<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
JUNE 30, 1999
SEMI-ANNUAL REPORT
SEPARATE ACCOUNT VA-1 FUNDING
THE CHAIRMAN-TM-
COMBINATION FIXED AND VARIABLE ANNUITY CONTRACTS
PRINCIPAL OFFICE LOCATED AT:
#1 Franklin Square
Springfield, Illinois 62713
SEMI-ANNUAL REPORT DATED JUNE 30, 1999
- --------------------------------------------------------------------------------
JUNE 30, 1999
SEMI-ANNUAL REPORTS
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
PRINCIPAL OFFICE OF BOTH FIDELITY FUNDS LOCATED AT:
82 Devonshire Street
Boston, Massachusetts 02109
MFS VARIABLE INSURANCE TRUST
PRINCIPAL OFFICE LOCATED AT:
500 Boylston Street
Boston, Massachusetts 02116
SEMI-ANNUAL REPORTS JUNE 30, 1999
The Semi-Annual Report of Separate Account VA-1 is prepared and provided by The
American Franklin Life Insurance Company. The Semi-Annual Reports of the
Variable Insurance Products Fund and the Variable Insurance Products Fund II are
prepared by Fidelity Investments. The Semi-Annual Report of MFS Variable
Insurance Trust is prepared by MFS Investment Management.
- -------------------------------------------------------------------------------
This Semi-Annual Report is not to be construed as an offering for sale of any
American Franklin Life contract. No offering is made except in conjunction with
a prospectus which must precede or accompany this report.
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
---------------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
ASSETS DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments in Funds at fair value
(cost: see below) $ 10,627,450 $ 25,562,852 $ 25,477,509 $ 2,610,049 $ 3,091,764
Dividends receivable 43,763 - - - -
Due from (to) general account 409 981 977 100 119
---------------------------------------------------------------------------------------
NET ASSETS $ 10,671,622 $ 25,563,833 $ 25,478,486 $ 2,610,149 $ 3,091,883
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Unit value, at June 30, 1999 $ 5.43 $ 7.32 $ 8.79 $ 6.60 $ 5.91
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Units outstanding, at June 30, 1999 1,963,603 3,490,159 2,897,328 395,631 522,960
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Cost of investments $ 10,627,450 $ 23,336,957 $ 22,463,726 $ 2,474,793 $ 3,340,216
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
1
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
------------------------------------------------------------------------
VIPII VIPII VIPII VIPII MFS
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
ASSETS DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments in Funds at fair value
(cost: see below) $ 4,336,396 $ 6,495,125 $35,983,969 $16,669,435 $15,673,987
Dividends receivable - - - - -
Due from (to) general account 167 249 1,380 640 601
----------------------------------------------------------------------------------------
NET ASSETS $ 4,336,563 $ 6,495,374 $35,985,349 $16,670,075 $15,674,588
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Unit value, at June 30, 1999 $ 5.54 $ 6.79 $ 8.63 $ 8.28 $ 8.27
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
Units outstanding, at June 30, 1999 782,397 956,720 4,170,193 2,013,168 1,895,228
----------------------------------------------------------------------------------------
Cost of investments $ 4,509,536 $ 6,422,349 $30,512,252 $14,174,860 $12,251,432
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
--------------------------------------------------------------------------------------
MFS MFS
MFS GROWTH MFS MFS CAPITAL
RESEARCH WITH INCOME TOTAL RETURN UTILITIES OPPORTUNITIES
ASSETS DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investments in Funds at fair value
(cost: see below) $ 18,837,921 $ 14,540,769 $ 18,109,654 $ 9,575,527 $ 7,134,877
Dividends receivable - - - - -
Due from (to) general account 723 557 695 367 274
--------------------------------------------------------------------------------------
NET ASSETS $ 18,838,644 $ 14,541,326 $ 18,110,349 $ 9,575,894 $ 7,135,151
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Unit value, at June 30, 1999 $ 7.37 $ 7.70 $ 6.61 $ 7.69 $ 8.84
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Units outstanding, at June 30, 1999 2,556,219 1,888,735 2,737,866 1,244,750 807,578
--------------------------------------------------------------------------------------
Cost of investments $ 16,284,104 $ 13,194,076 $ 17,484,933 $ 8,955,047 $ 5,742,741
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
------------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends $ 234,232 $ 311,742 $ 32,647 $ 37,970 $ 266,034
Capital gains distributions - 689,113 2,052,679 61,242 9,945
Expenses
Mortality and expense risk charge 70,810 153,147 148,858 17,566 20,333
---------------------------------------------------------------------------------
Net investment income (expense) 163,422 847,708 1,936,468 81,646 255,646
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) - 98,486 132,769 (3,888) (47,214)
Net unrealized appreciation (depreciation)
Beginning of period - 1,183,114 3,017,796 56,038 (234,242)
End of period - 2,225,895 3,013,783 135,256 (248,452)
---------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period - 1,042,781 (4,013) 79,218 (14,210)
