<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
DECEMBER 31, 1999
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
ANNUAL REPORT DATED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
DECEMBER 31, 1999
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
ANNUAL REPORTS DATED DECEMBER 31, 1999
The Annual Report of Separate Account VA-1 is prepared and provided by The
American Franklin Life Insurance Company. The Annual Reports of the Variable
Insurance Products Fund and the Variable Insurance Products Fund II are prepared
by Fidelity Investments. The Annual Report of MFS Variable Insurance Trust is
prepared by MFS Investment Management.
- --------------------------------------------------------------------------------
This 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
DECEMBER 31, 1999
<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) $ 13,272,126 $ 25,258,747 $ 34,152,902 $ 3,633,771 $ 2,892,279
Dividends receivable 56,584 - - - -
Due from (to) general account 511 969 1,310 140 111
---------------------------------------------------------------------------------------
NET ASSETS $ 13,329,221 $ 25,259,716 $ 34,154,212 $ 3,633,911 $ 2,892,390
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Unit value $ 5.54 $ 6.96 $ 10.66 $ 8.46 $ 5.91
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Units outstanding 2,405,743 3,628,549 3,203,599 429,458 489,147
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
Cost of investments $ 13,272,126 $ 24,230,711 $ 25,217,890 $ 2,710,715 $ 3,025,036
---------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
1
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1999
<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) $ 4,204,626 $ 7,208,321 $42,419,113 $20,133,336 $25,331,726
Dividends receivable - - - - -
Due from (to) general account 161 276 1,627 773 971
-------------------------------------------------------------------
NET ASSETS $ 4,204,787 $ 7,208,597 $42,420,740 $20,134,109 $25,332,697
-------------------------------------------------------------------
-------------------------------------------------------------------
Unit value $ 5.58 $ 7.23 $ 9.43 $ 9.15 $ 12.41
-------------------------------------------------------------------
-------------------------------------------------------------------
Units outstanding 753,885 996,623 4,500,014 2,199,553 2,040,810
-------------------------------------------------------------------
-------------------------------------------------------------------
Cost of investments $ 4,316,955 $ 6,655,157 $33,462,498 $15,733,427 $13,636,890
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF NET ASSETS (CONTINUED)
DECEMBER 31, 1999
<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) $ 21,398,028 $ 14,783,354 $ 17,875,136 $ 12,288,384 $ 9,803,476
Dividends receivable - - - - -
Due from (to) general account 1,260 1,551 685 535 376
--------------------------------------------------------------------------------------
NET ASSETS $ 21,399,288 $ 14,784,905 $ 17,875,821 $ 12,288,919 $ 9,803,852
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Unit value $ 8.37 $ 7.83 $ 6.48 $ 9.05 $ 10.86
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Units outstanding 2,556,910 1,889,006 2,758,393 1,358,316 903,043
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Cost of investments $ 16,355,450 $ 13,268,276 $ 17,601,632 $ 9,835,722 $ 6,763,356
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
*Formerly known as MFS Value Division
3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<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 $ 540,658 $ 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 152,688 333,894 347,409 37,932 41,383
------------------------------------------------------------------------------------
Net investment income (expense) 387,970 666,961 1,737,917 61,280 234,596
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) - 176,490 211,816 5,202 (141,543)
Net unrealized appreciation (depreciation)
Beginning of year - 1,183,114 3,017,796 56,038 (234,242)
End of year - 1,028,036 8,935,012 923,056 (132,757)
------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year - (155,078) 5,917,216 867,018 101,485
------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments - 21,412 6,129,032 872,220 (40,058)
------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ 387,970 $ 688,373 $ 7,866,949 $ 933,500 $ 194,538
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
<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 56,672 87,003 472,322 224,230 205,655
------------------------------------------------------------------------------------
Net investment income (expense) 135,369 330,617 (13,978) 296,625 (205,655)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) (6,167) 2,023 473,358 199,923 307,184
Net unrealized appreciation (depreciation)
Beginning of year 103,216 321,095 3,813,554 1,822,547 2,047,653
End of year (112,329) 553,164 8,956,615 4,399,909 11,694,836
------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year (215,545) 232,069 5,143,061 2,577,362 9,647,183
------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments (221,712) 234,092 5,616,419 2,777,285 9,954,367
