<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 1, 1999
1933 ACT REGISTRATION NO. 333-10489
1940 ACT REGISTRATION NO. 811-7781
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-4
----------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
PRE-EFFECTIVE AMENDMENT NO.
POST-EFFECTIVE AMENDMENT NO. 3
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 4
SEPARATE ACCOUNT VA-1 OF
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
(Exact Name of Registrant)
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
(Name of Depositor)
#1 Franklin Square, Springfield, Illinois 62713
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number, including Area Code: (800) 528-2011
----------
ELIZABETH E. ARTHUR, ESQ.
Associate General Counsel and Assistant Secretary
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
#1 Franklin Square, Springfield, Illinois 62713
(Name and Address of Agent for Service)
Copy to:
STEPHEN E. ROTH, ESQ.
SUTHERLAND ASBILL & BRENNAN LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
Title of Securities Being Registered: Interests in Flexible Payment Deferred
Individual Annuity Contracts.
It is proposed that this filing will become effective:
/ / immediately upon filing pursuant to paragraph (b) of Rule 485
/ / on _________, 1999 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/x/ on April 30, 1999 pursuant to paragraph (a)(1) of Rule 485.
<PAGE>
COMBINATION FIXED AND VARIABLE ANNUITY
THE
CHAIRMAN-TM-
ISSUED BY
THE AMERICAN FRANKLIN
LIFE INSURANCE COMPANY
PROSPECTUS DATED APRIL 30, 1999
FIDELITY INVESTMENTS:
VARIABLE INSURANCE PRODUCTS FUND AND
VARIABLE INSURANCE PRODUCTS FUND II
PROSPECTUS DATED APRIL 30, 1999
PRINCIPAL OFFICE OF BOTH FIDELITY FUNDS LOCATED AT:
82 DEVONSHIRE STREET
BOSTON, MASSACHUSETTS 02109
MASSACHUSETTS FINANCIAL SERVICES COMPANY:
MFS VARIABLE INSURANCE TRUST
PROSPECTUS DATED MAY 1, 1999
PRINCIPAL OFFICE LOCATED AT:
500 BOYLSTON STREET
BOSTON, MASSACHUSETTS 92116
THE CHAIRMAN IS A TRADEMARK OF THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY.
-ii-
<PAGE>
THE CHAIRMAN-TM-
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACTS
OFFERED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
HOME OFFICE: ADMINISTRATIVE OFFICE:
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY AMFLIC ANNUITY SERVICE CENTER
#1 FRANKLIN SQUARE P.O. BOX 4636
SPRINGFIELD, ILLINOIS 62713 HOUSTON, TX 77210-4636
(800) 528-2011 (800) 200-3101 OR (713) 831-3310
The American Franklin Life Insurance Company ("American Franklin")
offers The Chairman flexible payment deferred individual annuity contracts
(the "Contracts") described in this Prospectus.
You may use the Contracts to accumulate savings on a variable basis
through purchase payment investment in Divisions funded by the following
mutual fund portfolios:
- - Fidelity Variable Insurance Products - VIPII Asset Manager
Fund - VIPII Index 500
- VIP Money Market - VIPII Contrafund Portfolio
- VIP High Income
- VIP Equity-Income - MFS Variable Insurance Trust
- VIP Growth - MFS Emerging Growth
- VIP Overseas Portfolio - MFS Research
- MFS Growth With Income
- - Fidelity Variable Insurance Products - MFS Total Return
Fund II - MFS Utilities
- VIPII Investment Grade Bond - MFS Capital Opportunities
You may also invest purchase payments in our Fixed Account through
the Contracts. This option has three different Guarantee Periods, each with
its own Guaranteed Interest Rate. Special limits apply to transfers from the
Fixed Account.
We designed this Prospectus to provide you with information about
the Contracts that you should know before investing. Read this Prospectus
carefully and kept it for future reference. We have also filed additional
information about the Contracts with the Securities and Exchange Commission
in the Statement of Additional Information (the "Statement of Additional
Information"). The Statement of Additional Information, dated April 30,
1999, is incorporated by reference into this Prospectus. The table of
contents of the Statement of Additional Information appears at page 42 of
this Prospectus. You can get a free copy of the Statement of
<PAGE>
Additional Information by writing to American Franklin's Administrative
Office at P.O. Box 4636, Houston, Texas 77210-4636, or by calling (800)
200-3101 or (713) 831-3310.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED THE
CONTRACTS AS AN INVESTMENT AND HAS NOT DETERMINED THAT THIS PROSPECTUS IS
COMPLETE OR ACCURATE. IT IS AGAINST THE LAW FOR ANYONE TO TELL YOU OTHERWISE.
AN INVESTMENT IN A CONTRACT IS NOT A DEPOSIT OF A BANK AND IS NOT INSURED OR
GUARANTEED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER
GOVERNMENT AGENCY. INVESTMENTS IN A CONTRACT ARE SUBJECT TO INVESTMENT RISKS,
INCLUDING POSSIBLE LOSS OF THE MONEY INVESTED.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT
PROSPECTUSES OF THE VARIABLE INSURANCE PRODUCTS FUND, THE VARIABLE INSURANCE
PRODUCTS FUND II AND MFS VARIABLE INSURANCE TRUST.
Prospectus dated April 30, 1999
The Chairman is a trademark of The American Franklin Life Insurance Company.
-2-
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
PAGE
----
<S> <C>
Glossary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Fee Table. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Financial and Performance Information. . . . . . . . . . . . . . . . . 12
American Franklin and the Separate Account . . . . . . . . . . . . . . 13
The Portfolios . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Voting Privileges. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
The Fixed Account. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Contract Issue and Purchase Payments . . . . . . . . . . . . . . . . . 19
Account Value . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Variable Account Value. . . . . . . . . . . . . . . . . . . . . . 20
Fixed Account Value . . . . . . . . . . . . . . . . . . . . . . . 21
Transfer, Variable Account Asset Rebalancing, Surrenders and Transfers 21
Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Variable Account Asset Rebalancing. . . . . . . . . . . . . . . . 22
Surrenders and Partial Withdrawals. . . . . . . . . . . . . . . . 23
Systematic Withdrawal Plan. . . . . . . . . . . . . . . . . . . . 23
Charges Under the Contracts. . . . . . . . . . . . . . . . . . . . . . 24
Premium Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 24
Surrender Charge. . . . . . . . . . . . . . . . . . . . . . . . . 24
Transfer Charges. . . . . . . . . . . . . . . . . . . . . . . . . 26
Annual Contract Fee . . . . . . . . . . . . . . . . . . . . . . . 26
Charge to Separate Account VA-1 . . . . . . . . . . . . . . . . . 27
Portfolio Expenses. . . . . . . . . . . . . . . . . . . . . . . . 27
Reduction in Surrender Charges or Administrative Charges. . . . . 27
Annuity Period and Annuity Payment Options . . . . . . . . . . . . . . 28
Annuity Commencement Date . . . . . . . . . . . . . . . . . . . . 28
Application of Account Value. . . . . . . . . . . . . . . . . . . 28
Fixed and Variable Annuity Payments . . . . . . . . . . . . . . . 28
Annuity Payment Options . . . . . . . . . . . . . . . . . . . . . 29
Transfers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Use of Gender Based Annuity Tables. . . . . . . . . . . . . . . . 32
</TABLE>
-3-
<PAGE>
<TABLE>
<CAPTION>
CONTENTS
PAGE
----
<S> <C>
Death Benefit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Other Aspects of the Contracts . . . . . . . . . . . . . . . . . . . . 34
Owners, Annuitants and Beneficiaries; Assignments . . . . . . . . 34
Long-Term Care and Terminal Illness . . . . . . . . . . . . . . . 35
Reports . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Modification. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Payment and Deferment . . . . . . . . . . . . . . . . . . . . . . 36
Federal Income Tax Matters . . . . . . . . . . . . . . . . . . . . . . 36
Taxation of Non-Qualified Contracts . . . . . . . . . . . . . . . 37
Taxation of Qualified Contracts . . . . . . . . . . . . . . . . . 39
Our Income Taxes. . . . . . . . . . . . . . . . . . . . . . . . . 40
Possible Tax Law Changes. . . . . . . . . . . . . . . . . . . . . 41
Distribution Arrangement . . . . . . . . . . . . . . . . . . . . . . . 41
Year 2000 Transition . . . . . . . . . . . . . . . . . . . . . . . . . 41
Accumulation Unit Values . . . . . . . . . . . . . . . . . . . . . . . 42
Other Information on File. . . . . . . . . . . . . . . . . . . . . . . 42
Table of Contents of Statement of Additional Information . . . . . . . 42
</TABLE>
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 IS NOT AN OFFER IN ANY JURISDICTION TO ANY PERSON
TO WHOM AN OFFER WOULD BE UNLAWFUL.
-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 before the Annuity Commencement Date.
AMERICAN FRANKLIN OR WE, OUR, US - The American Franklin Life Insurance
Company.
ANNUITANT - the person named in the application for a Contract on whose life
annuity payments may be based.
ANNUITY COMMENCEMENT DATE - the date on which American Franklin begins making
payments under an Annuity Payment Option, unless you elect a lump-sum
distribution instead.
ANNUITY PAYMENT OPTION - one of the several forms in which an Owner can ask
us to make annuity payments.
ANNUITY UNIT - a measuring unit used in calculating the amount of Variable
Annuity Payments.
CONTRACT ANNIVERSARY - each anniversary of the date we issue your Contract.
Every Contract Anniversary is the beginning of a Contract Year.
FIXED ACCOUNT - the name of the investment alternative under which we
allocate your purchase payments to American Franklin's General Account.
OWNER, YOU - the holder of record of a Contract. An 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.
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 Portfolio 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 - the name of the investment alternative under which we
allocate your purchase payments to one or more Divisions. The return on a
Division will vary, depending on the investment performance of its
underlying Portfolio.
-5-
<PAGE>
<TABLE>
<CAPTION>
FEE TABLE
<S> <C>
TRANSACTION CHARGES
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%
</TABLE>
- --------------------------------
(1) This charge does not apply or is reduced under certain circumstances.
(2) This charge is $25 for each transfer after the twelfth during each Contract
Year before the Annuity Commencement Date.
(3) We don't impose this charge while we make annuity payments, and currently,
if cumulative purchase payments are at least $75,000. See "Annual Contract
Fee."
The Portfolios' Annual Expenses for 1998 Fiscal Year
(as a percentage of average net assets)
<TABLE>
<CAPTION>
TOTAL PORTFOLIO
MANAGEMENT OTHER OPERATING
FEES EXPENSES EXPENSES
---------- -------- ---------------
<S> <C> <C> <C>
VIP Money Market .............
VIP High Income ..............
VIP Equity-Income ............
VIP Growth ...................
VIP Overseas .................
VIPII Investment Grade Bond ..
VIPII Asset Manager ..........
VIPII Index 500 ..............
VIPII Contrafund .............
MFS Emerging Growth ..........
MFS Research .................
MFS Growth With Income .......
MFS Total Return .............
MFS Utilities ................
MFS Capital Opportunities ....
</TABLE>
-6-
<PAGE>
EXAMPLE
If you surrender your Contract or annuitize, and pay a Surrender Charge at
the end of the time period shown, you would pay the following expenses on a
$1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
If all amounts invested in one of
the following Portfolios: 1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
VIP Money Market ...................
VIP High Income ....................
VIP Equity-Income ..................
VIP Growth .........................
VIP Overseas .......................
VIPII Investment Grade Bond ........
VIPII Asset Manager ................
VIPII Index 500 ....................
VIPII Contrafund ...................
MFS Emerging Growth ................
MFS Research .......................
MFS Growth with Income .............
MFS Total Return ...................
MFS Utilities ......................
MFS Capital Opportunities ..........
</TABLE>
-7-
<PAGE>
If you do not surrender a Contract or annuitize, you would pay the following
expenses on a $1,000 investment, assuming a 5% annual return on assets:
<TABLE>
<CAPTION>
If all amounts are invested in one
of the following Portfolios: 1 YEAR 3 YEARS 5 YEARS 10 years
<S> <C> <C> <C> <C>
VIP Money Market .....................
VIP High Income ......................
VIP Equity-Income ....................
VIP Growth ...........................
VIP Overseas .........................
VIPII Investment Grade Bond ..........
VIPII Asset Manager ..................
VIPII Index 500 ......................
VIPII Contrafund .....................
MFS Emerging Growth ..................
MFS Research .........................
MFS Growth with Income ...............
MFS Total Return .....................
MFS Utilities ........................
MFS Capital Opportunities ............
</TABLE>
We compiled this Fee Table to help you understand the various costs and
expenses that you would bear, directly or indirectly, under the Contract.
The table reflects expenses of Separate Account VA-1 and the Portfolios. In
addition to the fees and expenses described below, we will deduct an amount
to cover any applicable premium taxes. Premium tax rates depend on your place
of residence at the time the tax is charged. Rates currently range from 0% to
3.5% and may change.
THESE EXAMPLES DO NOT REPRESENT PAST OR FUTURE EXPENSES. YOUR ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The assumed 5% annual rate
of return is not an estimate or a guarantee of future investment performance.
-8-
<PAGE>
SUMMARY
You should read this summary together with the other information in this
Prospectus. We designed the Contracts to provide retirement benefits through
the accumulation of purchase payments on a fixed or variable basis, and by
the application of savings under the Contract to provide fixed or variable
annuity payments.
MINIMUM INVESTMENT REQUIREMENTS
Your initial purchase payment must be at least $5,000 (or $2,000 for
IRAs and SEPs). Any subsequent purchase payment must be at least $50. If
the Account Value for a Contract falls below $500, we may cancel your
interest in the Contract and treat it as a full surrender. Different
termination provisions apply to IRAs. We also may transfer funds from a
Division (other than the VIP Money Market Division) or from a Guarantee
Period, 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."
FLEXIBLE PREMIUM PAYMENTS
After your initial purchase payment, you determine the frequency and the
amount of purchase payments, subject to certain limits. See "Contract
Issuance and Purchase Payments."
PURCHASE PAYMENT ACCUMULATION
Purchase payments will accumulate on a variable or fixed basis, as you
direct, until the Annuity Commencement Date. For variable accumulation, you
may allocate purchase payments and Account Value to one or more of the 15
available Divisions of Separate Account VA-1. Each Division invests 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 in the corresponding Division
increases or decreases, subject to applicable charges and deductions. See
"Variable Account Value."
For fixed accumulation, you may allocate purchase payments and Account
Value 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. The value of accumulated
purchase payments in a Guarantee Period increases at the Guaranteed Interest
Rate applicable to that Guarantee Period. See "The Fixed Account."
FIXED AND VARIABLE ANNUITY PAYMENTS
You may elect to receive Fixed or Variable Annuity Payments, or a
combination of them, starting on the Annuity Commencement Date.
Fixed Annuity Payments are periodic payments from American Franklin
which are fixed and guaranteed by American Franklin. The amount of the
payments will depend on
-9-
<PAGE>
the Annuity Payment Option chosen, the age and, in some cases, sex of the
Annuitant, and the total amount of Account Value applied to purchase the
fixed Annuity Payment Option.
Variable Annuity Payments are similar to Fixed Annuity Payments, except
that the amount of each periodic payment will depend on the net investment
return of the Division or Divisions you choose. 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%. We
may in the future offer other forms of Contract with a lower assumed interest
rate, and we reserve the right to discontinue offering the higher interest
rate form of Contract. See "Annuity Period and Annuity Payment Options."
CHANGES IN ALLOCATIONS AMONG DIVISIONS AND GUARANTEE PERIODS
Before the Annuity Commencement Date, you may change your allocation of
future purchase payments to each of the various Divisions and Guarantee
Periods, without charge.
In addition, you may reallocate Account Value among the Divisions and
Guarantee Periods before 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, you may transfer Account Value
among the Divisions, or from a Division to a fixed Annuity Payment Option,
but you cannot make transfers FROM a fixed Annuity Payment Option. See
"Annuity Period and Annuity Payment Options - Transfers."
