<PAGE>
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. 4
AND/OR
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 5
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
/X / on April 30, 1999 pursuant to paragraph (b) of Rule 485
/ / 60 days after filing pursuant to paragraph (a)(1) of Rule 485
/ / on ________, 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
THROUGH SEPARATE ACCOUNT VA-1
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
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED
UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE CHAIRMAN IS A TRADEMARK OF THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY.
<PAGE>
THE CHAIRMAN-TM-
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACTS
OFFERED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
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
- VIP High Income - MFS Variable Insurance Trust
- VIP Equity-Income - MFS Emerging Growth
- VIP Growth - MFS Research
- VIP Overseas - MFS Growth With Income
- MFS Total Return
- - Fidelity Variable Insurance Products - MFS Utilities
Fund II - MFS Capital Opportunities
- VIPII Investment Grade Bond
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 keep 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
<PAGE>
Additional Information appears at page 42 of this Prospectus. You can get a free
copy of the Statement of 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>
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Glossary ..................................................................... 5
Fee Table..................................................................... 6
Summary ..................................................................... 8
Financial and Performance Information.........................................11
American Franklin and the Separate Account....................................12
The Portfolios................................................................13
Voting Privileges.............................................................16
The Fixed Account.............................................................17
Contract Issue and Purchase Payments..........................................18
Account Value........................................................19
Variable Account Value...............................................20
Fixed Account Value..................................................20
Transfer, Variable Account Asset Rebalancing, Surrenders and Transfers........21
Transfers............................................................21
Variable Account Asset Rebalancing...................................22
Surrenders and Partial Withdrawals...................................22
Systematic Withdrawal Plan...........................................23
Charges Under the Contracts...................................................23
Premium Taxes........................................................23
Surrender Charge.....................................................24
Transfer Charges.....................................................26
Annual Contract Fee..................................................26
Charge to Separate Account VA-1......................................26
Portfolio Expenses...................................................26
Reduction in Surrender Charges or Administrative Charges.............27
Annuity Period and Annuity Payment Options....................................27
Annuity Commencement Date............................................27
Application of Account Value.........................................27
Fixed and Variable Annuity Payments..................................27
Annuity Payment Options..............................................28
Transfers............................................................30
Use of Gender Based Annuity Tables...................................31
</TABLE>
3
<PAGE>
<TABLE>
<S> <C>
Death Benefit..................................................................31
Other Aspects of the Contracts.................................................33
Owners, Annuitants and Beneficiaries; Assignments.....................33
Long-Term Care and Terminal Illness...................................34
Reports...............................................................34
Modification..........................................................34
Payment and Deferment.................................................34
Federal Income Tax Matters.....................................................35
Taxation of Non-Qualified Contracts...................................36
Taxation of Qualified Contracts.......................................38
Our Income Taxes......................................................39
Possible Tax Law Changes..............................................39
Distribution Arrangement.......................................................39
Year 2000 Transition...........................................................40
Legal Proceedings..............................................................41
Accumulation Units.............................................................42
Other Information on File......................................................42
Table of Contents of Statement of Additional Information.......................43
</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>
FEE TABLE
<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(1)(2)
---------- -------- ---------------
<S> <C> <C> <C>
VIP Money Market..................... 0.20% 0.10% 0.30%
VIP High Income...................... 0.58% 0.12% 0.70%
VIP Equity-Income.................... 0.49% 0.09% 0.58%
VIP Growth........................... 0.59% 0.09% 0.68%
VIP Overseas......................... 0.74% 0.17% 0.91%
VIPII Investment Grade Bond.......... 0.43% 0.14% 0.57%
VIPII Asset Manager.................. 0.54% 0.10% 0.64%
VIPII Index 500...................... 0.24% 0.11% 0.35%
VIPII Contrafund..................... 0.59% 0.11% 0.70%
MFS Emerging Growth.................. 0.75% 0.10% 0.85%
MFS Research......................... 0.75% 0.11% 0.86%
MFS Growth With Income............... 0.75% 0.13% 0.88%
MFS Total Return..................... 0.75% 0.16% 0.91%
MFS Utilities........................ 0.75% 0.26% 1.01%
MFS Capital Opportunities............ 0.75% 0.36%(3) 1.11%(3)
</TABLE>
(1) A portion of the brokerage commissions certain Fidelity Portfolios paid was
used to reduce their expenses. In addition, certain Fidelity Portfolios have
entered into arrangements with their custodian whereby credits
6
<PAGE>
realized as a result of uninvested cash balances were used to reduce custodian
expenses. Including these reductions, the total operating expenses, after
reimbursement for Index 500 Portfolio, would have been: for VIP Equity-Income
Portfolio: 0.57%; for VIP Growth Portfolio: 0.66%; for VIP Overseas Portfolio:
0.89%; for VIPII Asset Manager Portfolio: 0.63%; for VIPII Index 500 Portfolio:
0.28%; and for VIPII Contrafund Portfolio: 0.66%.
(2) Each MFS series has an expense offset arrangement which reduces the series'
custodian fee based upon the amount of cash maintained by the series with its
custodian and dividend disbursing agent. Each MFS series may enter into other
such arrangements and directed brokerage arrangements, which would also have the
effect of reducing the series' expenses. MFS series expenses do not take into
account these expense reductions, and are therefore higher than the actual
expenses of the series.
(3) MFS has agreed to bear expenses for this series, subject to reimbursement by
this series, such that such series' "Other Expenses" shall not exceed 0.25% of
the average daily net assets of the series during the current fiscal year. After
taking this expense reimbursement into account, the total operating expenses for
MFS Capital Opportunities would have been 1.02%. The payments made by MFS on
behalf of the series under this arrangement are subject to reimbursement by the
series to MFS, which will be accomplished by the payment of an expense
reimbursement fee by the series to MFS computed and paid monthly at a percentage
of the series' average daily net assets for its then current fiscal year, with a
limitation that immediately after such payment the series' "Other Expenses" will
not exceed the percentage set forth above for that series. The obligation of MFS
to bear a series' "Other Expenses" pursuant to this arrangement, and the series'
obligation to pay the reimbursement fee to MFS, terminates on the earlier of the
date on which payments made by the series equal the prior payment of such
reimbursable expenses by MFS, or December 31, 2004. MFS may, in its discretion,
terminate this arrangement at an earlier date, provided that the arrangement
will continue for the series until at least May 1, 2000, unless terminated with
the consent of the board of trustess which oversees the series.
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>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
If all amounts invested in one of
the following Portfolios:
VIP Money Market..................... $74 $105 $135 $206
VIP High Income...................... $77 $116 $155 $247
VIP Equity-Income.................... $76 $113 $149 $234
VIP Growth........................... $77 $115 $153 $243
VIP Overseas......................... $79 $122 $165 $266
VIPII Investment Grade Bond.......... $76 $113 $149 $234
VIPII Asset Manager.................. $77 $114 $152 $240
VIPII Index 500...................... $73 $104 $134 $204
VIPII Contrafund..................... $77 $115 $153 $243
MFS Emerging Growth.................. $79 $121 $163 $263
MFS Research......................... $79 $121 $163 $264
MFS Growth with Income............... $79 $121 $164 $266
MFS Total Return..................... $79 $122 $166 $269
MFS Utilities........................ $80 $125 $171 $279
MFS Capital Opportunities............ $80 $125 $171 $280
</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>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
<S> <C> <C> <C> <C>
If all amounts are invested in one
of the following Portfolios:
VIP Money Market..................... $18 $55 $95 $206
VIP High Income...................... $22 $67 $115 $247
VIP Equity-Income.................... $21 $63 $109 $234
VIP Growth........................... $21 $66 $113 $243
VIP Overseas......................... $24 $73 $125 $266
VIPII Investment Grade Bond.......... $21 $63 $109 $234
VIPII Asset Manager.................. $21 $65 $112 $240
VIPII Index 500...................... $18 $55 $94 $204
VIPII Contrafund..................... $21 $66 $113 $243
MFS Emerging Growth.................. $23 $72 $123 $263
MFS Research......................... $23 $72 $123 $264
MFS Growth with Income............... $24 $73 $124 $266
MFS Total Return..................... $24 $74 $126 $269
MFS Utilities........................ $25 $77 $131 $279
MFS Capital Opportunities............ $25 $77 $131 $280
</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.
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.
8
<PAGE>
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 the Annuity Payment Option chosen, the age, and in some cases,
sex of the Annuitant, and the total amount of Account Value applied to the fixed
Annuity Payment Option.
Variable Annuity Payments are similar to Fixed Annuity Payments, except
that the amount of each periodic payment 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
9
<PAGE>
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."
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."
10
<PAGE>
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.
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.
11
<PAGE>
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.
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.
12
<PAGE>
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 ("MFS 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 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 as high a level of current income as
is consistent with the preservation of capital and liquidity. The
Portfolio invests in U.S. dollar-denominated money market securities of
domestic and foreign issuers and complies with industry-standard
requirements for money market funds regarding the quality, maturity and
diversification of the Portfolio's investments.
VIP HIGH INCOME PORTFOLIO seeks a high level of current income while
also considering growth of capital. The Portfolio normally invests at
least 65% of its total assets in income-producing debt securities,
preferred stocks and covertible securities, with an emphasis on
lower-quality debt securities 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.
13
<PAGE>
VIP EQUITY-INCOME PORTFOLIO seeks reasonable income. The Portfolio will
also consider the potential for capital appreciation. The Portfolio
seeks a yield which exceeds the composite yield on the securities
comprising the Standard & Poor's 500 Composite Stock Price Index. The
Portfolio normally invests at least 65% of its total assets in
income-producing equity securities.
VIP GROWTH PORTFOLIO seeks capital appreciation and normally invests
its assets primarily in common stocks. The Portfolio invests its assets
in companies which its investment adviser believes have above-average
growth potential.
VIP OVERSEAS PORTFOLIO seeks long-term growth of capital and normally
invests at least 65% of its total assets in foreign securities. The
Portfolio normally invests its assets primarily in common stocks.
Following is a summary of the policies and objectives of the Portfolios
of the VIPII:
VIPII INVESTMENT GRADE BOND PORTFOLIO seeks as high a level of current
income as is consistent with the preservation of capital and normally
invests its assets in U.S. dollar-denominated investment-grade bonds.
The investment adviser uses the Lehman Brothers Aggregate Bond Index as
a guide in structuring the Portfolio and selecting investments and
manages the Portfolio to have similar overall interest rate risk to the
index.
VIPII ASSET MANAGER PORTFOLIO seeks high total return with reduced risk
over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term 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 ("S
& P 500"), and normally invests at least 80% of its assets in common
stocks included in the S & P 500. The S & P 500 is a widely recognized,
unmanaged index of common stock prices.
VIPII CONTRAFUND PORTFOLIO seeks long-term capital appreciation and
normally invests its assets primarily in common stocks. The Portfolio
invests its assets in securities of companies whose value the
investment adviser believes is not fully recognized by the public.
Following is a summary of the policies and objectives of the Portfolios
of the MFS Trust:
MFS EMERGING GROWTH SERIES will seek long-term growth of capital. The
series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities, of emerging growth companies.
MFS RESEARCH SERIES will seek to provide long-term growth of capital
and future income. The series invests, under normal market conditions,
at least 80% of its total assets in common stocks and related
securities, such as preferred stocks, convertible securities and
depositary receipts.
14
<PAGE>
MFS GROWTH WITH INCOME SERIES will seek long-term growth of capital and
future income while providing more current dividend income than is
normally obtainable from a portfolio of only growth stocks. The series
invests, under normal market conditions, at least 65% of its total
assets in common stock and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities.
MFS TOTAL RETURN SERIES will primarily seek to obtain above-average
income (compared to a portfolio invested entirely in equity securities)
consistent with prudent employment of capital; its secondary objective
is to take advantage of opportunities for growth of capital and income
since many securities offering a better than average yield may also
possess growth potential. The series is a "balanced fund," and invests
in a combination of equity and fixed income securities.
MFS UTILITIES SERIES will seek capital growth and current income
(income above that available from a portfolio invested entirely in
equity securities) by investing under normal market conditions, at
least 65% of its total assets in equity and debt securities of both
domestic and foreign companies in the utilities industry.
MFS CAPITAL OPPORTUNITIES SERIES will seek capital appreciation. The
series invests, under normal market conditions, at least 65% of its
total assets in common stocks and related securities, such as preferred
stocks, convertible securities and depositary receipts for those
securities.
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.
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 VIPII, and exercises overall responsibility for
the investment and reinvestment of their assets. Each Portfolio of the VIP and
the VIPII 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 VIPII.
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.
15
<PAGE>
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. 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.
16
<PAGE>
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 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
written instructions in good order 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 may vary from one Guarantee Period
to another because the other Guarantee Period begins on a
17
<PAGE>
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.
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.
18
<PAGE>
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 will consider any
cancellation to be a full surrender of the Contract. We will provide you 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 under Section 403(b) of the Internal Revenue Code only with American
Franklin's agreement. Also, the following annual limits on purchase payments
apply to Contracts in the categories shown:
<TABLE>
<CAPTION>
CONTRACT MAXIMUM PURCHASE PAYMENTS PER YEAR
-------- ----------------------------------
<S> <C>
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.
19
<PAGE>
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 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.
20
<PAGE>
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 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
21
<PAGE>
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 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
22
<PAGE>
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 applicable 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, 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 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
23
<PAGE>
(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.
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
WITHDRAWAL 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,
24
<PAGE>
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.
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.
25
<PAGE>
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."
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 your 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.
26
<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.
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
27
<PAGE>
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.
Sixty 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 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.
28
<PAGE>
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.
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.
29
<PAGE>
FOURTH OPTION - PAYMENTS FOR A DESIGNATED PERIOD. We make payments monthly to
the Annuitant or another payee for a period ranging from 5 to 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 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.
30
<PAGE>
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.
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.
31
<PAGE>
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 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.
32
<PAGE>
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.
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."
33
<PAGE>
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;
(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.
34
<PAGE>
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 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 A 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
35
<PAGE>
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 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
36
<PAGE>
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:
- - made on or after the taxpayer reaches age 59 1/2;
- - made on or after the death of an owner;
- - attributable to the taxpayer's becoming disabled; or
- - 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 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.
37
<PAGE>
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 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
38
<PAGE>
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 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.
39
<PAGE>
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
decentralized basis. AGC's Year 2000 readiness efforts are 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 our information technology and
non-information technology systems; (2) assess which items in the inventory may
expose us 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 our
critical systems were Year 2000 ready and had 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. We have 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 we exchange 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 we exercise less,
or no, control over Year 2000 readiness. We have 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 had identified and assessed approximately 700 critical
third party dependencies, including those relating to American Franklin. A more
detailed evaluation was completed during the first quarter 1999 as part of our
contingency planning efforts. Due to the various stages of third parties' Year
2000 readiness, our testing activities will extend through 1999.
CONTINGENCY PLANS. American Franklin and its affiliates have commenced
contingency planning to reduce the risk of Year 2000-related business failures.
The contingency plans, which
40
<PAGE>
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. We are currently developing
contingency plans and expect to substantially complete all contingency planning
activities during the second quarter of 1999.
RISKS AND UNCERTAINTIES. Based on our plans to make internal systems
ready for Year 2000, to deal with third party relationships, and to develop
contingency actions, we believe that we 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's
future results of operations, liquidity, or financial condition. However, due to
the size and complexity of this project, risks and uncertainties exist, and we
cannot predict a most reasonably likely worst case scenario. If conversion of
our 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 our 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 our 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. The cost
of activities related to Year 2000 readiness has not had a material adverse
effect on our results of operations or financial condition. In addition, we have
elected to accelerate the planned replacement of certain systems as part of the
Year 2000 plans. Costs of the replacement systems are not passed to Divisions of
Separate Account VA-1.
LEGAL PROCEEDINGS
In recent years, various life insurance companies have been
named as defendants in class action lawsuits relating to life insurance and
sales practices, and a number of these lawsuits have resulted in substantial
settlements. American Franklin is a defendant in such purported class action
lawsuits filed since 1996, asserting claims related to pricing and sales
practices. On December 16, 1998, AGC announced that certain of its life
insurance subsidiaries had entered into agreements to resolve the market conduct
class action lawsuits. The settlements are not final until approval by the
courts and until the respective time periods for filing appeals have been
finally resolved. If court approvals are obtained and appeals are not taken, it
is expected the settlements will be final in the third quarter of 1999. The
proposed settlements will not have a material impact on American Franklin's
financial condition or business operations.
American Franklin is a party to various other lawsuits and
proceedings arising in the ordinary course of business. Many of these lawsuits
and proceedings arise in jurisdictions, such as Alabama and Mississippi, that
permit damage awards disproportionate to the actual economic damages incurred.
Based upon information presently available, American Franklin believes that the
total amounts that will ultimately be paid, if any, arising from these lawsuits
and proceedings
41
<PAGE>
will not have a material adverse effect on American Franklin's
results of operations and financial position. However, it should be noted that
the frequency of large damage awards, including large punitive damage awards,
that bear little or no relation to actual economic damages incurred by
plaintiffs in jurisdictions like Alabama and Mississippi continues to create the
potential for an unpredictable judgment in any given suit.
ACCUMULATION UNITS
SEPARATE ACCOUNT VA-1
<TABLE>
<CAPTION>
NUMBER OF
ACCUMULATION ACCUMULATION UNITS
UNIT VALUE AT OUTSTANDING AT
DECEMBER 31, 1998 DECEMBER 31, 1998
------------------- ---------------------
<S> <C> <C>
VIP Money Market Division $5.34 1,634,822
VIP Equity-Income Division 6.73 2,991,972
VIP Growth Division 7.94 2,207,408
VIP Overseas Division 6.20 383,712
VIP High Income Division 5.54 499,418
VIPII Investment Grade Bond Division 5.70 598,142
VIPII Asset Manager Division 6.64 820,384
VIPII Index 500 Division 8.07 3,224,829
VIPII Contrafund Division 7.62 1,551,801
MFS Emerging Growth Division 7.48 1,603,087
MFS Research Division 6.95 2,214,458
MFS Growth With Income Division 7.51 1,338,496
MFS Total Return Division 6.43 2,294,198
MFS Utilities Division 7.04 903,586
MFS Capital Opportunities Division 7.59 623,561
</TABLE>
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.
A Statement of Additional Information is available from us on request.
Its contents are as follows:
42
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<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>
43
<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 702 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 702, 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>
YEAR SINGLE MARRIED - FILING JOINTLY
---- ------ ------------------------
<S> <C> <C>
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>
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.
2
<PAGE>
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.):
<TABLE>
<S> <C>
$10,000 - Excess AGI
-------------------------- x Maximum Allowable Deduction = Deduction Limit
$10,000
</TABLE>
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:
<TABLE>
<S> <C>
$ 10,000 - $6,619
--------------------- x $2,000 = $676 (rounded to $680)
$10,000
</TABLE>
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:
<TABLE>
<S> <C>
$ 10,000 - 4,255
------------------- x $2,000 = $1,149 (rounded to $1,150)
$10,000
</TABLE>
3
<PAGE>
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>
<S> <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.
Example: An individual makes the following contributions to his or her IRA(s).
<TABLE>
<CAPTION>
YEAR DEDUCTIBLE NON-DEDUCTIBLE
---- ---------- --------------
<S> <C> <C>
1986 $2,000 0
1987 1,800 0
1990 1,000 $1,000
</TABLE>
4
<PAGE>
<TABLE>
<S> <C> <C>
1992 600 1,400
-------- -------
$5,400 $2,400
<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>
<S> <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.
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.
5
<PAGE>
PENALTIES FOR PREMATURE DISTRIBUTIONS
If you receive a distribution from your IRA before you reach age 592,
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 702; 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.
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.
6
<PAGE>
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 592 (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 OF CONTENTS
<TABLE>
<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.............................................................................12
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 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.
2
<PAGE>
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 and $1,740,597 were
paid on the Contracts.
The securities offered pursuant to the Contracts are offered on a
continuous basis.
ADMINISTRATION OF THE CONTRACTS
While American Franklin has primary responsibility for all
administration of the Contracts, American General Life 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
3
<PAGE>
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 Aadequately 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.
