<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 27, 2000
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. 6
and/or
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
AMENDMENT NO. 7
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
-------------------------
PAULETTA P. COHN, ESQ.
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
2929 Allen Parkway, Houston, Texas 77019
(Name and Address of Agent for Service)
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 May 1, 2000 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
PROSPECTUS DATED MAY 1, 2000
Fidelity Investments:
VARIABLE INSURANCE PRODUCTS FUND AND
VARIABLE INSURANCE PRODUCTS FUND II
PROSPECTUS DATED APRIL 30, 2000
Massachusetts Financial Services Company:
MFS VARIABLE INSURANCE TRUST
PROSPECTUS DATED MAY 1, 2000
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
<TABLE>
<CAPTION>
HOME OFFICE: ADMINISTRATIVE OFFICE:
<S> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
<S> <C>
. Fidelity Variable Insurance Products . VIPII Asset Manager
Fund . VIPII Index 500
. VIP Money Market . VIPII Contrafund
. VIP High Income
. VIP Equity-Income . MFS Variable Insurance Trust
. VIP Growth . MFS(R) Emerging Growth Series
. VIP Overseas . MFS(R) Research Series
. MFS(R) Growth With Income Series
. Fidelity Variable Insurance Products . MFS(R) Total Return Series
Fund II . MFS(R) Utilities Series
. VIPII Investment Grade Bond . MFS(R) Capital Opportunities Series
</TABLE>
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 May 1, 2000, is incorporated by
reference into this Prospectus. The table of contents of the Statement of
Additional Information appears at page 46 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.
<PAGE>
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 May 1, 2000
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............................................................................. 9
Minimum Investment Requirements................................................ 9
Flexible Purchase Payments..................................................... 9
Purchase Payment Accumulation.................................................. 9
Fixed and Variable Annuity Payments............................................ 9
Changes in Allocations Among Divisions and Guarantee Periods................... 10
Surrenders, Withdrawals and Cancellations...................................... 10
Death Benefit.................................................................. 11
Employee Benefit or Deferred Compensation Plans................................ 11
Notice to Us................................................................... 11
Financial and Performance Information............................................... 11
American Franklin and Separate Account VA-1......................................... 12
The Portfolios...................................................................... 13
Voting Privileges................................................................... 16
The Fixed Account................................................................... 17
Contract Issue and Purchase Payments................................................ 18
Account Value.................................................................. 20
Variable Account Value......................................................... 20
Fixed Account Value............................................................ 20
Transfers, Variable Account Asset Rebalancing, Surrenders and Partial Withdrawals... 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
Death Benefit....................................................................... 31
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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
General........................................................................ 35
Non-Qualified Contracts........................................................ 35
Individual Retirement Annuities ("IRAs")....................................... 38
Roth IRAs...................................................................... 40
Simplified Employee Pension Plans.............................................. 40
Simple Retirement Accounts..................................................... 40
Tax-Sheltered Annuities........................................................ 41
Other Qualified Plans.......................................................... 41
Private Employer Unfunded Deferred Compensation Plans.......................... 42
Federal Income Tax Withholding and Reporting................................... 43
Taxes Payable by American Franklin and the Separate Account.................... 43
Tax Changes.................................................................... 43
Distribution Arrangement............................................................ 43
Year 2000 Considerations............................................................ 44
Legal Proceedings................................................................... 44
Accumulation Units.................................................................. 45
Other Information on File........................................................... 45
Table of Contents of Statement of Additional Information............................ 46
</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
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%
- -----------------------------
(1) This charge does not apply or is reduced under certain circumstances. See
"Surrender Charge."
(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 1999 Fiscal Year
(as a percentage of average net assets)
<TABLE>
<CAPTION>
MANAGEMENT OTHER TOTAL PORTFOLIO
FEES EXPENSES OPERATING
EXPENSES(1)(2)
<S> <C> <C> <C>
VIP Money Market.................. 0.18% 0.09% 0.27%
VIP High Income................... 0.58% 0.11% 0.69%
VIP Equity-Income................. 0.48% 0.09% 0.57%
VIP Growth........................ 0.58% 0.08% 0.66%
VIP Overseas...................... 0.73% 0.18% 0.91%
VIPII Investment Grade Bond....... 0.43% 0.11% 0.54%
VIPII Asset Manager............... 0.53% 0.10% 0.63%
VIPII Index 500................... 0.24% 0.10% 0.34%
VIPII Contrafund.................. 0.58% 0.09% 0.67%
MFS Emerging Growth............... 0.75% 0.09% 0.84%
MFS Research...................... 0.75% 0.11% 0.86%
MFS Growth With Income............ 0.75% 0.13% 0.88%
MFS Total Return.................. 0.75% 0.15% 0.90%
MFS Utilities..................... 0.75% 0.16% 0.91%
MFS Capital Opportunities......... 0.75% 0.27%(3) 1.02%(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 VIP Equity-Income Portfolio would have been 0.56%; for VIP
Growth Portfolio: 0.65%; for VIP Overseas Portfolio: 0.87%; for VIPII Asset
Manager Portfolio: 0.62%; for VIPII Index 500 Portfolio: 0.28%; and for VIPII
Contrafund Portfolio: 0.65%.
(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. Including these
reductions and any applicable expense reimbursements, the total operating
expenses for MFS Emerging Growth would have been 0.83%; for MFS Capital
Opportunities: 0.90%; for MFS Research: 0.85%; for MFS Growth With Income:
0.87%; for MFS Total Return: 0.89%; for MFS Utilities: 0.90%.
(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
0.15% of the average daily net assets of the series during the current
fiscal year. After taking this expense reimbursement into account (but not
the expense offset arrangement), the total operating expenses for MFS
Capital Opportunities would have been 0.91%. 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, 2001, 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>
If all amounts invested in one of 1 YEAR 3 YEARS 5 YEARS 10 YEARS
the following Portfolios:
<S> <C> <C> <C> <C>
VIP Money Market.................. $73 $104 $134 $203
VIP High Income................... $77 $116 $155 $246
VIP Equity-Income................. $76 $112 $148 $233
VIP Growth........................ $77 $116 $154 $245
VIP Overseas...................... $79 $121 $164 $264
VIPII Investment Grade Bond....... $76 $112 $147 $231
VIPII Asset Manager............... $77 $114 $151 $239
VIPII Index 500................... $73 $104 $134 $204
VIPII Contrafund.................. $77 $115 $153 $242
MFS Emerging Growth............... $79 $120 $163 $262
MFS Research...................... $79 $121 $163 $264
MFS Growth With Income............ $79 $121 $164 $266
MFS Total Return.................. $79 $122 $165 $268
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1 YEAR 3 YEARS 5 YEARS 10 YEARS
MFS Utilities..................... $79 $122 $166 $269
MFS Capital Opportunities......... $79 $122 $166 $269
</TABLE>
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
If all amounts are invested in
one of the following Portfolios:
<S> <C> <C> <C> <C>
VIP Money Market.................. $18 $54 $ 94 $203
VIP High Income................... $22 $67 $115 $246
VIP Equity-Income................. $20 $63 $108 $233
VIP Growth........................ $22 $67 $114 $245
VIP Overseas...................... $24 $72 $124 $264
VIPII Investment Grade Bond....... $20 $63 $107 $231
VIPII Asset Manager............... $21 $65 $111 $239
VIPII Index 500................... $18 $55 $ 94 $204
VIPII Contrafund.................. $21 $66 $113 $242
MFS Emerging Growth............... $23 $72 $123 $262
MFS Research...................... $23 $72 $123 $264
MFS Growth With Income............ $24 $73 $124 $266
MFS Total Return.................. $24 $73 $125 $268
MFS Utilities..................... $24 $74 $126 $269
MFS Capital Opportunities......... $24 $74 $126 $269
</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 (the "Separate Account") and
the Portfolios. In addition to the fees and expenses described below, we will
deduct an amount to cover any applicable premium taxes. Premium tax rates depend
on your place of residence at the time the tax is charged. Rates currently range
from 0% to 3.5% and may change.
THESE EXAMPLES DO NOT REPRESENT PAST OR FUTURE EXPENSES. YOUR ACTUAL
EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN. The assumed 5% annual rate of
return is not an estimate or a guarantee of future investment performance.
8
<PAGE>
SUMMARY
You should read this summary together with the other information in this
Prospectus. We designed the Contracts to provide retirement benefits through
the accumulation of purchase payments on a fixed or variable basis, and by the
application of savings under the Contract to provide fixed or variable annuity
payments. If you are purchasing the Contract through a tax favored arrangement,
including IRAs and Roth IRAs, you should carefully consider the costs and
benefits of the Contract (including annuity income benefits) before purchasing
the Contract, since the tax favored arrangement itself provides tax sheltered
growth.
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 PURCHASE 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 the Separate Account. 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
9
<PAGE>
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 annualized 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 annualized 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% per year. We may in the future offer other forms of Contract
with a lower assumed interest rate, and we reserve the right to discontinue
offering the higher interest rate form of Contract. See "Annuity Period and
Annuity Payment Options."
CHANGES IN ALLOCATIONS AMONG DIVISIONS AND GUARANTEE PERIODS
Before the Annuity Commencement Date, you may change your allocation of
future purchase payments to each of the various Divisions and Guarantee Periods,
without charge.
In addition, you may reallocate Account Value among the Divisions and
Guarantee Periods before the Annuity Commencement Date. Transfers out of a
Guarantee Period, however, are subject to limitations as to amount. For these
and other terms and conditions of transfer, see "Transfer, Surrender and Partial
Withdrawal of Account Value - Transfers."
After the Annuity Commencement Date, you may transfer Account Value among
the Divisions, or from a Division to a fixed Annuity Payment Option, but you
cannot make transfers from a fixed Annuity Payment Option. See "Annuity Period
and Annuity Payment Options - Transfers."
SURRENDERS, WITHDRAWALS AND CANCELLATIONS
You may totally surrender or partially withdraw funds from a Contract at
any time before the Annuity Commencement Date, by written request to us. We may
assess a Surrender Charge, and you may have to pay a tax or a tax penalty. The
maximum Surrender Charge (computed as a percentage of purchase payments
withdrawn) is 6% of purchase payments withdrawn during the first two years after
we received them. See "Surrenders and Partial Withdrawals" and "Charges Under
the Contracts - Surrender Charge."
You may cancel your Contract by delivering or mailing it, with a written
cancellation request, to us before the close of business on the tenth day after
you receive the Contract. (In some states, the Contract may provide for a
different period.) If you cancel the Contract, we will deem it cancelled on the
date of the postmark, and we will refund the Account Value plus any premium
taxes and Annual Contract Fee that have been deducted. If state law requires,
we will refund the greater of that amount or the amount of purchase payments.
Surrenders, withdrawals and cancellations may have adverse tax
consequences. See "Federal Tax Matters."
10
<PAGE>
DEATH BENEFIT
If the Annuitant (where there is no surviving contingent annuitant) or
Owner dies before the Annuity Commencement Date, we will pay a death benefit to
the beneficiary. The death benefit amount will depend on whether your Contract
has a death benefit endorsement, but it will be at least the greater of the
Account Value at the time we receive proof of death minus premium taxes, or the
sum of all purchase payments made minus surrenders and withdrawals. See the
"Death Benefit" section in this prospectus.
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
Units."
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.
11
<PAGE>
We may also advertise our ratings by independent financial rating services,
such as A.M. Best Company, Standard & Poor's, and Duff & Phelps. The ratings
from these three nationally-recognized rating organizations reflect the claims
paying ability and financial strength of American Franklin and are not a rating
of investment performance of the Divisions or the Contracts.
In addition, we may include in advertisements endorsements in the form of a
list of organizations, individuals or other parties that recommend American
Franklin or the Contracts. American Franklin may occasionally include in
advertisements comparisons of currently taxable and tax-deferred investment
programs, based on selected tax brackets, or discussions of alternative
investment vehicles and general economic conditions.
The financial statements for the Separate Account 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 the Separate Account.
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 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.
We established the Separate Account on May 22, 1996. It consists of 15
Divisions, all of which are available under the Contracts offered by this
Prospectus. We have registered the Separate Account 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 the Separate Account. The Separate Account meets the definition of
a "separate account" under federal securities laws.
The operations of each Division of the Separate Account are part of
our general operations, and the assets of the Separate Account belong to us.
Obligations under the contracts are our obligations. Under Illinois law, the
assets of the Separate Account 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
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issued through the Separate Account. We may transfer the excess to our general
account. The income, gains, and losses, whether or not realized, from assets
allocated to the Separate Account are credited to or charged against the
Separate Account without regard to our other income, gains, or losses.
THE PORTFOLIOS
Each Division of the Separate Account 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
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income-producing debt securities, preferred stocks and convertible
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.
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
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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.
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.
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Subject to the policies of the Fund's Board of Trustees, Massachusetts
Financial Services Company ("MFS") makes investment decisions for each Portfolio
of the MFS Trust. MFS also provides the MFS Trust Portfolios with administrative
services and general office facilities. MFS receives a monthly management fee
for its services. For a description of MFS and the calculation of its fee, see
the Prospectus of the MFS Trust.