SURRENDERS, WITHDRAWALS AND CANCELLATIONS
You may totally surrender or partially withdraw funds from a Contract at
any time before the Annuity Commencement Date, by written request to us. We
may assess a Surrender Charge, and you may have to pay a tax or a tax
penalty. The maximum Surrender Charge (computed as a percentage of purchase
payments withdrawn) is 6% of purchase payments withdrawn during the first two
years after we received them. See "Surrenders and Partial Withdrawals" and
"Charges Under the Contracts - Surrender Charge."
You may cancel your Contract by delivering or mailing it, with a written
cancellation request, to us before the close of business on the tenth day
after you receive the Contract. (In some states, the Contract may provide for
a different period.) If you cancel the Contract, we will deem it cancelled
on the date of the postmark, and we will refund the Account Value plus any
premium taxes and Annual Contract Fee that have been deducted. If state law
requires, we will refund the greater of that amount or the amount of purchase
payments.
Surrenders, withdrawals and cancellations may have adverse tax
consequences. See "Federal Tax Matters."
-10-
<PAGE>
DEATH BENEFIT
If the Annuitant (where there is no surviving contingent annuitant) or
Owner dies before the Annuity Commencement Date, we will pay a death benefit
to the beneficiary. The death benefit amount will depend on whether your
Contract has a death benefit endorsement, but it will be at least the greater
of the Account Value at the time we receive proof of death minus premium
taxes, or the sum of all purchase payments made minus surrenders and
withdrawals. See "Death Benefit."
EMPLOYEE BENEFIT OR DEFERRED COMPENSATION PLANS
Any applicable employee benefit or deferred compensation plan may limit
your rights under a Contract to surrender, take partial withdrawals, make
purchase payments, and annuitize. This Prospectus doesn't describe any
employee benefit or deferred compensation plans. You should learn about any
retirement or deferred compensation plan that applies to your Contract. You
can get more information on some employee benefit plans from the disclosure
documents prepared under the Employee Retirement Income Security Act of 1974.
We are not responsible for monitoring or assuring compliance with any
retirement or deferred compensation plan.
NOTICE TO US
Direct all communications to us to our Administrative Office. Include
the Contract number, the Owner's name and, if different, the Annuitant's
name.
We deem purchase payments or other communications to be received by us
on the actual date of receipt in proper form unless we receive them (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 cases, the date of receipt
is the next Valuation Date.
-11-
<PAGE>
FINANCIAL AND PERFORMANCE INFORMATION
For historical financial information on the Divisions, see "Accumulation
Unit Values."
From time to time, we 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 VIPII 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 on historical information and does not
represent the future performance of a Division. These performance figures
also do not represent the actual experience of any particular Owner. The
investment experience for each Division reflects the investment performance
of the separate Portfolio funding the Division for the periods stated. For
periods before the Contract became available, we may also show results by
applying all applicable Contract charges and fees to the historical Portfolio
performance results for those periods. Additional information about the
Divisions' performance appears in the Statement of Additional Information.
We may also advertise our 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 of the Divisions or the
Contracts.
In addition, we may include in 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.
The financial statements for Separate Account VA-1 and 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 reflect the
investment performance of Separate Account VA-1.
We are a member of the Insurance Marketplace Standards Association
("IMSA"), and may include the IMSA logo and information about IMSA membership
in our advertisements. Companies that belong to IMSA subscribe to a set of
ethical standards covering the various aspects of sales and service for
individually sold life insurance and annuities.
-12-
<PAGE>
AMERICAN FRANKLIN AND SEPARATE ACCOUNT VA-1
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 American General
Corporation, 2929 Allen Parkway, Houston, Texas 77019-2155. American
General, a publicly traded company whose stock is traded on the New York
Stock Exchange, is one of the largest diversified financial services
organizations in the United States, and its operating subsidiaries are
leading providers of retirement services, consumer loans and life insurance.
We established Separate Account VA-1 on May 22, 1996. It consists of 15
Divisions, all of which are available under the Contracts offered by this
Prospectus. We have registered Separate Account VA-1 with the Securities and
Exchange Commission as a unit investment trust under the Investment Company
Act of 1940, as amended (the "1940 Act"). This registration does not mean
that the Securities and Exchange Commission supervises the management or
investment policies of Separate Account VA-1. 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 our
general operations, and the assets of Separate Account VA-1 belong to us.
Obligations under the contracts are our obligations. Under Illinois law, the
assets of Separate Account VA-1 equal to its reserves and other liabilities
are not chargeable with liabilities arising out of any other business which
we may conduct, but are held exclusively to meet our obligations under
variable annuity contracts issued through Separate Account VA-1. We may
transfer the excess to our general account. The income, gains, and losses,
whether or not realized, from assets allocated to Separate Account VA-1, are
credited to or charged against Separate Account VA-1 without regard to our
other income, gains, or losses.
THE PORTFOLIOS
Each Division of Separate Account VA-1 invests exclusively in shares of
a specific separate investment Portfolio that is operated by one of three
mutual funds (the "Funds"). The Funds sell shares of these Portfolios,
without sales charges, exclusively to insurance company separate accounts and
qualified plans. The three mutual funds are the VARIABLE INSURANCE PRODUCTS
FUND ("VIP"); the VARIABLE INSURANCE PRODUCTS FUND II ("VIPII"); and the MFS
VARIABLE INSURANCE TRUST ("AMFS Trust"). The Portfolios are listed below.
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 us. We do 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
-13-
<PAGE>
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.
Each Portfolio has a different investment objective and different
investment policies. The objectives and policies of each Portfolio will affect
its return and its risks. The Prospectuses and Statements of Additional
Information for the Portfolios describe in detail the investment objectives,
policies, restrictions and risks of the Portfolios. The Prospectuses for the
Portfolios are attached to this Prospectus.
The investment objectives and policies of some of the Portfolios may be
similar to those of other funds managed by the same investment adviser. The
investment results of the Portfolios, however, may be higher or lower than the
results of those other funds. There can be no assurance, and we do not
represent, that the investment results of any Portfolio will be comparable to
the investment results of any other fund, even if the other fund has the same
investment adviser.
Following is a summary of the policies and objectives of the Portfolios of
the VIP:
VIP 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.
VIP 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 investing in junk bonds, see the Prospectus for the Variable
Insurance Products Fund, which is attached to this Prospectus.
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income by investing primarily
in income-producing equity securities. In choosing these securities, the
investment adviser 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.
VIP 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. The Portfolio's investment adviser
may also look for capital appreciation in other types of securities
including bonds and preferred stocks.
VIP OVERSEAS PORTFOLIO seeks long-term growth of capital primarily through
investments in foreign securities. VIP Overseas Portfolio provides a means
for
-14-
<PAGE>
investors to diversify their own portfolios by participating in
companies and economies outside of the United States.
Following is a summary of the policies and objectives of the Portfolios of
the VIP II:
VIPII 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.
VIPII 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 money market instruments.
VIPII INDEX 500 PORTFOLIO seeks investment results that correspond to the
total return 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.
VIPII CONTRAFUND PORTFOLIO seeks to increase the value of investments over
the long term by investing in securities of companies that the investment
adviser believes are undervalued or out of favor.
Following is a summary of the policies and objectives of the Portfolios of
the MFS Trust:
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 CAPITAL OPPORTUNITIES PORTFOLIO seeks capital appreciation.
We do not guarantee that any Portfolio will achieve its objective. In
addition, no single Portfolio or Division, by itself, constitutes a balanced
investment plan.
-15-
<PAGE>
Except for the VIP MONEY MARKET, VIPII INVESTMENT GRADE BOND, VIPII
INDEX 500 and MFS GROWTH WITH INCOME Portfolios, the Portfolios can purchase
lower-quality bonds, also known as "junk bonds". Junk bonds are highly
speculative. They provide poor protection for payment of principal and
interest. Changes in an issuer's creditworthiness can cause greater risks of
default or price changes than the risks typically associated with
higher-rated securities. For a discussion of the risks of investing in junk
bonds, see the Prospectuses for the Funds, which are attached to this
Prospectus.
Subject to the approval and supervision of the Funds' Boards of Trustees,
Fidelity Management & Research Company ("FMR") manages the day-to-day investment
operations of VIP and VIP II, and exercises overall responsibility for the
investment and reinvestment of their assets. Each Portfolio of the VIP and the
VIP II pays FMR a monthly fee for managing its business and investment affairs.
For a description of FMR and the calculation of its fee, see the Prospectuses
and Statements of Additional Information for the VIP and the VIP II.
Subject to the policies of the Fund's Board of Trustees, Massachusetts
Financial Services Company ("MFS") makes investment decisions for each Portfolio
of the MFS Trust. MFS also provides the MFS Trust Portfolios with
administrative services and general office facilities. MFS receives a monthly
management fee for its services. For a description of MFS and the calculation
of its fee, see the Prospectus of the MFS Trust.
We and the Funds' investment advisers may agree that the investment
advisers will reimburse us or our affiliates for certain costs incurred in
administering the Funds as variable funding options for the Contracts. We have
agreed with MFS that MFS or its affiliates will pay us a fee equal, on an
annualized basis, to a percentage of the aggregate net assets of each Portfolio
of the MFS Trust attributable to the Contracts and certain other variable
contracts that we or our affiliates issue. This fee will not be paid by the
Portfolios, their shareholders or the Owners.
Affiliates of FMR may compensate us or our affiliates for administrative,
distribution, or other services relating to the Portfolios of the Funds. Such
compensation is generally based on assets of the portfolios attributable to the
Contracts and certain other variable contracts that we or our affiliates issue.
BEFORE YOU SELECT ANY DIVISION, you should carefully read the Funds'
prospectuses. To obtain additional copies of the Prospectuses of the Funds,
contact us.
VOTING PRIVILEGES
At meetings of Portfolio shareholders, Separate Account VA-1 will vote
shares of the Portfolios according to your instructions, in proportion to the
shares attributable to your Contract. We will request voting instructions from
Owners of Contracts that are not yet in the annuity period. (This is the period
when we make annuity payments under an Annuity Payment Option.) For Contracts
that are in the annuity period, we will request instructions from Annuitants or
other payees, or from Owners of Section 457 Contracts.
-16-
<PAGE>
We will determine the persons entitled to give voting instructions, and the
number of their votes, as of the record date for a meeting.
If there are shares for which we receive no instructions, or if we hold
shares on our own behalf, we will vote these shares in the same proportion as
the shares for which we do receive instructions.
The number of votes you are entitled to direct for a Portfolio equals (a)
your Variable Account value in that Portfolio divided by (b) the net asset value
of one share of that Portfolio. We will take fractional shares into account in
determining the number of votes. If you have chosen a variable Annuity Payment
Option, we will calculate your votes in a similar manner, based on our liability
for future Variable Annuity Payments as of the record date, the mortality
assumptions and the assumed interest rate used to determine the number of
Annuity Units under a Contract and the applicable value of an Annuity Unit on
the record date.
We believe that these voting instruction procedures comply with current
federal securities laws and their interpretations. We reserve the right to
change these procedures with any changes in the law.
THE FIXED ACCOUNT
ANY PURCHASE PAYMENTS THAT YOU ALLOCATE TO A GUARANTEE PERIOD OF THE FIXED
ACCOUNT OR THAT SUPPORTS FIXED ANNUITY PAYMENTS BECOMES PART OF OUR GENERAL
ACCOUNT. BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, WE HAVE NOT
REGISTERED THE GENERAL ACCOUNT UNDER THE SECURITIES ACT OF 1933 OR AS AN
INVESTMENT COMPANY UNDER THE 1940 ACT. WE HAVE BEEN ADVISED THAT THE STAFF OF
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS
PROSPECTUS ABOUT THE FIXED ACCOUNT OR ABOUT FIXED ANNUITY PAYMENTS. THOSE
DISCLOSURES, HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS
OF THE FEDERAL SECURITIES LAWS THAT REQUIRE STATEMENTS IN PROSPECTUSES TO BE
ACCURATE AND COMPLETE.
Obligations of the Fixed Account are our legal obligations and are
supported by our General Account assets, which also support our obligations
under other insurance and annuity contracts. American Franklin owns the
investments purchased with Fixed Account funds, and Separate Account VA-1 Owners
have no legal rights in those investments.
If you allocate Account Value to the Fixed Account, you earn a Guaranteed
Interest Rate, starting on the date of your allocation. This Guaranteed
Interest Rate continues for the Guarantee Period you select. You can select a
Guarantee Period from the Guarantee Periods that we then offer. We currently
offer Guarantee Periods of one, three and five years. Each Guarantee Period has
its own Guaranteed Interest Rate, which may be different from the rate for other
Guarantee Periods.
At the end of a Guarantee Period, we will allocate your Account Value in
that Guarantee Period, including accrued interest, to a new Guarantee Period of
the same
-17-
<PAGE>
length, unless you have instructed us differently in writing. You can
instruct us to allocate the Account Value to a different Guarantee Period, to
several Guarantee Periods, or to one or more of the Divisions of Separate
Account VA-1. We must receive this written request at least three Valuation
Dates before the end of the Guarantee Period. If you have not given us a
written allocation request, and the renewed Guarantee Period extends beyond your
scheduled Annuity Commencement Date, we will contact you about your scheduled
Annuity Commencement Date. If you elect to annuitize in this situation, we may
waive the Surrender Charge. 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 earlier Guarantee Period. We will notify you at
least 30 days and not more than 60 days before the end of any Guarantee Period.
If your Account Value in a Guarantee Period is less than $500, we reserve the
right, without charge, to automatically transfer the balance to the VIP Money
Market Division at the end of that Guarantee Period, unless we have received in
good order written instructions to transfer the balance to a Division, or to
allocate the balance to a new Guarantee Period.
We declare the Guaranteed Interest Rates from time to time at our
discretion. We will notify you about the Guaranteed Interest Rate for a chosen
Guarantee Period when we receive a purchase payment, you make a transfer, or a
you renew a Guarantee Period. Interest rates might vary from one Guarantee
Period to another because the other Guarantee Period begins on a different date,
or is of a different length. Also, we may credit different rates of interest 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 we will, at our 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 started. Each allocation or transfer of an amount to a
Guarantee Period starts 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. We reserve 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. WE CAN NOT PREDICT OR ASSURE THE
LEVEL OF ANY FUTURE GUARANTEED INTEREST RATES ABOVE THE MINIMUM GUARANTEED
INTEREST RATE.
You can get information on the Guaranteed Interest Rates applicable to the
various Guarantee Periods at any time from us.
-18-
<PAGE>
CONTRACT ISSUE AND PURCHASE PAYMENTS
The minimum initial purchase payment for a Contract is $5,000 (or $2,000
for IRA or SEP Contracts). Subsequent purchase payments allocated to any
Division or Guarantee Period must be at least $50. We reserve the right to
change these minimums. We may waive the minimum initial purchase payment amount
for a block of Contracts where the average purchase payment for the block meets
the minimum requirement.
You must apply for a Contract by filling out and signing our application
form. We may agree to accept applications in other mediums or formats. If you
submit a properly completed application along with a purchase payment, we will,
within two business days after we receive them, either process the application,
credit the purchase payment, and issue the Contract, or reject the application
and return the purchase payment to you.
If we receive an incomplete application, we will attempt to contact you to
complete it. If we cannot complete the application within five business days
after we receive the initial purchase payment, we will immediately return the
entire initial purchase payment to you unless you have been informed of the
delay and you have asked us not to return it. When your application is
complete, we will credit the balance of the initial purchase payment, after
deducting any charges and any applicable premium tax, to the Divisions and/or
the Fixed Account according to your selection.
We credit subsequent purchase payments as of the end of the Valuation
Period in which we receive them together with any required written identifying
information. We reserve the right to reject any application or purchase payment
for any reason.
If your Account Value in any Division falls below $500 because of a partial
withdrawal from the Contract, we reserve the right to transfer, without charge,
the remaining balance to the VIP Money Market Division. If your Account Value
in any Division falls below $500 because of a transfer to other Divisions or to
the Fixed Account, we reserve the right to transfer the remaining balance in
that Division, without charge and pro rata, to the Divisions or Fixed Account to
which the transfer was made. We will waive these minimum requirements for
transfers under the Variable Account Asset Rebalancing program. See "Variable
Account Asset Rebalancing."