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
4
<PAGE>
availability of the Annuity Payment Options for Contracts issued in connection
with such plans. The proposed regulations are generally effective for calendar
years after 1984; persons contemplating the purchase of a Contract should
consult a qualified tax advisor concerning the effect of the proposed
regulations on the Annuity Payment Option or Options he or she is contemplating.
FIRST OPTION -- LIFE ANNUITY. Under Qualified Contracts, if the
Annuitant dies before Annuity payments have commenced, this Annuity Payment
Option is available to the Beneficiary only if the Beneficiary is an individual
designated in the Contract and distributions to the Beneficiary begin not later
than one year after the date of the Annuitant's death (except that distributions
to a designated Beneficiary who is the surviving spouse of the Annuitant need
not commence earlier than the date on which the Annuitant would have attained
age 70 1/2). If the surviving spouse of the Annuitant is the designated
Beneficiary and such surviving spouse dies before Annuity payments to such
spouse have commenced, the surviving spouse generally will be treated as the
Annuitant for purposes of the distribution requirements.
Under Non-Qualified Contracts, if any Owner dies before Annuity
payments have commenced, this Annuity Payment Option is available to a
non-spouse designated Beneficiary only if the Beneficiary is an individual
designated in the Contract and distributions to the designated Beneficiary begin
not later than one year after the date of the Owner's death (or the substituted
surviving spouse's death, as the case may be). If the surviving spouse of the
Owner is the designated Beneficiary, the distribution requirements are applied
as if the surviving spouse was the Owner.
Under Section 457 Contracts, if the Annuitant dies before Annuity
payments have commenced, this Annuity Payment Option is not available to the
Beneficiary unless the designated Beneficiary is the surviving spouse of the
Annuitant and distributions to the designated Beneficiary begin not later than
the later of (i) one year after the date of the Annuitant's death or (ii) the
date on which the Annuitant would have attained age 70 1/2.
SECOND OPTION -- LIFE ANNUITY WITH PAYMENT FOR A FIXED TERM OF YEARS.
Under Qualified Contracts, this Annuity Payment Option is available only if the
selected period does not extend beyond the life expectancy of the Annuitant (or
the joint life expectancies of the Annuitant and his or her designated
Beneficiary). Further, if the Annuitant dies before Annuity payments have
commenced, this Annuity Payment Option is not available to a Beneficiary unless
(i) the Beneficiary is an individual designated in the Contract, (ii) the
selected period does not extend beyond the life expectancy of the designated
Beneficiary and (iii) the 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.
5
<PAGE>
Under Non-Qualified Contracts, if any Owner dies before Annuity
payments have commenced, this Annuity Payment Option is available to a
non-spouse designated Beneficiary only if the Beneficiary is an individual
designated in the Contract, distributions to the designated Beneficiary begin
not later than one year after the date of the Owner's death (or the substituted
surviving spouse's death, as the case may be), and the selected period does not
extend beyond the life expectancy of the designated Beneficiary. If the
surviving spouse of the deceased Owner is the designated Beneficiary, the
distribution requirements are applied as if the surviving spouse was the Owner.
Under Section 457 Contracts, this Annuity Payment Option is not
available unless the selected period does not extend beyond the life expectancy
of the Annuitant (or the joint life expectancy of the Annuitant and his or her
designated Beneficiary who is an individual designated in the Contract).
Further, if the Annuitant dies before Annuity payments have commenced, this
Annuity Payment Option is not available to the Beneficiary unless (a) the
designated Beneficiary is the surviving spouse of the Annuitant, (b) the
selected period does not extend beyond the life expectancy of the designated
Beneficiary and (c) distributions to the designated Beneficiary begin not later
than the later of (i) one year after the date of the Annuitant's death or (ii)
the date on which the Annuitant would have attained age 70 1/2. This Annuity
Payment Option is also not available under Section 457 Contracts unless certain
minimum distribution rules similar to the minimum distribution incidental
benefit requirements of proposed regulations are met.
THIRD OPTION -- JOINT AND LAST SURVIVOR LIFE ANNUITY. Under Section 457
Contracts and Qualified Contracts, this Annuity Payment Option is available only
if the secondary annuitant is the spouse of the Annuitant or if certain minimum
distribution incidental benefit requirements of the proposed regulations are
met. Further, if the Annuitant dies before Annuity payments have commenced, this
Annuity Payment Option is not available to a Beneficiary. Under Non-Qualified
Contracts, if any Owner dies before Annuity payments have commenced, this
Annuity Payment Option is available only if the designated Beneficiary is the
surviving spouse of the deceased Owner.
FOURTH OPTION -- INCOME PAYMENTS FOR A FIXED TERM OF YEARS. Under
Qualified Contracts, this Annuity Payment Option is available only if the
limitations described in the Second Option, above, applicable to such Qualified
Contracts, are satisfied, except that this Annuity Payment Option is otherwise
available to a designated Beneficiary where the Annuitant dies before Annuity
payments have commenced if the designated period does not exceed a period that
terminates five years after the death of the Annuitant or the substituted
surviving spouse, as the 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.
6
<PAGE>
Under Section 457 Contracts this Annuity Payment Option is not
available unless the limitations described in the Second Option, above,
applicable to Section 457 Contracts, are satisfied. This Annuity Payment Option
is also available to a designated Beneficiary where the Annuitant dies before
Annuity payments have commenced if the designated period does not exceed a
period that terminates five years after the death of the Annuitant. If the
surviving spouse of the Annuitant is the designated Beneficiary and the
surviving spouse dies before Annuity payments to such spouse have commenced, the
surviving spouse will be treated as the Annuitant for purposes of the preceding
sentence. In addition, this Annuity Payment Option is not available if the
number of years in the selected period over which Annuity payments would
otherwise be paid plus the attained age of the Annuitant at the Annuity
Commencement Date would exceed 95.
FIFTH OPTION - PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Annuity
Payment Option is not available to a Beneficiary under a Non-Qualified Contract
where the Annuitant dies before Annuity payments have commenced, unless the
amount selected results in a distribution period which either satisfies the
limitations described in the Second Option, above, applicable to Non-Qualified
Contracts, or which terminates not more than five years after the death of the
Annuitant or the substitute surviving spouse, as the case may be.
ANNUITY PAYMENTS
A. GENDER OF ANNUITANT
When annuity payments are based on life expectancy, the amount of each
annuity payment ordinarily will be higher if the Annuitant or other measuring
life is a male, as compared with a female under an otherwise identical Contract.
This is because, statistically, females tend to have longer life expectancies
than males.
However, there will be no differences between males and females in any
jurisdiction, including Montana, where such differences are not permitted.
American Franklin will also make available Contracts with no such differences in
connection with certain employer-sponsored benefit plans. Employers should be
aware that, under most such plans, Contracts that make distinctions based on
gender are prohibited by law.
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.
7
<PAGE>
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 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.
8
<PAGE>
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/98
<TABLE>
<CAPTION>
DIVISION 1 YEAR FROM INCEPTION*
------------- --------- ---------------
<S> <C> <C>
Fidelity VIP Equity-Income 4.01% 14.48%
Fidelity VIP Growth 31.49% 26.18%
Fidelity VIP High Income -11.73% 2.76%
Fidelity VIP Money Market -2.06% 0.40%
Fidelity VIP Overseas 5.12% 9.26%
Fidelity VIPII Asset Manager 7.38% 13.76%
Fidelity VIPII Contrafund 22.11% 23.17%
Fidelity VIPII Index 500 20.47% 26.44%
Fidelity VIPII Investment Grade Bond 1.26% 4.37%
MFS Capital Opportunities 18.72% 23.20%
MFS Emerging Growth 26.23% 22.10%
MFS Growth With Income 14.55% 21.91%
MFS Research 15.60% 17.08%
MFS Total Return 4.70% 11.56%
MFS Utilities 10.35% 18.05%
</TABLE>
* Inception dates for the Divisions are: February 28, 1997
TOTAL RETURN CALCULATIONS (WITHOUT SURRENDER CHARGE)
Each Division may also advertise its non-standardized total return,
which will be calculated in the same manner and for the same time periods as the
standardized average annual total returns described immediately above, except
that the redeemable value will not reflect the deduction of any applicable
Surrender Charge that may be imposed at the end of the period, since it is
assumed that the Contract will continue through the end of each period, or the
deduction of the Annual Contract Fee. If reflected, these charges would reduce
the performance results presented.
CUMULATIVE TOTAL RETURN CALCULATIONS
No standardized formula has been prescribed by the Securities and
Exchange Commission for calculating cumulative total return performance.
Cumulative total return
9
<PAGE>
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.
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
10
<PAGE>
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 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.
11
<PAGE>
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-18
II. AMERICAN FRANKLIN FINANCIAL STATEMENTS
Report of Independent Auditors..........................................................F-19
Audited Financial Statements:
Statement of Operations for the years ended
December 31, 1998, 1997 and 1996........................................................F-20
Balance Sheet, December 31, 1998 and 1997...............................................F-21
Statement of Shareholder's Equity for the years
ended December 31, 1998, 1997 and 1996.................................................F-22
Statement of Cash Flows for the years ended
December 31, 1998, 1997 and 1996........................................................F-23
Notes to Financial Statements...........................................................F-24 - F-34
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The American Franklin Life Insurance Company
Contractowners of Separate Account VA-1
We have audited the accompanying statement of net assets of Separate
Account VA-1 (comprising, respectively, the Money Market,
Equity-Income, Growth, Overseas, High Income, Investment Grade Bond,
Asset Manager, Index 500, Contrafund, MFS Emerging Growth, MFS
Research, MFS Growth With Income, MFS Total Return, MFS Utilities and
MFS Value Divisions) as of December 31, 1998, and the related statement
of operations for the year then ended and the 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. These
financial statements are the responsibility of Separate Account VA-1
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. Our procedures included confirmation of
securities owned as of December 31, 1998 by correspondence with the
custodian. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of each of the
respective Divisions constituting Separate Account VA-1 at December 31,
1998, and the results of their operations for the year then ended and
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
in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 12, 1999
F-2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
---------------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in Funds at fair value
(cost: see below) $ 8,701,049 $ 20,127,458 $ 17,527,119 $ 2,378,108 $ 2,766,415
Dividends receivable 32,492 -- -- -- --
Due from (to) general account 437 772 673 318 (19)
--------------- -------------- ------------- ------------- --------------
$ 8,733,978 $ 20,128,230 $ 17,527,792 $ 2,378,426 $ 2,766,396
NET ASSETS
--------------- -------------- ------------- ------------- --------------
Unit value, at December 31, 1998 $ 5.34 $ 6.73 $ 7.94 $ 6.20 $ 5.54
--------------- -------------- ------------- ------------- --------------
Units outstanding, at December 31, 1998 1,634,822 2,991,972 2,207,408 383,712 499,418
--------------- -------------- ------------- ------------- --------------
Cost of investments $ 8,701,049 $ 18,944,344 $ 14,509,323 $ 2,322,070 $ 3,000,657
--------------- -------------- ------------- ------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
-------------------------------------------------------------------------------------
VIPII VIPII VIPII VIPII MFS
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in Funds at fair value
(cost: see below) $ 3,408,186 5,444,951 26,019,563 11,818,212 11,991,031
Dividends receivable -- -- -- -- --
Due from (to) general account (80) 208 998 453 460
--------------- ---------- ----------- ---------- ----------
$ 3,408,106 $ 5,445,159 $ 26,020,561 $ 11,818,665 $ 11,991,491
NET ASSETS
--------------- ---------- ----------- ---------- ----------
Unit value, at December 31, 1998 $ 5.70 $ 6.64 $ 8.07 $ 7.62 $ 7.48
--------------- ---------- ----------- ---------- ----------
Units outstanding, at December 31, 1998 598,142 820,384 3,224,829 1,551,801 1,603,087
--------------- ---------- ----------- ---------- ----------
Cost of investments $ 3,304,970 $ 5,123,856 $ 22,206,009 $ 9,995,665 $ 9,943,378
--------------- ---------- ----------- ---------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
--------------------------------------------------------------------------------------
MFS
MFS GROWTH MFS MFS MFS
RESEARCH WITH INCOME TOTAL RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS
Investments in Funds at fair value
(cost: see below) $ 15,385,248 $ 10,050,682 $ 14,747,684 $ 6,360,777 $ 4,730,214
Dividends receivable -- -- -- -- --
Due from (to) general account 590 386 565 244 260
--------------- --------------- -------------- ------------- --------------
$ 15,385,838 $ 10,051,068 $ 14,748,249 $ 6,361,021 $ 4,730,474
NET ASSETS
--------------- --------------- -------------- ------------- --------------
Unit value, at December 31, 1998 $ 6.95 $ 7.51 $ 6.43 $ 7.04 $ 7.59
--------------- --------------- -------------- ------------- --------------
Units outstanding, at December 31, 1998 2,214,458 1,338,496 2,294,198 903,586 623,561
--------------- --------------- -------------- ------------- --------------
Cost of investments $ 13,593,484 $ 8,958,122 $ 13,776,846 $ 5,860,204 $ 4,225,853
--------------- --------------- -------------- ------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
------------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends $ 273,178 $ 96,737 $ 27,383 $ 22,675 $ 94,119
Capital gains distributions -- 344,271 716,274 66,830 59,805
Expenses
Mortality and expense risk charge 71,033 175,737 141,890 39,051 27,048
----------- ------------- -------------- -------------- -------------
Net investment income (expense) 202,145 265,271 601,767 50,454 126,876
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) -- 55,848 88,948 (30,975) (3,120)
Net unrealized appreciation (depreciation)
Beginning of year -- 181,643 (7,936) (47,635) 42,794
End of year -- 1,183,114 3,017,796 56,038 (234,242)
----------- ------------- -------------- -------------- -------------
Net change in unrealized appreciation
(depreciation) during the year -- 1,001,471 3,025,732 103,673 (277,036)
----------- ------------- -------------- -------------- -------------
Net realized and unrealized gain (loss) on
investments -- 1,057,319 3,114,680 72,698 (280,156)
----------- ------------- -------------- -------------- -------------
Net increase (decrease) in net assets
from operations $ 202,145 $ 1,322,590 $ 3,716,447 $ 123,152 $ (153,280)
----------- ------------- -------------- -------------- -------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-6
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
------------------------------------------------------------------------------------
VIPII VIPII VIPII VIPII MFS
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends $ 23,299 $ 57,958 $ 63,920 $ 22,244 $ --
Capital gains distributions 2,764 173,875 148,050 163,653 35,970
Expenses
Mortality and expense risk charge 21,668 47,227 191,526 87,340 84,408
------------- ------------ -------------- ------------- --------------
Net investment income (expense) 4,395 184,606 20,444 98,557 (48,438)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) 11,687 17,120 117,249 35,537 63,281
Net unrealized appreciation (depreciation)
Beginning of year 10,658 38,856 146,733 12,404 (379)
End of year 103,216 321,095 3,813,554 1,822,547 2,047,653
------------- ------------ -------------- ------------- --------------
Net change in unrealized appreciation
(depreciation) during the year 92,558 282,239 3,666,821 1,810,143 2,048,032
------------- ------------ -------------- ------------- --------------
Net realized and unrealized gain (loss) on
investments 104,245 299,359 3,784,070 1,845,680 2,111,313
------------- ------------ -------------- ------------- --------------
Net increase (decrease) in net assets
from operations $ 108,640 $ 483,965 $ 3,804,514 $ 1,944,237 $ 2,062,875
------------- ------------ -------------- ------------- --------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-7
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
-----------------------------------------------------------------------------------
MFS MFS
MFS GROWTH TOTAL MFS MFS
RESEARCH WITH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends $ 12,306 $ -- $ 89,940 $ 20,082 $ 5,726
Capital gains distributions 161,384 -- 105,751 91,306 3,925
Expenses
Mortality and expense risk charge 131,242 63,989 129,148 29,190 18,303
------------- --------------- ------------- ------------ ------------
Net investment income (expense) 42,448 (63,989) 66,543 82,198 (8,652)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) 74,106 48,058 39,797 15,718 (6,658)
Net unrealized appreciation (depreciation)
Beginning of year 13,147 9,772 131,700 70,551 (65,257)
End of year 1,791,764 1,092,560 970,838 500,573 504,361
------------- --------------- ------------- ------------ ------------
Net change in unrealized appreciation
(depreciation) during the year 1,778,617 1,082,788 839,138 430,022 569,618
------------- --------------- ------------- ------------ ------------
Net realized and unrealized gain (loss) on
investments 1,852,723 1,130,846 878,935 445,740 562,960
------------- --------------- ------------- ------------ ------------
Net increase (decrease) in net assets
from operations $ 1,895,171 $ 1,066,857 $ 945,478 $ 527,938 $ 554,308
------------- --------------- ------------- ------------ ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-8
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
------------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 202,145 $ 265,271 $ 601,767 $ 50,454 $ 126,876
Net realized gain (loss) on -- 55,848 88,948 (30,975) (3,120)
investments
Net change in unrealized appreciation
(depreciation) on investments -- 1,001,471 3,025,732 103,673 (277,036)
--------------- -------------- -------------- ---------------- ------------
Net increase (decrease) in net assets from
operations 202,145 1,322,590 3,716,447 123,152 (153,280)
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 11,856,144 13,160,027 9,367,089 1,443,315 2,058,439
Withdrawals (352,036) (569,468) (562,277) (65,740) (38,135)
Transfers between Separate Account
VA-1 divisions, net (5,106,319) 554,939 737,303 (197,054) (197,465)
--------------- -------------- -------------- ---------------- ------------
Net increase in net assets from contract
related transactions 6,397,789 13,145,498 9,542,115 1,180,521 1,822,839
--------------- -------------- -------------- ---------------- ------------
Increase in net assets 6,599,934 14,468,088 13,258,562 1,303,673 1,669,559
Net assets, beginning of year 2,134,044 5,660,142 4,269,230 1,074,753 1,096,837
--------------- -------------- -------------- ---------------- ------------
Net assets, end of year $ 8,733,978 $ 20,128,230 $ 17,527,792 $ 2,378,426 $ 2,766,396
--------------- -------------- -------------- ---------------- ------------
FOR THE PERIOD FROM FEBRUARY 28, 1997
(DATE OF INCEPTION) TO DECEMBER 31, 1997
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 33,936 $ (21,790) (14,200) $ (5,551) $ (4,705)
Net realized gain on investments -- 7,054 19,623 4,079 1,744
Net change in unrealized appreciation
(depreciation) on investments -- 181,643 (7,936) (47,635) 42,794
--------------- -------------- -------------- ---------------- ------------
Net increase (decrease) in net assets from
operations 33,936 166,907 (2,513) (49,107) 39,833
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 3,051,376 5,425,325 4,237,375 1,070,074 1,058,464
Withdrawals (6,825) (47,105) (25,073) (1,162) (500)
Transfers between Separate Account
VA-1 divisions, net (944,443) 115,015 59,441 54,948 (960)
--------------- -------------- -------------- ---------------- ------------
Net increase in net assets from contract
related transactions 2,100,108 5,493,235 4,271,743 1,123,860 1,057,004
--------------- -------------- -------------- ---------------- ------------
Increase in net assets 2,134,044 5,660,142 4,269,230 1,074,753 1,096,837
Net assets, beginning of period -- -- -- -- --
--------------- -------------- -------------- ---------------- ------------
Net assets, end of period $ 2,134,044 $ 5,660,142 $ 4,269,230 $ 1,074,753 $ 1,096,837
--------------- -------------- -------------- ---------------- ------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
-----------------------------------------------------------------------------------
VIPII VIPII VIPII VIPII MFS
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 4,395 $ 184,606 $ 20,444 $ 98,557 $ (48,438)
Net realized gain (loss) on 11,687 17,120 117,249 35,537 63,281
investments
Net change in unrealized
appreciation (depreciation) on
investments 92,558 282,239 3,666,821 1,810,143 2,048,032
-------------- ------------- -------------- -------------- ---------------
Net increase (decrease) in net assets from
operations 108,640 483,965 3,804,514 1,944,237 2,062,875
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 2,886,571 3,816,140 17,267,124 7,275,556 7,611,963
Withdrawals (119,470) (124,688) (561,189) (220,074) (227,264)
Transfers between Separate Account
VA-1 divisions, net 149,361 (51,516) 1,284,744 292,732 436,324
-------------- ------------- -------------- -------------- ---------------
Net increase in net assets from contract
related transactions 2,916,462 3,639,936 17,990,679 7,348,214 7,821,023
-------------- ------------- -------------- -------------- ---------------
Increase in net assets 3,025,102 4,123,901 21,795,193 9,292,451 9,883,898
Net assets, beginning of year 383,004 1,321,258 4,225,368 2,526,214 2,107,593
-------------- ------------- -------------- -------------- ---------------
Net assets, end of year $ 3,408,106 $ 5,445,159 $ 26,020,561 $ 11,818,665 $ 11,991,491
-------------- ------------- -------------- -------------- ---------------
FOR THE PERIOD FROM FEBRUARY 28, 1997
(DATE OF INCEPTION) TO DECEMBER 31, 1997
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ (1,400) $ (5,278) $ (16,370) $ (9,586) $ (11,724)
Net realized gain on investments 146 4,336 14,060 14,623 21,859
Net change in unrealized
appreciation (depreciation) on
investments 10,658 38,856 146,733 12,404 (379)
-------------- ------------- -------------- -------------- ---------------
Net increase (decrease) in net assets from
operations 9,404 37,914 144,423 17,441 9,756
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 357,852 1,306,246 3,951,222 2,432,361 2,064,214
Withdrawals (312) (846) (15,675) (6,995) (6,359)
Transfers between Separate Account
VA-1 divisions, net 16,060 (22,056) 145,398 83,407 39,982
-------------- ------------- -------------- -------------- ---------------
Net increase in net assets from contract
related transactions 373,600 1,283,344 4,080,945 2,508,773 2,097,837
-------------- ------------- -------------- -------------- ---------------
Increase in net assets 383,004 1,321,258 4,225,368 2,526,214 2,107,593
Net assets, beginning of period -- -- -- -- --
-------------- ------------- -------------- -------------- ---------------
Net assets, end of period $ 383,004 $ 1,321,258 $ 4,225,368 $ 2,526,214 $ 2,107,593
-------------- ------------- -------------- -------------- ---------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-10
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
-----------------------------------------------------------------------------------
MFS MFS
MFS GROWTH TOTAL MFS MFS
RESEARCH WITH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 42,448 $ (63,989) $ 66,543 $ 82,198 $ (8,652)
Net realized gain (loss ) on investments 74,106 48,058 39,797 15,718 (6,658)
Net change in unrealized appreciation
(depreciation) on investments 1,778,617 1,082,788 839,138 430,022 569,618
--------------- ---------------- ---------------- ------------- ----------
Net increase (decrease) in net assets from
operations 1,895,171 1,066,857 945,478 527,938 554,308
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 9,304,712 7,103,204 9,969,517 4,447,436 3,498,061
Withdrawals (354,707) (193,536) (288,075) (94,887) (154,469)
Transfers between Separate Account
VA-1 divisions, net 158,605 684,133 531,659 568,287 227,972
--------------- ---------------- ---------------- ------------- ----------
Net increase in net assets from contract
related transactions 9,108,610 7,593,801 10,213,101 4,920,836 3,571,564
--------------- ---------------- ---------------- ------------- ----------
Increase in net assets 11,003,781 8,660,658 11,158,579 5,448,774 4,125,872
Net assets, beginning of year 4,382,057 1,390,410 3,589,670 912,247 604,602
--------------- ---------------- ---------------- ------------- ----------
Net assets, end of year $ 15,385,838 $ 10,051,068 $ 14,748,249 $ 6,361,021 $ 4,730,474
--------------- ---------------- ---------------- ------------- ----------
FOR THE PERIOD FROM FEBRUARY 28, 1997
(DATE OF INCEPTION) TO DECEMBER 31, 1997
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ (20,141) $ 27,416 $ (13,566) $ (3,183) $ 77,282
Net realized gain on investments 7,944 9,844 10,482 380 12,630
Net change in unrealized appreciation
(depreciation) on investments 13,147 9,772 131,700 70,551 (65,257)
--------------- ---------------- ---------------- ------------- ----------
Net increase (decrease) in net assets from
operations 950 47,032 128,616 67,748 24,655
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 4,376,126 1,342,706 3,492,360 844,009 540,032
Withdrawals (16,740) (6,853) (8,529) (726) (957)
Transfers between Separate Account
VA-1 divisions, net 21,721 7,525 (22,777) 1,216 40,872
--------------- ---------------- ---------------- ------------- ----------
Net increase in net assets from contract
related transactions 4,381,107 1,343,378 3,461,054 844,499 579,947
--------------- ---------------- ---------------- ------------- ----------
Increase in net assets 4,382,057 1,390,410 3,589,670 912,247 604,602
Net assets, beginning of period -- -- -- -- --
--------------- ---------------- ---------------- ------------- ----------
Net assets, end of period $ 4,382,057 $ 1,390,410 $ 3,589,670 $ 912,247 $ 604,602
--------------- ---------------- ---------------- ------------- ----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-11
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. NATURE OF OPERATIONS
The American Franklin Life Insurance Company (American Franklin) is a
wholly-owned subsidiary of The Franklin Life Insurance Company.