We and the Funds' investment advisers may agree that the investment
advisers will reimburse us or our affiliates for certain costs incurred in
administering the Funds as variable funding options for the Contracts. We have
agreed with MFS that MFS or its affiliates will pay us a fee equal, on an
annualized basis, to a percentage of the aggregate net assets of each Portfolio
of the MFS Trust attributable to the Contracts and certain other variable
contracts that we or our affiliates issue. This fee will not be paid by the
Portfolios, their shareholders or the Owners.
Affiliates of FMR may compensate us or our affiliates for administrative,
distribution, or other services relating to the Portfolios of the Funds. Such
compensation is generally based on assets of the portfolios attributable to the
Contracts and certain other variable contracts that we or our affiliates issue.
BEFORE YOU SELECT ANY DIVISION, you should carefully read the Funds'
prospectuses. To obtain additional copies of the Prospectuses of the Funds,
contact us.
VOTING PRIVILEGES
At meetings of Portfolio shareholders, the Separate Account 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.
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We believe that these voting instruction procedures comply with current
federal securities laws and their interpretations. We reserve the right to
change these procedures with any changes in the law.
THE FIXED ACCOUNT
ANY PURCHASE PAYMENTS THAT YOU ALLOCATE TO A GUARANTEE PERIOD OF THE FIXED
ACCOUNT OR THAT SUPPORTS FIXED ANNUITY PAYMENTS BECOMES PART OF OUR GENERAL
ACCOUNT. BECAUSE OF EXEMPTIVE AND EXCLUSIONARY PROVISIONS, WE HAVE NOT
REGISTERED THE GENERAL ACCOUNT UNDER THE SECURITIES ACT OF 1933 OR AS AN
INVESTMENT COMPANY UNDER THE 1940 ACT. WE HAVE BEEN ADVISED THAT THE STAFF OF
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT REVIEWED THE DISCLOSURES IN THIS
PROSPECTUS ABOUT THE FIXED ACCOUNT OR ABOUT FIXED ANNUITY PAYMENTS. THOSE
DISCLOSURES, HOWEVER, MAY BE SUBJECT TO CERTAIN GENERALLY APPLICABLE PROVISIONS
OF THE FEDERAL SECURITIES LAWS THAT REQUIRE STATEMENTS IN PROSPECTUSES TO BE
ACCURATE AND COMPLETE.
Obligations of the Fixed Account are our legal obligations and are
supported by our General Account assets, which also support our obligations
under other insurance and annuity contracts. American Franklin owns the
investments purchased with Fixed Account funds, and the Separate Account 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 the Separate
Account. 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.
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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 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.
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We credit subsequent purchase payments as of the end of the Valuation
Period in which we receive them together with any required written identifying
information. We reserve the right to reject any application or purchase payment
for any reason.
If your Account Value in any Division falls below $500 because of a partial
withdrawal from the Contract, we reserve the right to transfer, without charge,
the remaining balance to the VIP Money Market Division. If your Account Value
in any Division falls below $500 because of a transfer to other Divisions or to
the Fixed Account, we reserve the right to transfer the remaining balance in
that Division, without charge and pro rata, to the Divisions or Fixed Account to
which the transfer was made. We will waive these minimum requirements for
transfers under the Variable Account Asset Rebalancing program. See "Variable
Account Asset Rebalancing."
A purchase payment begins to earn a return on the date that it is credited
to a Contract. You must allocate amounts of each purchase payment to Divisions
or Guarantee Periods in whole percentages on the application form. You can
change these allocation percentages any time by sending written notice to us.
If your total Account Value falls below $500, we may cancel the Contract.
(In Texas, if your Account Value is less than $500 or would provide an income
the initial amount of which is less than $20 per month and no purchase payments
have been applied for a period of 2 full years, we may cancel the Contract upon
60 days' notice to you, and return your Account Value.) IRA annuities have
different termination provisions. We 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:
Contract Maximum Purchase Payments Per Year
-------- ----------------------------------
IRA In general, $2,000
SEP $24,500
SIMPLE IRA Maximum contribution allowed by law
Section 457 Contract In general, $7,500
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ACCOUNT VALUE
Before the Annuity Commencement Date, your Account Value under a Contract
is the sum of your Variable Account value and your Fixed Account value, as
discussed below.
VARIABLE ACCOUNT VALUE
Your Variable Account value as of any Valuation Date before the Annuity
Commencement Date equals the sum of the Variable Account values in each Division
of the Separate Account 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 THE SEPARATE ACCOUNT.
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
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amount of any transfers or withdrawals out of the Guarantee Period, including
withdrawals to pay applicable charges.
We guarantee the Fixed Account value. Therefore, we bear the investment
risk of amounts you allocate to the Fixed Account. However, we may vary the
Guaranteed Interest Rate for future Guarantee Periods.
TRANSFERS, VARIABLE ACCOUNT ASSET REBALANCING, SURRENDERS AND PARTIAL
WITHDRAWALS
TRANSFERS
Starting 30 days after your Contract's issue date (and before the Annuity
Commencement Date), you may transfer your Account Value among the available
Divisions of the Separate Account 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.
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If several people try to make telephone transfers at the same time, or if
the recording equipment malfunctions, you may not be able to make a telephone
transfer when you want. If this happens, you may submit a written transfer
request. Also, if the recording of a telephone request is incomplete or if we
can't understand what is being said, because of equipment malfunction or for any
other reason, we will not process the transaction. The phone numbers you should
use for telephone transfers are (800) 200-3101, or in the Houston area,
(713) 831-3310.
The Contracts are not designed for professional market timing organizations
or other entities using programmed and frequent transfers. We reserve the right
at any time and without prior notice to any party to terminate, suspend, or
modify ourpolicies or procedures regarding transfer requests.
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
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instructions, or if we can't process the withdrawal according to your
instructions, we will make the withdrawal pro-rata from the Divisions and
Guarantee Periods, based on your Account Value in each. Partial withdrawal
requests must be for at least $100 or, if less, for all of the Account Value.
Unless you request otherwise, upon a partial withdrawal, the Accumulation Units
and Fixed Account interests that are canceled will equal the amount of the
withdrawal request, and we will pay you the amount of your withdrawal request
less any 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 1/2.
Any full surrender or partial withdrawal payment may be subject to federal
income tax withholding and federal tax penalties. See "Federal Income Tax
Matters."
CHARGES UNDER THE CONTRACTS
We deduct the charges described below to cover costs and expenses, services
provided, and risks assumed under the Contracts. The amount of a charge may not
necessarily correspond to the costs associated with providing the services or
benefits indicated by the designation of the charge or associated with the
particular Contract. For example, the Surrender Charge may not fully cover all
of the sales and distribution expenses that we actually incur, and we may use
proceeds in part from other charges, including the mortality and expense risk
charge, to cover such expenses.
PREMIUM TAXES
When applicable, we will deduct charges for premium taxes. We will make
such a deduction, in accordance with applicable state law:
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(1) from purchase payment(s) when we receive them; or
(2) from your Account Value when annuity payments begin; or
(3) from any partial withdrawal; or
(4) from proceeds payable on termination of the Contract for any other reason,
including death of the Annuitant or Owner, or surrender of the Contract.
If you owe premium tax under paragraphs 2, 3, or 4 above, we may collect
reimbursement for the tax by multiplying the sum of the purchase payments being
withdrawn by the applicable premium tax percentage.
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:
Year of
Purchase Surrender Charge as a
Payment Percentage of Purchase
Withdrawal Payment Withdrawn
---------- -----------------------
1st 6%
2nd 6%
3rd 5%
4th 5%
5th 4%
6th 4%
7th 2%
Thereafter 0%
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.
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The Surrender Charge does not apply to the portion of a withdrawal or total
surrender in any Contract Year that is 10% or less of the amount of purchase
payments that (a) have not previously been withdrawn and (b) have been credited
to the Contract between one year and 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.
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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, the Separate Account will incur
a daily charge at an annualized rate of 1.40% of the average daily net asset
value of the Separate Account 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 may profit from this
charge and may use any profits for any lawful purpose including paying
distribution expenses.
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.
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REDUCTION IN SURRENDER CHARGES OR ADMINISTRATIVE CHARGES
We may reduce the Surrender Charges or administrative charges imposed under
certainQualified 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.
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We will convert the Account Value that provides variable annuity payments
to Annuity Units. We determine the number of your Annuity Units by dividing the
first variable annuity payment by the value of an Annuity Unit of the relevant
Division. We will perform this calculation at the end of the tenth day before
your Annuity Commencement Date, or, if that is not a Valuation Date, at the end
of the next Valuation Period. The number of Annuity Units, once calculated,
remains constant for any Annuitant. We determine each subsequent variable
annuity payment by multiplying Annuity Units by the value of an Annuity Unit as
of the end of the tenth day before each payment date, or, if that is not a
Valuation Date, at the end of the next Valuation Period. If the variable annuity
payments are based on more than one Division, we make these calculations
separately for each Division.
The value of an Annuity Unit at the end of a Valuation Period is the value
of the Annuity Unit at the end of the previous Valuation Period times the net
investment factor (see "Variable Account Value") for the Valuation Period, with
an offset for the 3.5% assumed interest rate used in the Contract's annuity
tables. The value of an Annuity Unit for each Division at the start of
operations was $5.00.
If the net investment return for a Division for any month turns out to be
more than the assumed interest rate in the Contract's annuity tables, a variable
annuity payment based on that Division will be higher than that Division's
payment for the prior month. On the other hand, if the net investment return
for a Division for any month is less than the assumed interest rate in the
Contract's annuity tables, a variable annuity payment based on that Division
will be less than that Division's payment for the prior month.
ANNUITY PAYMENT OPTIONS
You can have annuity payments made beginning on the Annuity Commencement
Date under any one of the Annuity Payment Options described below. 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
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monitoring or advising Owners as to whether the minimum distribution
requirements are being met unless you have asked us in writing to do so, and we
have agreed.
ALTERNATIVE PAYMENT SCHEDULES. For any of the five options, you or your
Annuitant may decide to receive payments on a quarterly, semi-annual or annual
basis, instead of every month. We will determine the amount of each payment in
a way that is consistent with how we determine monthly payments.
You may not elect any Annuity Payment Option unless that option would
provide an initial annuity payment of at least $100, where you elect only fixed
or only variable annuity payments, or of at least $50 on each basis, if you
elect a combination. If these minimums are not met, we will first reduce the
frequency of annuity payments, and if the minimums are still not met, we will
make a lump-sum payment to the Annuitant or other properly designated payee in
the amount of the Account Value, less any applicable Surrender Charge,
uncollected Annual Contract Fee, applicable premium tax and applicable federal
income tax withholding.
You may direct that we pay any amount due to your beneficiary under one of
the options described below, subject to tax law requirements. If you do not
make this choice, your beneficiary can select an option up to 60 days after your
or your Annuitant's death. See "Death Benefit." Your beneficiary will have all
the remaining rights and powers under the Contract and will be subject to all of
its terms and conditions, except that for Qualified Contracts and Section 457
Contracts, the Owner will retain those rights and powers. We will make the
first annuity payment at the beginning of the second month after the month in
which we approve the settlement request. We will credit Annuity Units based on
Annuity Unit Values as of the close of business ten days before we make the
first annuity payment, or if that is not a Valuation Date, at the close of the
next Valuation Period.
When an Annuity Payment Option becomes effective, you must deliver your
Contract to us, in exchange for a payment contract providing the option you have
selected. An Annuity Payment Option may not be terminated once annuity payments
have started.
First Option - Life Annuity. We make payments monthly during the lifetime of
the Annuitant, ending when the Annuitant dies. This Option offers the highest
monthly annuity payments, since there is no guarantee of a minimum number of
annuity payments, or provision for payments to a beneficiary when the Annuitant
dies. Under this Option, the Annuitant could receive only one annuity payment
if he or she died before the second annuity payment, or only two annuity
payments if he or she died after the second annuity payment but before the third
annuity payment, and so on.
SECOND OPTION - LIFE ANNUITY WITH 120, 180, OR 240 MONTHLY PAYMENTS CERTAIN. We
make payments monthly while the Annuitant lives. If the Annuitant dies and we
have made payments for less than 120 months, 180 months, or 240 months
(depending on the Option), we will continue making payments to your beneficiary
for the rest of the period.
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
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payment if both died before the second annuity payment date, or to receive only
two payments if both died after the second annuity payment but before the third,
and so on.
FOURTH OPTION - PAYMENTS FOR A DESIGNATED PERIOD. We make payments monthly to
the Annuitant or another payee for 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 the Separate Account, partly for mortality risks. See
"Charge to the Separate Account."
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 the Separate
Account, 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.
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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.
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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 the Separate
Account 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.
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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."
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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 the Separate Account 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 the Separate
Account 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.
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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
GENERAL
We cannot comment on all of the federal income tax consequences associated
with the Contracts. Federal income tax law is complex. Its application to a
particular person may vary according to facts peculiar to the person.
Consequently, we do not intend for you to take this discussion as tax advice.
You should consult with a competent tax adviser before purchasing a Contract.
We base this discussion on our understanding of the law, regulations and
interpretations existing on the date of this Prospectus. Congress, in the past,
has enacted legislation changing the tax treatment of annuities in both the
Qualified and the Non-Qualified markets and may do so again in the future. The
Treasury Department may issue new or amended regulations or other
interpretations of existing tax law. The courts may also interpret the tax law
in ways that affect the tax treatment of annuities. Any such change could have a
retroactive effect. We suggest that you consult your legal or tax adviser on
these issues.