A purchase payment begins to earn a return on the date that it is credited
to a Contract. You must allocate amounts of each purchase payment to Divisions
or Guarantee Periods in whole percentages on the application form. You can
change these allocation percentages any time by sending written notice to us.
If your total Account Value falls below $500, we may cancel the Contract.
(In Texas, if your Account Value is less than $500 or would provide an income
the initial amount of which is less than $20 per month and no purchase payments
have been applied for a period of 2 full years, we may cancel the Contract upon
60 days' notice to you, and return your Account Value.) IRA annuities have
different termination provisions. We
-19-
<PAGE>
will consider any cancellation to be a full surrender of the Contract. We
will provide an Owner with 60 days' advance notice of any such cancellation.
If your Account Value does not fall below $500, you are not required to
make any further purchase payments. However, you may make subsequent purchase
payments any time before the Annuity Commencement Date while the Owner and
Annuitant are still living. Make checks for subsequent purchase payments
payable to The American Franklin Life Insurance Company, and send them to us.
We will also accept purchase payments by wire or by exchange from another
insurance company. You can get more information about making purchase payments
by either of these methods from a sales representative or from us.
You may make purchase payments in connection with salary reduction plans
only with American Franklin's agreement. Also, the following annual limits on
purchase payments apply to Contracts in the categories shown:
<TABLE>
<CAPTION>
<S> <C>
Contract Maximum Purchase Payments Per Year
-------- ----------------------------------
IRA In general, $2,000
SEP $24,500
SIMPLE IRA Maximum contribution allowed by law
Section 457 Contract In general, $7,500
</TABLE>
ACCOUNT VALUE
Before the Annuity Commencement Date, your "Account Value" under a Contract
is the sum of your Variable Account value and your Fixed Account value, as
discussed below.
VARIABLE ACCOUNT VALUE
Your Variable Account value as of any Valuation Date before the Annuity
Commencement Date equals the sum of the Variable Account values in each Division
of Separate Account VA-1 on that date. The Variable Account value in a Division
is the number of Accumulation Units in that Division multiplied by the value of
an Accumulation Unit on that Valuation Date. WE DO NOT GUARANTEE ANY MINIMUM
VARIABLE ACCOUNT VALUE. YOU BEAR THE ENTIRE RISK OF ALL INVESTMENT LOSSES OF
ANY AMOUNT THAT YOU ALLOCATE TO SEPARATE ACCOUNT VA-1.
We credit Accumulation Units to a Division when you allocate purchase
payments or transfer amounts to that Division. Similarly, we cancel
Accumulation Units when you transfer or withdraw amounts from a Division, and to
pay certain charges under the Contract. We will credit or cancel Accumulation
Units based on their value at the end of the Valuation Date on which the related
amounts are being credited to or charged against the Variable Account value.
We calculate the value of an Accumulation Unit for a Division on any
Valuation Date by multiplying the prior value of that Division's Accumulation
Unit by the
-20-
<PAGE>
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
start of operations was $5.00. Investment performance of a Portfolio,
expenses, and deduction of charges all affect Accumulation Unit value.
We determine the net investment factor for a Division by:
- dividing the net asset value per share of the Portfolio shares held by
the Division, as of 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
- the net asset value per share of the Portfolio shares held in the
Division as of 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 before 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 equals 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.
We guarantee the Fixed Account value. Therefore, we bear the investment
risk of amounts you allocate to the Fixed Account. However, we may vary the
Guaranteed Interest Rate for future Guarantee Periods.
TRANSFERS, VARIABLE ACCOUNT ASSET REBALANCING, SURRENDERS AND PARTIAL
WITHDRAWALS
TRANSFERS
Starting 30 days after your Contract's issue date (and before the Annuity
Commencement Date), you may transfer your Account Value among the available
Divisions of Separate Account VA-1 and Guarantee Periods, subject to the
conditions described below. Transfers are effective at the end of the Valuation
Period in which we receive a written or telephone transfer request.
You may make up to 12 transfers each Contact Year without charge. Each
additional transfer will cost $25. You may not, during any Contract Year,
transfer out of
-21-
<PAGE>
a Guarantee Period more than 25% of the Account Value that you allocated to
it at its inception. This 25% limit does not apply to transfers 15 days
before or after the end of the Guarantee Period to the same or to another
Guarantee Period. The 25% limit also does not apply to a renewal at the end
of the Guarantee Period to a different Guarantee Period of the same length.
Subject to the above general rules concerning transfers, you may establish
an automatic transfer plan, where we automatically transfer amounts from the VIP
Money Market Division to one or more other Divisions, on a monthly, quarterly or
semi-annual basis. These transfers will not count towards the 12 free transfers
each Contract Year, and will not incur a $25 charge. You can get more
information about how to establish an automatic transfer program from a sales
representative or from us.
You must authorize telephone transfers by completing a Telephone Transfer
Privilege Form. If we have a properly completed form on file from whoever is
entitled to make transfers, we will make transfers according to telephone
instructions, subject to the terms of the Telephone Transfer Privilege
authorization.
Because we will honor telephone transfer instructions from anyone who
provides correct information, there is a risk that an unauthorized person could
use this service in your name, which could cost you money. We have 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. We will mail to the Owner a written confirmation of the transaction.
We are not liable for any acts or omissions based on instructions that we
reasonably believe to be genuine, including losses arising from errors in the
communication of instructions.
If several people try to make telephone transfers at the same time, or if
the recording equipment malfunctions, you may not be able to make a telephone
transfer when you want. If this happens, you may submit a written transfer
request. Also, if the recording of a telephone request is incomplete or if we
can't understand what is being said, because of equipment malfunction or for any
other reason, we will not process the transaction. The phone numbers you should
use for telephone transfers are (800) 200-3101, or in the Houston area, (713)
831-3310.
The Contracts are not designed for professional market timing organizations
or other entities utilizing programmed and frequent transfers. We reserve the
right at any time and without prior notice to any party to terminate, suspend,
or modify our policy on transfers.
VARIABLE ACCOUNT ASSET REBALANCING
Variable Account Asset Rebalancing authorizes us to automatically transfer
your Account Value among the Divisions on a quarterly, semi-annual or annual
basis, measured from the Contract Anniversary date, so that the values in each
Division on the transfer date correspond to a percentage allocation of the total
Variable Account value
-22
<PAGE>
that you designate. You may not use Variable Account Asset Rebalancing 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 help you to purchase at lower prices and sell at higher prices.
However, we cannot assure you that this actually will happen. This method
does not guarantee that you will experience profits or that you will not
experience losses.
You can use Variable Account Asset Rebalancing if your Contract has an
Account Value of at least $25,000 at the time we receive your application for
the Program. You can apply for the Program any time, and once enrolled, you
can get out of the Program any time, effective after we receive a written
notice. 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," above.
SURRENDERS AND PARTIAL WITHDRAWALS
Any time before your Annuity Commencement Date (and while the Annuitant
is still living), you may surrender or take a partial withdrawal from your
Contract. All collateral assignees of record must consent to any full
surrender or partial withdrawal.
If you make a full surrender, we will pay your Account Value as of the
end of the Valuation Period in which we receive a written surrender request
in good order, minus any applicable Surrender Charge, uncollected Annual
Contract Fee (see "Annual Contract Fee") and applicable premium tax. You
must return your Contract along with any request for a full surrender. After
a full surrender, or if your Account Value falls to zero, all rights of the
Owner, Annuitant or any other person with respect to the Contract will end.
If you request a partial withdrawal, you should specify, in writing, the
Divisions or Guarantee Periods from which you wish the withdrawal to be made.
If you don't give us instructions, or if we can't process the withdrawal
according to your instructions, we will make the withdrawal pro-rata from the
Divisions and Guarantee Periods, based on your Account Value in each.
Partial withdrawal requests must be for at least $100 or, if less, for all of
the Account Value. Unless you request otherwise, upon a partial withdrawal,
the Accumulation Units and Fixed Account interests that are canceled will
equal the amount of the withdrawal request, and we will pay you the amount of
your withdrawal request less any appplicable Surrender Charge, uncollected
Annual Contract Fee and premium tax.
SYSTEMATIC WITHDRAWAL PLAN
You may make automatic partial withdrawals, with minimum payments of
$100, at periodic intervals through a systematic withdrawal program. You may
choose monthly, quarterly, semi-annual or annual payment schedules, and may
start, stop,
-23-
<PAGE>
increase or decrease payments, subject to the minimum payment limit. You may
start taking these withdrawals as early as 30 days after the issue date of
the Contract, and they may be taken from the Fixed Account or any Division,
as you specify. The terms and conditions applicable to other partial
withdrawals apply to systematic withdrawals, including Surrender Charges and
exceptions to Surrender Charges. Systematic withdrawals may be subject to
federal tax penalties and federal income tax withholding.
You can get more information about how to establish a systematic
withdrawal program from a sales representative or from us. We reserve the
right to modify or terminate the procedures for systematic withdrawals at any
time.
THERE ARE CERTAIN RESTRICTIONS ON WITHDRAWALS UNDER SECTION 403(b) TAX
SHELTERED ANNUITIES. If your contract was issued under the Texas Optional
Retirement Program, you may not redeem it before your termination of
employment in the Texas public institutions of higher education or
retirement, death or reaching age 70 1/2.
Any full surrender or partial withdrawal payment may be subject to federal
income tax withholding and federal tax penalties. See "Federal Income Tax
Matters."
CHARGES UNDER THE CONTRACTS
We deduct the charges described below to cover costs and expenses, services
provided, and risks assumed under the Contracts. The amount of a charge may not
necessarily correspond to the costs associated with providing the services or
benefits indicated by the designation of the charge or associated with the
particular Contract. For example, the Surrender Charge may not fully cover all
of the sales and distribution expenses that we actually incur, and we may use
proceeds in part from other charges, including the mortality and expense risk
charge, to cover such expenses.
PREMIUM TAXES
When applicable, we will deduct charges for premium taxes. We will make
such a deduction, in accordance with applicable state law:
(1) from purchase payment(s) when we receive them; or
(2) from your Account Value when annuity payments begin; or
(3) from any partial withdrawal; or
(4) from proceeds payable on termination of the Contract for any other reason,
including death of the Annuitant or Owner, or surrender of the Contract.
If you owe premium tax under paragraphs 2, 3, or 4 above, we may collect
reimbursement for the tax by multiplying the sum of the purchase payments
being withdrawn by the applicable premium tax percentage.
-24-
<PAGE>
Applicable premium tax rates depend upon your then-current place of
residence. Rates currently range from 0% to 3.5%, and are subject to change.
SURRENDER CHARGE
The Surrender Charge compensates us for part of our expenses related to
distributing the Contracts. We believe, however, that the amount of expenses
will exceed the amount of revenues generated by the Surrender Charge. We
will pay any excess out of our general surplus.
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 you withdraw during the first seven years after we received it.
The percentage declines depending on how many years have passed since the
withdrawn purchase payment was made, as follows:
<TABLE>
<CAPTION>
Year of
Purchase Surrender Charge as a
Payment Percentage of Purchase
Withdrawn Payment Withdrawn
--------- ----------------------
<S> <C>
1st 6%
2nd 6%
3rd 5%
4th 5%
5th 4%
6th 4%
7th 2%
Thereafter 0%
</TABLE>
To compute the Surrender Charge, we will consider the earliest purchase
payments to be withdrawn first, and purchase payments to be withdrawn before any
amounts in excess of purchase payments are withdrawn from Account Value. We
will consider the following transactions 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.
The Surrender Charge does not apply to the portion of a withdrawal or total
surrender in any Contract Year that is not more than 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,
minus the amount of any previous withdrawals during such Contract Year. If you
make multiple withdrawals during a Contract Year, we will recalculate the amount
eligible for the free withdrawal at the time of each withdrawal. After the
first Contract Year, you may make non-automatic and automatic withdrawals 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.
-25-
<PAGE>
We also will not apply the Surrender Charge to withdrawals in the
following circumstances:
- - If your withdrawals exceed the cumulative amount of your purchase payments,
we will not apply the Surrender Charge to the excess;
- - The Annuitant dies, at any age, after the Annuity Commencement Date;
- - The Annuitant dies, at any age, before the Annuity Commencement Date,
provided no contingent annuitant survives;
- - 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; or
- - You or your Annuitant have been confined to a long-term care facility or
are 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."
In Maryland, the Surrender Charge will also not apply if an annuity payment
option starts at age 99.
We may also waive the Surrender Charge for the surrender of a Contract or
the withdrawal of Account Value (limited to the Variable Account value and the
one year Guarantee Period) under Contracts issued to Owners who are bona-fide
full-time employees of American Franklin, The Franklin Life Insurance Company or
Franklin Financial Services Corporation, the principal underwriter of the
Contracts. This waiver is based on the Contract Owner's status at the time the
Contract was purchased.
We will not apply the Surrender Charge to any amounts withdrawn above the
amount permitted by the 10% free withdrawal privilege, described above, if you
must withdraw those amounts to obtain or retain favorable tax treatment. This
exception is subject to our approval.
We will not consider a free withdrawal pursuant to any of the foregoing
Surrender Charge exceptions to be a withdrawal of purchase payments, except for
purposes of computing the 10% free withdrawal described in the preceding
paragraphs.
Withdrawals are subject to tax, and you may have to pay a federal tax
penalty on 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."
-26-
<PAGE>
TRANSFER CHARGES
The first twelve transfers in any Contract Year are free. After that, we
charge $25 for each transfer. Transfers under an automatic transfer plan and
the Variable Account Asset Rebalancing Program will not count toward the 12 free
transfers.
ANNUAL CONTRACT FEE
We will deduct an Annual Contract Fee of $30 from each Owner's Account
Value on each Contract Anniversary before the Annuity Commencement Date. This
fee compensates us for administrative expenses. We will allocate the fee among
the Guarantee Periods and Divisions in proportion to the Account Value in them.
(Where state law requires, we will allocate this fee among the Divisions in
proportion to the Account Value in each; and, if at the time we deduct this fee,
the Variable Account value is less than the Annual Contract Fee, we will waive
the fee for that deduction.) If you make a full surrender of your Contract on a
date other than a Contract Anniversary, we will deduct from the proceeds the
entire fee for the Contract Year during which the surrender occurs. Currently,
we will waive this Annual Contract Fee if cumulative purchase payments are at
least $75,000. We reserve the right to waive the Annual Contract Fee under
other circumstances.
CHARGE TO SEPARATE ACCOUNT VA-1
To offset administrative expenses, and to compensate us 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.
In assuming mortality risk, we are subject to the risk that our actuarial
estimate of mortality rates may be wrong, and that Annuitants will live longer
than expected, or that more Owners or Annuitants than expected will die when the
death benefit that we guarantee is higher than their interests in the Contracts.
In assuming expense risk, we take the risk that revenues from the expense
charges under the Contracts (which we guarantee will not increase) will not
cover our expense of administering the Contracts.
We reserve the right to impose charges or establish reserves for any
federal, state or local taxes that we have incurred or that we may incur, and
that may be deemed attributable to the Contracts.
PORTFOLIO EXPENSES
Each Portfolio will assess its own investment management fee and pay other
expenses from the Portfolio's assets, as described in the prospectus relating to
that Portfolio.
-27-
<PAGE>
REDUCTION IN SURRENDER CHARGES OR ADMINISTRATIVE CHARGES
We 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 we otherwise would have to
perform) and will not unfairly discriminate against any person.
ANNUITY PERIOD AND ANNUITY PAYMENT OPTIONS
ANNUITY COMMENCEMENT DATE
Subject to any limitations in a deferred compensation or employee benefit
plan, you may select your Annuity Commencement Date when you apply to purchase a
Contract. You can change this date any time before the start of an Annuity
Payment Option by submitting a written request, subject to our approval. The
Annuity Commencement Date can be any day of any month up to and including the
Annuitant's 99th birthday. See "Federal Income Tax Matters."