American Franklin established Separate Account VA-1 (Account) as a
unit investment trust registered under the Investment Company Act of
1940. The Account, which consists of fifteen investment divisions,
was established on May 22, 1996 in conformity with Illinois Insurance
Law. The assets in each division are invested in units of beneficial
interest (shares) of a designated portfolio (Portfolio) of three
mutual funds, sponsored by Fidelity Investments (Variable Insurance
Products Fund and Variable Insurance Products Fund II) and MFS
Investment Management (MFS Variable Insurance Trust) (collectively,
the Funds). The VIP Money Market, VIP Equity-Income, VIP Growth, VIP
Overseas, and VIP High Income Divisions of the Account are invested
in shares of a corresponding Portfolio of Variable Insurance Products
Fund; the VIPII Investment Grade Bond, VIPII Asset Manager, VIPII
Index 500, and VIPII Contrafund Divisions of the Account are invested
in shares of a corresponding Portfolio of Variable Insurance Products
Fund II; and the MFS Emerging Growth, MFS Research, MFS Growth With
Income, MFS Total Return, MFS Utilities, and MFS Value Divisions of
the Account are invested in shares of a corresponding Portfolio of
MFS Variable Insurance Trust. The Account's financial statements
should be read in conjunction with the financial statements of the
Funds. The Account commenced operations on February 28, 1997. The
accumulation unit value for each division was $5 at the inception of
the account.
The Account was established by American Franklin to support the
operations of American Franklin's The Chairman-TM- Combination Fixed
and Variable Annuity Contracts (the Contracts).
Franklin Financial Services Corporation, a wholly-owned subsidiary of
The Franklin Life Insurance Company, acts as the principal
underwriter, as defined in the Investment Company Act of 1940, of the
Contracts. The assets of the Account are the property of American
Franklin. The portion of the Account's assets applicable to the
Contracts is not chargeable with liabilities arising out of any other
business American Franklin may conduct.
The net assets of the Account may not be less than the reserves
applicable to the Contracts. Assets may also be set aside in American
Franklin's General Account based on the amounts allocated under the
Contracts to American Franklin's Fixed Account. Additional assets are
set aside in American Franklin's General Account to provide for other
contract benefits.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Account are as follows:
Investments in shares of the Funds are carried at fair value.
Investments in shares of the Funds are valued at the net asset values
of the respective Portfolios of the Funds. Investment transactions
are recorded on the trade date. Dividends are recorded as received.
Realized gains and losses on sales of the Account shares are
determined based on the specific identification method.
The operations of the Account are included in the federal income tax
return of American Franklin. Under the provisions of the Contracts,
American Franklin has the right to charge the Account for federal
income tax attributable to the Account. No charge is currently being
made against the Account for such tax since, under current tax law,
American Franklin pays no tax on investment income and capital gains
of the Account. However, American Franklin retains the right to
charge for any federal income tax incurred which is attributable to
the Account if the law is changed. Charges for state and local taxes,
if any, attributable to the Account may also be made.
F-12
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
3. SALES AND ADMINISTRATIVE CHARGES
Certain jurisdictions require that deductions be made from premium
payments for premium taxes. The amount of such deductions varies and
may be up to 5% of the premium or purchase payment. Other
jurisdictions assess a premium tax at the point of annuitization. The
balance of a purchase payment remaining after any such deduction is
placed by American Franklin in an account established for each
contractowner. Each year American Franklin makes a charge of $30
against each contractowner's account for administrative expenses.
This annual fee is currently waived if cumulative purchase payments
are at least $75,000. In addition, American Franklin will make
charges for a transfer between investment divisions in any contract
year in which twelve transfers have already been made ($25 for each
additional transfer in a given contract year). American Franklin
assumes mortality and expense risks related to the operations of the
Account and deducts a charge from the assets of the Account at an
effective annual rate of 1.40% of the Account's average daily net
asset value to cover these risks and to offset other administrative
expenses not covered by the annual contract fee. The total charges
paid by the Account to American Franklin were $1,271,400 and $148,200
for the year ended December 31, 1998 and the period from February 28,
1997 (date of inception) to December 31, 1997, respectively.
American Franklin imposes a surrender charge on the amount of each
purchase payment withdrawn during the first seven years after
receipt, unless the withdrawal is exempt from the surrender charge.
The maximum surrender charge is 6% of purchase payments withdrawn
during the first two years after receipt; the percentage declines
ratably until elimination after the seventh year.
F-13
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding
units is shown below:
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Unit value, beginning of year $ 5.14 $ 5.99 $ 5.65 $ 5.54 $ 5.89
----------- ---------- ---------- ----------- --------
Unit value, end of year $ 5.34 $ 6.73 $ 7.94 $ 6.20 $ 5.54
----------- ---------- ---------- ----------- --------
Number of units outstanding,
beginning of year 415,509 945,566 755,694 193,892 186,285
Net contract purchase payments 2,254,703 2,052,756 1,427,556 238,271 348,659
Withdrawals (66,473) (89,500) (81,680) (10,792) (6,632)
Transfers between Separate Account
VA-1 divisions, net (968,917) 83,150 105,838 (37,659) (28,894)
----------- ---------- ---------- ----------- --------
Number of units outstanding,
end of year 1,634,822 2,991,972 2,207,408 383,712 499,418
----------- ---------- ---------- ----------- --------
FOR THE PERIOD FROM FEBRUARY 28, 1997 (DATE
OF INCEPTION) TO DECEMBER 31, 1997
Unit value, beginning of period $ 5.00 $ 5.00 $ 5.00 $ 5.00 $ 5.00
----------- ---------- ---------- ----------- --------
Unit value, end of period $ 5.14 $ 5.99 $ 5.65 $ 5.54 $ 5.89
----------- ---------- ---------- ----------- --------
Number of units outstanding,
beginning of period -- -- -- -- --
Net contract purchase payments 602,404 934,067 749,740 184,417 186,518
Withdrawals (1,332) (8,001) (4,373) (206) (85)
Transfers between Separate Account
VA-1's Divisions, net (185,563) 19,500 10,327 9,681 (148)
----------- ---------- ---------- ----------- --------
Number of units outstanding,
end of period 415,509 945,566 755,694 193,892 186,285
----------- ---------- ---------- ----------- --------
</TABLE>
F-14
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS (continued)
Unit value information and a summary of changes in outstanding units
is shown below:
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
---------------------------------------------------------------------------------
VIPII VIPII VIPII VIPII MFS
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Unit value, beginning of year $ 5.32 $ 5.78 $ 6.21 $ 5.83 $ 5.50
------------ ----------- ----------- ----------- ----------
Unit value, end of year $ 5.70 $ 6.64 $ 8.07 $ 7.62 $ 7.48
------------ ----------- ----------- ----------- ----------
Number of units outstanding,
beginning of year 71,989 228,526 680,587 433,486 383,222
Net contract purchase payments 520,769 619,396 2,444,038 1,108,876 1,191,562
Withdrawals (21,276) (20,250) (77,752) (33,774) (35,893)
Transfers between Separate Account
VA-1 divisions, net 26,660 (7,288) 177,956 43,213 64,196
------------ ----------- ----------- ----------- ----------
Number of units outstanding,
end of year 598,142 820,384 3,224,829 1,551,801 1,603,087
------------ ----------- ----------- ----------- ----------
FOR THE PERIOD FROM FEBRUARY 28, 1997
(DATE OF INCEPTION) TO DECEMBER 31, 1997
Unit value, beginning of period $ 5.00 $ 5.00 $ 5.00 $ 5.00 $ 5.00
------------ ----------- ----------- ----------- ----------
Unit value, end of period $ 5.32 $ 5.78 $ 6.21 $ 5.83 $ 5.50
------------ ----------- ----------- ----------- ----------
Number of units outstanding,
beginning of period -- -- -- -- --
Net contract purchase payments 69,000 233,481 660,464 420,462 377,275
Withdrawals (59) (146) (2,563) (1,189) (1,139)
Transfers between Separate Account
VA-1's Divisions, net 3,048 (4,809) 22,686 14,213 7,086
------------ ----------- ----------- ----------- ----------
Number of units outstanding,
end of period 71,989 228,526 680,587 433,486 383,222
------------ ----------- ----------- ----------- ----------
</TABLE>
F-15
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS (continued)
Unit value information and a summary of changes in outstanding units
is shown below:
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
--------------------------------------------------------------------------------------
MFS MFS
MFS GROWTH TOTAL MFS MFS
RESEARCH WITH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1998
Unit value, beginning of year $5.61 $6.09 $5.73 $6.01 $5.99
------------- ------------ ----------- ----------- -----------
Unit value, end of year $6.95 $7.51 $6.43 $7.04 $7.59
------------- ------------ ----------- ----------- -----------
Number of units outstanding,
beginning of year 780,716 228,416 626,024 151,829 100,943
Net contract purchase payments 1,470,024 1,039,794 1,629,993 678,587 513,502
Withdrawals (56,418) (27,958) (46,902) (14,429) (21,848)
Transfers between Separate Account
VA-1 divisions, net 20,136 98,244 85,083 87,599 30,964
------------- ------------ ----------- ----------- -----------
Number of units outstanding,
end of year 2,214,458 1,338,496 2,294,198 903,586 623,561
------------- ------------ ----------- ----------- -----------
FOR THE PERIOD FROM FEBRUARY 28, 1997
(DATE OF INCEPTION) TO DECEMBER 31, 1997
Unit value, beginning of period $5.00 $5.00 $5.00 $5.00 $5.00
------------- ------------ ----------- ----------- -----------
Unit value, end of period $5.61 $6.09 $5.73 $6.01 $5.99
------------- ------------ ----------- ----------- -----------
Number of units outstanding,
beginning of period -- -- -- -- --
Net contract purchase payments 780,936 229,569 632,529 151,754 94,256
Withdrawals (2,963) (1,141) (1,523) (126) (165)
Transfers between Separate Account
VA-1 Divisions, net 2,743 (12) (4,982) 201 6,852
------------- ------------ ----------- ----------- -----------
Number of units outstanding,
end of period 780,716 228,416 626,024 151,829 100,943
------------- ------------ ----------- ----------- -----------
</TABLE>
F-16
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
5. REMUNERATION OF MANAGEMENT
The Account incurs no liability or expense for remuneration to directors,
members of advisory boards, officers or any other person who might provide
a service for the Account, except as described in Note 3.
6. YEAR 2000 (UNAUDITED)
INTERNAL SYSTEMS. American Franklin's ultimate parent, American General
Corporation (AGC), has numerous technology systems that are managed on a
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 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 applicable
action plans. American Franklin is currently developing contingency plans
and expects to substantially complete all contingency planning activities
by April 30, 1999.
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's 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
F-17
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1998
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, The 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 The American Franklin's normal accounting
policies.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
and Shareholder
The American Franklin Life Insurance Company
We have audited the accompanying balance sheets of The American Franklin Life
Insurance Company, (the Company), a wholly-owned subsidiary of The Franklin Life
Insurance Company, which is an indirect wholly-owned subsidiary of American
General Corporation, as of December 31, 1998 and 1997, and the related
statements of operations, shareholder's equity, cash flows, and comprehensive
income (loss) for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The American Franklin Life
Insurance Company at December 31, 1998 and 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 16, 1999
F-19
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Revenues
Premiums and other considerations $ 17,688 $ 17,434 $ 16,346
Net investment income 2,419 2,530 2,641
Realized investment gains 47 283 90
Other income (expense) 8,715 1,541 (623)
-------- -------- --------
Total revenues 28,869 21,788 18,454
Benefits and expenses
Insurance and annuity benefits 4,889 3,674 3,610
Operating cost and expenses 15,910 9,635 8,544
Commissions and allowances 27,695 20,096 14,843
Change in deferred policy acquisition costs and
cost of insurance purchased (20,354) (15,351) (7,866)
Litigation settlement 8,064 -- --
-------- -------- --------
Total benefits and expenses 36,204 18,054 19,131
-------- -------- --------
Income (loss) before income taxes (7,335) 3,734 (677)
Income tax expense (benefit)
Current (1,247) 715 873
Deferred (2,270) 244 (1,104)
-------- -------- --------
Total income tax expense (benefit) (3,517) 959 (231)
-------- -------- --------
Net income (loss) $ (3,818) $ 2,775 $ (446)
-------- -------- --------
-------- -------- --------
</TABLE>
See Notes to Financial Statements.
F-20
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
BALANCE SHEET
(In thousands, except share data)
<TABLE>
<CAPTION>
AT DECEMBER 31
1998 1997
--------- ---------
<S> <C> <C>
ASSETS
Investments
Fixed maturity securities (amortized cost: $31,219; $21,305) $ 32,587 $ 22,565
Policy loans 12,371 7,050
--------- ---------
Total investments 44,958 29,615
Cash 14,211 6,349
Accrued investment income 408 472
Amounts recoverable from reinsurers 10,314 8,885
Deferred policy acquisition costs 52,352 30,515
Cost of insurance purchased 8,941 10,549
Insurance premiums in course of settlement 1,620 1,286
Other assets 1,922 1,328
Assets held in Separate Accounts 442,801 223,529
--------- ---------
Total assets $ 577,527 $ 312,528
--------- ---------
--------- ---------
LIABILITIES
Insurance and annuity liabilities
Policy reserves, contract claims and other policyholders' funds $ 16,965 $ 13,051
Universal life contracts 31,150 31,289
Annuity contracts 5,376 2,274
Unearned revenue 9,591 6,801
Income tax liabilities
Current (1,220) 380
Deferred (4,464) (2,211)
Accrued expenses and other liabilities 25,402 7,767
Liabilities related to Separate Accounts 442,801 223,529
--------- ---------
Total liabilities 525,601 282,880
SHAREHOLDER'S EQUITY
Common stock ($5 par value; 500,000 shares authorized,
issued and outstanding) 2,500 2,500
Paid-in capital 51,437 25,373
Accumulated other comprehensive income 430 398
Retained earnings (deficit) (2,441) 1,377
--------- ---------
Total shareholder's equity 51,926 29,648
--------- ---------
Total liabilities and shareholder's equity $ 577,527 $ 312,528
--------- ---------
--------- ---------
</TABLE>
See Notes to Financial Statements.
F-21
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF SHAREHOLDER'S EQUITY
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
-------- --------- --------
<S> <C> <C> <C>
Common stock, balance at beginning and end of year $ 2,500 $ 2,500 $ 2,500
-------- --------- --------
Paid-in capital
Balance at beginning of year 25,373 25,373 15,373
Capital contribution 26,064 -- 10,000
-------- --------- --------
Balance at end of year 51,437 25,373 25,373
-------- --------- --------
Retained earnings (deficit)
Balance at beginning of year 1,377 (1,398) (952)
Net income (loss) (3,818) 2,775 (446)
-------- --------- --------
Balance at end of year (2,441) 1,377 (1,398)
-------- --------- --------
Accumulated other comprehensive income
Balance at beginning of year 398 391 727
Change during the year 49 10 (516)
Amounts applicable to deferred federal income taxes (17) (3) 180
-------- --------- --------
Balance at end of year 430 398 391
-------- --------- --------
Total shareholder's equity at end of year $ 51,926 $ 29,648 $ 26,866
-------- --------- --------
-------- --------- --------
</TABLE>
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
-------- ------- ---------
<S> <C> <C> <C>
Net income (loss) $(3,818) $ 2,775 $ (446)
Other comprehensive income (loss)
Gross change in unrealized gains (losses) on
securities (pretax: $97; $294; $(426)) 63 191 (277)
Less: gains (losses) realized in net income
(pretax: $48; $284, $90) 31 184 59
-------- ------- ---------
Change in net unrealized gains (losses) on
securities (pretax: $49; $10; $(516)) 32 7 (336)
-------- ------- ---------
Comprehensive income (loss) $(3,786) $ 2,782 $ (782)
-------- ------- ---------
-------- ------- ---------
</TABLE>
See Notes to Financial Statements.