The discussion does not address federal estate and gift tax, or social
security tax, or any state or local tax consequences associated with the
Contracts.
NON-QUALIFIED CONTRACTS
PURCHASE PAYMENTS. Purchasers of a Contract that does not qualify for special
tax treatment and is "Non-Qualified" may not deduct from their gross income the
amount of purchase payments made.
35
<PAGE>
TAX DEFERRAL BEFORE ANNUITY COMMENCEMENT DATE. Owners who are natural persons
are not taxed currently on (1) increases in their Account Value resulting from
interest earned in the Fixed Account, or (2) the investment experience of the
Separate Account so long as the Separate Account complies with certain
diversification requirements. These requirements mean that the Separate Account
must invest in Portfolios that are "adequately diversified" in accordance with
Treasury Department regulations. We do not control the Portfolios, but we have
received commitments from the investment advisers to the Portfolios to use their
best efforts to operate the Portfolios in compliance with these diversification
requirements. A Contract investing in a Portfolio that failed to meet the
diversification requirements would subject the Owner to current taxation of
income in the Contract for the period of such diversification failure (and any
subsequent period). Income means the excess of the Account Value over the
Owner's investment in the Contract (discussed below).
Control over allocation of values among different investment alternatives
may cause Owners or persons receiving annuity payments to be treated as the
Owners of the Separate Account's assets for tax purposes. However, current
regulations do not provide guidance as to how to avoid this result. We reserve
the right to amend the Contracts in any way necessary to avoid this result. The
Treasury Department has stated that it may establish standards through
regulations or rulings. These standards may apply only prospectively, although
they could apply retroactively if the Treasury Department considers the
standards not to reflect a new position.
Owners that are not natural persons -- that is, Owners such as corporations
- -- are taxed currently on annual increases in their Account Value, unless an
exception applies. Exceptions apply for, among other things, Owners that are
not natural persons but that hold a Contract as an agent for a natural person.
TAXATION OF ANNUITY PAYMENTS. Part of each annuity payment received after the
Annuity Commencement Date is excludible from gross income through the use of an
exclusion ratio.
In the case of fixed annuity payments, the excludible portion of each
payment is found by multiplying:
. the amount paid, by
. the ratio of the investment in the Contract (discussed below) to the expected
return under the fixed annuity payment option.
In the case of variable annuity payments, the excludible portion of each
payment is the investment in the Contract divided by the number of expected
payments.
36
<PAGE>
In both cases, the remaining portion of each annuity payment, and all
payments made after the investment in the Contract has been reduced to zero, are
included in the payee's income. Should annuity payments stop on account of the
death of the Annuitant before the investment in the Contract has been fully paid
out, the payee is allowed a deduction for the unpaid amount. If the payee is
the Annuitant, the deduction is taken on the final tax return. If the payee is
a beneficiary, that beneficiary may receive the balance of the total investment
as payments are made or on the beneficiary's final tax return. An Owner's
"investment in the Contract" is the amount equal to the portion of purchase
payments made by or on behalf of the Owner that have not been excluded or
deducted from the individual's gross income, less amounts previously received
under the Contract that were not included in income.
TAXATION OF PARTIAL WITHDRAWALS AND TOTAL SURRENDERS. Partial withdrawals from
a Contract are includible in income to the extent that the Owner's Account Value
exceeds the investment in the Contract. In the event you surrender a Contract
in its entirety, the amount of your investment in the Contract is excludible
from income, and any amount you receive in excess of your investment in the
Contract is includible in income. All annuity contracts or certificates we
issue to the same Owner during any calendar year are aggregated for purposes of
determining the amount of any distribution that is includible in gross income.
PENALTY TAX ON PREMATURE DISTRIBUTIONS. In the case of such a distribution,
there may be imposed a federal tax penalty equal to 10% of the amount treated as
taxable income. The penalty tax will not apply, however, to distributions:
. made on or after the recipient reaches age 59 1/2,
. made on account of the recipient's becoming disabled,
. made after the death of the Owner before the Annuity Commencement Date or of
the payee after the Annuity Commencement Date (or if such person is not a
natural person, that are made after the death of the primary Annuitant, as
defined in the Code), or
. that are part of a series of substantially equal periodic payments made at
least annually over the life (or life expectancy) of the Annuitant or the
joint life (or joint life expectancies) of the Annuitant and the beneficiary,
provided such payments are made for a minimum of 5 years and the distribution
method is not changed before the recipient reaches age 59 1/2 (except in the
case of death or disability).
Premature distributions may result from an early Annuity Commencement Date,
an early surrender, partial withdrawal from or assignment of a Contract, or the
early death of an Annuitant, unless the third clause listed above applies.
PAYMENT OF DEATH PROCEEDS. Special rules apply to the distribution of any death
proceeds payable under the Contract. (See "Death Benefit.")
37
<PAGE>
ASSIGNMENTS AND LOANS. An assignment, loan, or pledge under a Non-Qualified
Contract is taxed in the same manner as a partial withdrawal, as described
above. Repayment of a loan or release of an assignment or pledge is treated as
a new purchase payment.
INDIVIDUAL RETIREMENT ANNUITIES ("IRAS")
PURCHASE PAYMENTS. Individuals who are not active participants in a tax
qualified retirement plan may, in any year, deduct from their taxable income
purchase payments made to an IRA equal to the lesser of $2,000 or 100% of the
individual's earned income. In the case of married individuals filing a joint
return, the deduction will, in general, be the lesser of $4,000 or 100% of the
combined earned income of both spouses, reduced by any deduction for an IRA
purchase payment allowed to the spouse. Single persons who participate in a
tax-qualified retirement plan and who have adjusted gross income not in excess
of $31,000 for 1999 may fully deduct their IRA purchase payments. Those who
have adjusted gross income in excess of $41,000 for 1999 will not be able to
deduct purchase payments. For those with adjusted gross income in the range
between $31,000 and $41,000 in 1999, the deduction decreases to zero, based on
the amount of income. Beginning in 2000, that income range will increase, as
follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 and
thereafter
- ---------------------------------------------------------------------------------------------------------
$32,000 $33,000 $34,000 $40,000 $45,000 $50,000
to to to to to to
$42,000 $43,000 $44,000 $50,000 $55,000 $60,000
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Similarly, the otherwise deductible portion of an IRA purchase payment will
be phased out, in the case of married individuals filing joint tax returns, with
adjusted gross income between $51,000 and $61,000 in 1999, and in the case of
married individuals filing separately, with adjusted gross income between $0 and
$10,000 in 1999. (A husband and wife who file separate returns and live apart
at all times during the taxable year are not treated as married individuals.)
Beginning in 2000, the income range over which the otherwise deductible portion
of an IRA purchase payment will be phased out for married individuals filing
joint tax returns will increase as follows:
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------
2000 2001 2002 2003 2004 2005 2006 2007 and
thereafter
- ----------------------------------------------------------------------------------------------------------------
$52,000 $53,000 $54,000 $60,000 $65,000 $70,000 $75,000 $ 80,000
to to to to to to to to
$62,000 $63,000 $64,000 $70,000 $75,000 $80,000 $85,000 $100,000
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
A married individual filing a joint tax return, who is not an active
participant in a tax-qualified retirement plan, but whose spouse is an active
participant in such a plan, may, in any year, deduct from his or her taxable
income purchase payments for an IRA equal to the lesser of $2,000 or 100% of the
individual's earned income. For the individual, the adjusted gross income range
over which the otherwise deductible portion of an IRA purchase payment will be
phased out is $150,000 to $160,000.
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<PAGE>
TAX-FREE ROLLOVERS. Amounts may be transferred, in a tax-free rollover, from
(1) a tax-qualified plan to an IRA or (2) from one IRA to another IRA if the
transfer meets certain conditions. All taxable distributions ("eligible
rollover distributions") from tax qualified plans are eligible to be rolled over
with the exception of:
. annuities paid over a life or life expectancy,
. installments for a period of ten years or more, and
. required minimum distributions under section 401(a)(9) of the Code.
Rollovers may be accomplished in two ways. First, we may pay an eligible
rollover distribution directly to an IRA (a "direct rollover"). Second, we may
pay the distribution directly to the Annuitant and then, within 60 days of
receipt, the Annuitant may roll the amount over to an IRA. However, any amount
that was not distributed as a direct rollover will be subject to 20% income tax
withholding.
DISTRIBUTIONS FROM AN IRA. Amounts received under an IRA as annuity payments,
upon partial withdrawal or total surrender, or on the death of the Annuitant,
are included in the Annuitant's or other recipient's income. If nondeductible
purchase payments have been made, a pro rata portion of such distributions may
not be includible in income. A 10% penalty tax is imposed on the amount
includible in gross income from distributions that occur before the Annuitant
reaches age 59 1/2 and that are not made on account of death or disability, with
certain exceptions. These exceptions include:
. distributions that are part of a series of substantially equal periodic
payments made at least annually over the life (or life expectancy) of the
Annuitant or the joint lives (or joint life expectancies) of the Annuitant
and the beneficiary; provided such payments are made for a minimum of 5
years and the distribution method is not changed before the recipient
reaches age 59 1/2 (except in the case of death or disability);
. distributions for medical expenses in excess of 7.5% of the Annuitant's
adjusted gross income without regard to whether the Annuitant itemizes
deductions on his or her tax return;
. distributions for health insurance premiums to an unemployed individual who
has received unemployment compensation for at least 12 consecutive weeks;
. distributions for qualified first-time home purchases for the individual, a
spouse, children, grandchildren, or ancestor of the individual or the
individual's spouse, subject to a $10,000 lifetime maximum; and
. distributions for higher education expenses for the individual, a spouse,
children, or grandchildren.
Distributions of minimum amounts required by the Code must commence by
April 1 of the calendar year following the calendar year in which the Annuitant
reaches age 70 1/2 or retires
39
<PAGE>
(whichever is later). Additional distribution rules apply after the death of the
Annuitant. These rules are similar to those governing distributions on the death
of an Owner (or other payee during the Annuity Period) under a Non-Qualified
Contract. (See "Death Benefit.") Failure to comply with the minimum distribution
rules will result in a penalty tax of 50% of the amount by which the minimum
distribution required exceeds the actual distribution.
ROTH IRAS
Beginning in 1998, individuals may purchase a new type of non-deductible
IRA, known as a Roth IRA. Purchase payments for a Roth IRA are limited to $2,000
per year. This permitted contribution is phased out for adjusted gross income
between $95,000 and $110,000 in the case of single taxpayers, between $150,000
and $160,000 in the case of married taxpayers filing joint returns, and between
$0 and $10,000 in the case of married taxpayers filing separately. An overall
$2,000 annual limitation continues to apply to all of a taxpayer's IRA
contributions, including Roth IRAs and non-Roth IRAs.
An individual may make a rollover contribution from a non-Roth IRA to a
Roth IRA, unless the individual has adjusted gross income over $100,000 or the
individual is a married taxpayer filing a separate return. The individual must
pay tax on any portion of the IRA being rolled over that represents income or a
previously deductible IRA contribution. There are no similar limitations on
rollovers from a Roth IRA to another Roth IRA.
Qualified distributions from Roth IRAs are entirely tax-free. A qualified
distribution requires that (1) the individual has held the Roth IRA for at least
five years and (2) the distribution is made either after the individual reaches
age 59 1/2, on the individual's death or disability, or as qualified first-time
home purchase. Qualified Distributions for a qualified first-time home
purchase, are subject to a $10,000 lifetime maximum for the individual, a
spouse, child, grandchild, or ancestor of such individual or the individual's
spouse.
SIMPLIFIED EMPLOYEE PENSION PLANS
Eligible employers may establish an IRA plan known as a simplified employee
pension plan ("SEP"), if certain requirements are met. An employee may make
contributions to a SEP in accordance with the rules applicable to IRAs discussed
above. Employer contributions to an employee's SEP are deductible by the
employer and are not currently includible in the taxable income of the employee,
provided that total employer contributions do not exceed the lesser of 15% of an
employee's compensation or $30,000.
SIMPLE RETIREMENT ACCOUNTS
Eligible employers may establish an IRA plan known as a simple retirement
account ("SRA"), if they meet certain requirements. Under an SRA, the employer
contributes elective employee compensation deferrals up to a maximum of $7,000 a
year for 1999 to the employee's SRA. The employer must, in general, make a
fully vested matching contribution for employee deferrals up to a maximum of 3%
of compensation.
40
<PAGE>
TAX-SHELTERED ANNUITIES
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.
OTHER QUALIFIED PLANS
PURCHASE PAYMENTS. Purchase payments made by an employer under a pension,
profit sharing, or annuity plan qualified under section 401 or 403(a) of the
Code, not in excess of certain limits, are deductible by the employer. The
purchase payments are also excluded from the current income of the employee.
DISTRIBUTIONS BEFORE THE ANNUITY COMMENCEMENT DATE. Purchase payments
includible in an employee's taxable income (less any amounts previously received
that were not includible in the employee's taxable income) represent the
employee's "investment in the Contract." Amounts received before the Annuity
Commencement Date under a Contract in connection with a section 401 or 403(a)
plan are generally allocated on a pro-rata basis between the employee's
investment in the Contract and other amounts. A lump-sum distribution will not
be includible in income in the year of distribution, if the employee transfers,
within 60 days of receipt, all amounts received (less the employee's investment
in the Contract), to another tax-qualified plan, to an individual retirement
account or an IRA in accordance with the rollover rules under the Code.