APPLICATION OF ACCOUNT VALUE
Except under certain qualified contracts, we will automatically apply the
Variable Account value in any Division to provide Variable Annuity Payments, and
the Fixed Account value to provide Fixed Annuity Payments. If you give us other
written instructions at least 30 days before the Annuity Commencement Date, we
will apply your Account Value in different proportions. For a Section 457
Contract, under current federal income tax rules we may have to apply both the
Variable Account value in any Division and the Fixed Account value to provide
Fixed Annuity Payments.
We deduct any state and local premium taxes from the Account Value being
applied to an Annuity Payment Option. In some cases, we may deduct a Surrender
Charge from the amount being applied. See "Surrender Charge." Subject to any
such adjustments, your account value is applied to an Annuity Payment Option,
ten days before your Annuity Commencement Date. If that day is not a Valuation
Date, we will apply your Account Value to an Annuity Payment Option at the end
of the next Valuation Period.
FIXED AND VARIABLE ANNUITY PAYMENTS
Your first monthly Fixed or Variable Annuity Payment will be at least as
much as the amount determined from the annuity tables set forth in the Contract,
based on your Account Value being applied to provide the Fixed or Variable
Annuity Payments.
After that, the amount of each monthly Fixed Annuity Payment is fixed, and
is specified by the terms of the Annuity Payment Option selected.
-28-
<PAGE>
We will convert the Account Value that provides Variable Annuity Payments
to Annuity Units. We determine the number of your Annuity Units by dividing the
first Variable Annuity Payment by the value of an Annuity Unit of the relevant
Division. We will perform this calculation at the end of the tenth day before
your Annuity Commencement Date, or, if that is not a Valuation Date, at the end
of the next Valuation Period. The number of Annuity Units, once calculated,
remains constant for any Annuitant. We determine each subsequent Variable
Annuity Payment by multiplying Annuity Units by the value of an Annuity Unit as
of the end of the tenth day before each payment date, or, if that is not a
Valuation Date, at the end of the next Valuation Period. If the Variable
Annuity Payments are based on more than one Division, we make these calculations
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 times 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 start of
operations was $5.00.
If the net investment return for a Division for any month turns out to be
more than the assumed interest rate in the Contract's annuity tables, a Variable
Annuity Payment based on that Division will be higher than that Division's
payment for the prior month. On the other hand, if the net investment return
for a Division for any month is less than the assumed interest rate in the
Contract's annuity tables, a Variable Annuity Payment based on that Division
will be less than that Division's payment for the prior month.
ANNUITY PAYMENT OPTIONS
You can have annuity payments made beginning on the Annuity Commencement
Date under any one of the Annuity Payment Options described below. 60 to 90
days before the scheduled Annuity Commencement Date, we will notify you that
your Contract is scheduled to mature, and we will ask you to pick an Annuity
Payment Option. If you have not picked an Annuity Payment Option ten days
before the Annuity Commencement Date, we will proceed as follows:
(1) if the scheduled Annuity Commencement Date is before the Annuitant's
99th birthday, we 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, we will pay you the Account Value, less any applicable
Surrender Charge, Annual Contract Fee and premium taxes, in one lump
sum.
The tax code imposes minimum distribution requirements that affect the
Annuity Payment Option and the Annuity Commencement Date in connection with
Contracts that qualify under Sections 401(a), 403(a) or (b), 408(b), (k) or (p)
("Qualified Contracts"), those that do not ("Non-Qualified Contracts"), and
Section 457 Contracts. Certain Annuity Payment Options may be unavailable. See
"Federal Income Tax Matters" below, and "Limitations on Annuity Payment Options"
in the Statement of Additional
-29-
<PAGE>
Information. We are not responsible for monitoring or advising Owners as to
whether the minimum distribution requirements are being met unless you have
asked us in writing to do so, and we have agreed.
ALTERNATIVE PAYMENT SCHEDULES. For any of the five options, you or your
Annuitant may decide to receive payments on a quarterly, semi-annual or annual
basis, instead of every month. We will determine the amount of each payment in
a way that is consistent with how we determine monthly payments.
You may not elect any Annuity Payment Option unless that option would
provide an initial annuity payment of at least $100, where you elect only Fixed
or only Variable Annuity Payments, or of at least $50 on each basis, if you
elect a combination. If these minimums are not met, we will first reduce the
frequency of annuity payments, and if the minimums are still not met, we will
make a lump-sum payment to the Annuitant or other properly designated payee in
the amount of the Account Value, less any applicable Surrender Charge,
uncollected Annual Contract Fee, applicable premium tax and applicable federal
income tax withholding.
You may direct that we pay any amount due to your beneficiary under one of
the options described below, subject to tax law requirements. If you do not
make this choice, your beneficiary can select an option up to 60 days after your
or your annuitant's death. See "Death Benefit." Your beneficiary will have all
the remaining rights and powers under the Contract and will be subject to all of
its terms and conditions, except that for Qualified Contracts and Section 457
Contracts, the Owner will retain those rights and powers. We will make the
first annuity payment at the beginning of the second month after the month in
which we approve the settlement request. We will credit Annuity Units based on
Annuity Unit Values as of the close of business ten days before we make the
first annuity payment, or if that is not a Valuation Date, at the close of the
next Valuation Period.
When an Annuity Payment Option becomes effective, you must deliver your
Contract to us, in exchange for a payment contract providing the option you have
selected. An Annuity Payment Option may not be terminated once annuity payments
have started.
FIRST OPTION - LIFE ANNUITY. We make payments monthly during the lifetime of
the Annuitant, ending when the Annuitant dies. This Option offers the highest
monthly annuity payments, since there is no guarantee of a minimum number of
annuity payments, or provision for payments to a beneficiary when the Annuitant
dies. Under this Option, the Annuitant could receive only one annuity payment
if he or she died before the second annuity payment, or only two annuity
payments if he or she died after the second annuity payment but before the third
annuity payment, and so on.
SECOND OPTION - LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS CERTAIN. We
make payments monthly while the Annuitant lives. If the Annuitant dies and we
have made payments for less than 120 months, 180 months, or 240 months
(depending on the Option), we will continue making payments to your beneficiary
for the rest of the period.
-30-
<PAGE>
THIRD OPTION - JOINT AND LAST SURVIVOR LIFE ANNUITY. We make payments monthly
while both the Annuitant and another payee are alive, and after one dies, during
the survivor's life. Payments end when the survivor dies. There is no minimum
number of guaranteed payments under this Option, so it would be possible for
both the Annuitant and payee to receive only one payment if both died before the
second annuity payment date, or to receive only two payments if both died after
the second annuity payment but before the third, and so on.
FOURTH OPTION - PAYMENTS FOR A DESIGNATED PERIOD. We make payments monthly to
the Annuitant or another payee for between 5 and 40 years, as you designate.
When the Annuitant or other payee dies, we will continue payments to the
beneficiary for the rest of the period. If you select Variable Annuity Payments
under this Option, the designated period cannot exceed the life expectancy of
the Annuitant or other payee.
Under this option, we do not offer any mortality guarantee, even though we
will assess a charge under Separate Account VA-1, partly for mortality risks.
See "Charge to Separate Account VA-1."
FIFTH OPTION - PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Option is available
only as a Fixed Annuity. We make equal monthly payments of a designated dollar
amount (not less than $125, nor more than $200 per year per $1,000 of the
original amount due) until the remaining balance is less than one payment. We
will then pay the balance, and that will be the final payment under this Option.
If the Annuitant dies, and there is a remaining balance, we will make payments
to the beneficiary until the remaining balance is paid. We determine the
remaining balance at the end of the month 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 at least 3.5% interest, compounded annually.
Federal tax regulations may treat the fourth or fifth options as a
surrender of the total Account Value. For tax consequences of such treatment,
see "Federal Income Tax Matters." You also may not be able to defer taxes on
subsequent earnings.
ALTERNATIVE AMOUNT UNDER FIXED LIFE ANNUITY OPTIONS - If we make Fixed Annuity
Payments under one of the first three Annuity Payment Options, you (or if you
have not elected a payment option, your beneficiary) may elect monthly annuity
payments equal to the monthly payment available for any annuitant of the same
adjusted age and sex (if applicable) as your Annuitant, based on the single
payment immediate fixed annuity rates which we are then using. We provide this
option to assure you that, at retirement, if we are offering a higher fixed
annuity purchase rate for new single payment immediate annuity contracts than
the annuity rates guaranteed by your Contract, your Annuitant or other payee can
take advantage of the new rates.
TRANSFERS
After the Annuity Commencement Date, your Annuitant or other payee can 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. We will not
charge anything for this transfer. We will not permit transfers from a fixed to
a variable Annuity Payment
-31-
<PAGE>
Option. If a transfer would decrease the Contract value in any Division to
less than $500, we reserve the right to transfer the remaining balance in
that Division. We will carry out transfers at the end of the Valuation
Period during which we receive a written transfer request. We reserve the
right to terminate or restrict transfers at any time.
USE OF GENDER-BASED ANNUITY TABLES
Court decisions, particularly the United States Supreme Court's decision in
ARIZONA GOVERNING COMMITTEE V. NORRIS, have held that the use of gender-based
mortality tables to determine benefits under "employer-related" plans may
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
that 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, to enable employers to comply with NORRIS, we will provide
Contracts incorporating "unisex" annuity rate tables for use in connection with
"employer-related" plans. You should consult a legal advisor regarding NORRIS
and the Contract.
DEATH BENEFIT
Under the Contracts, if the Annuitant dies before the Annuity Commencement
Date, the contingent annuitant that you named in your Contract application will
become the Annuitant. If the Annuitant dies before the Annuity Commencement
Date and either (a) you have not designated a contingent annuitant, or (b) the
contingent annuitant dies before the Annuitant dies, we will pay the Death
Benefit to the beneficiary. We will determine the Death Benefit as of the date
we receive due proof of death.
Under the Contracts, we will also pay 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. The tax code requires that all amounts payable
under the Contract be distributed (a) within five years of the Owner's death or
(b) as annuity payments, beginning within a year of such Owner's death and
continuing over a period not extending beyond the life expectancy of the
designated beneficiary. If the designated beneficiary is the deceased Owner's
surviving spouse, the spouse can continue the Contract as the new Owner and, if
the deceased Owner was the Annuitant, as the new Annuitant.
If any Owner is not a natural person, these requirements apply upon the
death of the primary Annuitant within the meaning of the tax code. Failure to
satisfy these tax code distribution requirements may result in serious adverse
tax consequences. Parallel provisions of the tax code apply similar requirements
to retirement and deferred compensation plans in connection with which Qualified
Contracts and Section 457 Contracts are issued.
-32-
<PAGE>
The amount of the Death Benefit will depend on whether the Death Benefit
Endorsement was issued on your Contract. If your Contract was issued prior to
the approval of this Endorsement in your state of residence, your Contract will
not have this Endorsement, and the Death Benefit, before the deduction of any
premium taxes, will equal the Account Value, or the sum of all net purchase
payments minus amounts surrendered or withdrawn, whichever amount is greater.
If your Contract has this Endorsement, the Death Benefit, before the
deduction of any premium taxes, will equal the greatest of the following
amounts:
(1) the sum of all net purchase payments minus amounts surrendered or
withdrawn;
(2) the Account Value; or
(3) the Highest Anniversary Value.
We will determine the Highest Anniversary Value as follows:
First, we will calculate the Account Values at the end of each of the past
Contract Years that occurred before the deceased's 81st birthday;
Second, we will increase each of these Account Values by the amount of net
purchase payments made since the end of such Contract Years; and
Third, we will reduce the result by the amount of any withdrawals made
since the end of such Contract Years.
The Highest Anniversary Value will be the highest of these values and will
remain the same amount after the deceased's 81st birthday. Net purchase
payments are purchase payments less any premium taxes.
We will invest Death Benefit proceeds in the Fixed Account and Separate
Account VA-1 in accordance with your purchase payment allocation instructions,
until we pay the proceeds or we receive new instructions from the beneficiary.
We pay the death benefit in one sum within 7 days after we receive due proof of
death and a written request in good order from the beneficiary as to the manner
of payment (except when we can defer such payment under the 1940 Act, or under
any of the Annuity Payment Options that we then offer). A beneficiary may apply
death benefit proceeds to provide Variable Annuity Payments, Fixed Annuity
Payments, or a combination of them.
If you have not already done so, your 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 that satisfy
the tax code's distribution requirements described above. If we do not receive
any request as to the manner of payment, we will pay the Death Benefit in one
sum, based on values determined at that time. If an Annuity Payment Option is
selected, we will apply the Fixed Account value to provide Fixed Annuity
Payments and the Variable Account value
-33-
<PAGE>
to provide Variable Annuity Payments, unless your beneficiary directs
otherwise at least 30 days before the Annuity Commencement Date. For Section
457 Contracts, we will apply all Account Value to provide Fixed Annuity
Payments.
If the Owner is not an individual, the Death Benefit payable upon the death
of the Annuitant before 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.
Once we have paid the Death Benefit, the Contract ends, and we have no
further obligations under it.
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 you designate a different
Annuitant in your 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 you cannot change them afterward.
You can designate your beneficiary and any contingent beneficiary in your
application for a Contract. Subject to limits under the tax code and any
governing Plan using a Qualified Contract, you may change your beneficiary or
contingent beneficiary before the Annuity Commencement Date, while the annuitant
is still alive. After the Annuity Commencement Date, except for a Section 457
Contract, your payee may change the beneficiary or contingent beneficiary.
Any designation of a new beneficiary or contingent beneficiary takes effect
on the date it is signed, but it will not affect any payments we make or action
we take before we receive the written request. We also need the written consent
of any irrevocably-designated beneficiary or contingent beneficiary before
making a change. Under certain retirement programs, if you are married, you may
need the consent of your spouse to designate a beneficiary other than your
spouse, or to change a beneficiary to a person other than your spouse. We are
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, you will be the beneficiary. If you are not
then living, your estate will be the beneficiary.
-34-
<PAGE>
Rights under a Qualified Contract may be assigned only in certain narrow
circumstances referred to in the Contract. Owners and other payees may assign
their rights under Non-Qualified Contracts, including their ownership rights.
Only you may assign rights under a Section 457 Contract; your Annuitant or
another payee may not assign them. We are not responsible for the validity of
any assignment.
Any change in ownership rights must be made in writing, and a copy must be
sent to our Administrative Office. The change will be effective on the date it
was made, although we will not be bound by a change until the date we record it.
The rights under a Contract are subject to any assignment of record we have on
file. An assignment or pledge of a Contract may have adverse tax consequences.
See "Federal Income Tax Matters."
LONG-TERM CARE AND TERMINAL ILLNESS
THE RIDERS DESCRIBED BELOW ARE NOT AVAILABLE IN ALL STATES, AND YOU SHOULD
CONSULT A SALES REPRESENTATIVE OR US 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, we will not apply a Surrender Charge on withdrawals or surrenders
when you or the Annuitant are confined for 30 days or more (or within 30 days
after discharge) in a hospital or state licensed in-patient nursing facility.
We must receive satisfactory written proof of such confinement.
TERMINAL ILLNESS. This rider provides that, after the first Contract Year,
we will not apply a Surrender Charge on withdrawals or surrenders if we have
received a doctor's written certification that you or your Annuitant are
terminally ill and not expected to live more than twelve months, and we have
waived our right to a second physician's opinion or obtained a confirmatory
opinion from a second physician.
REPORTS
We will mail any reports and communications required by applicable law or
regulation to you (or persons receiving payments following the Annuity
Commencement Date) at the last address of record. Please send prompt written
notice of any address change to us.
MODIFICATION
We reserve the right to modify the Contract, but only if the modification:
(i) is necessary to make the Contract or Separate Account VA-1 comply with
any law or regulation to which we are subject;
(ii) is necessary to assure continued qualification of the Contract under
the tax code, or other federal or state laws relating to retirement
annuities or annuity contracts;
-35-
<PAGE>
(iii) is necessary to reflect a change in the operation of Separate Account
VA-1 or the Division(s);
(iv) provides additional Separate Account options; or
(v) withdraws Separate Account options.
If we make any modification, we will notify you, or if we are making
annuity payments under your Contract, we will notify your payee(s). We may also
make appropriate endorsements in the Contract to reflect the modification.