F-22
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ (3,818) $ 2,775 $ (446)
Reconciling adjustments to net cash used for
operating activities
Policy reserves, claims and other
policyholders' funds 12,783 18,078 12,609
Realized investment gains (47) (283) (90)
Deferred policy acquisition costs and cost of
insurance purchased (20,354) (15,351) (7,866)
Charges on universal life contracts, net of
interest credited (21,569) (17,369) (11,602)
Change in other assets and liabilities 11,343 (2,939) (2,660)
---------- ---------- ----------
Net cash used for operating activities (21,662) (15,089) (10,055)
---------- ---------- ----------
Investing activities
Investment purchases
Available-for-sale (26,271) (6,900) (32,704)
Other (5,794) (2,766) (2,107)
Investment calls, maturities and sales
Available-for-sale 17,072 17,699 26,096
---------- ---------- ----------
Net cash provided by (used for)
investing activities (14,993) 8,033 (8,715)
---------- ---------- ----------
Financing activities
Policyholder account deposits 191,502 99,023 43,912
Policyholder account withdrawals (173,049) (88,026) (39,565)
Proceeds from intercompany borrowings 18,896 15,320 4,742
Repayments of intercompany borrowings (18,896) (15,320) (4,832)
Capital contribution 26,064 -- 10,000
---------- ---------- ----------
Net cash provided by financing activities 44,517 10,997 14,257
---------- ---------- ----------
Net increase (decrease) in cash 7,862 3,941 (4,513)
Cash at beginning of year 6,349 2,408 6,921
---------- ---------- ----------
Cash at end of year $ 14,211 $ 6,349 $ 2,408
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See Notes to Financial Statements.
F-23
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
1.1 NATURE OF OPERATIONS
The American Franklin Life Insurance Company (AMFLIC), headquartered in
Springfield, Illinois, sells and services variable universal life,
variable annuity and universal life insurance products to the middle
income market, primarily in the Midwest.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) and include the
accounts of AMFLIC, a wholly-owned subsidiary of The Franklin Life
Insurance Company (FLIC). AMFLIC's ultimate parent is American General
Corporation (AGC).
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities.
Ultimate results could differ from these estimates.
1.3 INVESTMENTS
FIXED MATURITY SECURITIES. All fixed maturity securities are classified
as available-for-sale and recorded at fair value. After adjusting
related balance sheet accounts as if unrealized gains (losses) had been
realized, the net adjustment is recorded in accumulated other
comprehensive income within shareholder's equity. If the fair value of
a security classified as available-for-sale declines below its cost and
this decline is considered to be other than temporary, the security is
reduced to its fair value, and the reduction is recorded as a realized
loss.
POLICY LOANS. Policy loans are reported at unpaid principal balance.
INVESTMENT INCOME. Interest on fixed maturity securities and policy
loans is recorded as income when earned and is adjusted for any
amortization of premium or discount.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses)
are recognized using the specific identification method.
1.4 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain
contracts, principally universal life and annuities, for which the
investment risk lies predominantly with the contract holder. Therefore,
AMFLIC's liability for these accounts equals the value of the account
assets. Investment income, realized investment gains (losses), and
policyholder account deposits and withdrawals related to Separate
Accounts are excluded from the statement of operations. Assets held in
Separate Accounts are primarily shares in mutual funds, which are
carried at fair value, based on the quoted net asset value per share.
1.5 DEFERRED POLICY ACQUISITION COSTS (DPAC)
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as
DPAC.
DPAC associated with interest-sensitive life insurance contracts and
insurance investment contracts is charged to expense in relation to the
estimated gross profits of those contracts. DPAC associated with all
other insurance contracts is charged to expense over the premium-paying
period or as the premiums are earned over the life of the contract.
F-24
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.5 DEFERRED POLICY ACQUISITION COSTS (DPAC) (CONTINUED)
DPAC is adjusted for the impact on estimated future gross profits as if
net unrealized gains (losses) on securities had been realized at the
balance sheet date. The impact of this adjustment is included in
accumulated other comprehensive income within shareholder's equity.
AMFLIC reviews the carrying amount of DPAC on at least an annual basis.
AMFLIC considers estimated future gross profits or future premiums,
expected mortality, interest earned and credited rates, persistency,
and expenses in determining whether the carrying amount is recoverable.
1.6 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to insurance contracts in force at January 31, 1995,
the date of AGC's acquisition of FLIC and AMFLIC, is reported as CIP.
Interest is accreted on the unamortized balance of CIP at rates of 6%
to 8.5%. The amortization of CIP is charged to expense and CIP is also
adjusted for the impact of net unrealized gains (losses) on securities
in the same manner as DPAC. AMFLIC reviews the carrying amount of CIP
on at least an annual basis using the same methods used to evaluate
DPAC.
1.7 INSURANCE AND ANNUITY LIABILITIES
Substantially all of AMFLIC's insurance and annuity liabilities relate
to long-duration contracts. The contracts normally cannot be changed or
canceled by AMFLIC during the contract period.
For interest-sensitive life and insurance investment contracts,
reserves equal the sum of the policy account balance and deferred
revenue charges. Reserves for other contracts are based on estimates of
the cost of future policy benefits. Reserves are calculated using the
net level premium method. Interest assumptions used to compute reserves
ranged from 3% to 5.5% at December 31, 1998.
1.8 PREMIUM RECOGNITION
Receipts for insurance investment and interest-sensitive life insurance
contracts are classified as deposits instead of revenues. Revenues for
these contracts consist of mortality, expense, and surrender charges.
Policy charges that compensate AMFLIC for future services are deferred
and recognized over the period earned, using the same assumptions used
to amortize DPAC. For all other contracts, premiums are recognized when
due.
1.9 INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in
effect when the temporary differences reverse. The effect of a tax rate
change is recognized in income in the period of enactment. State income
taxes are included in income tax expense.
A valuation allowance for deferred tax assets is provided if it is more
likely than not that some portion of the deferred tax asset will not be
realized. A change in deferred tax assets or liabilities related to
fluctuations in the fair value of available-for-sale securities is
included in accumulated other comprehensive income within shareholder's
equity.
F-25
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.10 ACCOUNTING CHANGES
During 1998, AMFLIC adopted Statement of Financial Accounting Standards
(SFAS) No. 130, "Reporting Comprehensive Income," which establishes
standards for reporting and displaying comprehensive income and its
components in the financial statements. AMFLIC elected to report
comprehensive income and its components in a separate statement of
comprehensive income. Adoption of this statement did not change
recognition or measurement of net income and, therefore, did not impact
AMFLIC's results of operations or financial position.
1.11 RECLASSIFICATION
Certain amounts in the 1997 and 1996 financial statements have been
reclassified to conform to the 1998 presentation.
2. INVESTMENTS
2.1 FIXED MATURITY SECURITIES
VALUATION. Cost or amortized cost and fair value of fixed maturity
securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In thousands COST GAINS LOSSES VALUE
--------- ---------- ------------- --------
<S> <C> <C> <C> <C>
Corporate bonds
Investment grade $ 7,422 $ 614 $ -- $ 8,036
Below investment grade 300 4 -- 304
Public utilities 2,649 300 -- 2,949
Mortgage-backed 1,189 93 -- 1,282
U.S. government 19,456 343 -- 19,799
States/political subdivisions 203 14 -- 217
--------- ---------- ------------- --------
Total fixed maturity securities $31,219 $ 1,368 $ -- $32,587
--------- ---------- ------------- --------
--------- ---------- ------------- --------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In thousands COST GAINS LOSSES VALUE
--------- ----------- ---------- --------
<S> <C> <C> <C> <C>
Corporate bonds
Investment grade $ 9,172 $ 678 $ 2 $ 9,848
Below investment grade 300 12 -- 312
Public utilities 2,622 273 -- 2,895
Mortgage-backed 1,897 131 -- 2,028
U.S. government 7,111 155 -- 7,266
States/political subdivisions 203 13 -- 216
--------- ----------- ---------- --------
Total fixed maturity securities $21,305 $ 1,262 $ 2 $22,565
--------- ----------- ---------- --------
--------- ----------- ---------- --------
</TABLE>
F-26
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.1 FIXED MATURITY SECURITIES (CONTINUED)
Net unrealized gains on fixed maturity securities included in
accumulated other comprehensive income at December 31 were as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997
-------- --------
<S> <C> <C>
Gross unrealized gains $ 1,368 $ 1,262
Gross unrealized losses -- (2)
DPAC fair value adjustment (86) (39)
CIP fair value adjustment (621) (609)
Deferred federal income taxes (231) (214)
-------- --------
Net unrealized gains on securities $ 430 $ 398
-------- --------
-------- --------
</TABLE>
MATURITIES. The contractual maturities of fixed maturity securities at
December 31, 1998 were as follows:
<TABLE>
<CAPTION>
COST OR AMORTIZED FAIR
In thousands COST VALUE
----------------- -------
<S> <C> <C>
Fixed maturity securities, excluding mortgage-backed
securities, due
In one year or less $12,952 $12,978
In years two through five 10,924 11,572
In years six through ten 4,496 4,965
After ten years 1,658 1,790
Mortgage-backed securities 1,189 1,282
----------------- -------
Total fixed maturity securities $31,219 $32,587
----------------- -------
----------------- -------
</TABLE>
Actual maturities may differ from contractual maturities since
borrowers may have the right to call or prepay obligations. Corporate
requirements and investment strategies may result in the sale of
investments before maturity.
2.2 INVESTMENT INCOME
Investment income was as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Fixed maturity securities $1,592 $2,291 $2,141
Policy loans 445 264 175
Other investments 473 12 369
------ ------ ------
Gross investment income 2,510 2,567 2,685
Investment expense 91 37 44
------ ------ ------
Net investment income $2,419 $2,530 $2,641
------ ------ ------
------ ------ ------
</TABLE>
F-27
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.3 REALIZED INVESTMENT GAINS
Realized investment gains (losses), net of DPAC and CIP amortization
and investment expenses, were as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
----- ------ ------
<S> <C> <C> <C>
Fixed maturity securities
Gross gains $ 116 $ 564 $ 183
Gross losses -- (10) (10)
----- ------ ------
Total 116 554 173
Other (69) (271) (83)
----- ------ ------
Realized investment gains $ 47 $ 283 $ 90
----- ------ ------
----- ------ ------
</TABLE>
Voluntary sales of investments resulted in the following realized gains
(losses):
<TABLE>
<CAPTION>
REALIZED
-----------------------------
In thousands CATEGORY PROCEEDS GAINS LOSSES
------------------ ------------- ------------- -----------
<S> <C> <C> <C> <C>
1998 AVAILABLE-FOR-SALE $ 2,110 $ 116 $ -
------------------ ------------- ------------- -----------
------------------ ------------- ------------- -----------
1997 Available-for-sale $ 9,992 $ 550 $ 8
------------------ ------------- ------------- -----------
------------------ ------------- ------------- -----------
1996 Available-for-sale $ 12,081 $ 171 $ 10
</TABLE>
2.4 INVESTMENTS ON DEPOSIT
At December 31, 1998 and 1997, fixed maturity securities with a
carrying value of $6,717,000 and $7,018,000, respectively, were on
deposit with regulatory authorities to comply with state insurance
laws.
2.5 INVESTMENT RESTRICTIONS
AMFLIC is restricted by the insurance laws of its domiciliary state as
to the amount which it can invest in any entity. At December 31, 1998
and 1997, AMFLIC's largest investment in any one entity other than U.S.
government obligations was $1,000,000.
3. DEFERRED POLICY ACQUISITION COSTS (DPAC)
Activity in DPAC was as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Beginning at January 1 $ 30,515 $ 13,781 $ 4,101
Deferrals 25,320 18,223 9,861
Amortization (3,383) (1,307) (343)
Effect of changes in unrealized
(gains) losses on securities (47) (6) 195
Effect of realized investment gains (53) (176) (33)
--------- --------- ---------
Balance at December 31 $ 52,352 $ 30,515 $ 13,781
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-28
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. COST OF INSURANCE PURCHASED (CIP)
Activity in CIP was as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
Balance at January 1 $ 10,549 $ 12,212 $ 13,621
Interest accretion 926 1,054 1,400
Amortization (2,509) (2,619) (3,052)
Effect of changes in unrealized
(gains) losses on securities (12) (3) 293
Effect of realized investment gains (13) (95) (50)
--------- --------- ---------
Balance at December 31 $ 8,941 $ 10,549 $ 12,212
--------- --------- ---------
--------- --------- ---------
</TABLE>
CIP amortization, net of accretion, expected to be recorded in each of
the next five years is:
<TABLE>
<CAPTION>
AMOUNT
YEAR (000'S)
---- -------
<S> <C>
1999 $1,201
2000 1,054
2001 927
2002 820
2003 727
</TABLE>
5. INCOME TAXES
AMFLIC is subject to the life insurance company provisions of the
federal tax law and is part of a life/life consolidated return which
also includes FLIC.
The method of allocation of tax expense is subject to a written
agreement. Allocation is based upon separate return calculations with
current credit for net losses and tax credits. Consolidated alternative
minimum tax, excise tax or surtax, if any, is allocated separately. The
tax liability of AMFLIC under this agreement shall not exceed the
amount AMFLIC would have paid if it had filed on a separate return
basis. Intercompany tax balances are to be settled no later than thirty
(30) days after the date of filing the consolidated return.
5.1 DEFERRED TAXES
Components of deferred tax liabilities and assets at December 31, were
as follows:
<TABLE>
<CAPTION>
In thousands 1998 1997
-------- --------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of investments $ 398 $ 341
DPAC and CIP 14,891 9,213
Other 1,202 1,220
-------- --------
Total deferred tax liabilities 16,491 10,774
Deferred tax assets, applicable to:
Policy reserves (20,738) (12,438)
Other (217) (547)
-------- --------
Total deferred tax assets (20,955) (12,985)
-------- --------
Net deferred tax assets $ (4,464) $ (2,211)
-------- --------
-------- --------
</TABLE>
F-29
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5.1 DEFERRED TAXES (CONTINUED)
AMFLIC expects adequate future taxable income to realize the net
deferred tax assets. Accordingly, no valuation allowance is considered
necessary.
5.2 TAX EXPENSE
A reconciliation between the Federal statutory income tax rate and the
effective income tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- ------------
<S> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0%
State taxes, net - - (0.3)
Invested asset items 14.3 (5.4) 0.1
Other (1.4) (3.9) (0.7)
------------- ------------- ------------
Effective tax rate 47.9% 25.7% 34.1%
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
5.3 TAXES PAID
Federal income taxes paid during the years ended December 31, 1998,
1997 and 1996, were $243,000, $519,000 and $228,000, respectively.
State income taxes paid during the years ended December 31, 1998 and
1997, were $110,000 and $1,000, respectively. No state income taxes
were paid during the year ended December 31, 1996.
6. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and fair values for certain of AMFLIC's financial
instruments at December 31 are presented below. Care should be
exercised in drawing conclusions based on fair value, since (1) the
fair values presented do not include the value associated with all of
AMFLIC's assets and liabilities, (2) the reporting of investments at
fair value without a corresponding revaluation of related policyholder
liabilities can be misinterpreted, and (3) the estimates are based on
assumptions regarding future economic activity.
<TABLE>
<CAPTION>
1998 1997
----------------- ------------------
CARRYING FAIR CARRYING FAIR
In thousands AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- --------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $32,587 $32,587 $22,565 $22,565
Liabilities
Insurance investment contracts $ 5,479 $ 5,189 $ 2,318 $ 2,193
</TABLE>
The following methods and assumptions were used to estimate the fair
value of financial instruments:
FIXED MATURITY SECURITIES. Fair values of fixed maturity securities
were based on quoted market prices, where available. For investments
not actively traded, fair values were estimated using values obtained
from independent pricing services or, in the case of some private
placements, by discounting expected future cash flows using a current
market rate applicable to yield, credit quality, and average life of
the investments.
POLICY LOANS. Policy loans have no stated maturity dates and are an
integral part of the related insurance contract. Accordingly, it is not
practicable to estimate a fair value. The weighted average interest
rate charged on policy loan balances during 1998 and 1997 was 6.96% and
7.17%, respectively.
F-30
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts, which do not subject AMFLIC to significant risks arising
from policyholder mortality or morbidity, was estimated using cash
flows discounted at market interest rates.
7. STATUTORY ACCOUNTING
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity. In addition, state
regulators may permit statutory accounting practices that differ from
prescribed practices. No significant permitted practices are used to
prepare AMFLIC's statutory financial statements.
At December 31, 1998 and 1997, AMFLIC had statutory stockholder's
equity of $32,662,000 and $17,727,000, respectively. AMFLIC's statutory
net loss was $2,615,000, $648,000 and $1,949,000 for the years ended
December 31, 1998, 1997 and 1996, respectively.
Generally, AMFLIC is restricted by the insurance laws of its
domiciliary state as to amounts that can be transferred in the form of
dividends, loans or advances without the approval of the Illinois
Insurance Department. Under these restrictions, during 1999 no
dividends may be paid out and, loans and advances in excess of
$8,165,000 may not be transferred without the approval of the Illinois
Insurance Department.
8. STATEMENT OF CASH FLOWS
In addition to the cash activities shown in the statement of cash
flows, the following transactions, occurred:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
------ ------- -------
<S> <C> <C> <C>
Interest added to universal
life contracts and other
deposit funds $1,387 $1,279 $1,267
------ ------- -------
------ ------- -------
</TABLE>
9. RELATED PARTY TRANSACTIONS
AMFLIC has no full-time employees or office facilities. General and
administrative expenses are allocated to AMFLIC from FLIC, based upon
hours worked by administrative personnel. Allocated expenses for the
years ended December 31, 1998, 1997 and 1996, amounted to approximately
$8,541,000, $5,104,000, and $3,868,000, respectively.
AMFLIC participates in a program of short-term borrowing with AGC to
maintain its long-term investment commitments. AMFLIC borrowed and
repaid $18,896,000, and $15,320,000 in 1998 and 1997, respectively.
Interest was paid on the outstanding balance based on the rate as
stipulated in the program.
F-31
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. REINSURANCE
AMFLIC is routinely involved in reinsurance transactions. Ceded
reinsurance becomes a liability of the reinsurer that assumes the risk.
If the reinsurer could not meet its obligations, AMFLIC would reassume
the liability. The likelihood of a material reinsurance liability being
reassumed by AMFLIC is considered to be remote. AMFLIC diversifies the
risk of exposure to reinsurance loss by using a number of life
reinsurers, including FLIC, that have strong claims-paying ability
ratings. The maximum retention on one life for individual life
insurance is $100,000.
Effective January 1, 1997, AMFLIC entered into a modified coinsurance
agreement with FLIC covering the variable universal life product.
Amounts paid or deemed to have been paid in connection with ceded
reinsurance contracts are recorded as reinsurance receivables. The cost
of reinsurance related to long-duration contracts is recognized over
the life of the underlying reinsured policies using assumptions
consistent with those used to account for the underlying policies.
Under the provisions of an assumed reinsurance agreement, AMFLIC
recognized the following:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Premiums and other
considerations $ 2,387 $ 1,169 $ 1,433
Other income 1,869 810 1,196
Benefits 3,331 1,329 1,810
Commission expense (20) (59) (9)
Premium taxes -- -- (6)
</TABLE>
Under the provisions of a modified coinsurance agreement covering the
Variable Universal Life product, AMFLIC ceded the following:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
Premiums and other
considerations $ 9,058 $ 5,226 $ 4,014
Expense allowances 7,239 4,965 4,394
Other 885 60 (561)
</TABLE>
AMFLIC also carries reinsurance for policy risks that exceed its
retention limit of $100,000. AMFLIC ceded the following amounts:
<TABLE>
<CAPTION>
In thousands 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Premiums and other
considerations $9,476 $7,994 $5,909
Change in policy reserves 9,086 7,804 5,924
</TABLE>
11. LEGAL PROCEEDINGS
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing
and sales practices, and a number of these lawsuits have resulted in
substantial settlements. AMFLIC is a defendant in such purported class
action lawsuits. In December 1998, AGC announced that certain of its
life insurance subsidiaries had entered into agreements to resolve all
of the material pending market conduct class action lawsuits. The
settlements are not final until approved by the courts and any appeals
have been resolved. If court approvals are obtained and appeals are not
taken, it is expected the settlements will be final in the third
quarter of 1999.