---------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments - 1,141,267 128,756 75,330 (61,424)
---------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ 163,422 $ 1,988,975 $ 2,065,224 $ 156,976 $ 194,222
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
--------------------------------------------------------------------
VIPII VIPII VIPII VIPII MFS
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends $ 146,181 $ 184,244 $ 273,056 $ 62,503 $ -
Capital gains distributions 45,860 233,376 185,288 458,352 -
Expenses
Mortality and expense risk charge 26,822 40,530 203,401 98,140 94,422
--------------------------------------------------------------------------------------
Net investment income (expense) 165,219 377,090 254,943 422,715 (94,422)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) (3,559) 994 141,199 76,530 119,312
Net unrealized appreciation (depreciation)
Beginning of period 103,216 321,095 3,813,554 1,822,547 2,047,653
End of period (173,140) 72,776 5,471,717 2,494,575 3,422,555
--------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period (276,356) (248,319) 1,658,163 672,028 1,374,902
--------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments (279,915) (247,325) 1,799,362 748,558 1,494,214
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ (114,696) $ 129,765 $ 2,054,305 $ 1,171,273 $ 1,399,792
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
------------------------------------------------------------------------------------
MFS MFS MFS
MFS GROWTH TOTAL MFS CAPITAL
RESEARCH WITH INCOME RETURN UTILITIES OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends $ 35,451 $ 41,096 $ 306,685 $ 95,774 $ -
Capital gains distributions 187,340 49,328 568,718 481,560 -
Expenses
Mortality and expense risk charge 110,884 106,127 110,049 48,644 39,802
------------------------------------------------------------------------------------
Net investment income (expense) 111,907 (15,703) 765,354 528,690 (39,802)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) 165,756 87,478 87,063 113,345 54,637
Net unrealized appreciation (depreciation)
Beginning of period 1,791,764 1,092,560 970,838 500,573 504,361
End of period 2,553,817 1,346,693 624,721 620,480 1,392,136
------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period 762,053 254,133 (346,117) 119,907 887,775
------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 927,809 341,611 (259,054) 233,252 942,412
------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ 1,039,716 $ 325,908 $ 506,300 $ 761,942 $ 902,610
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<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
<S> MARKET INCOME GROWTH OVERSEAS INCOME
SIX MONTHS ENDED JUNE 30, 1999 DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
(UNAUDITED)
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 163,422 $ 847,708 $ 1,936,468 $ 81,646 $ 255,646
Net realized gain (loss) on -- 98,486 132,769 (3,888) (47,214)
investments
Net change in unrealized appreciation
(depreciation) on investments -- 1,042,781 (4,013) 79,218 (14,210)
-------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 163,422 1,988,975 2,065,224 156,976 194,222
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 4,591,642 4,204,391 5,774,517 227,097 315,784
Withdrawals (204,643) (681,443) (464,784) (92,490) (100,161)
Transfers between Separate Account
VA-1 divisions, net (2,612,777) (76,320) 575,737 (59,860) (84,358)
-------------------------------------------------------------------------------------
Net increase in net assets from contract
related transactions 1,774,222 3,446,628 5,885,470 74,747 131,265
-------------------------------------------------------------------------------------
Increase in net assets 1,937,644 5,435,603 7,950,694 231,723 325,487
Net assets, beginning of period 8,733,978 20,128,230 17,527,792 2,378,426 2,766,396
-------------------------------------------------------------------------------------
Net assets, end of period $ 10,671,622 $ 25,563,833 $ 25,478,486 $ 2,610,149 $ 3,091,883
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<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
<S> GRADE BOND MANAGER 500 FUND GROWTH
SIX MONTHS ENDED JUNE 30, 1999 DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
(UNAUDITED)
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 165,219 $ 377,090 $ 254,943 $ 422,715 $ (94,422)
Net realized gain (loss) on (3,559) 994 141,199 76,530 119,312
investments
Net change in unrealized
appreciation (depreciation)
on investments (276,356) (248,319) 1,658,163 672,028 1,374,902
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations (114,696) 129,765 2,054,305 1,171,273 1,399,792
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 774,609 1,106,104 8,153,987 3,923,704 2,461,843
Withdrawals (81,613) (162,978) (890,792) (361,437) (348,628)
Transfers between Separate Account
VA-1 divisions, net 350,157 (22,676) 647,288 117,870 170,090
-----------------------------------------------------------------------------------
Net increase in net assets from contract
related transactions 1,043,153 920,450 7,910,483 3,680,137 2,283,305
-----------------------------------------------------------------------------------