PAYMENT AND DEFERMENT
We will normally pay amounts surrendered or withdrawn from a Contract
within seven calendar days after we receive the written request in good order.
We reserve the right to delay payment of any surrender, transfer,
withdrawal, annuity payment or Death Benefits from a Division 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.
We reserve the right to defer payment or transfers of amounts out of the
Fixed Account for up to six months. Also, we reserve 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. In the case of a Death Benefit, if we do not
receive a written request as to the manner of payment within 60 days after it
becomes payable, we will pay any death benefit proceeds as a lump sum, normally
within seven calendar days after the end of the 60 day period.
FEDERAL INCOME TAX MATTERS
The following summary provides a general description of the Federal income
tax considerations associated with the Contract and does not purport to be
complete or to cover all tax situations. This discussion is not intended as tax
advice. You should consult a tax adviser for more complete information. This
discussion is based upon our understanding of the present Federal income tax
laws. No representation is made as to
-36-
<PAGE>
the likelihood of continuation of the present Federal income tax laws or as
to how they may be interpreted by the Internal Revenue Service (the "IRS").
We believe that our contracts will qualify as annuity contracts for Federal
income tax purposes and the following discussion assumes that they will so
qualify. Further details can be found in the Statement of Additional
Information pertaining to the contracts under the heading "Tax Status of the
Contracts."
When you invest in an annuity contract, you usually do not pay taxes on
your investment gains until you withdraw the money -- generally for retirement
purposes. In this way, annuity contracts have been recognized by the tax
authorities as a legitimate means of DEFERRING tax on investment income.
We believe that if you are a natural person you will not be taxed on
increases in the Account Value of a contract until a distribution occurs or
until annuity payments begin. (For these purposes, the agreement to assign or
pledge any portion of a contract's Account Value and, in the case of a qualified
contract (described below), any portion of an interest in the qualified plan,
generally will be treated as a distribution.) When annuity payments begin, you
will be taxed only on the investment gains you have earned and not on the
payments you made to purchase the contract. Generally, withdrawals from your
annuity should only be made once the annuitant reaches age 59-1/2, dies or is
disabled, otherwise a tax penalty of 10% may be applied against any amounts
included in income.
If you invest in a variable annuity as part of a pension plan or
employer-sponsored retirement program, your contract is called a QUALIFIED
CONTRACT. If your annuity is independent of any formal retirement or pension
plan, it is termed a NON-QUALIFIED contract.
TAXATION OF NON-QUALIFIED CONTRACTS
NON-NATURAL PERSON. If a non-natural person (e.g., a corporation or trust)
owns a non-qualified annuity contract, the owner generally must include in
income any increase in the excess of the Account Value over the investment in
the contract (generally, the premiums or other consideration paid for the
contract) during the taxable year. There are some exceptions to this rule and a
prospective owner that is not a natural person should discuss these with a tax
adviser.
The following discussion generally applies to contracts owned by natural
persons.
REQUIRED DISTRIBUTIONS. In order to be treated as an annuity contract for
Federal income tax purposes, section 72(s) of the Internal Revenue Code requires
any non-qualified contract to contain certain provisions specifying how your
interest in the contract will be distributed in the event of the death of a
owner of the contract. Specifically, section 72(s) requires that (a) if any
owner dies on or after the annuity starting date, but prior to the time the
entire interest in the contract has been distributed, the entire interest in the
contract will be distributed at least as rapidly as under the method of
distribution being used as of the date of such owner's death; and (b) if any
owner dies
-37-
<PAGE>
prior to the annuity starting date, the entire interest in the contract will
be distributed within five years after the date of such owner's death. These
requirements will be considered satisfied as to any portion of an owner's
interest which is payable to or for the benefit of a designated beneficiary
and which is distributed over the life of such designated beneficiary or over
a period not extending beyond the life expectancy of that beneficiary,
provided that such distributions begin within one year of the owner's death.
The designated beneficiary refers to a natural person designated by the owner
as a beneficiary and to whom ownership of the contract passes by reason of
death. However, if the designated beneficiary is the surviving spouse of the
deceased owner, the contract may be continued with the surviving spouse as
the new owner.
The non-qualified contracts contain provisions that are intended to comply
with these Code requirements, although no regulations interpreting these
requirements have yet been issued. We intend to review such provisions and
modify them if necessary to assure that they comply with the applicable
requirements when such requirements are clarified by regulation or otherwise.
WITHDRAWALS. When a withdrawal from a non-qualified contract occurs, the
amount received will be treated as ordinary income subject to tax up to an
amount equal to the excess (if any) of the Account Value immediately before the
distribution over the owner's investment in the contract (generally, the
premiums or other consideration paid for the contract, reduced by any amount
previously distributed from the contract that was not subject to tax) at that
time. In the case of a surrender under a non-qualified contract, the amount
received generally will be taxable only to the extent it exceeds the owner's
investment in the contract.
PENALTY TAX ON CERTAIN WITHDRAWALS. In the case of a distribution from a
non-qualified contract, there may be imposed a federal tax penalty equal to ten
percent of the amount treated as income. In general, however, there is no
penalty on distributions:
X made on or after the taxpayer reaches age 59-1/2;
X made on or after the death of an owner;
X attributable to the taxpayer's becoming disabled; or
X made as part of a series of substantially equal periodic payments for
the life (or life expectancy) of the taxpayer.
Other exceptions may be applicable under certain circumstances and special rules
may be applicable in connection with the exceptions enumerated above. You
should consult a tax adviser with regard to exceptions from the penalty tax.
ANNUITY PAYMENTS. Although tax consequences may vary depending on the
payout option elected under an annuity contract, a portion of each annuity
payment is generally not taxed and the remainder is taxed as ordinary income.
The non-taxable portion of an annuity payment is generally determined in a
manner that is designed to allow you to recover your investment in the contract
ratably on a tax-free basis over the
-38-
<PAGE>
expected stream of annuity payments, as determined when annuity payments
start. Once your investment in the contract has been fully recovered,
however, the full amount of each annuity payment is subject to tax as
ordinary income.
TAXATION OF DEATH BENEFIT PROCEEDS. Amounts may be distributed from a
contract because of your death or the death of the Annuitant. Generally, such
amounts are includible in the income of the recipient as follows: (i) if
distributed in a lump sum, they are taxed in the same manner as a surrender of
the contract, or (ii) if distributed under a payout option, they are taxed in
the same way as annuity payments.
TRANSFERS, ASSIGNMENTS OR EXCHANGES OF A CONTRACT. A transfer or
assignment of ownership of a contract, the designation of an annuitant, the
selection of certain maturity dates, or the exchange of a contract may result in
certain tax consequences to you that are not discussed herein. An owner
contemplating any such transfer, assignment or exchange, should consult a tax
advisor as to the tax consequences.
WITHHOLDING. Annuity distributions are generally subject to withholding
for the recipient's federal income tax liability. Recipients can generally
elect, however, not to have tax withheld from distributions.
MULTIPLE CONTRACTS. All annuity contracts that are issued by us (or our
affiliates) to the same owner during any calendar year are treated as one
annuity contract for purposes of determining the amount includible in such
owner's income when a taxable distribution occurs.
TAXATION OF QUALIFIED CONTRACTS
Your rights under a qualified contract may be subject to the terms of the
retirement plan itself, regardless of the terms of the qualified contract.
Adverse tax consequences may result if you do not ensure that contributions,
distributions and other transactions with respect to the contract comply with
the law.
INDIVIDUAL RETIREMENT ACCOUNTS (IRAs), as defined in Sections 219 and 408
of the Internal Revenue Code (Code), permit individuals to make annual
contributions of up to the lesser of $2,000 or 100% of adjusted gross income.
The contributions may be deductible in whole or in part, depending on the
individual's income. Distributions from certain pension plans may be rolled
over into an IRA on a tax-deferred basis without regard to these limits.
SIMPLE IRAS under Section 408(p) of the Code may also be used in connection
with variable annuity contracts. Simple IRAs allow employees to defer a
percentage of annual compensation up to $6,000 to a retirement plan, provided
the sponsoring employer makes matching or non-elective contributions. The
penalty for a distribution from a SIMPLE IRA that occurs within the first two
years after the employee begins to participate in the plan is 25%, rather than
the usual 10%.
SIMPLIFIED EMPLOYEE PENSION (SEP) IRAS may be established by employers
under Code section 408(k) to provide IRA contributions on behalf of their
employees. In
-39-
<PAGE>
addition to all of the general rules governing IRAs, such plans are subject
to additional requirements and different contribution limits.
CORPORATE PENSION AND PROFIT-SHARING PLANS under Section 401(a) of the Code
allow corporate employers to establish various types of retirement plans for
employees, and self-employed individuals to establish qualified plans for
themselves and their employees. Adverse tax consequences to the retirement
plan, the participant or both may result if the contract is transferred to any
individual as a means to provide benefit payments, unless the plan complies with
all the requirements applicable to such benefits prior to transferring the
contract.
TAX-SHELTERED ANNUITIES under Section 403(b) of the Code permit public
schools and other eligible employers to purchase annuity contracts and mutual
fund shares through custodial accounts on behalf of employees. Generally, these
purchase payments are excluded for tax purposes from employee gross incomes.
However, these payments may be subject to Social Security taxes. Distributions
of salary reduction contributions and earnings (other than your salary reduction
accumulation as of December 31, 1988) are not allowed prior to age 59-1/2,
separation from service, death or disability. Salary reduction contributions
may also be distributed upon hardship, but would generally be subject to
penalties.
DEFERRED COMPENSATION PLANS may be established under Code section 457 by
state governments, local governments, political subdivisions, agencies,
instrumentalities and certain affiliates of such entities, and tax exempt
organizations.
OTHER TAX ISSUES. You should note that the annuity contract includes a
death benefit that in some cases may exceed the greater of the purchase payments
or the contract value. The death benefit could be viewed as an incidental
benefit, the amount of which is limited in any 401(a) or 403(b) plan. Because
the death benefit may exceed this limitation, employers using the contract in
connection with corporate pension and profit-sharing plans, or tax-sheltered
annuities, should consult their tax adviser. The IRS has not addressed in a
ruling of general applicability whether a death benefit provision such as the
provision in the contract comports with IRA qualification requirements.
Qualified contracts have minimum distribution rules that govern the timing
and amount of distributions. You should refer to your retirement plan, adoption
agreement, or consult a tax adviser for more information about these
distribution rules.
Distributions generally are subject to withholding for the Owner's federal
income tax liability. The withholding rate varies according to the type of
distribution and the Owner's tax status. You will be provided the opportunity
to elect not to have tax withheld from distributions.
OUR INCOME TAXES
At the present time, we make no charge for any Federal, state or local
taxes (other than the charge for state and local premium taxes) that we incur
that may be attributable
-40-
<PAGE>
to the investment divisions of the separate account or to the contracts. We
do have the right in the future to make additional charges for any such tax
or other economic burden resulting from the application of the tax laws that
we determine is attributable to the investment divisions of the separate
account or the contracts.
Under current laws in several states, we may incur state and local taxes
(in addition to premium taxes). These taxes are not now significant and we are
not currently charging for them. If they increase, we may deduct charges for
such taxes.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the contract could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Contract.
We have the right to modify the contract in response to legislative changes
that could otherwise diminish the favorable tax treatment that annuity contract
owners currently receive. We make no guarantee regarding the tax status of any
contact and do not intend the above discussion as tax advice.
DISTRIBUTION ARRANGEMENT
Franklin Financial Services Corporation ("Franklin Financial"), #1 Franklin
Square, Springfield, Illinois 62713, a Delaware corporation, and American
Franklin, are both wholly-owned subsidiaries of The Franklin Life Insurance
Company. Franklin Financial is the principal underwriter of the Contracts under
a Sales Agreement between Franklin Financial and Separate Account VA-1.
Pursuant to the Sales Agreement, Franklin Financial pays certain sales expenses
for distribution of the Contracts. We pay surrender charge amounts that we
collect to Franklin Financial.
Franklin Financial's registered representatives earn commissions on the
sale of the Contracts of up to 4.75% of purchase payments, and annual trail
commissions at an annual rate of 0.25% on Variable Account values.
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.
From time to time, we may pay or permit other promotional incentives, in
cash or credit or other compensations.
YEAR 2000 TRANSITION
INTERNAL SYSTEMS. American Franklin's ultimate parent, American General
Corporation (AGC), has numerous technology systems that are managed on a
-41-
<PAGE>
decentralized basis. AGC's Year 2000 readiness efforts are therefore being
undertaken by its key business units with centralized oversight. Each business
unit, including American Franklin, has developed and is implementing a plan to
minimize the risk of a significant negative impact on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of American Franklin's information
technology and non-information technology systems; (2) assess which items in the
inventory may expose American Franklin to business interruptions due to Year
2000 issues; (3) reprogram or replace systems that are not Year 2000 ready;
(4) test systems to prove that they will function into the next century as they
do currently; and (5) return the systems to operations. As of December 31,
1998, substantially all of American Franklin's critical systems are Year 2000
ready and have been returned to operations. However, activities (3) through (5)
for certain systems are ongoing, with vendor upgrades expected to be received
during the first half of 1999.
THIRD PARTY RELATIONSHIPS. American Franklin has relationships with
various third parties who must also be Year 2000 ready. These third parties
provide (or receive) resources and services to (or from) American Franklin and
include organizations with which American Franklin exchanges information. Third
parties include vendors of hardware, software, and information services;
providers of infrastructure services such as voice and data communications and
utilities for office facilities; investors; customers; distribution channels;
and joint venture partners. Third parties differ from internal systems in that
American Franklin exercises less, or no, control over Year 2000 readiness.
American Franklin has developed a plan to assess and attempt to mitigate the
risks associated with the potential failure of third parties to achieve Year
2000 readiness. The plan includes the following activities: (1) identify and
classify third party dependencies; (2) research, analyze, and document Year
2000 readiness for critical third parties; and (3) test critical hardware and
software products and electronic interfaces. As of December 31, 1998, AGC has
identified and assessed approximately 700 critical third party dependencies,
including those relating to American Franklin. A more detailed evaluation will
be completed during the first quarter 1999 as part of American Franklin's
contingency planning efforts. Due to the various stages of third parties' Year
2000 readiness, American Franklin's testing activities will extend through 1999.
CONTINGENCY PLANS. American Franklin has commenced contingency planning to
reduce the risk of Year 2000-related business failures. The contingency plans,
which address both internal systems and third party relationships, include the
following activities: (1) evaluate the consequences of failure of business
processes with significant exposure to Year 2000 risk; (2) determine the
probability of a year 2000-related failure for those processes that have a high
consequence of failure; (3) develop an action plan to complete contingency plans
for those processes that rank high in consequence and probability of failure;
and (4) complete the application action plans. American Franklin is currently
developing contingency plans and expects to substantially complete all
contingency planning activities by April 30, 1999.
-42-
<PAGE>
RISKS AND UNCERTAINTIES. Based on its plans to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, American Franklin believes that it will experience at most
isolated and minor disruptions of business processes following the turn of the
century. Such disruptions are not expected to have a material effect on
American Franklin future results of operations, liquidity, or financial
condition. However, due to the magnitude and complexity of this project, risks
and uncertainties exist and American Franklin is not able to predict a most
reasonably likely worst case scenario. If conversion of American Franklin's
internal systems is not completed on a timely basis (due to non-performance by
significant third-party vendors, lack of qualified personnel to perform the Year
2000 work, or other unforeseen circumstances in completing American Franklin's
plans) or if critical third parties fail to achieve Year 2000 readiness on a
timely basis, the Year 2000 issues could have a material adverse impact on
American Franklin's operations following the turn of the century.
COSTS. Through December 31, 1998 American Franklin has incurred, and
anticipates that it will continue to incur, costs for internal staff,
third-party vendors, and other expenses to achieve Year 2000 readiness. These
costs are not passed to the divisions of the Account. The cost of activities
related to Year 2000 readiness has not had a material adverse effect on American
Franklin's results of operations or financial condition. In addition, American
Franklin has elected to accelerate the planned replacement of certain systems as
part of the Year 2000 plans. Costs of the replacement systems are being
capitalized and amortized over their useful lives, in accordance with American
Franklin's normal accounting policies.