F-32
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
11. LEGAL PROCEEDINGS (CONTINUED)
In conjunction with the proposed settlements, AMFLIC recorded an $8
million charge in 1998. The charge covers the cost of additional
policyholder benefits and other anticipated expenses resulting from the
proposed settlement, as well as other administrative and legal costs.
To offset the market conduct charge, AMFLIC recorded an $8 million
capital contribution from FLIC at December 31, 1998. The proposed
settlements will not have a material impact on AMFLIC's financial
condition or business operations after considering the contribution.
AMFLIC is party to various other lawsuits and proceedings arising in
the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama and Mississippi, that permit
damage awards disproportionate to the actual economic damages incurred.
Based upon information presently available, AMFLIC believes that the
total amounts that will ultimately be paid, if any, arising from these
lawsuits and proceedings will not have a material adverse effect on its
results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large
punitive damage awards, that bear little of no relation to actual
economic damages incurred by plaintiffs in jurisdictions like Alabama
and Mississippi continues to create the potential for an unpredictable
judgment in any given suit.
In addition to the charges recorded in 1998, AMFLIC will incur
additional expenses for claim administration, outside counsel and
actuarial services, and regulatory expenses, related to the resolution
of the litigation, which will be recorded as incurred. Given AGC's
commitment to maintaining adequate capital levels in support of
AMFLIC's business, the proposed settlements and related expenses are
not expected to have a material adverse effect on AMFLIC's financial
condition or business operations.
12. YEAR 2000 (UNAUDITED)
INTERNAL SYSTEMS. AMFLIC's ultimate parent, AGC, has numerous
technology systems that are managed on a decentralized basis. AGC's
Year 2000 readiness efforts are therefore being undertaken by its key
business units with centralized oversight. Each business unit,
including AMFLIC, 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 AMFLIC's information technology
and non-information technology systems; (2) assess which items in the
inventory may expose AMFLIC 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 AMFLIC'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. AMFLIC
will continue to test its systems throughout 1999 to maintain Year 2000
readiness.
THIRD PARTY RELATIONSHIPS. AMFLIC 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) AMFLIC and include
organizations with which AMFLIC 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 AMFLIC exercises less, or
no, control over Year 2000 readiness. AMFLIC has developed a plan to
assess and attempt to mitigate the
F-33
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. YEAR 2000 (UNAUDITED) (CONTINUED)
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
AMFLIC. A more detailed evaluation has been completed during the first
quarter of 1999 as part of AMFLIC's contingency planning efforts. Due
to the various stages of third parties' Year 2000 readiness, AMFLIC's
testing activities will extend through 1999.
CONTINGENCY PLANS. AMFLIC and its affiliates have 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 applicable action plans. AMFLIC is currently
developing contingency plans and expects to substantially complete all
contingency planning activities by April 30, 1999.
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, AMFLIC 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 AMFLIC's future results of operations, liquidity, or
financial condition. However, due to the magnitude and complexity of
this project, risks and uncertainties exist and AMFLIC is not able to
predict a most reasonably likely worst case scenario. If Year 2000
readiness is not achieved due to non-performance by significant third
party vendors, AMFLIC's failure to maintain critical systems as Year
2000 ready, failure of critical third parties to achieve Year 2000
readiness on a timely basis, or other unforeseen circumstances in
completing AMFLIC's plans, the Year 2000 issues could have a material
adverse impact on AMFLIC's operations following the turn of the
century.
COSTS. Through December 31, 1998, AGC and certain of its subsidiaries
have incurred, and will continue to incur, costs for internal staff,
third party vendors, and other expenses to achieve Year 2000 readiness.
The cost of activities related to Year 2000 readiness has not had a
material adverse effect on AGC's or AMFLIC's results of operations or
financial condition.
F-34
<PAGE>
PART C
OTHER INFORMATION
ITEM 24. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements
PART A: None.
PART B:
(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
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.*
1
<PAGE>
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 is hereby incorporated
herein by reference to Exhibit 4(g) to Post-Effective Amendment
No. 3 to the Registration Statement on Form N-4 (Reg. No.
333-10489) of Separate Account VA-1 of The American Franklin
Life Insurance Company, filed March 1, 1999.
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.
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
2
<PAGE>
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.**
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 is
hereby incorporated herein by reference to Exhibit 15 to
Post-Effective Amendment No. 3 to the Registration Statement on
Form N-4 (Reg. No. 333-10489) of Separate Account VA-1 of The
American Franklin.Life Insurance Company, filed March 1, 1999.
27 Not applicable.
- --------
* 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 on August 20, 1996 (Reg. No. 333-10489).
** 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).
*** 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).
3
<PAGE>
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
Michael M. Nicholson Director and President
Gary D. Reddick** Vice Chairman and Director
Richard W. Scott* Vice President and Chief Investment Officer
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
(1) (2)
NAME AND PRINCIPAL BUSINESS ADDRESS POSITIONS AND OFFICES WITH DEPOSITOR
----------------------------------- -------------------------------------
<S> <C>
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 (1),(2),(3),(4),(5)
The following is a list of American General Corporation's subsidiaries 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
- -------------------------------------------------------------------------------- ---------------
<S> <C>
AGC Life Insurance Company...................................................... Missouri
American General Life and Accident Insurance Company(6)...................... Tennessee
American General Exchange, Inc. .......................................... Tennessee
Independent Fire Insurance Company........................................ Florida
American General Property Insurance Company of Florida................. Florida
American General Life Insurance Company(7)................................... Texas
American General Annuity Service Corporation ............................. Texas
American General Life Companies .......................................... Delaware
American General Life Insurance Company of New York ...................... New York
The Winchester Agency Ltd. ............................................... New York
The Variable Annuity Life Insurance Company .............................. Texas
PESCO Plus, Inc(15).................................................... Delaware
American General Gateway Services, L.L.C(16)........................... Delaware
The Variable Annuity Marketing Company ................................ Texas
VALIC Investment Services Company ..................................... Texas
VALIC Retirement Services Company ..................................... Texas
VALIC Trust Company ................................................... Texas
American General Property Insurance Company ................................. Tennessee
The Franklin Life Insurance Company ......................................... Illinois
The American Franklin Life Insurance Company ............................. Illinois
Franklin Financial Services Corporation .................................. Delaware
HBC Development Corporation ................................................. Virginia
Templeton American General Life of Bermuda, Ltd(14).......................... Bermuda
Western National Corporation................................................. Delaware
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
WNL Holding Corp............................................................. Delaware
American General Annuity Insurance Company(8).......................... Texas
American General Assignment Corporation................................ Texas
AGA Brokerage Services, Inc. .......................................... Delaware
AGA Investment Advisory Services, Inc. ................................ Delaware
Independent Advantage Financial and Insurance Services, Inc.................. California
American General Financial Institution Group, Inc...................... Delaware
WNL Insurance Services, Inc............................................ Delaware
American General Corporation* .................................................. Delaware
American General Delaware Management Corporation1 .............................. Delaware
American General Finance, Inc. ................................................. Indiana
HSA Residential Mortgage Services of Texas, Inc.............................. Delaware
AGF Investment Corp. ........................................................ Indiana
American General Auto Finance, Inc. . ....................................... Delaware
American General Finance Corporation(9)...................................... Indiana
American General Finance Group, Inc. ..................................... Delaware
American General Financial Services, Inc.(10).......................... Delaware
The National Life and Accident Insurance Company .................. Texas
Merit Life Insurance Co. ................................................. Indiana
Yosemite Insurance Company ............................................... Indiana
American General Finance, Inc................................................ Alabama
American General Financial Center ........................................... Utah
American General Financial Center, Inc.* .................................... Indiana
American General Financial Center, Incorporated* ............................ Indiana
American General Financial Center Thrift Company* ........................... California
Thrift, Incorporated* ....................................................... Indiana
American General Investment Advisory Services, Inc.* .......................... Texas
American General Investment Holding Corporation(11)............................. Delaware
American General Investment Management Corporation(11).......................... Delaware
American General Realty Advisors, Inc. ......................................... Delaware
American General Realty Investment Corporation ................................. Texas
AGLL Corporation(12)......................................................... Delaware
American General Land Holding Company ....................................... Delaware
AG Land Associates, LLC(12)............................................... California
GDI Holding, Inc.*(13)....................................................... California
Pebble Creek Service Corporation ............................................ Florida
SR/HP/CM Corporation ........................................................ Texas
Green Hills Corporation ........................................................ Delaware
Knickerbocker Corporation ...................................................... Texas
American Athletic Club, Inc. ................................................ Texas
Pavilions Corporation........................................................... Delaware
USLIFE Corporation.............................................................. Delaware
All American Life Insurance Company.......................................... Illinois
American General Assurance Company........................................... Illinois
American General Indemnity Company........................................ Nebraska
USLIFE Credit Life Insurance Company of Arizona........................... Arizona
American General Life Insurance Company of Pennsylvania Pennsylvania
I.C. Cal* ................................................................... California
The Old Line Life Insurance Company of America............................... Wisconsin
The United States Life Insurance Company in the City of New York............. New York
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
USLIFE Agency Services, Inc......................................................Illinois
USMRP, Ltd................................................................... Turks & Caicos
USLIFE Financial Institution Marketing Group, Inc............................... California
USLIFE Insurance Services Corporation........................................... Texas
USLIFE Realty Corporation....................................................... Texas
USLIFE Real Estate Services Corporation................................... Texas
USLIFE Systems Corporation...................................................... Delaware
</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 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 their 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.
(5) Effective December 5, 1997, AGC and Grupo Nacional Provincial, S.A. ("GNP")
completed the purchase by AGC of a 40% interest in Grupo Nacional
Provincial Pensions S.A. de C.V., a new holding company formed by GNP, one
of Mexico's largest financial services companies.
(6) AGLA owns approximately 12% of Whirlpool Financial Corp. ("Whirlpool")
preferred stock. AGLA's holdings in Whirlpool represents approximately 3%
of the voting power of the capital stock of Whirlpool. The interests in
Whirlpool (which is a corporation 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)
7
<PAGE>
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) AGA Series Trust is a Massachusetts business trust, all of the shares of
which are held in the separate account of AGA for the benefit of AGA
variable annuity policyholders.
(9) 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 10 below.
(10) 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.
(11) 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.
(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.
(13) AGRI owns only a 75% interest in GDI Holding, Inc.
(14) AGCL owns 50% of the common stock of TAG Life. Franklin Resources, Inc., a
Delaware business corporation and financial services holding company,
through its subsidiary TGH Holdings, Ltd., a Bahamian business corporation,
owns the remaining 50% of TAG Life. Franklin Resources, Inc. and
TGH Holdings, Ltd. are not affiliated with AGC.
(15) VALIC holds 900 (90%) of the outstanding common shares. The Florida
Education Association/United, a Florida teachers union and unaffiliated
third party, holds the remaining 100 (10%) of the outstanding common
shares.
(16) VALIC holds (90%) of the outstanding common shares. Gateway Investment
Services, Inc., a California corporation and an unaffiliated third party,
holds the remaining 10% of the outstanding common shares.
ITEM 27. NUMBER OF CONTRACT OWNERS
As of March 31, 1999, there were 4,090 owners of Contracts of the class
covered by this registration statement (2,107 Qualified Contracts and 1,983
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."
8
<PAGE>
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.
(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 and Chief Executive Officer
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
Daniel E. Trudan Vice President and Assistant Secretary
</TABLE>
The principal business address of each individual with an asterisk next to his
name is 2727 Allen Parkway, Houston, Texas 77019. The principal business address
of each other individual except Tony M. Carter and Ross D. Friend 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. The principal business address of
Ross D. Friend is 2727-A Allen parkway, Houston, Texas 77019.
(c) Not Applicable.
9
<PAGE>
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:
(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.
10
<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, certifies that it meets the requirements of Securities Act
Rule 485(b) for effectiveness of this registration statement and has duly caused
this Post-Effective Amendment No. 4 to the Registration Statement to be signed
on its behalf, in the City of Springfield, and State of Illinois on this 23rd
day of April, 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
11
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, this Post-Effective Amendment
No. 4 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 April 23, 1999
- --------------------------------------------
Robert M. Beuerlein
/S/ BRADY W. CREEL* Director April 23, 1999
- --------------------------------------------
Brady W. Creel
Director _______, 1999
- --------------------------------------------
Rodney O. Martin, Jr.
Director _______, 1999
- --------------------------------------------
Jon P. Newton
/S/ MICHAEL M. NICHOLSON* Director April 23, 1999
- --------------------------------------------
Michael M. Nicholson
/S/ PHILIP K. POLKINGHORN* Executive Vice President April 23, 1999
- -------------------------------------------- and Chief Financial Officer
Philip K. Polkinghorn
Director _______, 1999
- --------------------------------------------
Gary D. Reddick
/S/ WILLIAM A. SIMPSON* Chairman of the Board April 23, 1999
- -------------------------------------------- and Chief Executive
William A. Simpson Officer
</TABLE>
/S/ ELIZABETH E. ARTHUR
- --------------------------------------------
*By Elizabeth E. Arthur, Attorney-in-Fact
12
<PAGE>
EXHIBIT INDEX
8(a)(1) Participation Agreement among American Franklin, Variable Insurance
Products Fund ("VIP") and Fidelity Distributors Corporation ("FDC"),
dated July 18, 1991.
8(b)(1) Participation Agreement among American Franklin, Variable Insurance
Products Fund II ("VIPII") and FDC, dated July 18, 1991.
8(c) Sub-License Agreement between FDC and American Franklin, dated July 18,
1991.
10(a) Consent of Ernst & Young LLP.
10(b) Consent of Sutherland Asbill & Brennan LLP.
13
<PAGE>
EXHIBIT 8(a)(1)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND,
FIDELITY DISTRIBUTORS CORPORATION
and
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into this l8th day of July, 1991 by and
among THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY, (hereinafter the "Company"),
an Illinois legal reserve, stock life insurance company, on its own behalf and
on behalf of each segregated asset account of the Company set forth on Schedule
A hereto as may be amended from time to time (each such account hereinafter
referred to as the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND, an
unincorporated business trust organized under the laws of the Commonwealth of
Massachusetts (hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION
(hereinafter the "Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively, the "Variable Insurance Products")
1
<PAGE>
to be offered by insurance companies which have entered into participation
agreements with the Fund and the Underwriter (hereinafter "Participating
Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several series
of shares, each designated a "Portfolio", and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated October 15, 1985 (File No. 812-6102), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b)(15) and 6e-3(T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold
to and held by variable annuity and variable life insurance separate accounts
of both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"), and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable life
and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to one or more of the aforesaid variable life and
annuity contracts (hereinafter the "Contracts"); and
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, (hereinafter the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD");
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
2
<PAGE>
WHEREAS, the Underwriter serves as principal underwriter for Fund shares
pursuant to a distribution agreement dated November 13, 1981 between the
Underwriter and the Fund; and
WHEREAS, the Company has entered into a servicing agreement dated June 15,
1989, as amended, with Integrity Life Insurance Company pursuant to which
Integrity Life Insurance Company will provide administrative services to support
the Account and the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Fund and the Underwriter each agrees to sell to the Company
those shares of the Fund which each Account orders, executing such orders on a
daily basis at the net asset value next computed after receipt by the Fund or
its designee of the order for the shares of the Fund. For purposes of this
Section 1.1, the Company or its designee shall be the designee of the Fund for
receipt of such orders from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
order by 9:30 a.m. Boston time on the next following Business Day. "Business
Day" shall mean any day on which the New York Stock Exchange is open for trading
and on which the Fund calculates its net asset value pursuant to the rules of
the Securities and Exchange Commission. Integrity Life Insurance Company shall
be the designee of the Company for purposes of this Section.
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating Insurance companies and their separate accounts. No
shares of any Portfolio will be sold to the general public. To the extent
permitted by law or regulation, the Fund and the Underwriter agree to make
available to the Account shares of all Portfolios of the Fund.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Sections 2.5 and 2.12 of
Article II of this Agreement is in effect to govern such sales.
3
<PAGE>
1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption without charge. For
purposes of this Section 1.5, the Company or its designee shall be the designee
of the Fund for receipt of requests for redemption from each Account and receipt
by such designee shall constitute receipt by the Fund; provided that the Fund
receives notice of such request for redemption on the next following Business
Day. Integrity Life Insurance Company shall be the designee of the Company for
purposes of this Section.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the Separate Accounts listed on Schedule A shall be invested in
the Fund, in such other Funds advised by the Adviser as may be mutually agreed
to in writing by the parties hereto, or in the Company's general account,
provided that such amounts may also be invested in an investment company other
than the Fund if (a) such other investment company, or series thereof, has
investment objectives or policies that are substantially different from the
investment objectives and policies of all the Portfolios of the Fund (excluding
any Portfolios for which the Company has terminated this Agreement pursuant to
Section 10.1(b)); or (b) the Company gives the Fund and the Underwriter 45 days
written notice of its intention to make such other investment company available
as a funding vehicle for the Contracts; or (c) such other investment company was
available as a funding vehicle for the Contracts prior to the date of this
Agreement and the Company so informs the Fund and Underwriter prior to their
signing this Agreement; or (d) the Fund or Underwriter consents to the use of
such other investment company.
1.7. The Company shall pay for Fund shares on the next Business Day after
an order to purchase Fund shares is made in accordance with the provisions of
Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For
purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal funds
so wired, such funds shall cease to be the responsibility of the Company and
shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company or its designee of any income,
dividends or capital gain distributions payable on the Fund's shares. The
Company hereby elects to receive all such income, dividends and capital gain
distributions as are payable on the Portfolio shares in additional shares of
that Portfolio. The Company reserves the right with respect to each Portfolio
to revoke this election and to receive all such income, dividends and capital
gain distributions in cash. The Fund shall notify the Company or its designee
of the number of shares so issued as payment of such dividends and
distributions. Integrity Life Insurance Company shall be the designee of the
Company for purposes of this Section.
4
<PAGE>
1.10. The Fund shall make the net asset value per share for each Portfolio
available to the Company or its designee on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 7 p.m. Boston
time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under Article XIV-1/2 of the Illinois Insurance Code and has registered or,
prior to any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Illinois and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
endowment, annuity or life insurance contracts, under applicable provisions of
the code and that it will make every effort to maintain such treatment and that
it will notify the Fund and the Underwriter immediately upon having a reasonable
basis for believing that the Contracts have ceased to be so treated or that they
might not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. The Fund has adopted a "no
feel' or "defensive" Rule 12b-I Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of
trustees, a
5
<PAGE>
majority of whom are not interested persons of the Fund, formulate and approve
any plan under Rule 12b-1 to finance distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Illinois and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Illinois to the extent required to perform this
Agreement.
2.7. The Underwriter represents and warrants that it is a member in good
standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Illinois and all applicable state
and federal securities laws, including without limitation the 1933 Act, the 1934
Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and that the Adviser shall perform its
obligations for the Fund in compliance in all material respects with the laws of
the State of Illinois and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(l) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are and shall continue to be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Fund, in an amount not less than the minimal coverage as required currently
by entities subject to the requirements of Rule 17g-1 of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid Bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.12. The Company represents and warrants that it will not purchase Fund
shares with Account assets derived from the sale of Contracts to deferred
compensation plans with respect to service for state and local governments which
qualify under Section 457 of the federal Internal
6
<PAGE>
Revenue Code, as may be amended. The Company may purchase Fund shares with
Account assets derived from any sale of a Contract to any other type of
tax-advantaged employee benefit plan; PROVIDED however that such plan has no
more than 500 employees who are eligible to participate at the time of the first
such purchase hereunder by the Company of Fund shares derived from the sale of
such contract.