Increase in net assets 928,457 1,050,215 9,964,788 4,851,410 3,683,097
Net assets, beginning of period 3,408,106 5,445,159 26,020,561 11,818,665 11,991,491
-----------------------------------------------------------------------------------
Net assets, end of period $ 4,336,563 $ 6,495,374 $ 35,985,349 $ 16,670,075 $ 15,674,588
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
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 on investments 11,687 17,120 117,249 35,537 63,281
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
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
----------------------------------------------------------------------------------------
MFS MFS MFS
MFS GROWTH TOTAL MFS CAPITAL
<S> RESEARCH WITH INCOME RETURN UTILITIES OPPORTUNITIES
SIX MONTHS ENDED JUNE 30, 1999 DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
(UNAUDITED)
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 111,907 $ (15,703) $ 765,354 $ 528,690 $ (39,802)
Net realized gain on investments 165,756 87,478 87,063 113,345 54,637
Net change in unrealized appreciation
(depreciation) on investments 762,053 254,133 (346,117) 119,907 887,775
-----------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 1,039,716 325,908 506,300 761,942 902,610
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 3,028,114 4,077,805 3,454,936 2,624,265 1,582,282
Withdrawals (488,510) (299,251) (623,880) (310,164) (208,214)
Transfers between Separate Account
VA-1 divisions, net (126,514) 385,796 24,744 138,830 127,999
----------------------------------------------------------------------------------------
Net increase in net assets from contract
related transactions 2,413,090 4,164,350 2,855,800 2,452,931 1,502,067
----------------------------------------------------------------------------------------
Increase in net assets 3,452,806 4,490,258 3,362,100 3,214,873 2,404,677
Net assets, beginning of period 15,385,838 10,051,068 14,748,249 6,361,021 4,730,474
----------------------------------------------------------------------------------------
Net assets, end of period $ 18,838,644 $ 14,541,326 $ 18,110,349 $ 9,575,894 $ 7,135,151
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
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
----------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
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 Capital Opportunities 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 American Franklin business.
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
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 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.
10
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
3. CONTRACT 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
charges $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 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 $1,301,000 for the
six months ended June 30, 1999.
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.
11
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
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
<S> MONEY EQUITY- VIP VIP HIGH
SIX MONTHS ENDED JUNE 30, 1999 MARKET INCOME GROWTH OVERSEAS INCOME
(UNAUDITED) DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Unit value, beginning of period $5.34 $6.73 $7.94 $6.20 $5.54
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Unit value, end of period $5.43 $7.32 $8.79 $6.60 $5.91
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Number of units outstanding,
beginning of period 1,634,822 2,991,972 2,207,408 383,712 499,418
Net contract purchase payments 852,273 604,798 677,408 35,721 54,716
Withdrawals (38,036) (97,403) (54,886) (14,517) (16,770)
Transfers between Separate Account
VA-1 divisions, net (485,456) (9,208) 67,398 (9,285) (14,404)
---------------------------------------------------------------------------------
Number of units outstanding,
end of period 1,963,603 3,490,159 2,897,328 395,631 522,960
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
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's 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
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
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
<S> INVESTMENT ASSET INDEX CONTRA- EMERGING
SIX MONTHS ENDED JUNE 30, 1999 GRADE BOND MANAGER 500 FUND GROWTH
(UNAUDITED) DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Unit value, beginning of period $5.70 $6.64 $8.07 $7.62 $7.48
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Unit value, end of period $5.54 $6.79 $8.63 $8.28 $8.27
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
Number of units outstanding,
beginning of period 598,142 820,384 3,224,829 1,551,801 1,603,087
Net contract purchase payments 136,617 164,125 974,395 491,896 314,238
Withdrawals (14,404) (24,255) (105,698) (45,113) (44,447)
Transfers between Separate Account
VA-1 divisions, net 62,042 (3,534) 76,667 14,584 22,350
----------------------------------------------------------------------------------
Number of units outstanding,
end of period 782,397 956,720 4,170,193 2,013,168 1,895,228
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
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's 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