ACCUMULATION UNIT VALUES
(FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT THE PERIOD)
SEPARATE ACCOUNT VA-1
CONDENSED FINANCIAL INFORMATION
[TO BE PROVIDED.]
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 its exhibits 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, refer to the instruments filed with the Securities and
Exchange Commission.
-43-
<PAGE>
A Statement of Additional Information is available from us on request. Its
contents are as follows:
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Regulation and Reserves. . . . . . . . . . . . . . . . . . . . . . . . 2
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Principal Underwriter. . . . . . . . . . . . . . . . . . . . . . . . . 3
Administration of the Contracts. . . . . . . . . . . . . . . . . . . . 3
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Tax Status of the Contracts. . . . . . . . . . . . . . . . . . . . . . 4
Limitations on Annuity Payment Options . . . . . . . . . . . . . . . . 4
A. Limitations on Choice of Annuity Payment Option . . . . . . . . 4
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A. Gender of Annuitant . . . . . . . . . . . . . . . . . . . . . . 7
B. Misstatement of Age or Sex and Other Errors . . . . . . . . . . 7
Change of Investment Adviser or Investment Policy. . . . . . . . . . . 8
Performance Data for the Divisions . . . . . . . . . . . . . . . . . . 8
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 11
Index to Financial Statements. . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
-44-
<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
You are eligible to contribute to an IRA for each year before the year
in which you reach age 70-1/2 if you received compensation from employment,
earnings from self-income or alimony. In addition, for each year before the
year when your spouse reaches age 70-1/2, you can contribute to a separate
IRA for your spouse, provided that you and your spouse file a joint income
tax return.
CONTRIBUTION LIMITS
The total amount you may contribute to an IRA each year is limited to the
lesser of $2,000 or 100% of your eligible compensation. If you open a separate
IRA for your lower-earning spouse, the annual contribution limit to that IRA is
the lesser of (1) $2,000 or (2) 100% of both spouses' combined compensation
minus any contribution to the higher-earning spouse's IRA or Roth IRA. A
maximum of $4,000 may be contributed for each tax year to both your and your
spouse's IRAs or Roth IRAs (only $2,000 in each IRA or Roth IRA). Any
contribution that you make to your or your spouse's IRA must be made by the due
date, not including extensions, for filing your federal income tax return for
the year (generally, April 15 of the following year).
Note that rollover contributions (described below), if properly made, do
not count toward your maximum annual contribution; nor do they affect your
deduction limits, described below.
DEDUCTIONS FOR IRA CONTRIBUTIONS
If neither you, nor your spouse, is an active participant (see A. below),
you may make a contribution to your IRA and your spouse's IRA for that year, up
to the maximum described above, and take a deduction for the entire amount
contributed.
-1-
<PAGE>
If you (or your spouse, if married) are an active participant, but you have
an adjusted gross income (AGI) (or, if married, a combined AGI) below a certain
level (see B. below), you may still make a deductible contribution. However, if
your AGI (or, if married, 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 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.
In 1998, if you are single, your Threshold AGI Level is $30,000. The
Threshold Level if you are married and file a joint tax return is $50,000, and
if you are married but file a separate tax return or lived apart from your
spouse for the entire year, the Threshold Level is $0. The chart below shows
the Threshold Levels for 1999 and later years.
<TABLE>
<CAPTION>
<S> <C> <C>
Year Single Married - Filing Jointly
---- ------ ------------------------
1999 $31,000 $51,000
2000 $32,000 $52,000
2001 $33,000 $53,000
2002 $34,000 $54,000
2003 $40,000 $60,000
2004 $45,000 $65,000
2005 $50,000 $70,000
2006 $50,000 $75,000
2007 and later $50,000 $80,000
</TABLE>
-2-
<PAGE>
If your AGI is less than $10,000 above your Threshold Level (or, for
married taxpayers starting in 2007, if AGI is less than $20,000 above your
Threshold Level), you will still be able to make a deductible contribution, but
the deduction will be limited in amount. The amount by which your AGI exceeds
your Threshold Level (AGI - Threshold Level) is called your Excess AGI. The
Maximum Allowable Deduction per individual is $2,000.
You can estimate your Deduction Limit by using the calculation below.
(Your Deduction Limit may be slightly higher if you use this formula rather than
the table provided by the IRS. For married joint filers starting in 2007,
substitute $20,000 for $10,000 in the equation.):
$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.
If your spouse is an active participant, but you are not, and you are
married filing jointly, your deduction begins to phase out at AGI between
$150,000 and $160,000. If you are married filing jointly and either you or your
spouse was an Active Participant, you must separately determine the IRA
deduction that applies to the contributions that you make to your and your
spouse's IRA. If you were divorced or legally separated (and did not remarry)
before the end of the year, you cannot deduct any contributions you made to your
spouse's IRA. After a divorce or legal separation, you can deduct only the
contributions you made to your own IRA and your deductions are subject to the
adjusted gross income limit under the rules for single individuals.
EXAMPLES OF DEDUCTIBILITY OF IRA CONTRIBUTIONS:
Example 1: Ms. Smith, a single person, is an active participant and has an
AGI of $37,619. She calculates her 1999 deductible IRA
contribution as follows:
Her AGI is $37,619
Her Threshold Level is $31,000
Her Excess AGI is (AGI - Threshold Level) or ($37,619-$31,000) = $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 $55,255. They may each contribute to an IRA and
calculate their 1999 deductible contributions to each IRA as
follows:
Their AGI is $55,255
Their Threshold Level is $51,000
Their Excess AGI is (AGI - Threshold Level) or ($55,255 - $51,000) = $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:
-3-
<PAGE>
$ 10,000 - 4,255
------------------- x $2,000 = $1,149 (rounded to $1,150)
$10,000
Example 3: Mr. Jones, a married person, files a separate tax return and is
an active participant. He has $25,000 of compensation. He
cannot make a deductible contribution to an IRA because a
married taxpayer who files separately, or who is treated as
filing separately, cannot deduct any contribution to an IRA
where his AGI exceeds $10,000.
NON-DEDUCTIBLE CONTRIBUTIONS TO IRAS
Even if you are above the Threshold Level and thus may not make a
deductible contribution of $2,000, you may still contribute up to the lesser of
100% of compensation or $2,000 to an IRA. 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 nondeductible 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.
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 nondeductible contributions will
not be taxed again when received by you. If you make any nondeductible 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:
<TABLE>
<CAPTION>
<S> <C> <C>
Remaining Non-Deductible Contributions
-------------------------------------------------- x Total Distributions = Nontaxable Distributions
Year-End Total IRA Balances (for the year) (for the year)
</TABLE>
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.
-4-
<PAGE>
Example: An individual makes the following contributions to his or her IRA(s).
<TABLE>
<CAPTION>
<S> <C> <C>
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
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
Deductible Contributions: $5,400
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
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C> <C>
Total non-deductible contributions $2,400
--------- x $3,000 = $810
Total account balance in the IRAs, plus distributions $9,000
</TABLE>
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 365 days after the original rollover is made.
(However, you can instruct an IRA custodian to transfer amounts directly to
another IRA custodian; such a direct transfer does not count as a rollover.)
Amounts required to be distributed, such as because the individual has reached
age 702, 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 592, 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.
-5-
<PAGE>
If you combine eligible rollover distributions from a qualified
retirement plan or tax-sheltered annuity with regular IRA contributions, you
will be prohibited from rolling the assets which originated from the
qualified retirement plan or tax-sheltered annuity into a subsequent
employer's plan. You may want to open separate IRAs to keep regular IRA
contributions separate from eligible rollover distributions.
PENALTIES FOR PREMATURE DISTRIBUTIONS
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, or the life expectancies of you and your beneficiary(ies), (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, (d) is contributed to a
rollover IRA (or, if the amount consisted of just eligible rollover
contributions and earnings from a qualified plan or tax-sheltered annuity, to a
qualified plan or a tax-sheltered annuity, respectively) if the rollover is
completed within 60 days following the withdrawal; (e) to pay for medical
expenses which exceed 7.5% of your adjusted gross income, (f) to pay for health
insurance for an individual who has separated from employment and who has
received unemployment compensation under a federal or state program of at least
12 weeks, (g) for qualified first-time homebuyer expenses of you or certain
family members, or (h) for qualified higher education expenses of you or certain
family members. "Qualified first-time homebuyer expenses" are withdrawals of up
to $10,000 from an IRA that are used within 120 days of distribution for the
cost to acquire, construct or reconstruct a principal residence for yourself,
your spouse, or your or your spouse's child or grandchild (including customary
settlement, financing or closing costs). "Qualified higher education expenses"
include tuition, fees, books, supplies and equipment that is required for you,
your spouse, or your or your spouse's child or grandchild for enrollment and
attendance at a post-secondary institution. Room and board is a qualifying
higher education expense if the student is attending at least half-time.
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. Additional distribution rules apply if you die before you have
withdrawn the entire balance of your IRA.
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."
WITHHOLDING
Unless you elect not to have withholding apply, any distribution from your
IRA will be subject to withholding. Generally, 10% of the amount of the
distribution will be withheld. At the time of distribution, you will be
notified that you may choose whether or not to have withholding from a
distribution.
-6-
<PAGE>
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.
Any amounts which are included in your taxable income as a result of any
prohibited transaction, borrowing or use as security for a loan may also result
in the 10% premature distribution penalty.
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 all IRAs
(including Roth IRAs) for that year over the lesser of his or her taxable
compensation or $2,000. 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. Earnings on any
excess contributions that are timely withdrawn are taxable in the year the
excess contribution was made and may be subject to the 10% premature
distribution penalty if you are less than age 59-1/2 (see above).
ESTATE TAX
Your IRA will be included in your estate and will be subject to estate tax,
although certain credits or deductions may be available. Your designation of a
beneficiary for your IRA is not treated as a gift for gift tax purposes.
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.
-7-
<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 April 30, 1999
for Separate Account VA-1.
------------------------------------------------------------------
(Name)
------------------------------------------------------------------
(Street)
------------------------------------------------------------------
(City) (State) (Zip Code)
-8-
<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
(800) 528-2011
STATEMENT OF ADDITIONAL INFORMATION
Dated April 30, 1999
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 April 30, 1999. 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>
<CAPTION>
TABLE OF CONTENTS
<S> <C>
General Information. . . . . . . . . . . . . . . . . . . . . . . . . . 2
Regulation And Reserves. . . . . . . . . . . . . . . . . . . . . . . . 2
Experts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Principal Underwriter. . . . . . . . . . . . . . . . . . . . . . . . . 3
Administration Of The Contracts. . . . . . . . . . . . . . . . . . . . 3
Legal Matters. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Tax Status Of The Contracts. . . . . . . . . . . . . . . . . . . . . . 4
Limitations On Annuity Payment Options . . . . . . . . . . . . . . . . 4
A. Limitations On Choice Of Annuity Payment Option . . . . . . . 4
Annuity Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
A. Gender Of Annuitant . . . . . . . . . . . . . . . . . . . . . 7
B. Misstatement Of Age Or Sex And Other Errors . . . . . . . . . 7
Change Of Investment Adviser Or Investment Policy. . . . . . . . . . . 8
Performance Data For The Divisions . . . . . . . . . . . . . . . . . . 8
Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . 11
Index To Financial Statements. . . . . . . . . . . . . . . . . . . . . F-1
</TABLE>
-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.
The Franklin is a wholly-owned subsidiary of AGC Life Insurance Company
("AGC Life"). American General Corporation ("American General") owns all of
the outstanding shares of common stock of AGC Life. The address of AGC Life
is American General Center, Nashville, Tennessee 37250-0001. The address of
American General is 2929 Allen Parkway, Houston, Texas 77019-2155. American
General is one of the largest diversified financial services organizations in
the United States. American General's operating subsidiaries are leading
providers of retirement services, 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.
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
-2-
<PAGE>
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.
EXPERTS
The statement of net assets as of December 31, 1998 and the related
statement of operations for the year then ended, and the statements of
changes in net assets for the year ended December 31, 1998 and the period
from February 28, 1997 (date of inception) to December 31, 1997 of Separate
Account VA-1, appearing herein, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere herein. The financial statements of American Franklin at December
31, 1998 and 1997 and for each of the three years in the period ended
December 31, 1998, appearing herein, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
elsewhere herein. Such financial statements referred to above are included in
reliance upon such reports given upon the authority of such firm as experts
in accounting and auditing.
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. During
1998 and 1997, commissions in the amount of $5,234,337.20 and $1,740,597.96
were paid on the Contracts.
The securities offered pursuant to the Contracts are offered on a
continuous basis.
-3-
<PAGE>
ADMINISTRATION OF THE CONTRACTS
While American Franklin has primary responsibility for all
administration of the Contracts, American General Life Companies ("AGLC") 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 AGLC are parties
to the services agreement. Pursuant to such agreement, American Franklin
reimburses AGLC for the costs and expenses which AGLC 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. During 1998 and 1997, $265,992 and $4,750 was paid by American
Franklin to AGLC for these services. American Franklin's ability to
administer the Contracts could be adversely affected should AGLC terminate or
be unable to continue providing administrative services pursuant to the
services agreement.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice
on certain legal matters.
TAX STATUS OF THE CONTRACTS
Tax law imposes several requirements that variable annuities must
satisfy in order to receive the tax treatment normally accorded to annuity
contracts.
DIVERSIFICATION REQUIREMENTS. Federal tax laws require that the
investments of each investment division of the separate account underlying
the contracts be "adequately diversified" in order for the contracts to be
treated as annuity contracts for Federal income tax purposes. It is intended
that each investment division, through the fund in which it invests, will
satisfy these diversification requirements.
OWNER CONTROL. In certain circumstances, owners of variable annuity
contracts have been considered for Federal income tax purposes to be the
owners of the assets of the separate account supporting their contracts due
to their ability to exercise investment control over those assets. When this
is the case, the contract owners have been currently taxed on income and
gains attributable to the variable account assets. There is little guidance
in this area, and some features of our contracts, such as the flexibility of
an owner to allocate purchase payments and transfer amounts among the
investment divisions of the separate account, have not been explicitly
addressed in published rulings. While we believe that the contracts do not
give owners investment control over separate account assets, we reserve the
right to modify the contracts as necessary to prevent an owner from being
treated as the owner of the separate account assets supporting the contract.
-4-
<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 understanding 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
-5-
<PAGE>
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
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.
-6-
<PAGE>
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 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.
-7-
<PAGE>
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.
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 Portfolio 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
-8-
<PAGE>
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.
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
DIVISION 1 YEAR FROM INCEPTION*
<S> <C> <C>
Fidelity VIP Equity-Income
Fidelity VIP Growth
Fidelity VIP High Income
Fidelity VIP Money Market
Fidelity VIP Overseas
Fidelity VIPII Asset Manager
Fidelity VIPII Contrafund
Fidelity VIPII Index 500
Fidelity VIPII Investment Grade Bond
MFS Capital Opportunities
MFS Emerging Growth
MFS Growth With Income
MFS Research
MFS Total Return
MFS Utilities
</TABLE>
* Inception dates for the Divisions are:________________________
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.
-9-
<PAGE>
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 VIPII 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
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.
-10-
<PAGE>
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,
unrealized appreciation or depreciation or income other than investment income
of the Division's Portfolio 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.
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
-11-
<PAGE>
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 for Separate Account VA-1 and American Franklin
appear on the following pages. 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.
-12-
<PAGE>
INDEX TO
FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page No.
--------
<S> <C>
I. SEPARATE ACCOUNT VA-1 FINANCIAL STATEMENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . F-2
Audited financial statements:
Statement of Net Assets, December 31, 1998. . . . . . . . . . F-3 - F-5
Statement of Operations for the year ended December 31, 1998. F-6 - F-8
Statement of Changes in Net Assets for the year
ended December 31, 1998 and for the period from
February 28, 1997 (date of inception) to December 31, 1997. . F-9 - F-11
Notes to Financial Statements . . . . . . . . . . . . . . . . F-12 - F-16
II. AMERICAN FRANKLIN FINANCIAL STATEMENTS
Report of Independent Auditors . . . . . . . . . . . . . . . . . . F-17
Audited Financial Statements:
Statement of Operations for the years ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . F-18
Balance Sheet, December 31, 1998 and 1997. . . . . . . . . . . . . F-19 - F-20
Statement of Shareholder's Equity for the years
ended December 31, 1998, 1997 and 1996. . . . . . . . . . . . . . F-21
Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996 . . . . . . . . . . . . . . . . . F-22
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . F-23 - F-39
</TABLE>
[To be filed by amendment]
-13-
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) FINANCIAL STATEMENTS
PART A: TO BE FILED BY AMENDMENT.