However, any amount that is not distributed as a direct rollover will be
subject to 20% income tax withholding. (See "Tax Free Rollovers.") Special tax
treatment may be available, for tax years beginning before December 31, 1999, in
the case of certain lump-sum distributions that are not rolled over to another
plan or IRA.
A 10% penalty tax is imposed on the amount includible in gross income from
distributions that occur before the employee reaches age 59 1/2 and that are not
made on account of death or disability, with certain exceptions. These
exceptions include distributions that are:
. part of a series of substantially equal periodic payments made at least
annually beginning after the employee separates from service and made over
the life (or life expectancy) of the employee or the joint lives (or joint
life expectancies) of the employee and the beneficiary, provided such
payments are made for at least 5 years and the distribution method is not
changed before the recipient reaches age 59 1/2 (except in the case of death
or disability);
. made after the employee's separation from service on account of early
retirement after attaining age 55;
41
<PAGE>
. made to pay for qualified higher education or first-time home buyer expenses;
. made to an alternate payee pursuant to a qualified domestic relations order,
if the alternate payee is the spouse or former spouse of the employee;
. distributions for medical expenses in excess of 7.5% of the Annuitant's
adjusted gross income without regard to whether the Annuitant itemizes
deductions on his or her tax return; or
. distributions for health insurance premiums to an unemployed individual who
has received unemployment compensation for at least 12 consecutive weeks.
Annuity Payments. A portion of annuity payments received under Contracts for
section 401 and 403(a) plans after the Annuity Commencement Date may be
excludible from the employee's income, in the manner discussed above, in
connection with variable annuity payments, under "Non-Qualified Contracts -
Taxation of Annuity Payments." The difference is that, here, the number of
expected payments is determined under a provision in the Code. Distributions of
minimum amounts required by the Code generally must commence by April 1 of the
calendar year following the calendar year in which the employee reaches age
70 1/2 (or retires, if later). Failure to comply with the minimum distribution
rules will result in a penalty tax of 50% of the amount by which the minimum
distribution required exceeds the actual distribution.
SELF-EMPLOYED INDIVIDUALS. Various special rules apply to tax-qualified plans
established by self-employed individuals.
PRIVATE EMPLOYER UNFUNDED DEFERRED COMPENSATION PLANS
PURCHASE PAYMENTS. Private taxable employers may establish unfunded, Non-
Qualified deferred compensation plans for a select group of management or highly
compensated employees and/or for independent contractors. To avoid current
taxation, these benefits must be subject to a substantial risk of forfeiture.
These types of programs allow individuals to defer (1) receipt of up to
100% of compensation that would otherwise be includible in income and (2)
payment of federal income taxes on the amounts.
Deferred compensation plans represent a contractual promise on the part of
the employer to pay current compensation at some future time. The Contract is
owned by the employer and is subject to the claims of the employer's creditors.
The individual has no right or interest in the Contract and is entitled only to
payment from the employer's general assets in accordance with plan provisions.
Purchase payments are not currently deductible by the employer until benefits
are included in the taxable income of the employee.
Taxation of Distributions. Amounts that an individual receives from a private
employer deferred compensation plan are includible in gross income for the
taxable year in which such amounts are paid or otherwise made available.
42
<PAGE>
FEDERAL INCOME TAX WITHHOLDING AND REPORTING
Amounts distributed from a Contract, to the extent includible in taxable
income, are subject to federal income tax withholding.
In some cases, if you own more than one qualified annuity contract, the
contracts may be considered together to determine whether the federal tax law
requirement for minimum distributions after age 70 1/2, or retirement in
appropriate circumstances, has been satisfied. You may rely on distributions
from another annuity contract to satisfy the minimum distribution requirement
under a Qualified Contract we issued. However, you must sign a waiver releasing
us from any liability to you for not calculating and reporting the amount of
taxes and penalties payable for failure to make required minimum distributions
under the Contract.
TAXES PAYABLE BY AMERICAN FRANKLIN AND THE SEPARATE ACCOUNT
American Franklin is taxed as a life insurance company under the Code. The
operations of the Separate Account are part of the total operations of American
Franklin and are not taxed separately. Under existing federal income tax laws,
American Franklin is not taxed on investment income derived by the Separate
Account (including realized and unrealized capital gains) with respect to the
Contracts. American Franklin reserves the right to allocate to the Contracts
any federal, state or other tax liability that may result in the future from
maintenance of the Separate Account or the Contracts.
Certain Portfolios may elect to pass through to American Franklin any taxes
withheld by foreign taxing jurisdictions on foreign source income. Such an
election will result in additional taxable income and income tax to American
Franklin. The amount of additional income tax, however, may be more than offset
by credits for the foreign taxes withheld that the Portfolios will also pass
through. These credits may provide a benefit to American Franklin.
TAX CHANGES
The U.S. Congress frequently considers legislation that, if enacted, could
change the tax treatment of annuities. In addition, the Treasury Department may
amend existing regulations or adopt new interpretations of existing law. State
and local tax law or, if you are not a U.S. citizen and resident, foreign tax
law, may also affect the tax consequences to you or your beneficiary, and are
subject to change. Any changes in federal, state, local or foreign tax law or
interpretation could have a retroactive effect. We suggest you consult a
qualified tax adviser.
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 the
43
<PAGE>
Separate Account. Pursuant to the Sales Agreement, Franklin Financial pays
certain sales expenses for distribution of the Contracts. We pay surrender
charge amounts that we collect to Franklin Financial.
Franklin Financial's registered representatives earn commissions on the
sale of the Contracts of up to 4.75% of purchase payments, and annual trail
commissions at an annual rate of 0.25% on Variable Account values.
Franklin Financial is registered with the Securities and Exchange
Commission as a broker-dealer under the Securities Exchange Act of 1934 and is a
member of the National Association of Securities Dealers, Inc.
From time to time, we may pay or permit other promotional incentives, in
cash or credit or other compensations.
YEAR 2000 CONSIDERATIONS
As of March 10, 2000, all of our ultimate parent, American General
Corporation's ("AGC") major technology systems, programs, and applications,
including those which rely on third parties, are operating smoothly following
our transition into 2000. We have experienced no interruptions to normal
business operations, including the processing of customer account data and
transactions. We will continue to monitor our technology systems, including
critical third party dependencies, as necessary to maintain our Year 2000
readiness. We do not expect any future disruptions, if they occur, to have a
material effect on our results of operations, liquidity, or financial condition.
Through December 31, 1999, AGC incurred and expensed pretax costs of $98
million related to Year 2000 readiness, including $18 million in 1999 and $65
million in 1998. In 1999, Year 2000 readiness expenses were included in
division earnings. The 1998 expenses were excluded from division earnings,
consistent with the manner in which we reviewed division results. In addition,
we accelerated the planned replacement of certain systems as part of our Year
2000 plans. The cost of these replacement systems was immaterial. We do not
anticipate incurring any significant costs in the future to maintain Year 2000
readiness.
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 in 1996. On December 16, 1998, AGC announced that American
Franklin had entered into an agreement to resolve the market conduct class
action lawsuits.
American Franklin is a party to various other lawsuits and proceedings
arising in the ordinary course of business. Many of these lawsuits and
proceedings, including claims filed by individuals who excluded themselves from
the market conduct class action settlement, 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
44
<PAGE>
Franklin 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 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.
The order approving the settlement agreement for American Franklin was entered
by the court on June 1, 1999, and became final on July 1, 1999.
ACCUMULATION UNITS
SEPARATE ACCOUNT VA-1
<TABLE>
<CAPTION>
ACCUMULATION UNIT NUMBER OF ACCUMULATION
VALUE AT DECEMBER UNITS OUTSTANDING AT
31, 1999 DECEMBER 31, 1999
---------------------------------------------------
<S> <C> <C>
VIP Money Market Division $ 5.54 2,405,743
VIP Equity-Income Division 6.96 3,628,549
VIP Growth Division 10.66 3,203,599
VIP Overseas Division 8.46 429,458
VIP High Income Division 5.91 489,147
VIPII Investment Grade Bond Division 5.58 753,885
VIPII Asset Manager Division 7.23 996,623
VIPII Index 500 Division 9.43 4,500,014
VIPII Contrafund Division 9.15 2,199,553
MFS Emerging Growth Division 12.41 2,048,810
MFS Research Division 8.37 2,556,910
MFS Growth With Income Division 7.83 1,889,006
MFS Total Return Division 6.48 2,758,393
MFS Utilities Division 9.05 1,358,316
MFS Capital Opportunities Division 10.86 903,043
</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:
45
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
<S> <C>
General Information....................................... 2
Regulation and Reserves................................... 2
Experts................................................... 3
Principal Underwriter..................................... 3
Administration of the Contracts........................... 4
Legal Matters............................................. 4
Tax Status of the Contracts............................... 4
Limitations on Annuity Payment Options.................... 5
A. Limitations on Choice of Annuity Payment Option..... 5
Annuity Payments.......................................... 7
A. Gender of Annuitant................................. 7
B. Misstatement of Age or Sex and Other Errors......... 8
Change of Investment Adviser or Investment Policy......... 8
Performance Data for the Divisions........................ 8
Financial Statements...................................... 13
Index to Financial Statements............................. F-1
</TABLE>
46
<PAGE>
THE CHAIRMAN(TM)
INDIVIDUAL RETIREMENT ANNUITY (IRA)
DISCLOSURE STATEMENT
INTRODUCTION
THIS DISCLOSURE STATEMENT IS DESIGNED FOR PRESENT OWNERS OF IRAs ISSUED BY
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY.
This Disclosure Statement is not part of a contract but contains general
and standardized information which must be furnished to each person who is
issued an Individual Retirement Annuity. Please refer to the contract to
determine specific rights and obligations thereunder.
REVOCATION
If you are purchasing a new or rollover IRA, then if for any reason you, as
a recipient of this Disclosure Statement, decide within 20 days from the date
your policy is delivered to you that you do not desire to retain your IRA,
written notification to the Company must be mailed, together with your policy,
within that period. If such notice is mailed within 20 days, all contributions,
without adjustments for any applicable sales commissions or administrative
expenses, will be refunded.
MAIL NOTIFICATION OF REVOCATION AND YOUR CONTRACT TO:
The American Franklin Life Insurance Company
AMFLIC Annuity Service Center
P.O. Box 4636
Houston, Texas 77210-4636
(Phone No. (800) 200-3101).
ELIGIBILITY
You are eligible to contribute to an IRA for each year before the year in
which you reach age 70-1/2 if you received compensation from employment,
earnings from self-income or alimony. In addition, for each year before the
year when your spouse reaches age 70-1/2, you can contribute to a separate IRA
for your spouse, provided that you and your spouse file a joint income tax
return.
CONTRIBUTION LIMITS
The total amount you may contribute to an IRA each year is limited to the
lesser of $2,000 or 100% of your eligible compensation. If you open a separate
IRA for your lower-earning spouse, the annual contribution limit to that IRA is
the lesser of (1) $2,000 or (2) 100% of both spouses' combined compensation
minus any contribution to the higher-earning spouse's IRA or Roth IRA. A
maximum of $4,000 may be contributed for each tax year to both your and your
spouse's IRAs or Roth IRAs (only $2,000 in each IRA or Roth IRA). Any
contribution that you make to your or your spouse's IRA must be made by the due
date, not including extensions, for filing your federal income tax return for
the year (generally, April 15 of the following year).
Note that rollover contributions (described below), if properly made, do
not count toward your maximum annual contribution; nor do they affect your
deduction limits, described below.
DEDUCTIONS FOR IRA CONTRIBUTIONS
If neither you, nor your spouse, is an active participant (see A. below),
you may make a contribution to your IRA and your spouse's IRA for that year, up
to the maximum described above, and take a deduction for the entire amount
contributed.
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<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 1999, if you are single, your Threshold AGI Level is $31,000. The
Threshold Level if you are married and file a joint tax return is $51,000, 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 2000 and later years.
Year Single Married - Filing Jointly
---- ------ -----------------------
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
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.
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You can estimate your Deduction Limit by using the calculation below.
(Your Deduction Limit may be slightly higher if you use this formula rather than
the table provided by the IRS. For married joint filers starting in 2007,
substitute $20,000 for $10,000 in the equation.):
$10,000 - Excess AGI
-------------------- x Maximum Allowable Deduction = Deduction Limit
$10,000
You must round up the result to the next highest $10 level (the next highest
number which ends in zero). For example, if the result is $1,525, you must
round it up to $1,530. If the final result is below $200 but above zero, your
Deduction Limit is $200. Your Deduction Limit cannot, in any event, exceed 100%
of your compensation.
If your spouse is an active participant, but you are not, and you are
married filing jointly, your deduction begins to phase out at AGI between
$150,000 and $160,000. If you are married filing jointly and either you or your
spouse was an Active Participant, you must separately determine the IRA
deduction that applies to the contributions that you make to your and your
spouse's IRA. If you were divorced or legally separated (and did not remarry)
before the end of the year, you cannot deduct any contributions you made to your
spouse's IRA. After a divorce or legal separation, you can deduct only the
contributions you made to your own IRA and your deductions are subject to the
adjusted gross income limit under the rules for single individuals.