------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ (86,343) $ 564,709 $ 5,602,441 $ 3,073,910 $ 9,748,712
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
STATEMENT OF OPERATIONS (CONTINUED)
YEAR ENDED DECEMBER 31, 1999
<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 $ 419,228 $ 440,386 $ 16,038
Capital gains distributions 187,340 49,328 456,175 136,948 3,715
Expenses
Mortality and expense risk charge 264,721 184,166 240,584 124,145 94,869
------------------------------------------------------------------------------------
Net investment income (expense) (41,930) (93,742) 634,819 453,189 (75,116)
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) 386,598 250,078 186,241 165,818 278,487
Net unrealized appreciation (depreciation)
Beginning of year 1,791,764 1,092,560 970,838 500,573 504,361
End of year 5,042,578 1,515,078 273,504 2,452,662 3,040,120
------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year 3,250,814 422,518 (697,334) 1,952,089 2,535,759
------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 3,637,412 672,596 (511,093) 2,117,907 2,814,246
------------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ 3,595,482 $ 578,854 $ 123,726 $ 2,571,096 $ 2,739,130
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
*Formerly known as MFS Value Division
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
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 387,970 $ 666,961 $ 1,737,917 $ 61,280 $ 234,596
Net realized gain (loss) on investments - 176,490 211,816 5,202 (141,543)
Net change in unrealized appreciation
(depreciation) on investments - (155,078) 5,917,216 867,018 101,485
-------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 387,970 688,373 7,866,949 933,500 194,538
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 6,161,620 5,939,634 8,496,487 361,794 483,012
Withdrawals (403,806) (1,415,140) (997,367) (158,652) (176,331)
Transfers between Separate Account
VA-1 divisions, net (1,550,541) (81,381) 1,260,351 118,843 (375,225)
-------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
contract related transactions 4,207,273 4,443,113 8,759,471 321,985 (68,544)
-------------------------------------------------------------------------------------
Net increase in net assets 4,595,243 5,131,486 16,626,420 1,255,485 125,994
Net assets, beginning of year 8,733,978 20,128,230 17,527,792 2,378,426 2,766,396
-------------------------------------------------------------------------------------
Net assets, end of year $ 13,329,221 $ 25,259,716 $ 34,154,212 $ 3,633,911 $ 2,892,390
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
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 investments - 55,848 88,948 (30,975) (3,120)
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
-------------------------------------------------------------------------------------
Net 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
GRADE BOND MANAGER 500 FUND GROWTH
DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 135,369 $ 330,617 $ (13,978) $ 296,625 $ (205,655)
Net realized gain (loss) on investments (6,167) 2,023 473,358 199,923 307,184
Net change in unrealized appreciation
(depreciation) on investments (215,545) 232,069 5,143,061 2,577,362 9,647,183
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations (86,343) 564,709 5,602,441 3,073,910 9,748,712
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 1,044,185 1,579,419 12,171,546 5,996,698 4,087,052
Withdrawals (194,643) (357,559) (1,626,431) (632,746) (619,611)
Transfers between Separate Account
VA-1 divisions, net 33,482 (23,131) 252,623 (122,418) 125,053
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets from
contract related transactions 883,024 1,198,729 10,797,738 5,241,534 3,592,494
-----------------------------------------------------------------------------------
Net increase in net assets 796,681 1,763,438 16,400,179 8,315,444 13,341,206
Net assets, beginning of year 3,408,106 5,445,159 26,020,561 11,818,665 11,991,491
-----------------------------------------------------------------------------------
Net assets, end of year $ 4,204,787 $ 7,208,597 $ 42,420,740 $ 20,134,109 $ 25,332,697
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
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
-----------------------------------------------------------------------------------
Net 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
RESEARCH WITH INCOME RETURN UTILITIES OPPORTUNITIES
DIVISION DIVISION DIVISION DIVISION DIVISION*
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1999
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ (41,930) $ (93,742) $ 634,819 $ 453,189 $ (75,116)
Net realized gain (loss) on investments 386,598 250,078 186,241 165,818 278,487
Net change in unrealized appreciation
(depreciation) on investments 3,250,814 422,518 (697,334) 1,952,089 2,535,759
-------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 3,595,482 578,854 123,726 2,571,096 2,739,130
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 4,061,296 4,875,355 4,482,659 3,624,544 2,414,391
Withdrawals (1,005,043) (630,995) (1,184,152) (617,060) (455,798)
Transfers between Separate Account