2.13 The Fund and the Underwriter each represents that neither it nor any
person employed in any material connection with respect to the services provided
pursuant to this Agreement:
(i) Within the last 10 years has been convicted of any felony or
misdemeanor arising out of conduct involving embezzlement,
fraudulent conversion, or misappropriation of funds or securities,
or involving violations of Section 1341, Section 1342 or 1343 of
Title 18, United States Code; or
(ii) Within the last ten years has been found by any state regulatory
authority to have violated or has acknowledged violation of any
provision of any state insurance law involving fraud, deceit or
knowing misrepresentation; or
(iii) within the last ten years has been found by any federal or state
regulatory authorities to have violated or have acknowledged
violation of any provision of federal or state securities laws
involving fraud, deceit or knowing misrepresentation.
ARTICLE III. PROSPECTUSES, STATEMENTS OF ADDITIONAL INFORMATION AND PROXY
STATEMENTS; VOTING
3.1. The Underwriter shall provide the Company (at the Company's expense)
with as many copies of the Fund's current prospectus and any supplements thereto
as the Company may reasonably request. If requested by the Company in lieu
thereof, the Fund shall provide such documentation (including a camera ready
final copy of the new prospectus or supplement as set in type at the Fund's
expense) and other assistance as is reasonably necessary in order for the
Company once each year (or more frequently if the prospectus for the Fund is
amended) to have the prospectus for the Contracts and the Fund's prospectus
printed together in one document (such printing to be at the Company's expense).
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter (or in the Fund's
discretion, the Prospectus shall state that such Statement is available from the
Fund), and the Underwriter (or the Fund), at its expense, shall print and
provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
3.3 The Fund shall promptly notify the Company of any anticipated
amendments to the Fund's registration statement or supplement to the prospectus.
7
<PAGE>
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to stockholders and other communications to
stockholders in such quantity as the Company shall reasonably require for
distributing to Contract owners. At the request of the Company, the Fund shall
provide a camera ready copy of such communication to the Company, which may
combine such communication with a communication of the Company or the Accounts,
which communications may be bound together. In such case the printing expenses
of the combined communications shall be borne by the Company and the Fund in
proportion to the number of pages for which they are respectively responsible.
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract Owners;
(ii) vote the Fund shares in accordance with instructions received from
Contract owners; and
(iii) vote Fund shares for which no instructions have been received in the
same proportion as Fund shares of such Portfolio for which
instructions have been received;
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule B attached hereto and incorporated herein by this reference, which
standards will also be provided to the other Participating Insurance Companies
and the requirements of the 1940 Act.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act
in accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect to periodic elections of trustees
and with whatever rules the Commission may promulgate with respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, the text and to the extent relevant the graphic component
of each piece of sales literature or other promotional material in which the
Fund or its investment adviser or the Underwriter is named, at least fifteen
Business Days prior to its use. No such material shall be used if the Fund or
its designee objects to such use within fifteen Business Days after receipt of
8
<PAGE>
such material. The Fund or its designee will use its best efforts to review
such materials within a shorter time period as the Company will have requested
in writing.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause
to be furnished, to the Company or its designee, each piece of sales literature
or other promotional material in which the Company and/or its separate
account(s), is named at least fifteen Business Days prior to its use. No such
material shall be used if the company or its designee object to such use within
fifteen Business Days after receipt of such material.
4.4. The Fund and the Underwriter shall not give any information or make
any representations on behalf of the Company or concerning the Company, each
Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, Statements of Additional information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the Securities and Exchange commission or
other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
each Account, contemporaneously with the filing of such document with the
Securities and Exchange Commission.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or
9
<PAGE>
the public, including brochures, circulars, research reports, market letters,
form letters, seminar texts, reprints or excerpts of any other advertisement,
sales literature, or published article), educational or training materials or
other communications distributed or made generally available to some or all
agents or employees, and registration statements, prospectuses, Statements of
Additional Information, shareholder reports, and proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Underwriter shall pay no fee or other compensation to
the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees other-wise payable
to the Underwriter, past profits of the Underwriter or other resources available
to the Underwriter. No such payments shall be made directly by the Fund.
Currently, no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
and all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing the
Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the
scope of the foregoing, the Fund will at all times comply with Section 817(h) of
the Code and Treasury Regulation Section 1817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. The Fund
shall promptly notify the Company of any breach by any Portfolio of this Article
6.
10
<PAGE>
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of which
it is aware to the Board. The company will assist the Board in carrying out its
responsibilities under the Shared Funding Exemptive order, by providing the
Board with all information reasonably necessary for the Board to consider any
issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of its
disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented,
11
<PAGE>
and until the end of that six month period the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or
Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act
or the rules promulgated thereunder with respect to mixed or shared funding (as
defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
8.1(a). The Company agrees to indemnify and hold harmless the Fund and each
of the members of the Board and officers and each person, if any, who controls
the Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of
12
<PAGE>
this Section 8.1) against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of the Company)
or litigation (including legal and other expenses), to which the Indemnified
Parties may become subject under any statute, regulation, at common law or
otherwise, insofar as such losses, claims, damages, liabilities or expenses (or
actions in respect thereof) or settlements are related to the sale or
acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or prospectus for the Contracts or contained in the
Contracts or sales literature for the Contracts (or any amendment or
supplement to any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to the
Company by or on behalf of the Fund for use in the Registration
Statement or prospectus for the Contracts or in the Contracts or
sales literature (or any amendment or supplement) or otherwise for
use in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the Registration
Statement, prospectus or sales literature of the Fund not supplied
by the Company, or persons under its control) or wrongful conduct of
the Company or persons under its control, with respect to the sale
or distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus, or
sales literature of the Fund or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the
statements therein not misleading, if such a statement or omission
was made in reliance upon information furnished to the Fund by or on
behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Company, as limited by and in accordance with the
provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an
13
<PAGE>
Indemnified Party as such may arise from such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations or duties under this Agreement or to the Fund,
whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulations referring to the Indemnified Parties
or their conduct. After notice from the Company to such party of the Company's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Company will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of the
Fund.
8.2. INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the Company,
the principal underwriter for the Contracts and each of their directors and
officers and each person, if any, who controls the Company or the principal
underwriter for the Contracts within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Fund's
shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or prospectus or sales literature of the Fund (or any
amendment or supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to state therein
a material fact required to be stated therein or necessary to make
the
14
<PAGE>
statements therein not misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified Party if such
statement or omission or such alleged statement or omission was made
in reliance upon and in conformity with information furnished to the
Underwriter or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in sales
literature (or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations (other
than statements or representations contained in the Registration
Statement, prospectus or sales literature for the Contracts not
supplied by the Fund, Underwriter or persons under its control) or
wrongful conduct of the Fund, Adviser or Underwriter or persons
under their control, with respect to the sale or distribution of the
Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus, or
sales literature covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, if such statement or
omission was made in reliance upon information furnished to the
Company by or on behalf of the Fund or the Underwriter; or
(iv) arise as a result of any failure by the Fund or the Underwriter to
provide the services and furnish the materials under the terms of
this Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Underwriter; as limited by and in
accordance with the provisions of Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on
15
<PAGE>
any designated agent), but failure to notify the Underwriter of any such claim
shall not relieve the Underwriter from any liability which it may have to the
Indemnified Party against whom such action is brought otherwise than on account
of this indemnification provision. In case any such action is brought against
the Indemnified Parties, the Underwriter will be entitled to participate, at its
own expense, in the defense thereof. The Underwriter also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action and to settle the claim at its own expense provided, however, that no
such settlement shall, without the Indemnified Parties' written permission,
include any factual stipulations referring to the Indemnified Parties or their
conduct. After notice from the Underwriter to such party of the Underwriter's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Underwriter
will not be liable to such party under this Agreement for any legal or other
expenses subsequently incurred by such party independently in connection with
the defense thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
8.3(a). The Fund agrees to indemnify and hold harmless the Company, the
principal underwriter for the Contracts and each of their directors and officers
and each person, if any, who controls the Company or the principal underwriter
for the Contracts within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Fund) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful misconduct of the Board
or any member thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the services
and furnish the materials under the terms of this Agreement
(including a failure to comply with the diversification requirements
specified in Article VI of this Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this
Agreement by the Fund; as limited by and in accordance with the
provisions of Sections 8.3(b) and 8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified
16
<PAGE>
Party's reckless disregard of obligations and duties under this Agreement or
to the Company, the Fund, the Underwriter or each Account, whichever is
applicable.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action and
to settle the claim at its own expense provided, however, that no such
settlement shall, without the Indemnified Parties' written permission, include
any factual stipulations referring to the Indemnified Parties or their conduct.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the Fund
of the commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, with respect to the operation of either Account, or
the sale or acquisition of shares of the Fund.
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933, 1934
and 1940 acts, and the rules and regulations and rulings thereunder, including
such exemptions from those statutes, rules and regulations as the Securities and
Exchange Commission may grant (including, but not limited to, the Shared Funding
Exemptive Order) and the terms hereof shall be interpreted and construed in
accordance therewith.
ARTICLE X. TERMINATION
10.1. This Agreement shall terminate:
(a) at the option of any party upon one year advance written notice to
the other parties; provided, however such notice shall not be given
earlier than one year following the date of this Agreement; or
17
<PAGE>
(b) at the option of the Company to the extent that shares of Portfolios
are not reasonably available to meet the requirements of the
Contracts as determined by the Company, provided however, that such
termination shall apply only to the Portfolio(s) not reasonably
available. Prompt notice of the election to terminate for such
cause shall be furnished by the Company; or
(c) at the option of the Fund in the event that formal administrative
proceedings are instituted against the Company by the NASD, the
Securities and Exchange Commission, any state securities or
insurance department or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of the
Contracts, with respect to the operation of any Account, or the
purchase of the Fund shares, provided, however, that the Fund
determines in its sole judgment exercised in good faith, that any
such administrative proceedings will have a material adverse effect
upon the ability of the Company to perform its obligations under
this Agreement; or
(d) at the option of the Company in the event that formal administrative
proceedings are instituted against the Fund or Underwriter by the
NASD, the Securities and Exchange Commission, or any state
securities or insurance department or any other regulatory body,
provided, however, that the Company determines in its sole judgment
exercised in good faith, that any such administrative proceedings
will have a material adverse effect upon the ability of the Fund or
Underwriter to perform its obligations under this Agreement; or
(e) with respect to any Account, upon requisite vote of the Contract
owners having an interest in such Account (or any subaccount) to
substitute the shares of another investment company for the
corresponding Portfolio shares of the Fund in accordance with the
terms of the Contracts for which those Portfolio shares had been
selected to serve as the underlying investment media. The Company
will give 30 days' prior written notice to the Fund of the date of
any proposed vote to replace the Fund's shares; or
(f) at the option of the Company, in the event any of the Fund's shares
are not registered, issued or sold in accordance with applicable
state and/or federal law or such law precludes the use of such
shares as the underlying investment media of the Contracts issued or
to be issued by the Company; or
(g) at the option of the Company, if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code or under
any successor or similar provision, or if the Company reasonably
believes that the Fund may fail to so qualify; or
(h) at the option of the Company, if the Fund fails to meet the
diversification requirements specified in Article VI hereof; or
18
<PAGE>
(i) at the option of either the Fund or the Underwriter, if (1) the Fund
or the Underwriter, respectively, shall determine, in their sole
judgment reasonably exercised in good faith, that the Company has
suffered a material adverse change in its business or financial
condition or is the subject of material adverse publicity and such
material adverse change or material adverse publicity will have a
material adverse impact upon the business and operations of either
the Fund or the Underwriter, (2) the Fund or the Underwriter shall
notify the Company in writing of such determination and its intent
to terminate this Agreement, and (3) after considering the actions
taken by the Company and any other changes in circumstances since
the giving of such notice, such determination of the Fund or the
Underwriter shall continue to apply on the sixtieth (60th) day
following the giving of such notice, which sixtieth day shall be the
effective date of termination, or
(j) at the option of the Company, if (1) the Company shall determine, in
its sole judgment reasonably exercised in good faith, that either
the Fund or the Underwriter has suffered a material adverse change
in its business or financial condition or is the subject of material
adverse publicity and such material adverse change or material
adverse publicity will have a material adverse impact upon the
business and operations of the Account or the Company's ability to
market the Contracts, (2) the Company shall notify the Fund and the
Underwriter in writing of such determination and its intent to
terminate the Agreement, and (3) after considering the actions taken
by the Fund and/or the Underwriter and any other changes in
circumstances since the giving of such notice, such determination
shall continue to apply on the sixtieth (60th) day following the
giving of such notice, which sixtieth day shall be the effective
date of termination; or
(k) at the option of either the Fund or the Underwriter, if the Company
gives the Fund and the Underwriter the written notice specified in
Section 1.6(b) hereof and at the time such notice was given there
was no notice of termination outstanding under any other provision
of this Agreement; provided, however any termination under this
Section 10.1(k). shall be effective forty five (45) days after the
notice specified in Section 1.6(b) was given.
10.2. It is understood and agreed that the right of any party hereto to
terminate this Agreement pursuant to Section 10.1(a) may be exercised for any
reason or for no reason.
10.3. Notice REQUIREMENT. No termination of this Agreement shall be
effective unless and until the party terminating this Agreement gives prior
written notice to all other parties to this Agreement of its intent to terminate
which notice shall set forth the basis for such termination. Furthermore,
(a) In the event that any termination is based upon the provisions of
Article VII, or the provision of Section 10.1(a), 10.1(i), 10.1(j)
or 10.1(k) of this Agreement, such prior written notice shall be
given in advance of the effective date of termination as required by
such provisions; and
(b) in the event that any termination is based upon the provisions of
Section l0.l(c) or l0.l(d) of this Agreement, such prior written
notice shall be given at least ninety (90) days before the effective
date of termination.
19
<PAGE>
10.4. EFFECT OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.4 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.5. The company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in either Account) except (i) as necessary to implement Contract Owner initiated
transactions, (ii) as required by state and/or federal laws or regulations or
judicial or other legal precedent of general application (hereinafter referred
to as a "Legally Required Redemption"), or (iii) as upon termination of this
Agreement with respect to one or more portfolios. Upon request, the Company
will promptly furnish to the Fund and the Underwriter the opinion of counsel for
the Company (which counsel shall be reasonably satisfactory to the Fund and the
Underwriter) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, except in cases where permitted
under the terms of the Contracts, the Company shall not prevent Contract owners
from allocating payments to a Portfolio that was otherwise available under the
Contracts without first giving the Fund or the Underwriter 90 days notice of its
intention to do so.
10.6 If for any reason the shares of any Portfolio are no longer to be
made available, then, at the request of the Company, the Fund and the
Underwriter shall cooperate with the Company so that the provisions of Section
26(b) of the 1940 Act will be complied with as soon as reasonably practicable
and substitution of an underlying funding medium accomplished without disruption
of sales of securities to the Account or a division thereof, as the case may be,
in connection with such Contracts.
10.7 Article II and VIII and Sections 12.1, 12.6 and 12.7 shall survive
termination of this Agreement.
ARTICLE XI.
NOTICES Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company;
20
<PAGE>
The American Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: President
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid by
a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the NASD and state insurance regulators) and
shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby. Notwithstanding the generality of the
foregoing, each party hereto further agrees to furnish the California Insurance
Commissioner with any information or reports in connection with services
provided under this Agreement which such commissioner may request in order to
ascertain whether the variable life insurance operations of the Company are
being conducted in a manner consistent with the California Variable Life
Insurance Regulations and any other applicable law or regulations.
21
<PAGE>
12.7 The Fund and Underwriter agree that to the extent any advisory or
other fees received by the Fund, the Underwriter or the Adviser are determined
to be unlawful in legal or administrative proceedings under the 1973 NAIC model
variable life insurance regulation in the states of California, Colorado,
Maryland or Michigan, the Underwriter shall indemnify and reimburse the Company
for any out of pocket expenses and actual damages the Company has incurred as a
result of any such proceeding; provided however that the provisions of Section
8.2(b) of this and 8.2(c) shall apply to such indemnification and reimbursement
obligation. Such indemnification and reimbursement obligation shall be in
addition to any other indemnification and reimbursement obligations of the Fund
and/or the Underwriter under this Agreement.
12.8. The rights, remedies and obligations contained in this Agreement are
cumulative and are in addition to any and all rights, remedies and obligations,
at law or in equity, which the parties hereto are entitled to under state and
federal laws.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below.
Company:
THE AMERICAN FRANKLIN LIFE INSURANCE
COMPANY
By its authorized officer
SEAL BY:
--------------------------------
Title: Stephen P. Horvat, Jr.
Senior Vice President, General
Counsel and Secretary
Date:
Fund:
VARIABLE INSURANCE PRODUCTS FUND
By its authorized officer,
--------------------------------
By:
SEAL Title: ITS: Sr. V.P.
Date: 10-1-91
22
<PAGE>
Underwriter:
FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
By:
--------------------------------
Title: V.P.
-----------------------------
Date: 10-3-91
------------------------------
23
<PAGE>
SCHEDULE A
ACCOUNTS
Name of Account Date of Resolution of Company's Board
which Established the Account
Separate Account VUL - 2 April 9, 1991
24
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for
the handling of proxies relating to the Fund by the Underwriter, the Fund and
the Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to
call in the number of Customers to Fidelity, as soon as possible,
but no later than two weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of a proxy statement.
Underwriter will provide at least one copy of the last Annual Report to the
Company.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The company, at its expense, shall
produce and personalize the Voting Instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the
Card before it is printed. Allow approximately 2-4 business days for
printing information on the Cards. Information commonly found on the Cards
includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual Card number for use in tracking and verification of
votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
25
<PAGE>
During this time, Fidelity Legal will develop, produce, and the Fund will
pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to Company for
insertion into envelopes (envelopes and return envelopes are provided and
paid for by the Insurance Company). Contents of envelope sent to Customers
by company will include:
a. Voting Instruction Card(s)
b. one proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly
as possible and that their vote is important. One copy will be
supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
The Fund must allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) solicitation time
is calculated as calendar days from (but NOT including) the meeting,
counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal
procedure and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, If the account registration is under "Bertram C.
Jones, Trustee," then that is the exact legal name to be printed
on the Card and is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter, a new
Card and return envelope. The mutilated or illegible card is disregarded
and considered to be NOT RECEIVED for purposes of vote tabulation.
26
<PAGE>
Any Cards that have "kicked out" (e.g. mutilated, illegible) of the
procedure are "hand verified," i.e., examined as to why they did not
complete the system. Any questions on those Cards are usually remedied
individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of SHARES.) Fidelity Legal must
review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if required to calculate the
vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provided a standard from for each Certification.
15. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
27
<PAGE>
EXHIBIT 8 (b)(1)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND II,
FIDELITY DISTRIBUTORS CORPORATION
and
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into this 18th day of July, 1991 by and
among THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY, (hereinafter the "Company"),
an Illinois legal reserve, stock life insurance company, on its own behalf and
on behalf of each segregated asset account of the Company set forth on Schedule
A hereto as may be amended from time to time (each such account hereinafter
referred to as the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND II, an
unincorporated business trust organized under the laws of the Commonwealth of
Massachusetts (hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION
(hereinafter the "Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management investment
company and is available to act as the investment vehicle for separate accounts
established for variable life insurance policies and variable annuity contracts
(collectively, the "Variable insurance Products") to be offered by insurance
companies which have entered into participation agreements with the Fund and the
Underwriter (hereinafter "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several series
of shares, each designated a "Portfolio" and representing the interest in a
particular managed portfolio of securities and other assets; and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated September 17, 1986 (File No. 812-64222), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
1
<PAGE>
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable life
and variable annuity contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to one or more of the aforesaid variable life and
annuity contracts (hereinafter the "Contracts"); and
WHEREAS, the Company has registered or will register each Account as a unit
investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, (hereinafter the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD");
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
WHEREAS, the Underwriter serves as principal underwriter for Fund shares
pursuant to a distribution agreement dated November 13, 1981 between the
Underwriter and the Fund; and
WHEREAS, the Company has entered into a servicing agreement dated June 15,
1989, as amended, with Integrity Life Insurance Company pursuant to which
Integrity Life Insurance Company will provide administrative services to support
the Account and the Contracts;
NOW, THEREFORE, in consideration of their mutual promises, the Company, the
Fund and the Underwriter agree as follows:
ARTICLE I. SALE OF FUND SHARES
1.1. The Fund and the Underwriter each agrees to sell to the Company those
shares of the Fund which each Account orders, executing such orders on a daily
basis at the net asset value next computed after receipt by the Fund or its
designee of the order for the shares of the Fund. For purposes of this Section
1.1, the Company or its designee shall be the designee of the Fund for receipt
of such orders from each Account and receipt by such designee shall constitute
receipt by the Fund; provided that the Fund receives notice of such order by
9:30 a.m. Boston time on the next following Business Day. "Business Day" shall
mean any day on which the New York Stock Exchange is open for trading and on
which the Fund calculates its net asset value pursuant to the rules of the
Securities and Exchange Commission. Integrity Life Insurance Company shall be
the designee of the Company for purposes of this Section.