Examples of Deductibility of IRA Contributions:
Example 1: Ms. Smith, a single person, is an active participant and has an AGI
of $37,619. She calculates her 2000 deductible IRA contribution as
follows:
Her AGI is $37,619
Her Threshold Level is $32,000
Her Excess AGI is (AGI - Threshold Level) or ($37,619-$32,000) = $5,619
Her Maximum Allowable Deduction is $2,000
So, her IRA deduction limit is:
$ 10,000 - $5,619
--------------------- x $2,000 = $876 (rounded to $880)
$10,000
Example 2: Mr. and Mrs. Young file a joint tax return. Each spouse earns more
than $2,000 and one is an active participant. They have a combined
AGI of $55,255. They may each contribute to an IRA and calculate
their 2000 deductible contributions to each IRA as follows:
Their AGI is $55,255
Their Threshold Level is $52,000
Their Excess AGI is (AGI - Threshold Level) or ($55,255 - $52,000) = $3,255
The Maximum Allowable Deduction for each spouse is $2,000
So, each spouse may compute his or her IRA deduction limit as follows:
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$ 10,000 -3,255
------------------- x $2,000 = $1,350 (rounded to $1, 350)
$10,000
Example 3: Mr. Jones, a married person, files a separate tax return and is an
active participant. He has $25,000 of compensation. He cannot make a
deductible contribution to an IRA because a married taxpayer who
files separately, or who is treated as filing separately, cannot
deduct any contribution to an IRA where his AGI exceeds $10,000.
NON-DEDUCTIBLE CONTRIBUTIONS TO IRAS
Even if you are above the Threshold Level and thus may not make a
deductible contribution of $2,000, you may still contribute up to the lesser of
100% of compensation or $2,000 to an IRA. The amount of your contribution which
is not deductible will be a non-deductible contribution to the IRA. You may also
choose to make a contribution nondeductible even if you could have deducted part
or all of the contribution. Interest or other earnings on your IRA contribution,
whether from deductible or non-deductible contributions, will not be taxed until
taken out of your IRA and distributed to you.
If you make a non-deductible contribution to an IRA, you must report the
amount of the non-deductible contribution to the IRS on Form 8606 as a part of
your tax return for the year.
You may make a $2,000 contribution at any time during the year, if your
compensation for the year will be at least $2,000, without having to know how
much will be deductible. When you fill out your return, you may then figure out
how much is deductible.
You may withdraw an IRA contribution made for a year any time before April
15 of the following year. If you do so, you must also withdraw the earnings
attributable to that portion and report the earnings as income for the year for
which the contribution was made. If some portion of your contribution is not
deductible, you may decide either to withdraw the non-deductible amount, or to
leave it in the IRA and designate that portion as a non-deductible contribution
on your tax return.
IRA DISTRIBUTIONS
Generally, IRA distributions which are not rolled over (see "Rollover IRA
Rules," below) are included in your gross income in the year they are received.
Non-deductible IRA contributions, however, are made using income which has
already been taxed (that is, they are not deductible contributions). Thus, the
portion of the IRA distributions consisting of nondeductible contributions will
not be taxed again when received by you. If you make any nondeductible IRA
contributions, each distribution from your IRA(s) will consist of a non-taxable
portion (return of non-deductible contributions) and a taxable portion (return
of deductible contributions, if any, and account earnings). Special tax rules
applicable to lump sum distributions from tax qualified retirement plans are not
applicable to IRA distributions.
Thus, you may not take a distribution which is entirely tax-free. The
following formula is used to determine the non-taxable portion of your
distributions for a taxable year:
<TABLE>
<CAPTION>
<S> <C> <C>
Remaining Non-Deductible Contributions
------------------------------------- x Total Distributions = Nontaxable Distributions
Year-End Total IRA Balances (for the year) (for the year)
</TABLE>
To figure the year-end total IRA balance, you treat all of your IRAs as a
single IRA. This includes all regular IRAs (whether accounts or annuities), as
well as Simplified Employee Pension (SEP) IRAs, and Rollover IRAs. You also add
back the distributions taken during the year.
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Example: An individual makes the following contributions to his or her IRA(s).
Year Deductible Non-Deductible
---- ---------- --------------
1986 $2,000 0
1987 1,800 0
1990 1,000 $1,000
1992 600 1,400
------ ------
$5,400 $2,400
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
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:
Total non-deductible contributions $2,400
------ x $3,000 = $810
Total account balance in the IRAs, plus distributions $9,000
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 70-1/2, 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 59- 1/2, 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.
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PENALTIES FOR PREMATURE DISTRIBUTIONS
If you receive a distribution from your IRA before you reach age 59-1/2, an
additional tax of 10 percent will be imposed under Code Section 72(t), unless
the distribution (a) occurs because of your death or disability, (b) is received
as a part of a series of substantially equal payments over your life or life
expectancy, or the life expectancies of you and your beneficiary(ies), (c) is
received as a part of a series of substantially equal payments over the lives or
life expectancy of you and your designated beneficiary, (d) is contributed to a
rollover IRA (or, if the amount consisted of just eligible rollover
contributions and earnings from a qualified plan or tax-sheltered annuity, to a
qualified plan or a tax-sheltered annuity, respectively) if the rollover is
completed within 60 days following the withdrawal; (e) to pay for medical
expenses which exceed 7.5% of your adjusted gross income, (f) to pay for health
insurance for an individual who has separated from employment and who has
received unemployment compensation under a federal or state program of at least
12 weeks, (g) for qualified first-time homebuyer expenses of you or certain
family members, or (h) for qualified higher education expenses of you or certain
family members. "Qualified first-time homebuyer expenses" are withdrawals of up
to $10,000 from an IRA that are used within 120 days of distribution for the
cost to acquire, construct or reconstruct a principal residence for yourself,
your spouse, or your or your spouse's child or grandchild (including customary
settlement, financing or closing costs). "Qualified higher education expenses"
include tuition, fees, books, supplies and equipment that is required for you,
your spouse, or your or your spouse's child or grandchild for enrollment and
attendance at a post-secondary institution. Room and board is a qualifying
higher education expense if the student is attending at least half-time.
MINIMUM DISTRIBUTIONS
Under the rules set forth in Code Section 408(b)(3) and Section 401(a)(9),
you may not leave the funds in your contract indefinitely. Certain minimum
distributions are required. These required distributions may be taken in one of
two ways: (a) by withdrawing the balance of your contract by a "required
beginning date," usually April 1 of the year following the date at which you
reach age 70-1/2; or (b) by withdrawing periodic distributions of the balance
in your contract by the required beginning date. These periodic distributions
may be taken over (a) your life; (b) the lives of you and your designated
beneficiary; (c) a period not extending beyond your life expectancy; or (d) a
period not extending beyond the joint life expectancy of you and your designated
beneficiary. Additional distribution rules apply if you die before you have
withdrawn the entire balance of your IRA.
If you do not satisfy the minimum distribution requirements, then, pursuant
to Code Section 4974, you may have to pay a 50% excise tax on the amount not
distributed as required that year.
The foregoing minimum distribution rules are discussed in detail in IRS
Publication 590, "Individual Retirement Arrangements."
WITHHOLDING
Unless you elect not to have withholding apply, any distribution from your
IRA will be subject to withholding. Generally, 10% of the amount of the
distribution will be withheld. At the time of distribution, you will be
notified that you may choose whether or not to have withholding from a
distribution.
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.
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Borrowing any money from (or by use of) this IRA would, under Code Section
408(e)(3), cause the contract to cease to be an Individual Retirement Annuity
and would result in the fair market value of the annuity being included in the
Owner's gross income in the taxable year in which such loan is made.
Use of this contract as security for a loan, if such loan were otherwise
permitted, would, under Code Section 408(e)(4), cause the portion so used to be
treated as a taxable distribution includable in your gross income for the year
during which the contract is so used.
Any amounts which are included in your taxable income as a result of any
prohibited transaction, borrowing or use as security for a loan may also result
in the 10% premature distribution penalty.
EXCESS CONTRIBUTIONS
Code Section 4973 imposes a six percent excise tax as a penalty for an
excess contribution to an IRA. An excess contribution is the excess of the
deductible and nondeductible amounts contributed by the Owner to all IRAs
(including Roth IRAs) for that year over the lesser of his or her taxable
compensation or $2,000. If the excess contribution plus any net income
attributable thereto is not withdrawn by the due date of your tax return
(including extensions) you will be subject to the penalty. Earnings on any
excess contributions that are timely withdrawn are taxable in the year the
excess contribution was made and may be subject to the 10% premature
distribution penalty if you are less than age 59-1/2 (see above).
ESTATE TAX
Your IRA will be included in your estate and will be subject to estate tax,
although certain credits or deductions may be available. Your designation of a
beneficiary for your IRA is not treated as a gift for gift tax purposes.
IRS APPROVAL
Your contract and IRA endorsement have been approved by the Internal
Revenue Service as a tax qualified Individual Retirement Annuity. Such approval
by the Internal Revenue Service is a determination only as to the form of the
annuity and does not represent a determination of the merits of such annuity.
This disclosure statement is intended to provide an overview of the
applicable tax laws relating to Individual Retirement Annuities. It is not
intended to constitute a comprehensive explanation as to the tax consequences of
your IRA. As with all significant transactions such as the establishment or
maintenance of, or withdrawal from an IRA, appropriate tax and legal counsel
should be consulted. Further information may also be acquired by contacting
your IRS District Office or consulting IRS Publication 590.
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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 May 1, 2000
for Separate Account VA-1.
- ------------------------------------------------------------------------------
(Name)
- ------------------------------------------------------------------------------
(Street)
- ------------------------------------------------------------------------------
(City) (State) (Zip Code)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
54
<PAGE>
SEPARATE ACCOUNT VA-1 OF
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
THE CHAIRMAN
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 May 1, 2000
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 (the "Separate Account") 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 May 1, 2000. 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. 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>
<CAPTION>
<S> <C>
General Information..................................................... 2
Regulation and Reserves................................................. 2
Experts................................................................. 3
Principal Underwriter................................................... 3
Administration of the Contracts......................................... 4
Legal Matters........................................................... 4
Tax Status of the Contracts............................................. 4
Limitations on Annuity Payment Options.................................. 5
A. Limitations on Choice of Annuity Payment Option................ 5
Annuity Payments........................................................ 7
A. Gender of Annuitant............................................ 7
B. Misstatement of Age or Sex and Other Errors.................... 8
Change of Investment Adviser or Investment Policy....................... 8
Performance Data for the Divisions...................................... 8
Financial Statements.................................................... 13
Index to Financial Statements........................................... F-1
</TABLE>
1
<PAGE>
GENERAL INFORMATION
American Franklin is a legal reserve stock life, accident and health
insurance company organized under the laws of the State of Illinois in 1981.
American Franklin is a wholly-owned subsidiary of The Franklin Life Insurance
Company ("The Franklin"). The Franklin is a legal reserve stock life insurance
company organized under the laws of the State of Illinois in 1884. The Franklin
issues individual life insurance, annuity and accident and health insurance
policies, group annuities and group life and health insurance and offers a
variety of whole life, life, retirement income and level and decreasing term
insurance plans. Its home office is located at #1 Franklin Square, Springfield,
Illinois 62713.
The Franklin is a wholly-owned subsidiary of AGC Life Insurance Company
("AGC Life"). American General Corporation ("American General") owns all of the
outstanding shares of common stock of AGC Life. The address of AGC Life is
American General Center, Nashville, Tennessee 37250-0001. The address of
American General is 2929 Allen Parkway, Houston, Texas 77019-2155. American
General is one of the largest diversified financial services organizations in
the United States. American General's operating subsidiaries are leading
providers of retirement services, consumer loans and life insurance. American
General was incorporated as a general business corporation in Texas in 1980 and
is the successor to American General Insurance Company, an insurance company
incorporated in Texas in 1926.
REGULATION AND RESERVES
American Franklin is subject to regulation and supervision by the insurance
departments of the states in which it is licensed to do business. This
regulation covers a variety of areas, including benefit reserve requirements,
adequacy of insurance company capital and surplus, various operational
standards, and accounting and financial reporting procedures. American
Franklin's operations and accounts are subject to periodic examination by
insurance regulatory authorities.
Under insurance guaranty fund laws in most states, insurers doing business
therein can be assessed up to prescribed limits for insurance contract losses,
if covered, incurred by insolvent companies. The amount of any future
assessments of American Franklin under these laws cannot be reasonably
estimated. Most of these laws do provide, however, that an assessment may be
excused or deferred if it would threaten an insurer's own financial strength.
Although the federal government generally has not directly regulated the
business of insurance, federal initiatives often have an impact on the business
in a variety of ways. Federal measures that may adversely affect the insurance
business include employee benefit regulation, tax law changes affecting the
taxation of insurance companies or of insurance products, changes in the
relative desirability of various personal investment vehicles, and removal of
impediments on the entry of banking institutions into the business of insurance.
Also, both the executive and legislative branches of the federal
2
<PAGE>
government have under consideration various insurance regulatory matters, which
could ultimately result in direct federal regulation of some aspects of the
insurance business. It is not possible to predict whether this will occur or, if
so, what the effect on American Franklin would be.