VA-1 divisions, net (638,285) (89,377) (294,661) 349,318 375,655
-------------------------------------------------------------------------------------
Net increase (decrease) in net assets from
contract related transactions 2,417,968 4,154,983 3,003,846 3,356,802 2,334,248
-------------------------------------------------------------------------------------
Net increase in net assets 6,013,450 4,733,837 3,127,572 5,927,898 5,073,378
Net assets, beginning of year 15,385,838 10,051,068 14,748,249 6,361,021 4,730,474
-------------------------------------------------------------------------------------
Net assets, end of year $ 21,399,288 $ 14,784,905 $ 17,875,821 $ 12,288,919 $ 9,803,852
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
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
-------------------------------------------------------------------------------------
Net 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
*Formerly known as MFS Value Division
9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 (formerly known
as 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 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 on the ex-dividend date. 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)
DECEMBER 31, 1999
3. CONTRACT CHARGES
Certain jurisdictions require deductions 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 $2,885,000 and $1,271,400 for the
years ended December 31, 1999 and 1998, 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.
11
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 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
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
YEAR ENDED DECEMBER 31, 1999 DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $5.34 $6.73 $7.94 $6.20 $5.54
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Unit value, end of year $5.54 $6.96 $10.66 $8.46 $5.91
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Number of units outstanding,
beginning of year 1,634,822 2,991,972 2,207,408 383,712 499,418
Net contract purchase payments 1,138,347 847,264 972,450 54,281 83,357
Withdrawals (74,314) (200,988) (112,513) (23,786) (29,801)
Transfers between Separate Account
VA-1 divisions, net (293,112) (9,699) 136,254 15,251 (63,827)
---------------------------------------------------------------------------------
Number of units outstanding,
end of year 2,405,743 3,628,549 3,203,599 429,458 489,147
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C>
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)
DECEMBER 31, 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
INVESTMENT ASSET INDEX CONTRA- EMERGING
GRADE BOND MANAGER 500 FUND GROWTH
YEAR ENDED DECEMBER 31, 1999 DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $5.70 $6.64 $8.07 $7.62 $7.48
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Unit value, end of year $5.58 $7.23 $9.43 $9.15 $12.41
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
Number of units outstanding,
beginning of year 598,142 820,384 3,224,829 1,551,801 1,603,087
Net contract purchase payments 184,940 232,264 1,432,920 740,828 499,530
Withdrawals (34,631) (52,447) (189,173) (77,427) (74,352)
Transfers between Separate Account
VA-1 divisions, net 5,434 (3,578) 31,438 (15,649) 12,545
---------------------------------------------------------------------------------
Number of units outstanding,
end of year 753,885 996,623 4,500,014 2,199,553 2,040,810
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C>
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)
DECEMBER 31, 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
MFS GROWTH TOTAL MFS CAPITAL
RESEARCH WITH INCOME RETURN UTILITIES OPPORTUNITIES
YEAR ENDED DECEMBER 31, 1999 DIVISION DIVISION DIVISION DIVISION DIVISION*
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of year $6.95 $7.51 $6.43 $7.04 $7.59
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Unit value, end of year $8.37 $7.83 $6.48 $9.05 $10.86
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Number of units outstanding,
beginning of year 2,214,458 1,338,496 2,294,198 903,586 623,561
Net contract purchase payments 568,876 646,798 693,249 493,730 284,000
Withdrawals (137,471) (83,238) (181,718) (81,406) (51,712)
Transfers between Separate Account
VA-1 divisions, net (88,953) (13,050) (47,336) 42,406 47,194
--------------------------------------------------------------------------------------
Number of units outstanding,
end of year 2,556,910 1,889,006 2,758,393 1,358,316 903,043
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C>
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>
*Formerly known as MFS Value Division
14
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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 (unaudited)
INTERNAL SYSTEMS. American Franklin's ultimate parent, American General
Corporation ("AGC"), has numerous technology and non-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, 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; and (5) return the systems to operations. As of December 31, 1999,
these activities had been completed, making American Franklin's critical
systems Year 2000 ready.