2
<PAGE>
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Board
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will be
sold only to Participating insurance Companies and their separate accounts. No
shares of any Portfolio will be sold to the general public. To the extent
permitted by law or regulation, the Fund and the Underwriter agree to make
available to the Account shares of all Portfolios of the Fund.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Sections 2.5 and 2.12 of
Article II of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request, any
full or fractional shares of the Fund held by the company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption without charge. For
purposes of this Section 1.5, the Company or its designee shall be the designee
of the Fund for receipt of requests for redemption from each Account and receipt
by such designee shall constitute receipt by the Fund; provided that the Fund
receives notice of such request for redemption on the next following Business
Day. Integrity Life Insurance Company shall be the designee of the Company for
purposes of this Section.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the Separate Accounts listed on Schedule A shall be invested in
the Fund, in such other Funds advised by the Adviser as may be mutually agreed
to in writing by the parties hereto, or in the Company's general account,
provided that such amounts may also be invested in an investment company other
than the Fund if (a) such other investment company, or series thereof, has
investment objectives or policies that are substantially different from the
investment objectives and policies of all the Portfolios of the Fund (excluding
any Portfolios for which the Company has terminated this Agreement pursuant to
Section 10.1(b)); or (b) the Company gives the Fund and the Underwriter 45 days
written notice of its intention to make such other investment company available
as a funding vehicle for the Contracts; or (c) such other investment company was
available as a funding vehicle for the Contracts prior to the date of this
Agreement and the Company so informs the Fund and Underwriter prior to their
signing this Agreement; or (d) the Fund or Underwriter consents to the use of
such other investment company.
1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal
funds so wired, such funds shall cease to be the responsibility of the Company
and shall become the responsibility of the Fund.
3
<PAGE>
1.8. Issuance and transfer of the Fund's shares will be by book entry
only. Stock certificates will not be issued to the Company or any Account.
Shares ordered from the Fund will be recorded in an appropriate title for each
Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or telephone,
followed by written confirmation) to the Company or its designee of any income,
dividends or capital gain distributions payable on the Fund's shares. The
Company hereby elects to receive all such income, dividends and capital gain
distributions as are payable on the Portfolio shares in additional shares of
that Portfolio. The Company reserves the right with respect to each Portfolio
to revoke this election and to receive all such income, dividends and capital
gain distributions in cash. The Fund shall notify the Company or its designee
of the number of shares so issued as payment of such dividends and
distributions. Integrity Life Insurance Company shall be the designee of the
Company for purposes of this Section.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company or its designee on a daily basis as soon as
reasonably practical after the net asset value per share is calculated and shall
use its best efforts to make such net asset value per share available by 7 p.m.
Boston time.
ARTICLE II. REPRESENTATIONS AND WARRANTIES
2.1. The Company represents and warrants that the Contracts are or will
be registered under the 1933 Act; that the Contracts will be issued and sold in
compliance in all material respects with all applicable Federal and State laws
and that the sale of the Contracts shall comply in all material respects with
state insurance suitability requirements. The Company further represents and
warrants that it is an insurance company duly organized and in good standing
under applicable law and that it has legally and validly established each
Account prior to any issuance or sale thereof as a segregated asset account
under Article XIV-1/2 of the Illinois Insurance Code and has registered or,
prior to any issuance or sale of the Contracts, will register each Account as a
unit investment trust in accordance with the provisions of the 1940 Act to serve
as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant to
this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Illinois and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Under-writer.
2.3. The Fund represents that it is currently qualified as a Regulated
Investment Company under Subchapter M of the Internal Revenue Code of 1986, as
amended, (the "Code") and that it will make every effort to maintain such
qualification (under Subchapter M or any successor or similar provision) and
that it will notify the Company immediately upon having a reasonable basis for
believing that it has ceased to so qualify or that it might not so qualify in
the future.
2.4. The Company represents that the Contracts are currently treated as
endowment, annuity or life insurance contracts, under applicable provisions of
the Code and that it will make every effort to maintain such treatment and that
it will notify the Fund and the Underwriter immediately upon having a
4
<PAGE>
reasonable basis for believing that the Contracts have ceased to be so treated
or that they might not be so treated in the future.
2.5. The Fund currently does not intend to make any payments to finance
distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise,
although it may make such payments in the future. The Fund has adopted a "no
feel' or "defensive" Rule 12b-1 Plan under which it makes no payments for
distribution expenses. To the extent that it decides to finance distribution
expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of
trustees, a majority of whom are not interested persons of the Fund, formulate
and approve any plan under Rule 12b-1 to finance distribution expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Illinois and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Illinois to the extent required to perform this
Agreement.
2.7. The Under-writer represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute the Fund
shares in accordance with the laws of the State of Illinois and all applicable
state and federal securities laws, including without limitation the 1933 Act,
the 1934 Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and that the Adviser shall perform its
obligations for the Fund in compliance in all material respects with the laws of
the State of Illinois and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Rule 17g-(l) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its. directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are and shall continue to be at all
times covered by a blanket fidelity bond or similar coverage for the benefit of
the Fund, in an amount not less than the minimal coverage as required currently
by entities subject to the requirements of Rule 17g-1 of the 1940 Act or related
provisions as may be promulgated from time to time. The aforesaid Bond shall
include coverage for larceny and embezzlement and shall be issued by a reputable
bonding company.
2.12. The Company represents and warrants that it will not purchase Fund
shares with Account assets derived from the sale of Contracts to deferred
compensation plans with respect to service for state
5
<PAGE>
and local governments which qualify under Section 457 of the federal Internal
Revenue Code, as may be amended. The Company may purchase Fund shares with
Account assets derived from any sale of a Contract to any other type of
tax-advantaged employee benefit plan; PROVIDED however that such plan has no
more than 500 employees who are eligible to participate at the time of the first
such purchase hereunder by the Company of Fund shares derived from the sale of
such Contract.
2.13 The Fund and the Underwriter each represents that neither it nor
any person employed in any material connection with respect to the services
provided pursuant to this Agreement:
(i) Within the last 10 years has been convicted of any felony or
misdemeanor arising out of conduct involving embezzlement,
fraudulent conversion, or misappropriation of funds or securities,
or involving violations of 1341, 1342 or 1343 of Title 18, United
States Code; or
(ii) Within the last ten years has been found by any state regulatory
authority to have violated or has acknowledged violation of any
provision of any state insurance law involving fraud, deceit or
knowing misrepresentation; or
(iii) Within the last ten years has been found by any federal or state
regulatory authorities to have violated or have acknowledged
violation of any provision of federal or state securities laws
involving fraud, deceit or knowing misrepresentation
ARTICLE III. PROSPECTUSES, STATEMENTS OF ADDITIONAL INFORMATION AND PROXY
STATEMENTS; VOTING
3.1. The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus and any
supplements thereto as the Company may reasonably request. If requested by the
Company in lieu thereof, the Fund shall provide such documentation (including a
camera ready final copy of the new prospectus or supplement as set in type at
the Fund's expense) and other assistance as is reasonably necessary in order for
the Company once each year (or more frequently if the prospectus for the Fund is
amended) to have the prospectus for the Contracts and the Fund's prospectus
printed together in one document (such printing to be at the Company's expense).
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter (or in the Fund's
discretion, the Prospectus shall state that such Statement is available from the
Fund), and the Underwriter (or the Fund), at its expense, shall print and
provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
3.3 The Fund shall promptly notify the Company of any anticipated
amendments to the Fund's registration statement or supplement to the prospectus.
3.4. The Fund, at its expense, shall provide the Company with copies of
its proxy material, reports to stockholders and other communications to
stockholders in such quantity as the Company shall reasonably require for
distributing to Contract owners. At the request of the Company, the Fund shall
provide a camera ready copy of such communication to the Company, which may
combine such communication with a communication of the Company or the Accounts,
which communications may be bound together. In such case the printing expenses
of the combined communications shall be borne by the Company and the Fund in
proportion to the number of pages for which they are respectively responsible.
6
<PAGE>
3.5. If and to the extent required by law the Company shall:
(i) solicit voting instructions from Contract Owners;
(ii) vote the Fund shares in accordance with instructions received from
Contract owners; and
(iii) vote Fund shares for which no instructions have been received in
the same proportion as Fund shares of such Portfolio for which
instructions have been received;
so long as and to the extent that the Securities and Exchange commission
continues to interpret the 1940 Act to require pass-through voting privileges
for variable contract owners. The Company reserves the right to vote Fund
shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule B attached hereto and incorporated herein by this reference, which
standards will also be provided to the other Participating Insurance Companies
and the requirements of the 1940 Act.
3.6. The Fund will comply with all provisions of the 1940 Act requiring
voting by shareholders, and in particular the Fund will either provide for
annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund
is not one of the trusts described in Section 16(c) of that Act) as well as with
Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act
in accordance with the Securities and Exchange Commission's interpretation of
the requirements of Section 16(a) with respect to periodic elections of trustees
and with whatever rules the Commission may promulgate with respect thereto.
ARTICLE IV. SALES MATERIAL AND INFORMATION
4.1. The Company shall furnish, or shall cause to be furnished, to the
Fund or its designee, the text and to the extent relevant the graphic component
of each piece of sales literature or other promotional material in which the
Fund or its investment adviser or the Underwriter is named, at least fifteen
Business Days prior to its use. No such material shall be used if the Fund or
its designee objects to such use within fifteen Business Days after receipt of
such material. The Fund or its designee will use its best efforts to review
such materials within a shorter time period as the Company will have requested
in writing.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee object to such use
within fifteen Business Days after receipt of such material.
7
<PAGE>
4.4. The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, proxy statements, sales literature and other promotional materials,
applications for exemptions, requests for no-action letters, and all amendments
to any of the above, that relate to the Fund or its shares, contemporaneously
with the filing of such document with the Securities and Exchange Commission or
other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, Statements of Additional Information,
reports, solicitations for voting instructions, sales literature and other
promotional materials, applications for exemptions, requests for no action
letters, and all amendments to any of the above, that relate to the Contracts or
each Account, contemporaneously with the filing of such document with the
Securities and Exchange Commission.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (I.E., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. FEES AND EXPENSES
5.1. The Fund and Underwriter shall pay no fee or other compensation to
the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-1 to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable to
the Underwriter, past profits of the Underwriter or other resources available to
the Underwriter. No such payments shall be made directly by the Fund.
Currently, no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that
8
<PAGE>
constitutes an annual report), the preparation of all statements and notices
required by any federal or state law, and all taxes on the issuance or transfer
of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing
the Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. DIVERSIFICATION
6.1. The Fund will at all times invest money from the Contracts in such
a manner as to ensure that the Contracts will be treated as variable contracts
under the Code and the regulations issued thereunder. Without limiting the
scope of the foregoing, the Fund will at all times comply with Section 817(h) of
the Code and Treasury Regulation 1.817-5, relating to the diversification
requirements for variable annuity, endowment, or life insurance contracts and
any amendments or other modifications to such Section or Regulations. The Fund
shall promptly notify the Company of any breach by any Portfolio of this Article
6.
ARTICLE VII. POTENTIAL CONFLICTS
7.1. The Board will monitor the Fund for the existence of any material
irreconcilable conflict between the interests of the contract owners of all
separate accounts investing in the Fund. An irreconcilable material conflict
may arise for a variety of reasons, including: (a) an action by any state
insurance regulatory authority; (b) a change in applicable federal or state
insurance, tax, or securities laws or regulations, or a public ruling, private
letter ruling, no-action or interpretative letter, or any similar action by
insurance, tax, or securities regulatory authorities; (c) an administrative or
judicial decision in any relevant proceeding; (d) the manner in which the
investments of any Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by an insurer to disregard the voting
instructions of contract owners. The Board shall promptly inform the Company if
it determines that an irreconcilable material conflict exists and the
implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected Contract owners and, as appropriate, segregating the assets of
any appropriate group (i.e., annuity contract owners, life insurance contract
owners, or variable contract owners of one or more Participating Insurance
Companies) that votes in favor of such segregation, or offering to the affected
contract owners the option of making such a change; and (2), establishing a new
registered management investment company or managed separate account.
9
<PAGE>
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw the affected Account's
investment in the Fund and terminate this Agreement with respect to such
Account; provided, however that such withdrawal and termination shall be limited
to the extent required by the foregoing material irreconcilable conflict as
determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a particular
state insurance regulator's decision applicable to the Company conflicts with
the majority of other state regulators, then the Company will withdraw the
affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the company in
writing that it has determined that such decision has created an irreconcilable
material conflict; provided, however, that such withdrawal and termination shall
be limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested members of the Board.
Until the end of the foregoing six month period, the Underwriter and Fund shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw the Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended,
or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the
Act or the rules promulgated thereunder with respect to mixed or shared funding
(as defined in the Shared Funding Exemptive Order) on terms and conditions
materially different from those contained in the Shared Funding Exemptive Order,
then (a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T),
as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable;
and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall
continue in effect only to the extent that terms and conditions substantially
identical to such Sections are contained in such Rule(s) as so amended or
adopted.
ARTICLE VIII. INDEMNIFICATION
8.1. INDEMNIFICATION BY THE COMPANY
10
<PAGE>
8.1(a). The Company agrees to indemnify and hold harmless the Fund and each
of the members of the Board and officers and each person, if any, who controls
the Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Fund's shares or the Contracts
and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus for the Contracts or
contained in the Contracts or sales literature for the Contracts
(or any amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided
that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity
with information furnished to the Company by or on behalf of the
Fund for use in the Registration Statement or prospectus for the
Contracts or in the Contracts or sales literature (or any
amendment or supplement) or otherwise for use in connection with
the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations(other
than statements or representations contained in the Registration
Statement, prospectus or sales literature of the Fund not supplied
by the Company, or persons under its control) or wrongful conduct
of the Company or persons under its control, with respect to the
sale or distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus,
or sales literature of the Fund or any amendment thereof or
supplement thereto or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, if such a statement
or omission was made in reliance upon information furnished to the
Fund by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Company, as limited by and in accordance
with the provisions of Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement or to
the Fund, whichever is applicable.
11
<PAGE>
8.1(c). The Company stall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. in case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action and to settle the claim at its own expense provided,
however, that no such settlement shall, without the Indemnified Parties' written
consent, include any factual stipulations referring to the Indemnified Parties
or their conduct. After notice from the Company to such party of the Company's
election to assume the defense thereof, the Indemnified Party shall bear the
fees and expenses of any additional counsel retained by it, and the Company will
not be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of the
Fund.
8.2. INDEMNIFICATION BY THE UNDERWRITER
8.2(a). The Underwriter agrees to indemnify and hold harmless the Company,
the principal underwriter for the Contracts and each of their directors and
officers and each person, if any, who controls the Company or the principal
underwriter for the Contracts within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, regulation, at common law or otherwise, insofar as
such losses, claims, damages, liabilities or expenses (or actions in respect
thereof) or settlements are related to the sale or acquisition of the Fund's
shares or the Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus or sales literature of the
Fund (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not
apply as to any Indemnified Party if such statement or omission or
such alleged statement or omission was made in reliance upon and
in conformity with information furnished to the Underwriter or
Fund by or on behalf of the company for use in the Registration
Statement or prospectus for the Fund or in sales literature (or
any amendment or supplement) or otherwise for use in connection
with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for the
Contracts not supplied by the Fund, Underwriter or persons under
its control) or
12
<PAGE>
wrongful conduct of the Fund, Adviser or Underwriter or persons
under their control, with respect to the sale or distribution of
the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus,
or sales literature covering the Contracts, or any amendment
thereof or supplement thereto, or the omission or alleged omission
to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, if such
statement or omission was made in reliance upon information
furnished to the Company by or on behalf of the Fund or the
Underwriter; or
(iv) arise as a result of any failure by the Fund or the Underwriter to
provide the services and furnish the materials under the terms of
this Agreement (including a failure, whether unintentional or in
good faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material breach
of this Agreement by the Underwriter; as limited by and in
accordance with the provisions of Sections 8.2(b) and 8.2(c)
hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
incurred or assessed against an Indemnified Party as such may arise from such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
each Company or the Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Under-writer in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the party named in the action and to settle the claim at its own expense
provided, however, that no such settlement shall, without the Indemnified
Parties' written permission, include any factual stipulations referring to the
Indemnified Parties or their conduct. After notice from the Underwriter to such
party of the Underwriter's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. INDEMNIFICATION BY THE FUND
13
<PAGE>
8.3(a). The Fund agrees to indemnify and hold harmless the Company, the
principal underwriter for the Contracts and each of their directors and officers
and each person, if any, who controls the Company or the principal underwriter
for the Contracts within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Fund) or litigation (including
legal and other expenses) to which the Indemnified Parties may become subject
under any statute, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
result from the gross negligence, bad faith or willful misconduct of the Board
or any member thereof. are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the diversification
requirements specified in Article VI of this Agreement);or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement
or arise out of or result from any other material breach of this
Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification provision
with respect to any losses, claims, damages, liabilities or litigation incurred
or assessed against an Indemnified Party as such may arise from such Indemnified
Party's willful misfeasance, bad faith, or gross negligence in the performance
of such Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to the
Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified the Fund in writing within a reasonable
time after the summons or other first legal process giving information of the
nature of the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify the Fund of any such claim shall not
relieve the Fund from any liability which it may have to the Indemnified Party
against whom such action is brought otherwise than on account of this
indemnification provision. In case any such action is brought against the
Indemnified Parties, the Fund will be entitled to participate, at its own
expense, in the defense thereof. The Fund also shall be entitled to assume the
defense thereof, with counsel satisfactory to the party named in the action and
to settle the claim at its own expense provided, however, that no such
settlement shall, without the Indemnified Parties' written permission, include
any factual stipulations referring to the Indemnified Parties or their conduct.
After notice from the Fund to such party of the Fund's election to assume the
defense thereof, the Indemnified Party shall bear the fees and expenses of any
additional counsel retained by it, and the Fund will not be liable to such party
under this Agreement for any legal or other expenses subsequently incurred by
such party independently in connection with the defense thereof other than
reasonable costs of investigation.
8.3(d). The Company and the Under-writer agree promptly to notify the Fund
of the commencement of any litigation or proceedings against it or any of its
respective officers or directors in connection with this Agreement, the issuance
or sale of the Contracts, with respect to the operation of either Account, or
the sale or acquisition of shares of the Fund.