Pursuant to state insurance laws and regulations, American Franklin is
obligated to carry on its books, as liabilities, reserves to meet its
obligations under outstanding insurance contracts. These reserves are based on
assumptions about, among other things, future claims experience and investment
returns. Neither the reserve requirements nor the other aspects of state
insurance regulation provide absolute protection to holders of insurance
contracts, including the Contracts, if American Franklin were to incur claims or
expenses at rates significantly higher than expected, for example, due to
acquired immune deficiency syndrome or other infectious diseases or
catastrophes, or significant unexpected losses on its investments.
EXPERTS
The statement of net assets as of December 31, 1999 and the related
statement of operations for the year then ended, and the statements of changes
in net assets for each of the two years in the period then ended of the Separate
Account, 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, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999, 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 which offers 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 1999, 1998 and 1997,
commissions in the amount of $3,453,466, $5,234,337 and $1,740,597,
respectively, were paid on the Contracts.
The securities offered pursuant to the Contracts are offered on a
continuous basis.
3
<PAGE>
ADMINISTRATION OF THE CONTRACTS
While American Franklin has primary responsibility for all administration
of the Contracts, American General Life Companies ("AGLC") has agreed pursuant
to a services agreement among American General Corporation and almost all of its
subsidiaries to provide all administrative services in connection with the
Contracts, including the issuance of the Contracts and the maintenance of
Owners' records. American Franklin and AGLC are parties to the services
agreement. Pursuant to such agreement, American Franklin reimburses AGLC for
the costs and expenses which AGLC incurs in providing such administrative
services in connection with the Contracts, but neither American Franklin nor
AGLC incurs a loss or realizes a profit by reason thereof. During 1999, 1998,
and 1997, $472,681, $265,992 and $4,750, respectively, was paid by American
Franklin to AGLC for these services. American Franklin's ability to administer
the Contracts could be adversely affected should AGLC terminate or be unable to
continue providing administrative services pursuant to the services agreement.
LEGAL MATTERS
Sutherland Asbill & Brennan LLP of Washington, D.C. has provided advice on
certain legal matters.
TAX STATUS OF THE CONTRACTS
Tax law imposes several requirements that variable annuities must satisfy
in order to receive the tax treatment normally accorded to annuity contracts.
DIVERSIFICATION REQUIREMENTS. Federal tax laws require that the
investments of each investment division of the separate account underlying the
contracts be "adequately diversified" in order for the contracts to be treated
as annuity contracts for Federal income tax purposes. It is intended that each
investment division, through the fund in which it invests, will satisfy these
diversification requirements.
OWNER CONTROL. In certain circumstances, Owners of variable annuity
contracts have been considered for Federal income tax purposes to be the Owners
of the assets of the separate account supporting their contracts due to their
ability to exercise investment control over those assets. When this is the
case, the contract Owners have been currently taxed on income and gains
attributable to the Variable Account assets. There is little guidance in this
area, and some features of our contracts, such as the flexibility of an Owner to
allocate purchase payments and transfer amounts among the investment divisions
of the separate account, have not been explicitly addressed in published
rulings. While we believe that the contracts do not give Owners investment
control over separate account assets, we reserve the right to modify the
contracts as necessary to prevent an Owner from being treated as the Owner of
the separate account assets supporting the contract.
4
<PAGE>
LIMITATIONS ON ANNUITY PAYMENT OPTIONS
A. LIMITATIONS ON CHOICE OF ANNUITY PAYMENT OPTION
Described below are certain limitations on Annuity Payment Options based on
American Franklin's current understanding of the distribution rules generally
applicable to Non-Qualified Contracts, Section 457 Contracts and to Qualified
Contracts. Various questions exist, however, about the application of the
distribution rules to distributions from the Contracts and their effect on
Annuity Payment Option availability thereunder.
The Internal Revenue Service has proposed regulations relating to required
distributions from Section 457 Plans and Qualified Plans. These proposed
regulations may limit the availability of the Annuity Payment Options for
Contracts issued in connection with such plans. The proposed regulations are
generally effective for calendar years after 1984; persons contemplating the
purchase of a Contract should consult a qualified tax advisor concerning the
effect of the proposed regulations on the Annuity Payment Option or Options he
or she is contemplating.
FIRST OPTION -- LIFE ANNUITY. Under Qualified Contracts, if the Annuitant
dies before annuity payments have commenced, this Annuity Payment Option is
available to the beneficiary only if the beneficiary is an individual designated
in the Contract and distributions to the beneficiary begin not later than one
year after the date of the Annuitant's death (except that distributions to a
designated beneficiary who is the surviving spouse of the Annuitant need not
commence earlier than the date on which the Annuitant would have attained age
70- 1/2). If the surviving spouse of the Annuitant is the designated
beneficiary and such surviving spouse dies before annuity payments to such
spouse have commenced, the surviving spouse generally will be treated as the
Annuitant for purposes of the distribution requirements.
Under Non-Qualified Contracts, if any Owner dies before annuity payments
have commenced, this Annuity Payment Option is available to a non-spouse
designated beneficiary only if the beneficiary is an individual designated in
the Contract and distributions to the designated beneficiary begin not later
than one year after the date of the Owner's death (or the substituted surviving
spouse's death, as the case may be). If the surviving spouse of the Owner is
the designated beneficiary, the distribution requirements are applied as if the
surviving spouse was the Owner.
Under Section 457 Contracts, if the Annuitant dies before annuity payments
have commenced, this Annuity Payment Option is not available to the beneficiary
unless the designated beneficiary is the surviving spouse of the Annuitant and
distributions to the designated beneficiary begin not later than the later of
(i) one year after the date of the Annuitant's death or (ii) the date on which
the Annuitant would have attained age 70- 1/2.
SECOND OPTION -- LIFE ANNUITY WITH PAYMENT FOR A FIXED TERM OF YEARS.
Under Qualified Contracts, this Annuity Payment Option is available only if the
selected period does not extend beyond the life expectancy of the Annuitant (or
the joint life expectancies of the Annuitant and his or her designated
beneficiary). Further, if the
5
<PAGE>
Annuitant dies before annuity payments have commenced, this Annuity Payment
Option is not available to a beneficiary unless (i) the beneficiary is an
individual designated in the Contract, (ii) the selected period does not extend
beyond the life expectancy of the designated beneficiary and (iii) the
distribution to the designated beneficiary commences not later than one year
after the date of the Annuitant's death (except that distributions to a
designated beneficiary who is the surviving spouse of the Annuitant need not
commence earlier than the date on which the Annuitant would have attained age
70-1/2). If the surviving spouse of the Annuitant is the designated beneficiary
and the surviving spouse dies before annuity payments to such spouse have
commenced, the surviving spouse generally will be treated as the Annuitant for
purposes of the distribution requirements. This Annuity Payment Option is
available in connection with Individual Retirement Annuities or in connection
with Section 403(b) annuity purchase plans only if certain minimum distribution
incidental benefit requirements of the proposed regulations are met.
Under Non-Qualified Contracts, if any Owner dies before annuity payments
have commenced, this Annuity Payment Option is available to a non-spouse
designated beneficiary only if the beneficiary is an individual designated in
the Contract, distributions to the designated beneficiary begin not later than
one year after the date of the Owner's death (or the substituted surviving
spouse's death, as the case may be), and the selected period does not extend
beyond the life expectancy of the designated beneficiary. If the surviving
spouse of the deceased Owner is the designated beneficiary, the distribution
requirements are applied as if the surviving spouse was the Owner.
Under Section 457 Contracts, this Annuity Payment Option is not available
unless the selected period does not extend beyond the life expectancy of the
Annuitant (or the joint life expectancy of the Annuitant and his or her
designated beneficiary who is an individual designated in the Contract).
Further, if the Annuitant dies before annuity payments have commenced, this
Annuity Payment Option is not available to the beneficiary unless (a) the
designated beneficiary is the surviving spouse of the Annuitant, (b) the
selected period does not extend beyond the life expectancy of the designated
beneficiary and (c) distributions to the designated beneficiary begin not later
than the later of (i) one year after the date of the Annuitant's death or (ii)
the date on which the Annuitant would have attained age 70- 1/2. This Annuity
Payment Option is also not available under Section 457 Contracts unless certain
minimum distribution rules similar to the minimum distribution incidental
benefit requirements of proposed regulations are met.
THIRD OPTION -- JOINT AND LAST SURVIVOR LIFE ANNUITY. Under Section 457
Contracts and Qualified Contracts, this Annuity Payment Option is available only
if the secondary annuitant is the spouse of the Annuitant or if certain minimum
distribution incidental benefit requirements of the proposed regulations are
met. Further, if the Annuitant dies before annuity payments have commenced,
this Annuity Payment Option is not available to a beneficiary. Under Non-
Qualified Contracts, if any Owner dies before Annuity payments have commenced,
this Annuity Payment Option is available only if the designated beneficiary is
the surviving spouse of the deceased Owner.
6
<PAGE>
FOURTH OPTION -- INCOME PAYMENTS FOR A FIXED TERM OF YEARS. Under
Qualified Contracts, this Annuity Payment Option is available only if the
limitations described in the Second Option, above, applicable to such Qualified
Contracts, are satisfied, except that this Annuity Payment Option is otherwise
available to a designated beneficiary where the Annuitant dies before annuity
payments have commenced if the designated period does not exceed a period that
terminates five years after the death of the Annuitant or the substituted
surviving spouse, as the case may be. In addition, this Annuity Payment Option
is not available if the number of years in the selected period over which
Annuity payments would otherwise be paid plus the attained age of the Annuitant
at the Annuity Commencement Date would exceed 95.
Under Non-Qualified Contracts this Annuity Payment Option is not available
to a beneficiary where the Annuitant dies before annuity payments have
commenced, unless either the limitations described in the Second Option, above,
applicable to such Non-Qualified Contracts are satisfied, or the selected period
does not exceed a period that terminates five years after the death of the
Annuitant or the substituted surviving spouse, as the case may be.
Under Section 457 Contracts this Annuity Payment Option is not available
unless the limitations described in the Second Option, above, applicable to
Section 457 Contracts, are satisfied. This Annuity Payment Option is also
available to a designated beneficiary where the Annuitant dies before Annuity
payments have commenced if the designated period does not exceed a period that
terminates five years after the death of the Annuitant. If the surviving spouse
of the Annuitant is the designated beneficiary and the surviving spouse dies
before annuity payments to such spouse have commenced, the surviving spouse will
be treated as the Annuitant for purposes of the preceding sentence. In
addition, this Annuity Payment Option is not available if the number of years in
the selected period over which annuity payments would otherwise be paid plus the
attained age of the Annuitant at the Annuity Commencement Date would exceed 95.
FIFTH OPTION -- PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Annuity
Payment Option is not available to a beneficiary under a Non-Qualified Contract
where the Annuitant dies before annuity payments have commenced, unless the
amount selected results in a distribution period which either satisfies the
limitations described in the Second Option, above, applicable to Non-Qualified
Contracts, or which terminates not more than five years after the death of the
Annuitant or the substitute surviving spouse, as the case may be.
ANNUITY PAYMENTS
A. GENDER OF ANNUITANT
When annuity payments are based on life expectancy, the amount of each
annuity payment ordinarily will be higher if the Annuitant or other measuring
life is a male, as compared with a female under an otherwise identical Contract.
This is because, statistically, females tend to have longer life expectancies
than males.
7
<PAGE>
However, there will be no differences between males and females in any
jurisdiction, including Montana, where such differences are not permitted.
American Franklin will also make available Contracts with no such differences in
connection with certain employer-sponsored benefit plans. Employers should be
aware that, under most such plans, Contracts that make distinctions based on
gender are prohibited by law.
B. MISSTATEMENT OF AGE OR SEX AND OTHER ERRORS
If the age or sex of an Annuitant has been misstated to American Franklin,
the benefits payable will be those which the purchase payments paid would have
purchased at the correct age and sex. If American Franklin made any
overpayments because of incorrect information about age or sex, or any error or
miscalculation, American Franklin will deduct the overpayment from the next
payment or payments due. American Franklin will add any underpayments to the
next payment. The amount of any adjustment will be credited or charged with
interest at the assumed interest rate used in the Contract's annuity tables.
CHANGE OF INVESTMENT ADVISER OR INVESTMENT POLICY
Unless otherwise required by law or regulation, neither the investment
adviser to any Portfolio 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 the Separate Account 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 the Separate Account. Such results are not an estimate or
guarantee of future investment performance, and do not represent the actual
experience of amounts invested by a particular Owner. The investment experience
for each Division will reflect the investment performance of the separate
investment Portfolio then funding such Division for the periods stated.
AVERAGE ANNUAL TOTAL RETURN CALCULATIONS
Each Division's average annual total return quotation will be computed in
accordance with a standard method prescribed by the Securities and Exchange
Commission. The average annual total return for a Division for a specific
period is found by first taking a hypothetical $1,000 investment in the
Division's Accumulation Units on the first day of the period at the maximum
offering price, which is the Accumulation Unit value per unit ("initial
investment"), and computing the ending redeemable value ("redeemable value") of
that investment at the end of the period. The redeemable value reflects the
effect of the applicable Surrender Charge that may be imposed at the end of
8
<PAGE>
the period as well as all other recurring charges and fees applicable under the
Contract to all Owner accounts. Such other charges and fees include the
mortality and expense risk charge, the administrative expense charge, and a pro
rata portion of the Annual Contract Fee for the relevant period. Any premium
taxes will not be reflected. The redeemable value is then divided by the initial
investment and this quotient is taken to the Nth root (N represents the number
of years in the period) and 1 is subtracted from the result, which is then
expressed as a percentage.