PART B: TO BE FILED BY AMENDMENT.
(1) FINANCIAL STATEMENTS OF SEPARATE ACCOUNT VA-1:
Report of Independent Auditors
Audited Financial Statements:
Statement of Net Assets, December 31, 1998
Statement of Operations for the year ended December 31, 1998
Statement of Changes in Net Assets for the year ended
December 31, 1998 and for the period from February 28, 1997
(date of inception) to December 31, 1997
Notes to Financial Statements
(2) Financial Statements of The American Franklin Life Insurance Company:
Report of Independent Auditors
Audited Financial Statements:
Statement of Operations for the years ended December 31,
1998, 1997 and 1996
Balance Sheet, December 31, 1998 and 1997
Statement of Shareholder's Equity for the years ended
December 31, 1998, 1997 and 1996
Statement of Cash Flows for the years ended December 31,
1998, 1997 and 1996
NOTES TO FINANCIAL STATEMENTS
-1-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
PART C: NONE
(b) EXHIBITS
1 Certified resolutions regarding organization of Separate Account VA-1
of The American Franklin Life Insurance Company (the "Separate Account").*
2 Not applicable. The American Franklin Life Insurance Company
("American Franklin") maintains custody of all assets.
3(a) Sales Agreement between Franklin Financial Services Corporation
("Franklin Financial") and the Separate Account, dated as of July 30,
1996.*
3(b) Specimen Registered Representative Agreement between Franklin
Financial and registered representatives of Franklin Financial distributing
the Contracts.*
3(c) Schedule of Sales Commissions.*
3(d) Agreement between American Franklin and Franklin Financial, dated
July 30, regarding supervision of agents.*
4(a)(1) Specimen form of Combination Fixed and Variable Annuity Contract
(Form No. T1575).**
4(a)(2) Specimen form of Combination Fixed and Variable Annuity Contract
(Form No. T1575Z) ("unisex" version).**
4(b)(1) Specimen form of Terminal Illness Waiver of Surrender Charges
Rider.**
4(b)(2) Specimen form of Long Term Care Waiver of Surrender Charges
Rider.**
4(c) Specimen form of Qualified Contract Endorsement.*
4(d) Specimen form of Individual Retirement Annuity Endorsement.**
4(e) Specimen form of Section 457 Contract Endorsement.*
4(f) Specimen form of Section 403(b) Annuity Contract Endorsement.**
4(g) Specimen form of Death Benefit Endorsement.
5(a) Specimen form of Application for Contract Form Nos. T1575 and
T1575Z.**
6(a) Certificate of Incorporation of American Franklin is hereby
incorporated herein by reference to Exhibit 1-A (6)(a) to Post-Effective
Amendment No. 2 to the Registration Statement on Form S-6
(Reg. No. 33-77470) of Separate Account VUL-2 of The American Franklin
Life Insurance Company, filed April 30, 1996.
6(b) By-Laws of American Franklin are hereby incorporated herein by
reference to Exhibit 1-A (6)(b) to Post-Effective Amendment No. 3 to the
Registration Statement on Form S-6 (Reg. No. 33-77470) of Separate Account
VUL-2 of The American Franklin Life Insurance Company, filed February 28,
1997.
7 Not applicable.
</TABLE>
-2-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
8(a)(1) Participation Agreement among American Franklin, Variable
Insurance Products Fund ("VIP") and Fidelity Distributors Corporation
("FDC"), dated July 18, 1991.***
8(a)(2) Amendment No. 1 dated November 1, 1991 to Participation Agreement
among American Franklin, VIP and FDC.*
8(a)(3) Amendment No. 2 dated January 18, 1995 to Participation Agreement
among American Franklin, VIP and FDC.*
8(a)(4) Amendment No. 3 dated July 1, 1996 to Participation Agreement
among American Franklin, VIP and FDC.*
8(a)(5) Form of Amendment No. 4 dated November, 1996 to Participation
Agreement among American Franklin, VIP and FDC.**
8(b)(1) Participation Agreement among American Franklin, Variable
Insurance Products Fund II ("VIP II") and FDC, dated July 18,
1991.***
8(b)(2) Amendment No. 1 dated November 1, 1991 to Participation Agreement
among American Franklin, VIP II and FDC.*
8(b)(3) Amendment No. 2 dated January 18, 1995 to Participation Agreement
among American Franklin, VIP II and FDC.*
8(b)(4) Amendment No. 3 dated July 1, 1996 to Participation Agreement
among American Franklin, VIP II and FDC.*
8(b)(5) Form of Amendment No. 4 dated November, 1996 to Participation
Agreement among American Franklin, VIP II and FDC.**
8(c) Sub-License Agreement between FDC and American Franklin, dated
July 18, 1991.***
8(d)(1) Participation Agreement among MFS Variable Insurance Trust,
American Franklin and Massachusetts Financial Services Company ("MFS"),
dated July 30, 1996.*
8(d)(2) Indemnification Agreement between American Franklin and MFS dated
July 30, 1996.*
8(d)(3) Form of Amendment No. 1 dated November, 1996 to Participation
Agreement among MFS Variable Insurance Trust, American Franklin and
MFS.**
</TABLE>
- --------------
* Incorporated herein by reference to similarly designated exhibit to
Form N-4 of Separate Account VA-1 of The American Franklin Life Insurance
Company, filed November 26, 1996 (Reg. No. 333-10489).
-3-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
8(d)(4) Form of Amendment No. 2 dated November, 1997 to Participation
Agreement among MFS Variable Insurance Trust, American Franklin and
MFS.****
9 Opinion and consent of Elizabeth E. Arthur, Esq., Assistant Secretary
of American Franklin.*
10(a) Consent of Ernst & Young LLP.***
10(b) Consent of Sutherland Asbill & Brennan LLP.***
11 Not applicable.
12 Not applicable.
13 Not applicable.
14 Not applicable.
15 Power of Attorney with respect to the Registration Statement.
27 Not applicable.
</TABLE>
ITEM 25. DIRECTORS AND OFFICERS OF THE DEPOSITOR
The directors, executive officers, and, to the extent responsible for variable
annuity operations, other officers of the depositor are listed below.
<TABLE>
<CAPTION>
(1) (2)
Name and Principal Business Address Positions and Offices with Depositor
----------------------------------- ------------------------------------
<S> <C>
Robert M. Beuerlein Director, Senior Vice President-Actuarial/Financial and Treasurer
Pauletta P. Cohn** Secretary
Brady W. Creel Director, Senior Vice President and Chief Marketing Officer
Barbara Fossum Senior Vice President
Ross D. Friend** Senior Vice President and Chief Compliance Officer
Rodney O. Martin, Jr.** Director and Senior Chairman
Jon P. Newton* Director and Vice Chairman
</TABLE>
- --------------
**Incorporated herein by reference similarly designated exhibit to Form N-4 of
separate Account VA-1 of The American Franklin Life Insurance Company, filed
November 26, 1996 (Reg. No. 333-10489).
***To be filed by amendment.
****Incorporated herein by reference to similarly designated exhibit to Form N-4
of Separate Account VA-1 of The American Franklin Life Insurance Company, filed
April 30, 1998 (Reg. No. 333-10489).
-4-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Michael M. Nicholson Director and President
Gary D. Reddick** Vice Chairman and Director
Richard W. Scott* Vice President and Chief Investment Officer
William A. Simpson Director and Chief Executive Officer
T. Clayton Spires Director, Corporate Tax
Christian D. Weiss Director-Controller
Diane S. Workman Vice President-Administration
</TABLE>
THE PRINCIPAL BUSINESS ADDRESS OF EACH INDIVIDUAL WITH AN ASTERISK
NEXT TO HIS NAME IS 2929 ALLEN PARKWAY, HOUSTON, TEXAS 77019. THE PRINCIPAL
BUSINESS ADDRESS OF EACH INDIVIDUAL WITH TWO ASTERISKS NEXT TO HIS NAME IS
2727-A ALLEN PARKWAY, HOUSTON, TEXAS 77019. THE PRINCIPAL BUSINESS ADDRESS
OF EACH OTHER INDIVIDUAL IS IN CARE OF THE FRANKLIN LIFE INSURANCE COMPANY,
#1 FRANKLIN SQUARE, SPRINGFIELD, ILLINOIS 62713.
ITEM 26. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE DEPOSITOR OR
REGISTRANT
There is no person controlled by or under common control with Registrant.
American Franklin is an indirect wholly-owned subsidiary of American
General Corporation ("American General").
SUBSIDIARIES OF AMERICAN GENERAL CORPORATION
The following is a list of American General Corporation's subsidiaries1,2,3,4 as
of December 31, 1998. All subsidiaries listed are corporations, unless
otherwise indicated. Subsidiaries of subsidiaries are indicated by indentations
and unless otherwise indicated, all subsidiaries are wholly owned. Inactive
subsidiaries are denoted by an asterisk (*).
<TABLE>
<CAPTION>
Jurisdiction of
---------------
Name Incorporation Insurer
---- ------------- -------
<S> <C> <C>
AGC Life Insurance Company(5) Missouri Yes
American General Life and Accident Insurance Company(6) Tennessee Yes
American General Exchange, Inc. Tennessee No
Independent Fire Insurance Company Florida Yes
American General Property Insurance Company of Florida Florida Yes
Old Faithful General Agency, Inc. Texas No
Independent Life Insurance Company Georgia Yes
American General Life Insurance Company(7) Texas Yes
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
American General Annuity Service Corporation Texas Yes
American General Life Insurance Company of New York New York Yes
The Winchester Agency Ltd. New York No
The Variable Annuity Life Insurance Company Texas Yes
The Variable Annuity Marketing Company Texas No
VALIC Investment Services Company Texas No
VALIC Retirement Services Company Texas No
VALIC Trust Company Texas No
Astro Acquisition Corp. Delaware No
The Franklin Life Insurance Company Illinois Yes
The American Franklin Life Insurance Company Illinois Yes
Franklin Financial Services Corporation Delaware No
HBC Development Corporation Virginia No
Allen Property Company Delaware No
Florida Westchase Corporation Delaware No
Hunter's Creek Communications Corporation Florida No
Westchase Development Corporation Delaware No
American General Capital Services, Inc. Delaware No
American General Corporation* Delaware No
American General Delaware Management Corporation(1) Delaware No
American General Finance, Inc. Indiana No
AGF Investment Corp. Indiana No
American General Auto Finance, Inc. Delaware No
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of
---------------
Name Incorporation Insurer
---- ------------- -------
<S> <C> <C>
American General Finance Corporation(8) Indiana No
American General Finance Group, Inc. Delaware No
American General Financial Services, Inc.(9) Delaware No
The National Life and Accident Insurance Company Texas Yes
Merit Life Insurance Co. Indiana Yes
Yosemite Insurance Company California Yes
American General Finance, Inc. Alabama No
American General Financial Center Utah No
American General Financial Center, Inc.* Indiana No
American General Financial Center, Incorporated* Indiana No
American General Financial Center Thrift Company* California No
Thrift, Incorporated* Indiana No
American General Independent Producer Division Co. Delaware No
American General Investment Advisory Services, Inc.* Texas No
American General Investment Holding Corporation(10) Delaware No
American General Investment Management Corporation(10) Delaware No
American General Realty Advisors, Inc. Delaware No
American General Realty Investment Corporation Texas No
American General Mortgage Company Delaware No
GDI Holding, Inc.*(11) California No
Ontario Vineyard Corporation Delaware No
Pebble Creek Country Club Corporation Florida No
Pebble Creek Service Corporation Florida No
SR/HP/CM Corporation Texas No
American General Property Insurance Company Tennessee Yes
Bayou Property Company Delaware No
AGLL Corporation(12) Delaware No
American General Land Holding Company Delaware No
</TABLE>
-7-
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of
---------------
Name Incorporation Insurer
---- ------------- -------
<S> <C> <C>
AG Land Associates, LLC(12) California No
Hunter's Creek Realty, Inc.* Florida No
Summit Realty Company, Inc. So. Carolina No
Florida GL Corporation Delaware No
GPC Property Company Delaware No
Cinco Ranch East Development, Inc. Delaware No
Cinco Ranch West Development, Inc. Delaware No
Hickory Downs Development, Inc. Delaware No
Lake Houston Development, Inc. Delaware No
South Padre Development, Inc. Delaware No
Green Hills Corporation Delaware No
Knickerbocker Corporation Texas No
American Athletic Club, Inc. Texas No
Pavilions Corporation Delaware No
USLIFE Corporation New York No
All American Life Insurance Company Illinois Yes
1149 Investment Corp. Delaware No
American General Life Insurance Company of Pennsylvania Pennsylvania Yes
New D Corporation* Iowa No
The Old Line Life Insurance Company of America Wisconsin Yes
The United States Life Insurance Company in the
City of New York New York Yes
USLIFE Advisers, Inc. New York No
USLIFE Agency Services, Inc. Illinois No
USLIFE Credit Life Insurance Company Illinois Yes
USLIFE Credit Life Insurance Company of Arizona Arizona Yes
USLIFE Indemnity Company Nebraska Yes
USLIFE Financial Corporation of Delaware* Delaware No
Midwest Holding Corporation Delaware No
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
Jurisdiction of
---------------
Name Incorporation Insurer
---- ------------- -------
<S> <C> <C>
I.C. Cal* Nebraska No
Midwest Property Management Co. Nebraska No
USLIFE Financial Institution Marketing Group, Inc. California No
USLIFE Insurance Services Corporation Texas No
USLIFE Realty Corporation Texas No
405 Leasehold Operating Corporation New York No
405 Properties Corporation* New York No
USLIFE Real Estate Services Corporation Texas No
USLIFE Realty Corporation of Florida Florida No
USLIFE Systems Corporation Delaware No
</TABLE>
American General Finance Foundation, Inc. is not included on this list. It
is a non-profit corporation.
NOTES
(1) The following limited liability companies were formed in the State of
Delaware on March 28, 1995. The limited liability interests of each are
jointly owned by AGC and AGDMC and the business and affairs of each are
managed by AGDMC:
American General Capital, L.L.C.
American General Delaware, L.L.C.
(2) On November 26, 1996, American General Institutional Capital A ("AG Cap
Trust A"), a Delaware business trust, was created. On March 10, 1997, American
General Institutional Capital B ("AG Cap Trust B"), also a Delaware business
trust, was created. Both AG Cap Trust A's and AG Cap Trust B's business and
affairs are conducted through their trustees: Bankers Trust Company and Bankers
Trust (Delaware). Capital securities of each are held by non-affiliated third
party investors and common securities of AG Cap Trust A and AG Cap Trust B are
held by AGC.
(3) On November 14, 1997, American General Capital I, American General
Capital II, American General Capital III, and American General Capital IV
(collectively, the "Trusts"), all Delaware business trusts, were created.
Each of the Trusts' business and affairs are conducted through its trustees:
Bankers Trust (Delaware) and James L. Gleaves (not in his individual capacity
but solely as Trustee).
(4) On July 10, 1997, the following insurance subsidiaries of AGC became the
direct owners of the parenthetically indicated percentages of membership
units of SBIL B, L.L.C. ("SBIL B"), a U.S. limited liability company: VALIC
(22.6%), FL (8.1%), AGLA (4.8%) and AGL (4.8%).
Through its aggregate 40.3% interest in SBIL B, VALIC, FL, AGLA and AGL
indirectly own approximately 28% of the securities of SBI, an English
company, and 14% of the securities of ESBL, an English company, SBP, an
English company, and SBFL, a Cayman Islands company. These interests are
held for investment purposes only.