14
<PAGE>
ARTICLE IX. APPLICABLE LAW
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
ARTICLE X. Termination
10.1. This Agreement shall terminate:
(a) at the option of any party upon one year advance written notice to
the other parties; provided, however such notice shall not be
given earlier than one year following the date of this Agreement;
or
(b) at the option of the Company to the extent that shares of
Portfolios are not reasonably available to meet the requirements
of the Contracts as determined by the Company, provided however,
that such termination shall apply only to the Portfolio(s) not
reasonably available. Prompt notice of the election to terminate
for such cause shall be furnished by the Company; or
(c) at the option of the Fund in the event that formal administrative
proceedings are instituted against the Company by the NASD, the
Securities and Exchange Commission, any state securities or
insurance department or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of
the Contracts, with respect to the operation of any Account, or
the purchase of the Fund shares, provided, however, that the Fund
determines in its sole judgment exercised in good faith, that any
such administrative proceedings will have a material adverse
effect upon the ability of the Company to perform its obligations
under this Agreement; or
(d) at the option of the Company in the event that formal
administrative proceedings are instituted against the Fund or
Underwriter by the NASD, the Securities and Exchange commission,
or any state securities or insurance department or any other
regulatory body, provided, however, that the Company determines in
its sole judgment exercised in good faith, that any such
administrative proceedings will have a material adverse effect
upon the ability of the Fund or underwriter to perform its
obligations under this Agreement; or
(e) with respect to any Account, upon requisite vote of the Contract
owners having an interest in such Account (or any subaccount) to
substitute the shares of another investment company for the
corresponding Portfolio shares of the Fund in accordance with the
terms of the Contracts for which those Portfolio shares had been
selected to serve as the underlying investment media. The Company
will give 30 days' prior written notice to the Fund of the date of
any proposed vote to replace the Fund's shares; or
15
<PAGE>
(f) at the option of the Company, in the event any of the Fund's
shares are not registered, issued or sold in accordance with
applicable state and/or federal law or such law precludes the use
of such shares as the underlying investment media of the Contracts
issued or to be issued by the Company; or
(g) at the option of the Company, if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code or
under any successor or similar provision, or if the Company
reasonably believes that the Fund may fail to so qualify; or
(h) at the option of the Company, if the Fund fails to meet the
diversification requirements specified in Article VI hereof; or
(i) at the option of either the Fund or the Underwriter, if (1) the
Fund or the Underwriter, respectively, shall determine, in their
sole judgment reasonably exercised in good faith, that the Company
has suffered a material adverse change in its business or
financial condition or is the subject of material adverse
publicity and such material adverse change or material adverse
publicity will have a material adverse impact upon the business
and operations of either the Fund or the Underwriter, (2) the Fund
or the Underwriter shall notify the Company in writing of such
determination and its intent to terminate this Agreement, and (3)
after considering the actions taken by the Company and any other
changes in circumstances since the giving of such notice, such
determination of the Fund or the Underwriter shall continue to
apply on the sixtieth (60th) day following the giving of such
notice, which sixtieth day shall be the effective date of
termination; or
(j) at the option of the Company, if (1) the Company shall determine,
in its sole judgment reasonably exercised in good faith, that
either the Fund or the Underwriter has suffered a material adverse
change in its business or financial condition or is the subject of
material adverse publicity and such material adverse change or
material adverse publicity will have a material adverse impact
upon the business and operations of the Account or the Company's
ability to market the Contracts, (2) the Company shall notify the
Fund and the Under-writer in writing of such determination and its
intent to terminate the Agreement, and (3) after considering the
actions taken by the Fund and/or the Underwriter and any other
changes in circumstances since the giving of such notice, such
determination shall continue to apply on the sixtieth (60th) day
following the giving of such notice, which sixtieth day shall be
the effective date of termination; or
(k) at the option of either the Fund or the Underwriter, if the
Company gives the Fund and the Underwriter the written notice
specified in Section 1.6(b) hereof and at the time such notice was
given there was no notice of termination outstanding under any
other provision of this Agreement; provided, however any
termination under this Section 10.1(k) shall be effective forty
five (45) days after the notice specified in Section 1.6(b) was
given.
10.2. It is understood and agreed that the right of any party hereto
to terminate this Agreement pursuant to Section 10.1(a) may be exercised for
any reason or for no reason.
16
<PAGE>
10.3. NOTICE REQUIREMENT. No termination of this Agreement shall be
effective unless and until the party terminating this Agreement gives prior
written notice to all other parties to this Agreement of its intent to terminate
which notice shall set forth the basis for such termination. Furthermore,
(a) In the event that any termination is based upon the provisions of
Article VII, or the provision of section 10.1(a), 10.1(i), 10.1(j)
or 10.1(k) of this Agreement, such prior written notice shall be
given in advance of the effective date of termination as required
by such provisions; and
(b) in the event that any termination is based upon the provisions of
Section 10.1(c) or 10.1(d) of this Agreement, such prior written
notice shall be given at least ninety (90) days before the
effective date of termination.
10.4. Effect OF TERMINATION. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall, at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.4 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.5. The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in either Account) except (i) as necessary to implement Contract owner initiated
transactions, (ii) as required by state and/or federal laws or regulations or
judicial or other legal '-precedent of general application (hereinafter referred
to as a "Legally Required Redemption"), or (iii) as upon termination of this
Agreement with respect to one or more portfolios. Upon request, the Company
will promptly furnish to the Fund and the Underwriter the opinion of counsel for
the Company (which counsel shall be reasonably satisfactory to the Fund and the
Underwriter) to the effect that any redemption pursuant to clause (ii) above is
a Legally Required Redemption. Furthermore, except in cases where permitted
under the terms of the Contracts, the Company shall not prevent Contract Owners
from allocating payments to a Portfolio that was otherwise available under the
Contracts without first giving the Fund or the Underwriter 90 days notice of its
intention to do so.
10.6 If for any reason the shares of any Portfolio are no longer to be
make available, then, at the request of the Company, the Fund and the
Underwriter shall cooperate with the Company so that the provisions of Section
26(b) of the 1940 Act will be complied with as soon as reasonably practicable
and substitution of an underlying funding medium accomplished without disruption
of sales of securities to the Account or a division thereof, as the case may be,
in connection with such Contracts.
10.7 Article II and VIII and Sections 12.1, 12.6 and 12.7 shall survive
termination of this Agreement.
ARTICLE XI. NOTICES
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth
below or at such other address as such party may from time to time specify in
writing to the other party.
If to the Fund:
17
<PAGE>
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
The American Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: President
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. MISCELLANEOUS
12.1 All persons dealing with the Fund must look solely to the property
of the Fund for the enforcement of any claims against the Fund as neither the
Board, officers, agents or shareholders assume any personal liability for
obligations entered into on behalf of the Fund.
12.2 Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and addresses
of the owners of the Contracts and all information reasonably identified as
confidential in writing by any other party hereto and, except as permitted by
this Agreement, shall not disclose, disseminate or utilize such names and
addresses and other confidential information until such time as it may come into
the public domain without the express written consent of the affected party.
12.3 The captions in this Agreement are included for convenience of
reference only and in no way define or delineate any of the provisions hereof or
otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the NASD and state insurance regulators) and
shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby. Notwithstanding the generality of the
foregoing, each party hereto further agrees to furnish the California Insurance
Commissioner with any information or reports in connection with services
provided under this Agreement which such Commissioner may request in order to
ascertain whether the variable life insurance operations of the Company are
being conducted in a manner consistent with the California Variable Life
Insurance Regulations and any other applicable law or regulations.
12.7 The Fund and Underwriter agree that to the extent any advisory or
other fees received by the Fund, the Underwriter or the Adviser are determined
to be unlawful in legal or administrative
18
<PAGE>
proceedings under the 1973 NAIC model variable life insurance regulation in the
states of California, Colorado, Maryland or Michigan, the Underwriter shall
indemnify and reimburse the Company for any out of pocket expenses and actual
damages the Company has incurred as a result of any such proceeding; provided
however that the provisions of Section 8.2(b) of this and 8.2(c) shall apply to
such indemnification and reimbursement obligation. Such indemnification and
reimbursement obligation shall be in addition to any other indemnification and
reimbursement obligations of the Fund and/or the Underwriter under this
Agreement.
12.8. The rights, remedies and obligations contained in this Agreement
are cumulative and are in addition to any and all rights, remedies and
obligations, at law or in equity, which the parties hereto are entitled to under
state and federal laws.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by its duly authorized representative
and its seal to be hereunder affixed hereto as of the date specified below.
Company:
THE AMERICAN FRANKLIN LIFE INSURANCE
COMPANY
By its authorized officer
SEAL By:
Title: Senior Vice President, General
Counsel and Secretary
Date:
Fund:
VARIABLE INSURANCE PRODUCTS FUND II
By its authorized officer,
By:
SEAL Title: Senior V. P.
Date: 10/1/91
Underwriter:
FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
SEAL By:
Title: V.P.
Date: 10/3/91
19
<PAGE>
SCHEDULE A
ACCOUNTS
Name of Account Date of Resolution of Company's Board
which Established the Account
Separate Account VUL - 2 April 9, 1991
20
<PAGE>
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter as
early as possible before the date set by the Fund for the shareholder
meeting to facilitate the establishment of tabulation procedures. At this
time the Underwriter will inform the Company of the Record, Mailing and
Meeting dates. This will be done verbally approximately two months before
meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units which are attributed to each contractowner/policyholder (the
"Customer") as of the Record Date. Allowance should be made for account
adjustments made after this date that could affect the status of the
Customers' accounts as of the Record Date.
Note: The number of proxy statements is determined by the activities
described in Step #2. The Company will use its best efforts to
call in the number of Customers to Fidelity, as soon as possible,
but no later than two weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of a proxy statement.
Underwriter will provide at least one copy of the last Annual Report to the
Company.
4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is
provided to the Company by the Fund. The Company, at its expense, shall
produce and personalize the Voting instruction Cards. The Legal Department
of the Underwriter or its affiliate ("Fidelity Legal") must approve the
Card before it is printed. Allow approximately 2-4 business days for
printing information on the Cards. Information commonly found on the Cards
includes:
a. name (legal name as found on account registration)
b. address
c. Fund or account number
d. coding to state number of units
e. individual card number for use in tracking and verification of
votes (already on Cards as printed by the Fund)
(This and related steps may occur later in the chronological process due to
possible uncertainties relating to the proposals.)
5. During this time, Fidelity Legal will develop, produce, and the Fund will
pay for the Notice of Proxy and the Proxy Statement (one document).
Printed and folded notices and statements will be sent to
21
<PAGE>
Company for insertion into envelopes (envelopes and return envelopes are
provided and paid for by the Insurance Company). Contents of envelope sent
to Customers by Company will include:
a. Voting Instruction Card(s)
b. One proxy notice and statement (one document)
c. return envelope (postage pre-paid by Company) addressed to the
Company or its tabulation agent
d. "urge buckslip" - optional, but recommended. (This is a small,
single sheet of paper that requests Customers to vote as quickly
as possible and that their vote is important. One copy will be
supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
6. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness and
completeness. Copy of this approval sent to Fidelity Legal.
7. Package mailed by the Company.
The Fund MUST allow at least a 15-day solicitation time to the Company
as the shareowner. (A 5-week period is recommended.) Solicitation time
is calculated as calendar days from (but NOT including) the meeting,
counting backwards.
8. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival by proposal into vote
categories of all yes, no, or mixed replies, and to begin data entry.
Note: Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal
procedure and has not been required by Fidelity in the past.
9. Signatures on Card checked against legal name on account registration which
was printed on the Card.
Note: For Example, If the account registration is under "Bertram
C.Jones, Trustee," then that is the exact legal name to be
printed on the Card and is the signature needed on the Card.
10. If Cards are mutilated, or for any reason are illegible or are not signed
properly, they are sent back to Customer with an explanatory letter, a new
Card and return envelope. The mutilated or illegible Card is disregarded
and considered to be NOT RECEIVED for purposes of vote tabulation. Any
Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure
are "hand verified," i.e., examined as to why they did not complete the
system. Any questions on those Cards are usually remedied individually.
11. There are various control procedures used to ensure proper tabulation of
votes and accuracy of that tabulation. The most prevalent is to sort the
Cards as they first arrive into categories depending upon their vote; an
estimate of how the vote is progressing may then be calculated. If the
initial estimates and the actual vote do not coincide, then an internal
audit of that vote should occur. This may entail a recount.
22
<PAGE>
12. The actual tabulation of votes is done in units which is then converted to
shares. (It is very important that the Fund receives the tabulations stated
in terms of a percentage and the number of SHARES.) Fidelity Legal must
review and approve tabulation format.
13. Final tabulation in shares is verbally given by the Company to Fidelity
Legal on the morning of the meeting not later than 10:00 a.m. Boston time.
Fidelity Legal may request an earlier deadline if required to calculate the
vote in time for the meeting.
14. A Certification of Mailing and Authorization to Vote Shares will be
required from the Company as well as an original copy of the final vote.
Fidelity Legal will provided a standard from for each Certification.
15. The Company will be required to box and archive the Cards received from the
Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity Legal
will be permitted reasonable access to such Cards.
16. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
23
<PAGE>
EXHIBIT 8(c)
SUB-LICENSE AGREEMENT
Agreement effective as of this 18th day of July, 1991 by and between
Fidelity Distributors Corporation (hereinafter called "Fidelity"), a corporation
organized and existing under the laws of the Commonwealth of Massachusetts, with
a principal place of business at 82 Devonshire Street, Boston, Massachusetts,
and The American Franklin Life Insurance Company (hereinafter called "Company"),
a company organized and existing under the laws of the State of Illinois, with a
principal place of business at #1 Franklin Square, Springfield, Illinois 62713.
WHEREAS, FMR Corp., a Massachusetts corporation, the parent company of
Fidelity, is the owner of the trademark and the tradename "FIDELITY INVESTMENTS"
and is the owner of a trademark in a pyramid design (hereinafter, collectively
the "Fidelity Trademarks"), a copy of each of which is attached hereto as
Exhibit "A;" and
WHEREAS, FMR Corp. has granted a license to Fidelity (the "Master License
Agreement") to sub-license the Fidelity Trademarks to third parties for their
use in connection with Promotional Materals as hereinafter defined; and
WHEREAS, Company is desirous of using the Fidelity Trademarks in connection
with distribution of "sales literature and other promotional material" with
information, including the Fidelity Trademarks, printed in said material (such
material hereinafter called the Promotional Material). For the purpose of this
Agreement, "sales literature and other promotional material" shall have the same
meaning as in the certain Participation Agreement dated as of the ____ day of
July, 1991, among Fidelity, Company and Variable Insurance Products Fund
(hereinafter "Participation Agreement"); and
WHEREAS, Fidelity is desirous of having the Fidelity Trademarks used in
connection with the Promotional Material.
NOW, THEREFORE, in consideration of the foregoing and for other good and
valuable consideration, the receipt and adequacy whereof is hereby acknowledged,
and of the mutual promises hereinafter set forth, the parties hereby agree as
follows:
1. Fidelity hereby grants to Company a non-exclusive, non-transferrable
license to use the Fidelity Trademarks in connection with the promotional
distribution of the Promotional Material and Company accepts said license,
subject to the terms and conditions set forth herein.
2. Company acknowledges that FMR Corp. is the owner of all right, title
and interest in the Fidelity Trademarks and agrees that it will do nothing
inconsistent with the ownership of the Fidelity Trademarks by FMR Corp., and
that it will not, now or hereinafter, contest any registration or application
for registration of the Fidelity Trademarks by FMR Corp., nor will it, now or
hereafter, aid anyone in contesting any registration or application for
registration of the Fidelity Trademarks by FMR Corp.
3. Company agrees to use the Fidelity Trademarks only in the form and
manner approved by Fidelity and not to use any other trademark, service mark or
registered trademark in combination with any of the Fidelity Trademarks without
approval by Fidelity.
1
<PAGE>
4. Company agrees that it will place all necessary and proper notices and
legends in order to protect the interests of FMR Corp. and Fidelity therein
pertaining to the Fidelity Trademarks on the Promotional Material including, but
not limited to, symbols indicating trademarks, service marks and registered
trademarks. Company will place such symbols and legends on the Promotional
Material as requested by Fidelity or FMR Corp. upon receipt of notice of same
from Fidelity or FMR Corp.
5. Company agrees that the nature and quality of all of the Promotional
Material distributed by Company bearing the Fidelity Trademarks shall conform to
standards set by, and be under the control of, Fidelity.
6. Company agrees to cooperate with Fidelity in facilitating Fidelity's
control of the use of the Fidelity Trademarks and of the quality of the
Promotional Material to permit reasonable inspection of samples of same by
Fidelity and to supply Fidelity with reasonable quantities of samples of the
Promotional Material upon request.
7. Company shall comply with all applicable laws and regulations and
obtain any and all licenses or other necessary permits pertaining to the
distribution of said Promotional Material.
8. Company agrees to notify Fidelity of any unauthorized use of the
Fidelity Trademarks by others promptly as it comes to the attention of Company.
Fidelity or FMR Corp. shall have the sole right and discretion to commence
actions or other proceedings for infringement, unfair competition or the like
involving the Fidelity Trademarks and Company shall cooperate in any such
proceedings if so requested by Fidelity or FMR Corp.
9. This agreement shall continue in force until terminated by Fidelity.
This agreement shall automatically terminate upon termination of the Master
License Agreement. In addition, Fidelity shall have the right to terminate this
agreement at any time upon notice to Company, with or without cause. Upon any
such termination, Company agrees to cease immediately all use of the Fidelity
Trademarks and shall destroy, at Company's expense, any and all materials in its
possession bearing the Fidelity Trademarks, and agrees that all rights in the
Fidelity Trademarks and in the goodwill connected therewith shall remain the
property of FMR Corp. Unless so terminated by Fidelity, or extended by written
agreement of the parties, this agreement shall expire on the termination of that
certain Participation Agreement.
10. Company shall indemnify Fidelity and FMR Corp. and hold each of them
harmless from and against any loss, damage, liability, cost or expense of any
nature whatsoever, including without limitation, reasonable attorneys' fees and
all court costs, arising out of use of the Fidelity Trademarks by Company except
such use that has been permitted under the terms of this Agreement.
2
<PAGE>
11. In consideration for the promotion and advertising of Fidelity as a
result of the distribution by Company of the Promotional Material, Company shall
not pay any monies as a royalty to Fidelity for this license.
12. This agreement is not intended in any manner to modify the terms and
conditions of the Participation Agreement. In the event of any conflict between
the terms and conditions herein and thereof, the terms and conditions of the
Participation Agreement shall control.
13. This agreement shall be interpreted according to the laws of the
Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereunto set their hands and seals, and
hereby execute this agreement, as of the date first above written.
FIDELITY DISTRIBUTORS CORPORATION
By:
------------------------------------
Title: V.P.
Date: 10/3/91
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
By:
------------------------------------
Title: Senior Vice President, General Counsel &
Secretary
Date:
3
<PAGE>
INT. CL.: 36
PRIOR U.S. CLS.: 101 AND 102
REG. NO. 1,481,040
United States Patent and Trademark Office Registered Mar. 15, 1988
---------------------------------------------------------------------
SERVICE MARK
PRINCIPAL REGISTER
FIDELITY
INVESTMENTS
FMR CORP. (MASSACHUSETTS CORPORA- FIRST USE 2-22-1984; IN COMMERCE
TION) 2-22-1984.
82 DEVONSHIRE STREET
BOSTON, MA 02109, ASSIGNEE OF FIDELITY NO CLAIM IS MADE TO THE
EXCLUSIVE
DISTRIBUTORS CORPORATION (MASSA- RIGHT TO USE "INVESTMENTS", APART
CHUSETTS CORPORATION) BOSTON, MA FROM THE MARK AS SHOWN.
02109
SER. NO. 641,707, FILED 1-28-1987
FOR: MUTUAL FUND AND STOCK BRO-
KERAGE SERVICES, IN CLASS 36 (U.S. CLS.
101 AND 102). RUSS HERMAN, EXAMINING ATTORNEY
<PAGE>
EXHIBIT 10(a)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated February 12, 1999, with respect to the financial
statements of Separate Account VA-1 of The American Franklin Life Insurance
Company and our report dated February 16, 1999, with respect to the financial
statements of The American Franklin Life Insurance Company, in this
Post-Effective Amendment No. 4 to the Registration Statement on Form N-4 (No.
333-10489) under the Securities Act of 1933 and Registration Statement (No.
811-7781) under the Investment Company Act of 1940 and related Prospectus and
Statement of Additional Information of Separate Account VA-1 of The American
Franklin Life Insurance Company.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
April 28, 1999
<PAGE>
Exhibit 10(b)
[LETTERHEAD OF SUTHERLAND ASBILL & BRENNAN LLP]
April 28, 1999
The American Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
RE: CONSENT OF SUTHERLAND ASBILL & BRENNAN LLP
Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the statement of additional information filed as part of the
registration statement on Form N-4 for Separate Account VA-1 of The American
Franklin Life Insurance Company (File No. 333-10489). In giving this consent,
we do not admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933.
Sincerely,
SUTHERLAND ASBILL & BRENNAN LLP
By: /S/ Kimberly J. Smith
------------------------------
Kimberly J. Smith, Esq.
