions of the Account are invested in shares of a corresponding
Portfolio of MFS Variable Insurance Trust. The Account's financial
statements should be read in conjunction with the financial statements of
the Funds. The Account commenced operations on February 28, 1997. The
accumulation unit value for each division was $5 at the inception of the
account.
The Account was established by American Franklin to support the operations
of American Franklin's The Chairman-TM- Combination Fixed and Variable
Annuity Contracts (the Contracts). American Franklin currently has
obtained the necessary state insurance department approvals for the sale of
the Contracts in 38 states.
Franklin Financial Services Corporation, a wholly-owned subsidiary of The
Franklin Life Insurance Company, acts as the principal underwriter, as
defined in the Investment Company Act of 1940, of the Contracts. The
assets of the Account are the property of American Franklin. The portion
of the Account's assets applicable to the Contracts is not chargeable with
liabilities arising out of any other business American Franklin may
conduct.
The net assets of the Account may not be less than the reserves applicable
to the Contracts. Assets may also be set aside in American Franklin's
General Account based on the amounts allocated under the Contracts to
American Franklin's Fixed Account. Additional assets are set aside in
American Franklin's General Account to provide for other contract benefits.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Account are as follows:
Investments in shares of the Funds are carried at fair value. Investments
in shares of the Funds are valued at the net asset values of the respective
Portfolios of the Funds corresponding to the investment divisions of the
Account. Investment transactions are recorded on the trade date.
Dividends are recorded as received. Realized gains and losses on sales of
the Funds' shares are determined based on the specific identification
method.
The operations of the Account are included in the federal income tax return
of American Franklin. Under the provisions of the Contracts, American
Franklin has the right to charge the Account for federal income tax
attributable to the Account. No charge is currently being made against the
Account for such tax since, under current tax law, American Franklin pays
no tax on investment income and capital gains of the Account on assets held
in the Account. However, American Franklin retains the right to charge for
any federal income tax incurred which is attributable to the Account if the
law is changed. Charges for state and local taxes, if any, attributable to
the Account may also be made.
10
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
3. SALES AND ADMINISTRATIVE CHARGES
Certain jurisdictions require that deductions be made from premium payments
for taxes. The amount of such deductions varies and may be up to 5% of the
premium or purchase payment. Other jurisdictions assess a premium tax at
the point of annuitization. The balance of a purchase payment remaining
after any such deduction is placed by American Franklin in an account
established for each contractowner. Each year American Franklin makes a
charge of $30 against each contractowner's account for administrative
expenses. This annual fee is currently waived if cumulative purchase
payments are at least $75,000. In addition, American Franklin will make
charges for a transfer between investment divisions in any contract year in
which twelve transfers have already been made ($25 for each additional
transfer in a given contract year). American Franklin assumes mortality
and expense risks related to the operations of the Account and deducts a
charge from the assets of the Account at an effective annual rate of 1.40%
of the Account's average daily net asset value to cover these risks and to
offset other administrative expenses not covered by the annual contract
fee. The total charges paid by the Account to American Franklin were
$420,800 for the six months ended June 30, 1998.
American Franklin will impose a surrender charge on the amount of each
purchase payment that is withdrawn during the first seven years after it
was received, unless the withdrawal is exempt from the surrender charge.
The maximum surrender charge is 6% of purchase payments withdrawn during
the first two years after they were received; the percentage declines
depending on how many years have passed since the withdrawn purchase
payment was made and is eliminated after the seventh year.
11
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
-------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period $ 5.14 $ 5.99 $ 5.65 $ 5.54 $ 5.89
-------------------------------------------------------------------------------
Unit value, end of period $ 5.24 $ 6.68 $ 6.82 $ 6.34 $ 6.11
-------------------------------------------------------------------------------
Number of units outstanding,
beginning of period 415,509 945,566 755,694 193,892 186,285
Net contract purchase payments 817,139 1,016,960 701,689 103,388 186,315
Transfers for contract related
transactions (4,940) (20,775) (20,015) (894) (1,617)
Transfers between Separate Account
VA-1 divisions, net (320,141) 37,090 12,619 (12,352) 24,411
-------------------------------------------------------------------------------
Number of units outstanding,
end of period 907,567 1,978,841 1,449,987 284,034 395,394
-------------------------------------------------------------------------------
VARIABLE INSURANCE PRODUCTS FUND II
--------------------------------------------------------------
VIPII VIPII VIPII VIPII MFS
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
Unit value, beginning of period $ 5.32 $ 5.78 $ 6.21 $ 5.83 $ 5.50
-------------------------------------------------------------------------------
Unit value, end of period $ 5.49 $ 6.33 $ 7.36 $ 6.85 $ 6.82
-------------------------------------------------------------------------------
Number of units outstanding,
beginning of period 71,989 228,526 680,587 433,486 383,222
Net contract purchase payments 184,359 322,786 1,145,847 486,625 514,446
Transfers for contract related
transactions (2,486) (5,215) (12,553) (9,817) (5,018)
Transfers between Separate Account
VA-1 divisions, net 6,094 3,571 40,559 6,429 22,597
-------------------------------------------------------------------------------
Number of units outstanding,
end of period 259,956 549,668 1,854,440 916,723 915,247
-------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
-------------------------------------------------------------------------------
MFS MFS
MFS GROWTH TOTAL MFS MFS
RESEARCH WITH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period $ 5.61 $ 6.09 $ 5.73 $ 6.01 $ 5.99
-------------------------------------------------------------------------------
Unit value, end of period $ 6.72 $ 7.15 $ 6.25 $ 6.67 $ 7.21
-------------------------------------------------------------------------------
Number of units outstanding,
beginning of period 780,716 228,416 626,024 151,829 100,943
Net contract purchase payments 703,370 388,099 768,686 236,251 187,561
Transfers for contract related
transactions (17,112) (6,650) (16,992) (6,764) (1,447)
Transfers between Separate Account
VA-1 divisions, net 19,943 24,168 6,211 35,623 28,300
-------------------------------------------------------------------------------
Number of units outstanding,
end of period 1,486,917 634,033 1,383,929 416,939 315,357
-------------------------------------------------------------------------------
</TABLE>
5. REMUNERATION OF MANAGEMENT
The Account incurs no liability or expense for remuneration to directors,
members of advisory boards,officers or any other person who might provide a
service for the Account, except as described in Note 3.
13