----------------------------------------------------------------------------------
----------------------------------------------------------------------------------
</TABLE>
13
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
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
<S> MFS GROWTH TOTAL MFS CAPITAL
SIX MONTHS ENDED JUNE 30, 1999 RESEARCH WITH INCOME RETURN UTILITIES OPPORTUNITIES
(UNAUDITED) DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------
<C> <C> <C> <C> <C>
Unit value, beginning of period $6.95 $7.51 $6.43 $7.04 $7.59
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Unit value, end of period $7.37 $7.70 $6.61 $7.69 $8.84
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Number of units outstanding,
beginning of period 2,214,458 1,338,496 2,294,198 903,586 623,561
Net contract purchase payments 428,163 537,489 536,485 365,831 192,934
Withdrawals (68,733) (39,433) (95,767) (42,570) (24,986)
Transfers between Separate Account
VA-1 divisions, net (17,669) 52,183 2,950 17,903 16,069
--------------------------------------------------------------------------------------
Number of units outstanding,
end of period 2,556,219 1,888,735 2,737,866 1,244,750 807,578
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
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
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
5. REMUNERATION OF MANAGEMENT
The Account incurs no liability or expense for payments 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
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 have been performed
by its key business units with centralized oversight. Each business unit,
including American Franklin, has executed a plan to minimize the risk of a
significant negative impact on its operations.
While the specifics of the plans varied, the plans included 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 June 30, 1999, these activities had been substantially completed,
making American Franklin's critical systems Year 2000 ready. American
Franklin will continue to test its systems throughout 1999 to maintain Year
2000 readiness. In addition, American Franklin currently is developing
plans for the century transition, which will restrict systems modifications
from November 1999 through January 2000, create rapid response teams to
address problems, and limit vacations for key technical personnel.
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 assessed and mitigated the risks associated with the
potential failure of third parties to achieve Year 2000 readiness. American
Franklin's activities included the following: (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 June 30, 1999, these
activities have been substantially completed. Where necessary, critical
third party dependencies have been included in American Franklin's
contingency plans. Due to the various stages of Year 2000 readiness for
these critical third party dependencies, American Franklin's testing
activities related to critical third parties will extend throughout 1999.
CONTINGENCY PLANS. American Franklin has undertaken contingency planning to
reduce the risk of Year 2000-related business failures. The contingency
plans, which address both internal systems and third party relationships,
included the following activities: (1) evaluate the consequences of failure
of critical business processes with significant exposure to Year 2000 risk;
(2) determine the probability of a Year 2000-related failure for those
critical processes that have a high consequence of failure; (3) develop an
action plan to complete contingency plans for critical processes that rank
high in consequence and probability of failure; and (4) complete the
applicable contingency plans. As of June 30, 1999, these activities have
been substantially completed. The contingency plans will continue to be
tested and updated throughout 1999.
15
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
RISKS AND UNCERTAINTIES. Based on the Year 2000 readiness of internal
systems, century transition plans, plans to deal with third party
relationships, and contingency plans, 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 Year 2000 readiness is not achieved due to American
Franklin's failure to maintain critical systems as Year 2000 ready, failure
of critical third parties to achieve Year 2000 readiness on a timely basis,
failure of contingency plans to reduce Year 2000-related business failures,
or other unforeseen circumstances in completing American Franklin's plans,
the Year 2000 issues could have a material adverse impact on American
Franklin's operations following the turn of the century.
COSTS. In 1999, American Franklin has incurred and 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 Account. The
cost of activities related to Year 2000 readiness has not had a material
adverse effect on American Franklin's results of operations or financial
condition. In addition, American Franklin has elected to accelerate the
planned replacement of certain systems as part of the Year 2000 plans.
Costs of the replacement systems are being capitalized and amortized over
their useful lives, in accordance with American Franklin's normal
accounting policies.
16