9
<PAGE>
AVERAGE ANNUAL TOTAL RETURN AS OF 12/31/99
<TABLE>
<CAPTION>
DIVISION 1 YEAR FROM INCEPTION*
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Fidelity VIP Equity-Income (1.22)% 11.34%
- --------------------------------------------------------------------------------------------------
Fidelity VIP Growth 29.46% 30.08%
- --------------------------------------------------------------------------------------------------
Fidelity VIP High Income 0.58% 4.55%
- --------------------------------------------------------------------------------------------------
Fidelity VIP Money Market (2.35)% 1.95%
- --------------------------------------------------------------------------------------------------
Fidelity VIP Overseas 34.58% 20.30%
- --------------------------------------------------------------------------------------------------
Fidelity VIPII Asset Manager 3.48% 12.68%
- --------------------------------------------------------------------------------------------------
Fidelity VIPII Contrafund 16.46% 23.49%
- --------------------------------------------------------------------------------------------------
Fidelity VIPII Index 500 12.77% 24.19%
- --------------------------------------------------------------------------------------------------
Fidelity VIPII Investment Grade Bond (8.49)% 2.19%
- --------------------------------------------------------------------------------------------------
MFS Capital Opportunities 39.61% 31.50%
- --------------------------------------------------------------------------------------------------
MFS Emerging Growth 68.20% 39.48%
- --------------------------------------------------------------------------------------------------
MFS Growth With Income (0.86)% 16.07%
- --------------------------------------------------------------------------------------------------
MFS Research 16.26% 19.49%
- --------------------------------------------------------------------------------------------------
MFS Total Return (4.42)% 8.27%
- --------------------------------------------------------------------------------------------------
MFS Utilities 22.93% 22.46%
- --------------------------------------------------------------------------------------------------
* Inception dates for the Divisions are: February 28, 1997
</TABLE>
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
10
<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
<TABLE>
<CAPTION>
Where:
<S> <C>
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.
</TABLE>
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
11
<PAGE>
method, the current yield quotation is based on a seven-day period and computed
as follows: the net change in the Accumulation Unit value during the period is
divided by the Accumulation Unit value at the beginning of the period to obtain
the base period return; the base period return is then multiplied by the
fraction 365/7 to obtain the current yield figure, which is carried to the
nearest one-hundredth of one percent. Realized capital gains or losses,
unrealized appreciation or depreciation or income other than investment income
of the Division's Portfolio are not included in the calculation.
The VIP Money Market Division's effective yield will be determined by
taking the base period return (computed as described above) and calculating the
effect of assumed compounding. The formula for the effective yield is:
(base period return + 1) 365/7-1.
Yield and effective yield will not reflect the deduction of Surrender
Charges or premium taxes that may be imposed upon the redemption of Accumulation
Units.
PERFORMANCE COMPARISONS
The performance of each or all of the available Divisions of the Separate
Account 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
the Separate Account. 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
12
<PAGE>
intermediate and long term bonds during various market cycles; and (5) the
Morgan Stanley Capital International Europe Australia Far East Index, an
unmanaged index that is generally considered to be representative of major non-
United States stock markets.
FINANCIAL STATEMENTS
The financial statements for the Separate Account 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.
13
<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, 1999..................... F-3 - F-5
Statement of Operations for the year ended December 31, 1999... F-6 - F-8
Statement of Changes in Net Assets for the years
ended December 31, 1999 and 1998............................... 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, 1999, 1998 and 1997............................... F-20
Balance Sheet, December 31, 1999 and 1998...................... F-21
Statement of Shareholder's Equity for the years
ended December 31, 1999, 1998 and 1997........................ F-22
Statement of Comprehensive Income (Loss) for the years
ended December 31, 1999, 1998 and 1997......................... F-22
Statement of Cash Flows for the years ended
December 31, 1999, 1998 and 1997............................... F-23
Notes to Financial Statements.................................. F-24 - F-33
</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 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
-------------------------
Ernst & Young LLP
Chicago, Illinois
February 9, 2000
F-2
<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
F-3
<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
F-4
<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
F-5
<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
F-6
<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
F-7
<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
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, 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 - 176,490 211,816 5,202 (141,543)
investments
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 - 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
-------------------------------------------------------------------------------
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
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, 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 (6,167) 2,023 473,358 199,923 307,184
investments
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
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
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
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
F-11
<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.
F-12
<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.
F-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
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
=====================================================================
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>
F-14
<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
=============================================================================
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>
F-15
<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
====================================================================
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>
*Formerly known as MFS Value Division
F-16
<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.
F-17
<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.
F-18
<PAGE>
REPORT OF INDEPENDENT AUDITORS
___________________________________
Board of Directors
and Shareholder
The American Franklin Life Insurance Company
We have audited the accompanying balance sheet 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, 1999 and 1998, and the related
statements of operations, shareholder's equity, comprehensive income (loss), and
cash flows for each of the three years in the period ended December 31, 1999.
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 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. 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, 1999 and 1998, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
/s/ Ernst & Young LLP
Ernst & Young LLP
Chicago, Illinois
February 18, 2000
F-19
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31
---------------------------------------------------------
1999 1998 1997
---------------------------------------------------------
<S> <C> <C> <C>
Revenues
Premiums and other considerations $ 10,087 $ 7,725 $ 4,397
Net investment income 2,541 2,419 2,530
Realized investment gains 21 47 283
Other income 32,418 18,678 14,578
---------------------------------------------------------
Total revenues 45,067 28,869 21,788
Benefits and expenses
Insurance and annuity benefits 9,040 4,889 3,674
Operating cost and expenses 21,524 15,910 9,635
Commissions and allowances 28,533 27,695 20,096
Change in deferred policy acquisition costs and cost
of insurance purchased (16,871) (20,354) (15,351)
Litigation settlement - 8,064 -
---------------------------------------------------------
Total benefits and expenses 42,226 36,204 18,054
---------------------------------------------------------
Income (loss) before income taxes 2,841 (7,335) 3,734
Income tax expense (benefit)
Current (1,449) (1,247) 715
Deferred 1,358 (2,270) 244
---------------------------------------------------------
Total income tax expense (benefit) (91) (3,517) 959
---------------------------------------------------------
Net income (loss) $ 2,932 $ (3,818) $ 2,775
=========================================================
</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
---------------------------
ASSETS 1999 1998
<S> <C> <C>
Investments
Fixed maturity securities (amortized cost: $15,746; $31,219) $ 15,852 $ 32,587
Policy loans 17,037 12,371
Short-term investments 6,733 -
---------------------------
Total investments 39,622 44,958
Cash 13,552 14,211
Accrued investment income 338 408
Amounts recoverable from reinsurers 10,875 10,314
Deferred policy acquisition costs 70,989 52,352
Cost of insurance purchased 7,884 8,941
Insurance premiums in course of settlement 795 1,620
Other assets 1,519 1,922
Assets held in separate accounts 644,899 442,801
---------------------------
Total assets $ 790,473 $ 577,527
===========================
LIABILITIES
Insurance and annuity liabilities
Policy reserves, contract claims and other policyholders' funds $ 9,804 $ 16,965
Universal life contracts 40,493 31,150
Annuity contracts 7,246 5,376
Unearned revenue 10,127 9,591
Income tax liabilities
Current (2,565) (1,220)
Deferred (3,288) (4,464)
Accrued expenses and other liabilities 17,237 25,402
Liabilities related to separate accounts 644,899 442,801
---------------------------
Total liabilities 723,953 525,601
SHAREHOLDER'S EQUITY
Common stock ($5 par value; 500,000 shares authorized,
issued and outstanding) 2,500 2,500
Paid-in capital 63,437 51,437
Accumulated other comprehensive income 92 430
Retained earnings (deficit) 491 (2,441)
---------------------------
Total shareholder's equity 66,520 51,926
---------------------------
Total liabilities and shareholder's equity $ 790,473 $ 577,527
===========================
</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
1999 1998 1997
---------------------------------
<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 51,437 25,373 25,373
Capital contribution 12,000 26,064 -
---------------------------------
Balance at end of year 63,437 51,437 25,373
---------------------------------
Retained earnings (deficit)
Balance at beginning of year (2,441) 1,377 (1,398)
Net income (loss) 2,932 (3,818) 2,775
---------------------------------
Balance at end of year 491 (2,441) 1,377
---------------------------------
Accumulated other comprehensive income
Balance at beginning of year 430 398 391
Change during the year (520) 49 10
Amounts applicable to deferred federal income taxes 182 (17) (3)
---------------------------------
Balance at end of year 92 430 398
---------------------------------
Total shareholder's equity at end of year $ 66,520 $ 51,926 $ 29,648
=================================
</TABLE>
STATEMENT OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
<TABLE>
<CAPTION>
For the years ended December 31
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Net income (loss) $ 2,932 $ (3,818) $ 2,775
Other comprehensive income (loss)
Gross change in unrealized gains (losses) on
securities (pretax: $(499); $96; $293) (324) 63 191
Less: gains realized in net income
(pretax:$21; $47, $283) 14 31 184
---------------------------------
Change in net unrealized gains (losses) on
securities (pretax: $(520); $49; $10) (338) 32 7
---------------------------------
Comprehensive income (loss) $ 2,594 $ (3,786) $ 2,782
=================================
</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
1999 1998 1997
-------------------------------------------------
<S> <C> <C> <C>
Operating activities
Net income (loss) $ 2,932 $ (3,818) $ 2,775
Reconciling adjustments to net cash used for
operating activities
Policy reserves, claims and other
policyholders' funds (2,994) 12,783 18,078
Realized investment gains (21) (47) (283)
Deferred policy acquisition costs and cost of
insurance purchased (16,871) (20,354) (15,351)
Charges on universal life contracts, net of
interest credited (28,863) (21,569) (17,369)
Change in other assets and liabilities (7,621) 11,343 (2,939)
------------------------------------------------
Net cash used for operating activities (53,438) (21,662) (15,089)
------------------------------------------------
Investing activities
Investment purchases
Available-for-sale (30,018) (26,271) (6,900)
Other (4,721) (5,794) (2,766)
Investment calls, maturities and sales
Available-for-sale 45,751 16,568 17,557
Other 55 504 142
Net increase in short term investments (6,733) - -
------------------------------------------------
Net cash provided by (used for)
investing activities 4,334 (14,993) 8,033
------------------------------------------------
Financing activities
Policyholder account deposits 167,565 191,502 99,023
Policyholder account withdrawals (131,120) (173,049) (88,026)
Proceeds from intercompany borrowings - 18,896 15,320
Repayments of intercompany borrowings - (18,896) (15,320)
Capital contribution 12,000 26,064 -
------------------------------------------------
Net cash provided by financing activities 48,445 44,517 10,997
------------------------------------------------
Net increase (decrease) in cash (659) 7,862 3,941
Cash at beginning of year 14,211 6,349 2,408
------------------------------------------------
Cash at end of year $ 13,552 $ 14,211 $ 6,349
================================================
</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. AMFLIC's ultimate parent is American General
Corporation (AGC).
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).
Management must make estimates and assumptions that affect amounts reported
in the financial statements and in disclosures of contingent assets and
liabilities. Ultimate results could differ from our estimates.
1.3 Investments
-----------
Fixed Maturity Securities. All fixed maturity securities were classified as
available-for-sale and reported at fair value. We adjust related balance
sheet accounts as if the unrealized gains (losses) had been realized and
record the net adjustment in accumulated other comprehensive income (loss)
in shareholder's equity. If the fair value of a security classified as
available-for-sale declines below its cost and we consider the decline to
be other than temporary, we reduce the security's amortized cost to its
fair value and recognize a realized loss.
Policy Loans. Policy loans are reported at unpaid principal balance.
Short-Term Investments. Short-term investments include investments with
maturities of less than one year at the date of acquisition and are carried
at amortized cost, which approximates fair value.
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, as appropriate.
Mortgage-Backed Securities. We recognize income on mortgage-backed
securities using a constant effective yield based on estimated prepayments
of the underlying mortgages. If actual prepayments differ from estimated
prepayments, we calculate a new effective yield and adjust the net
investment in the security accordingly. The adjustment is recognized in net
investment income.
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 variable universal life and annuities, for which the
investment risk lies predominantly with the contract holder. The 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.
F-24
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
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. We adjust the DPAC balance and
related expense when our estimate of future gross profits changes
significantly. 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.
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 (loss) in shareholder's equity.
We review the carrying amount of DPAC on at least an annual basis. We
consider estimated future gross profits or future premiums, expected
mortality, interest earned and credited rates, persistency, and expenses to
determine whether the carrying amount is recoverable. Any amounts deemed
unrecoverable are charged to expense.
1.6 Cost of Insurance Purchased (CIP)
---------------------------------
The cost assigned to AMFLIC 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%. CIP is charged to expense and adjusted for the impact of net
unrealized gains (losses) on securities in the same manner as DPAC. We
review 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. AMFLIC normally cannot change or cancel these
contracts.