American Franklin continued to test its systems throughout 1999 to maintain
Year 2000 readiness. In addition, American Franklin implemented plans for
the century transition. These plans included a freeze on system
modifications from November 1999 through January 2000, the creation of
rapid response teams to address problems and limiting vacations for certain
business and technical personnel. In addition, AGC established Y2K command
centers in Houston and each of its locations across the country. Each
command center monitored all major business processing activities during
the century transition and reported progress to the Houston command center
which coordinated AGC's nationwide Year 2000 effort. The command centers
continued to operate 24 hours a day until January 7, 2000.
On January 1, 2000, AGC announced that its Year 2000 command centers
reported that all major technology systems, programs, and applications were
operating smoothly following the transition into the 21st century. As of
February 9, 2000, American Franklin has experienced no interruptions to
normal business operations, including the processing of customer account
data and transactions. American Franklin will continue to monitor its
technology systems and maintain quality customer service throughout the
transition period.
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 such parties' Year 2000 readiness.
American Franklin developed plans to assess and mitigate the risks
associated with the potential failure of third parties to achieve Year 2000
readiness. These plans included 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, and, where feasible,
American Franklin has taken reasonable precautions to protect against the
receipt of non-Year 2000 ready data. Where necessary, critical third party
dependencies have been included in American Franklin's contingency plans.
15
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
CONTINGENCY PLANS. American Franklin's contingency planning process was
designed to reduce the risk of Year 2000-related business failures related
to both internal systems and third party relationships. The contingency
plans 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. The contingency plans were tested and
updated throughout 1999.
RISKS AND UNCERTAINTIES. Based on the Year 2000 readiness of internal
systems, century transition plans, plans to deal with third party
relationships, contingency plans and the reports from the AGC command
centers described above, American Franklin believes that American Franklin
will experience at most isolated and minor disruptions of business processes
due to the Year 2000 transition. 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. Through December 31, 1999, American Franklin has incurred, and
anticipates that it will continue to incur, costs relative to achieving and
maintaining Year 2000 readiness. 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. None of the costs associated
with Year 2000 readiness are passed to divisions of the Account.
16
<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 VIP Money Market, VIP Equity-Income, VIP
Growth, VIP Overseas, VIP High Income, VIPII Investment Grade Bond, VIPII Asset
Manager, VIPII Index 500, VIPII Contrafund, MFS Emerging Growth, MFS Research,
MFS Growth With Income, MFS Total Return, MFS Utilities and MFS Capital
Opportunities (formerly MFS Value) Divisions) as of December 31, 1999, and the
related statement of operations for the year then ended and the statement of
changes in net assets for each of two years then ended. 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 auditing standards generally accepted
in the United States. 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, 1999 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, 1999, and the
results of their operations for the year then ended and changes in net assets
for each of the two years then ended in conformity with accounting principles
generally accepted in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
February 9, 2000
17