-9-
<PAGE>
(5) On December 23, 1994, AGCL purchased approximately 40% of the shares of
common stock of Western National Corporation ("WNC"), Western National Life
Insurance Company's ("WNL") indirect intermediate parent. Therefore, WNL
became approximately 40% indirectly controlled by AGC. On September 30,
1996, AGC purchased 7,254,464 shares of WNC's Series A Participating
Convertible Preferred Stock (the "Convertible Preferred Stock"). On
November 30, 1996, AGC contributed the Convertible Preferred Stock to AGCL.
On May 14, 1997, WNC's shareholders approved the conversion of 7,254,464
shares of WNC's Series A Participating Convertible Preferred Stock held by
AGCL into an equal number of WNC common stock. Thus, at present, the
percentage of WNC common stock owned directly by AGCL (and indirectly by
AGC) is 46.2%. WNC, a Delaware corporation, owns the following companies:
WNL Holding Corporation
Western National Life Insurance Company (TX)
Independent Advantage Financial & Insurance Services, Inc.
WNL Investment Advisory Services, Inc.
Conseco Annuity Guarantee Corp.
WNL Brokerage Services, Inc.
WNL Insurance Services, Inc.
However, AGCL (1) holds the direct interest in WNC (and the indirect
interests in WNC's subsidiaries) for investment purposes; (2) does not
direct the operations of WNC or WNL; (3) has no representatives on the
Board of Directors of WNC; and (4) is restricted, pursuant to a
Shareholder's Agreement between WNC and AGCL, in its right to vote its
shares against the slate of directors proposed by WNC's Board of Directors.
Accordingly, although WNC and its subsidiaries technically are members of
the American General insurance holding company system under insurance
holding company laws, AGCL does not direct the operations of WNC or its
subsidiaries.
(6) AGLA owns approximately 11% of Whirlpool Financial Corp. ("Whirlpool") on
a fully diluted basis. The total investment of AGLA in Whirlpool
represents approximately 3% of the voting power of the capital stock of
Whirlpool, but approximately 11% of the Whirlpool stock which has voting
rights. The interests in Whirlpool (which is a corporations that is not
associated with AGC) are held for investment purposes only.
(7) AGL owns 100% of the common stock of American General Securities
Incorporated ("AGSI"), a full-service NASD broker-dealer. AGSI, in turn,
owns 100% of the stock of the following insurance agencies:
American General Insurance Agency, Inc. (Missouri)
American General Insurance Agency of Hawaii, Inc. (Hawaii)
American General Insurance Agency of Massachusetts, Inc.
(Massachusetts)
In addition, the following agencies are indirectly related to AGSI, but not
owned or controlled by AGSI:
American General Insurance Agency of Ohio, Inc. (Ohio)
American General Insurance Agency of Texas, Inc. (Texas)
American General Insurance Agency of Oklahoma, Inc. (Oklahoma)
Insurance Masters Agency, Inc. (Texas)
AGSI and the foregoing agencies are not affiliates or subsidiaries of AGL
under applicable holding company laws, but they are part of the AGC group
of companies under other laws.
(8) American General Finance Corporation is the parent of an additional 48
wholly owned subsidiaries incorporated in 30 states and Puerto Rico for the
purpose of conducting its consumer finance operations, INCLUDING those
noted in footnote 7 below.
(9) American General Financial Services, Inc. is the parent of an additional 7
wholly owned subsidiaries incorporated in 4 states and Puerto Rico for the
purpose of conducting its consumer finance operations.
-10-
<PAGE>
(10) American General Investment Management, L.P. is jointly owned by AGIHC and
AGIMC. AGIHC holds a 99% limited partnership interest, and AGIMC owns a 1%
general partnership interest.
(11) AGRI owns only a 75% interest in GDI Holding, Inc.
(12) AG Land Associates, LLC is jointly owned by AGLH and AGLL. AGLH holds a
98.75% managing interest and AGLL owns a 1.25% managing interest.
ITEM 27. NUMBER OF CONTRACT OWNERS
[To be updated] As of _______________, 1999, there were ________ owners of
Contracts of the class covered by this registration statement (_____ Qualified
Contracts and _____ Non-Qualified Contracts).
ITEM 28. INDEMNIFICATION
AMERICAN FRANKLIN'S BY-LAWS PROVIDE, IN ARTICLE X, AS FOLLOWS:
"SECTION 1. THE COMPANY SHALL INDEMNIFY AND HOLD HARMLESS EACH
PERSON WHO SHALL SERVE AT ANY TIME HEREAFTER AS A DIRECTOR,
OFFICER OR EMPLOYEE OF THE COMPANY, OR WHO SHALL SERVE ANY OTHER
COMPANY OR ORGANIZATION IN ANY CAPACITY AT THE REQUEST OF THE
COMPANY, FROM AND AGAINST ANY AND ALL CLAIMS AND LIABILITIES TO
WHICH SUCH PERSON SHALL BECOME SUBJECT BY REASON OF HAVING
HERETOFORE OR HEREAFTER BEEN A DIRECTOR, OFFICER, OR EMPLOYEE OF
THE COMPANY, OR BY REASON OF ANY ACTION ALLEGED TO HAVE BEEN
HERETOFORE OR HEREAFTER TAKEN OR OMITTED BY SUCH PERSON AS A
DIRECTOR, OFFICER OR EMPLOYEE, AND SHALL REIMBURSE EACH SUCH
PERSON FOR ALL LEGAL AND OTHER EXPENSES REASONABLY INCURRED IN
CONNECTION WITH ANY SUCH CLAIM OR LIABILITY; PROVIDED, HOWEVER,
THAT NO SUCH PERSON SHALL BE INDEMNIFIED AGAINST, OR BE
REIMBURSED, FOR, ANY EXPENSE INCURRED IN CONNECTION WITH ANY
CLAIM OR LIABILITY ARISING OUT OF SUCH PERSON'S OWN WILFUL
MISCONDUCT."
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Registrant's principal underwriter, Franklin Financial Services
Corporation, also acts as principal underwriter for 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.
-11-
<PAGE>
(b) The directors and principal officers of the principal underwriter are:
<TABLE>
<CAPTION>
(1) (2)
Positions and Offices
Name with Underwriter
---- ---------------------
<S> <C>
Tony M. Carter Vice President
Ross D. Friend Senior Vice President and Chief
Compliance Officer
John A. Kalbaugh Vice President -- Marketing
Kathy Keith Treasurer and Associate Director
E. Paul Kovach, Jr. Chairman of the Board
Karen Kunz Chief Financial Officer and Director of
Compliance and Administration
Gary D. Osmonson Director and President
Robert M. Roth Vice President -- Administration and
Compliance and Secretary
William A. Simpson Director
Dan E. Trudan Vice President and Assistant Secretary
</TABLE>
The principal business address of each individual except Tony M. Carter is
c/o Franklin Financial Services Corporation, #1 Franklin Square, Springfield,
Illinois 62713. The principal business address of Tony M. Carter is
2900 Greenbrier Drive, Springfield, Illinois 62704.
(c) Not Applicable.
ITEM 30. LOCATION OF RECORDS
All records referenced under Section 31(a) of the 1940 Act, and Rules 31a-1
through 31a-3 thereunder, are maintained and in the custody of The American
Franklin Life Insurance Company at its principal executive office located at #1
Franklin Square, Springfield, Illinois 62713 or at American Franklin's
Administrative Office located at 2727-A Allen Parkway 3-50, Houston, Texas
77019-2191.
ITEM 31. MANAGEMENT SERVICES
All management services agreements relating to Separate Account VA-1 and
the Contracts are described in the Prospectus or Statement of Additional
Information forming a part of this Registration Statement.
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
The Registrant undertakes:
-12-
<PAGE>
(a) to file a post-effective amendment to this Registration Statement as
frequently as is necessary to ensure that the audited financial statements in
the Registration Statement are never more than 16 months old for so long as
payments under the Contracts may be accepted;
(b) to include either (1) as part of any application to purchase a
Contract offered by the Prospectus constituting part of this Registration
Statement, a space that an applicant can check to request a Statement of
Additional Information, or (2) a toll-free number or a post card or similar
written communication affixed to or included in the Prospectus that the
applicant can remove to send for a Statement of Additional Information;
(c) to deliver any Statement of Additional Information and any financial
statements required to be made available under Form N-4 promptly upon written
or oral request;
(d) that the Registrant is relying upon the "no-action" letter of the
Securities and Exchange Commission dated November 28, 1988 in response to the
American Council of Life Insurance with respect to restrictions on withdrawal
of amounts from Contracts used in connection with annuity purchase plans
meeting the requirements of Internal Revenue Code Section 403(b), which
amounts are attributable to contributions made on or after January 1, 1989
pursuant to a salary reduction agreement or to income earned on or after
January 1, 1989 with respect to contributions made pursuant to a salary
reduction agreement and that the Registrant will comply with the requirement
of numbered paragraphs (1) through (4) of such "no-action" letter;
(e) that the Registrant is relying upon Rule 6c-7 under the 1940 Act
with respect to the offer and sale of Contracts to participants in the Texas
Optional Retirement Program and that the Registrant will comply with the
provisions of paragraphs (a) - (d) of Rule 6c - 7.
(f) The American Franklin Life Insurance Company represents that the
fees and charges deducted under the Contracts, in the aggregate, are
reasonable in relation to the services rendered, the expenses expected to be
incurred, and the risks assumed by The American Franklin Life Insurance
Company in connection with the Contracts.
-13-
<PAGE>
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, Separate Account VA-1 of The American Franklin Life
Insurance Company, has duly caused this Post-Effective Amendment No. 3 to the
Registration Statement to be signed on its behalf, in the City of Springfield,
and State of Illinois on this 26th day of February, 1999.
SEPARATE ACCOUNT VA-1 OF THE AMERICAN
FRANKLIN LIFE INSURANCE COMPANY
By: THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY, Depositor
[SEAL] By: /s/ William A. Simpson
________________________________________
William A. Simpson
Chairman of the Board and
Chief Executive Officer
Attest:
/s/ Elizabeth E. Arthur
____________________________
Elizabeth E. Arthur
Assistant Secretary
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
[SEAL] By: /s/ William A. Simpson
________________________________________
William A. Simpson
Chairman of the Board and
Chief Executive Officer
Attest:
/s/ Elizabeth E. Arthur
_____________________________
Elizabeth E. Arthur
Assistant Secretary
-14-
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 3 to the Registration Statement has been signed by the following persons
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ Robert M. Beuerlein*
_________________________ Director February 26, 1999
Robert M. Beuerlein
/s/ Brady W. Creel*
_________________________ Director February 26, 1999
Brady W. Creel
_________________________ Director February __, 1999
Rodney O. Martin, Jr.
_________________________ Director February __, 1999
Jon P. Newton
/s/ Michael W. Nicholson*
_________________________ Director February 26, 1999
Michael M. Nicholson
/s/ Philip K. Polkinghorn*
_________________________ Executive Vice President February 26, 1999
Philip K. Polkinghorn and Chief Financial Officer
_________________________ Director February __, 1999
Gary D. Reddick
/s/ William A. Simpson*
_________________________ Chairman of the Board February 26, 1999
William A. Simpson and Chief Executive
Officer
</TABLE>
/s/ Elizabeth E. Arthur
_________________________________________
*By Elizabeth E. Arthur, Attorney-in-Fact
-15-
<PAGE>
EXHIBIT INDEX
4(g) Specimen form of Death Benefit Endorsement.
15 Power of Attorney with respect to the Registration Statement.
-16-
<PAGE>
ENDORSEMENT
This endorsement forms a part of the contract to which it is attached.
The following replaces the section titled "DEATH BENEFIT" of this Contract.
DEATH BENEFIT
If the Annuitant dies before the Annuity Commencement Date, and is survived
by a Contingent Annuitant, the Contract will be continued with the Contingent
Annuitant being named the Annuitant. If this is a Non-Qualified Contract,
this Contract may qualify for continuation under the "Distribution of Death
Benefit under Non-Qualified Contracts" provision. Otherwise, American
Franklin will pay the death benefit to the Beneficiary if one of the
following dies prior to the Annuity Commencement Date:
(1) The Annuitant (provided that no Contingent Annuitant survives); or
(2) The Owner of a Non-Qualified Contract (including the first to die in the
case of joint Owners).
If the Annuitant or such Owner dies, the amount of the death benefit will be
the greatest of the following amounts, less any applicable Premium Tax:
(1) The sum of all Net Purchase Payments less any prior partial withdrawals;
(2) The Owner's Account Value as of the end of the Valuation Period in which
American Franklin receives at its Administrative Office proof of the
Annuitant's or such Owner's death and a written request from the
Beneficiary as to the form of payment; or
(3) The Highest Anniversary Value prior to the date of death, as defined below.
The Highest Anniversary Value prior to the date of death will be determined as
follows:
First, American Franklin will calculate the Account Values at the end of
each of the past Contract Anniversaries that occurred prior to the
deceased's 81st birthday;
Second, each of the Account Values will be increased by the amount of Net
Purchase Payments made since the end of such Contract Years; and
Third, the result will be reduced by the amount of any withdrawals made
since the end of such Contract Years.
Form AFB802 Page 1
<PAGE>
The Highest Anniversary Value will be an amount equal to the highest of such
values. The Highest Anniversary Value will not be calculated after the
deceased's 81st birthday.
The death benefit will not be less than the amount payable on a full surrender
at the date used to value the death benefit. The death benefit will be paid
when American Franklin receives at its Administrative Office:
(1) Proof of the Owner's or Annuitant's death; and
(2) A written request from the Beneficiary for either a single sum or a payment
under an Annuity Option.
If the Annuitant dies, and a Contingent Annuitant was named but predeceased the
Annuitant, American Franklin will require proof of the Contingent Annuitant's
death in addition to proof of the death of the Annuitant.
American Franklin will pay a single sum to the Beneficiary unless an Annuity
Option is chosen.
If the Annuitant dies on or after the Annuity Commencement Date, the Beneficiary
will receive the death benefit, if any, provided by the Annuity Option in
effect.
Effective Date of this Endorsement: [January 1, 1999]
Date of Issue of this Endorsement: [December 8, 1998]
Signed for The American Franklin Life Insurance Company at Springfield,
Illinois.
SECRETARY
Form AFB802 Page 2
<PAGE>
EXHIBIT 15
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated opposite
their respective names below, hereby constitute and appoint WAYNE A. ROBINSON
and ELIZABETH E. ARTHUR, and each of them, singularly, attorneys-in-fact of
the undersigned with full power to each of them to sign for and in the name
of the undersigned in the capacities indicated below (a) Post-Effective
Amendment No. 3 to the Registration Statement under the Securities Act of
1933, as amended (the "1933 Act"), and Amendment No. 4 to the Registration
Statement under the Investment Company Act of 1940, as amended (the "1940
Act"), on Form N-4 (1933 Act File No. 333-10489 and 1940 Act File No.
811-7781) of Separate Account VA-1 of The American Franklin Life Insurance
Company and of The American Franklin Life Insurance Company, as depositor,
and (b) any and all amendments (including any further Amendments and
Post-Effective Amendments) thereto, and to give any certification which may
be required in connection therewith pursuant to Rule 485 under the 1933 Act.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Robert M. Beuerlein
- --------------------------------
Robert M. Beuerlein Director February 10, 1999
/s/ Brady W. Creel
- --------------------------------
Brady W. Creel Director February 10, 1999
- --------------------------------
Rodney O. Martin, Jr. Director ___________, 1999
- --------------------------------
Jon P. Newton Director ___________, 1999
/s/ Michael M. Nicholson
- --------------------------------
Michael M. Nicholson Director February 16, 1999
/s/ Philip K. Polkinghorn
- --------------------------------
Philip K. Polkinghorn Executive Vice February 12, 1999
President and Chief
Financial Officer
(principal
financial officer
and principal
accounting officer)
- --------------------------------
Gary D. Reddick Director ___________, 1999
/s/ William A. Simpson
- --------------------------------
William A. Simpson Chairman of the February 16, 1999
Board and Chief
Executive Officer
(principal
executive officer)
</TABLE>