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 our estimates of the cost of
future policy benefits, using the net level premium method. Interest
assumptions used to compute reserves ranged from 3% to 5.5% at December 31,
1999.
1.8 Premium Recognition
-------------------
Most receipts for annuities and interest-sensitive life insurance policies
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 Reinsurance
-----------
AMFLIC limits its exposure to loss on any individual life to $100,000 by
ceding additional risks through reinsurance contracts with other insurers,
including FLIC. We diversify our risk of reinsurance loss by ceding to a
number of reinsurers that have strong financial strength ratings. If a
reinsurer is not able to meet its obligations, AMFLIC remains liable. We
consider the likelihood of a material reinsurance liability not being met
by a reinsurer to be remote.
AMFLIC records a receivable for the portion of benefits paid and insurance
liabilities that have been reinsured. The cost of reinsurance is recognized
over the life of the reinsured policies using assumptions consistent with
those used to account for the underlying policies.
F-25
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1.10 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, using 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.
1.11 Reclassification
----------------
Certain amounts in the 1997 and 1998 financial statements have been
reclassified to conform to the 1999 presentation.
1.12 Future Accounting Changes
-------------------------
In 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires all derivative
instruments to be recognized at fair value in the balance sheet. Changes
in the fair value of a derivative instrument will be reported as earnings
or other comprehensive income, depending upon the intended use of the
derivative instrument. We will adopt SFAS 133 on January 1, 2001. We do
not expect adoption to have a material impact on AMFLIC's results of
operations and financial position.
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, 1999
----------------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In thousands Cost Gains Losses Value
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate bonds
Investment grade $ 5,803 $ 135 $ 79 $ 5,859
Below investment grade 678 6 1 683
Public utilities 1,508 77 - 1,585
Mortgage-backed 944 37 - 981
U.S. government 6,611 15 90 6,536
States/political subdivisions 202 6 - 208
----------------------------------------------------------
Total fixed maturity securities $ 15,746 $ 276 $ 170 $ 15,852
==========================================================
</TABLE>
<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>
F-26
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
--------------------------------------------
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2.1 Fixed Maturity Securities (continued)
-------------------------------------
Net Unrealized Gains (Losses). Net unrealized gains (losses) on fixed
maturity securities included in accumulated other comprehensive income
(loss) at December 31 were as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998
------------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 276 $ 1,368
Gross unrealized losses (170) -
DPAC fair value adjustment 560 (86)
CIP fair value adjustment (525) (621)
Deferred federal income taxes (49) (231)
--------------------
Net unrealized gains on securities $ 92 $ 430
====================
</TABLE>
Maturities. The contractual maturities of fixed maturity securities at
December 31, 1999 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 $ 1,147 $ 1,150
In years two through five 10,060 10,128
In years six through ten 2,182 2,228
After ten years 1,413 1,365
Mortgage-backed securities 944 981
----------------------------
Total fixed maturity securities $ 15,746 $15,852
============================
</TABLE>
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. AMFLIC may sell
investments before maturity to achieve corporate requirements and
investments strategies.
2.2 Investment Income
-----------------
Investment income was as follows:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturity securities $ 1,461 $ 1,592 $ 2,291
Policy loans 698 445 264
Other investments 547 473 12
---------------------------------------
Gross investment income 2,706 2,510 2,567
Investment expense 165 91 37
---------------------------------------
Net investment income $ 2,541 $ 2,419 $ 2,530
=======================================
</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:
In thousands 1999 1998 1997
-------------------------------------------------------------------
Fixed maturity securities
Gross gains $ 56 $ 116 $ 564
Gross losses - - (10)
---------------------------
Total 56 116 554
Other (35) (69) (271)
---------------------------
Realized investment gains $ 21 $ 47 $ 283
===========================
Voluntary sales of investments resulted in the following realized gains
(losses):
Realized
----------------
In thousands Category Proceeds Gains Losses
-----------------------------------------------------------------------
1999 Available-for-sale $ 1,758 $ 56 $ -
=======================================================================
1998 Available-for-sale $ 2,110 $ 116 $ -
=======================================================================
1997 Available-for-sale $ 9,992 $ 550 $ 8
2.4 Investments on Deposit
----------------------
At December 31, 1999 and 1998, fixed maturity securities with a carrying
value of $6,337,848 and $6,717,000 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, 1999 and
1998, AMFLIC's largest investment in any one entity other than U.S.
government obligations was $1,000,000.
3. Income Taxes
AMFLIC is subject to the life Insurance company provisions of the federal
tax law and is part of a 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
consolidated return.
3.1 Tax Expense
-----------
A reconciliation between the Federal income tax rate and the effective tax
rate follows:
1999 1998 1997
----------------------------
Federal income tax rate 35.0 % 35.0% 35.0 %
Invested asset items (37.7) 14.3 (5.4)
Other (0.5) (1.4) (3.9)
---------------------------
Effective tax rate (3.2)% 47.9 % 25.7 %
===========================
F-28
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3.2 Deferred Taxes
--------------
Components of deferred tax liabilities and assets at December 31, were as
follows:
In thousands 1999 1998
-----------------------
Deferred tax liabilities, applicable to:
Basis differential of investments $ - $ 398
DPAC and CIP 18,141 14,891
Other 4,740 1,202
-----------------------
Total deferred tax liabilities 22,881 16,491
Deferred tax assets, applicable to:
Policy reserves (24,713) (20,738)
Other (1,456) (217)
-----------------------
Total deferred tax assets (26,169) (20,955)
-----------------------
Net deferred tax assets $ (3,288) $ (4,464)
=======================
AMFLIC expects adequate future taxable income to realize the net deferred
tax assets. Accordingly, no valuation allowance is considered necessary.
3.3 Taxes Paid
----------
Income taxes paid (received) were as follows:
In thousands 1999 1998 1997
-----------------------------------------------------------
Federal $ (447) $ 243 $ 519
State 143 110 1
4. Deferred Policy Acquisition Costs (DPAC)
Activity in DPAC was as follows:
In thousands 1999 1998 1997
-------------------------------------------------------------------------
Beginning at January 1 $ 52,352 $ 30,515 $ 13,781
Deferrals 24,543 25,320 18,223
Amortization (6,524) (3,383) (1,307)
Effect of net unrealized (gains)
losses on securities 646 (47) (6)
Effect of realized investment gains (28) (53) (176)
---------------------------------
Balance at December 31 $ 70,989 $ 52,352 $ 30,515
=================================
5. Cost of Insurance Purchased (CIP)
Activity in CIP was as follows:
In thousands 1999 1998 1997
-------------------------------------------------------------------------
Balance at January 1 $ 8,941 $ 10,549 $ 12,212
Accretion of interest 767 926 1,054
Amortization (1,915) (2,509) (2,619)
Effect of net unrealized (gains)
losses on securities 96 (12) (3)
Effect of realized investment gains (5) (13) (95)
---------------------------------
Balance at December 31 $ 7,884 $ 8,941 $ 10,549
=================================
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
F-29
<PAGE>
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP) (continued)
CIP amortization, net of accretion, expected to be recorded in each of the
next five years is:
Amount
Year (000's)
------------------------------------------------
2000 $1,054
2001 927
2002 820
2003 727
2004 647
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, including the values of underlying customer relationships
and distribution systems, and (2) the reporting of investments at fair
value without a corresponding revaluation of related policyholder
liabilities can be misinterpreted.
<TABLE>
<CAPTION>
1999 1998
-----------------------------------------------------------------
Carrying Fair Carrying Fair
In thousands Amount Value Amount Value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $ 15,852 $ 15,852 $ 32,587 $ 32,587
Policy Loans 17,037 17,037 12,371 12,371
Short-term investments 6,733 6,733 - -
Assets held in separate accounts 644,899 644,899 442,801 442,801
Liabilities
Insurance investment contracts 7,480 7,102 5,479 5,189
Liabilities related to separate accounts 644,899 644,899 442,801 442,801
</TABLE>
We used the following methods and assumptions to estimate the fair value of
our financial instruments:
Fixed Maturity Securities. Fair values of fixed maturity securities were
based on quoted market prices, where available. For investments not
actively traded, we estimated the fair values 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 1999 and 1998 was 6.11% and 6.96%,
respectively.
Assets and Liabilities Related to Separate Accounts. We valued separate
account assets and liabilities based on quoted net asset value per share of
the underlying mutual funds.
Insurance Investment Contracts. We estimated the fair value of insurance
investment contracts, which do not subject AMFLIC to significant risks
arising from policyholder mortality or morbidity, using cash flows
discounted at market interest rates.
F-30
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. Reinsurance
Under the provisions of an assumed reinsurance agreement, AMFLIC recognized
the following:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other
considerations $ 1,416 $ 2,387 $ 1,169
Other income 1,337 1,869 810
Benefits 1,756 3,331 1,329
Commission expense 215 (20) (59)
</TABLE>
Under the provisions of a modified coinsurance agreement which cedes a
portion of the variable universal life product activity, AMFLIC recognized
the following:
<TABLE>
<CAPTION>
In thousands 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other
considerations $ 12,027 $ 9,058 $ 5,226
Expense allowances from
reinsurer 8,531 7,239 4,965
Other 1,744 885 60
</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 1999 1998 1997
----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other
considerations $ 10,687 $ 9,476 $ 7,994
Change in policy reserves 10,382 9,086 7,804
</TABLE>
8. 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, 1999 and 1998, AMFLIC had statutory stockholder's equity of
$41,590,000 and $32,662,000, respectively. AMFLIC's statutory net loss was
$2,947,000, $2,615,000 and $648,000 for the years ended December 31, 1999,
1998 and 1997, respectively.
Generally, AMFLIC is restricted by state insurance laws as to amounts it
may pay in the form of dividends, loans or advances without the approval of
the Illinois Insurance Department. Under these restrictions, during 2000 no
dividends may be paid out and, loans and advances in excess of $10,398,000
may not be transferred without the approval of the Illinois Insurance
Department.
F-31
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. Statement of Cash Flows
In addition to the cash activities shown in the statement of cash flows,
the following transactions, occurred:
In thousands 1999 1998 1997
-----------------------------------------------------------------------
Interest added to universal
life contracts and other deposit funds $ 2,214 $ 1,387 $ 1,279
==========================
10. Related Party Transactions
AMFLIC has no full-time employees or office facilities. General and
administrative expenses were allocated to AMFLIC from FLIC prior to 1999,
based upon hours worked by administrative personnel. Effective January 1,
1999 AMFLIC entered into a shared services agreement with other AGC life
subsidiaries. As part of this agreement, administration and general
expenses are allocated to AMFLIC from all subsidiaries. The amount
allocated to AMFLIC has increased since 1997 reflecting AMFLIC's increased
emphasis and focus on its variable product portfolio. Allocated expenses
for the years ended December 31, 1999, 1998 and 1997, amounted to
approximately $20,084,000, $8,541,000, and $5,104,000, respectively.
AMFLIC participates in a program of short-term borrowing with AGC to
maintain its long-term investment commitments. AMFLIC had no short-term
borrowing in 1999, and borrowed and repaid $18,896,000 in 1998. Interest
was paid on the outstanding balance based on the rate as stipulated in the
program.
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. A number of these lawsuits have resulted in substantial
settlements across the life insurance industry. AMFLIC was a defendant is
similar class action lawsuits. In 1998, AMFLIC entered into agreements to
resolve substantially all of the material pending market conduct class
action lawsuits. We recorded a charge of $8 million for additional
policyholder benefits and other anticipated expenses resulting from the
proposed settlements, 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. All of these settlements were
finalized in 1999.
AMFLIC is a party to various other lawsuits and proceedings arising in the
ordinary course of business. These lawsuits and proceedings include certain
class action claims and claims filed by individuals who excluded themselves
from market conduct settlements. In addition, many of these claims arise in
jurisdictions, such as Alabama and Mississippi, that permit damage awards
disproportionate to the actual economic damages alleged to have been
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 or no relation to actual economic damages incurred
by plaintiffs continues to create the potential for an unpredictable
judgement in any given suit.
12. Year 2000 (Unaudited)
As of February 18, 2000, all of our major technology systems, programs, and
applications, including those which rely on third parties, are operating
smoothly following our transition into 2000. We have experienced no
interruptions to normal business operations, including the processing of
customer account data and transactions. We will continue to monitor our
technology systems, including critical third party dependencies, as
necessary to maintain our Year 2000 readiness. We do not expect any
F-32
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. Year 2000 (Unaudited) (continued)
future disruptions, if they occur, to have a material effect on the
company's results of operations, liquidity, or financial condition.
Through December 31, 1999, AGC incurred and expensed pretax costs of $98
million related to Year 2000 readiness, including $18 million in 1999 and
$65 million in 1998. In 1999, Year 2000 readiness expenses were included in
division earnings. The 1998 expenses were excluded from division earnings,
consistent with the manner in which AGC reviewed division results. In
addition, we accelerated the planned replacement of certain systems as part
of our Year 2000 plans. The cost of these replacement systems was
immaterial. We do not anticipate incurring any significant costs in the
future to maintain Year 2000 readiness.
F-33
<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, 1999
Statement of Operations for the year ended December 31, 1999
Statement of Changes in Net Assets for the years ended
December 31, 1999 and 1998
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,
1999, 1998 and 1997
Balance Sheet, December 31, 1999 and 1998
Statement of Shareholder's Equity for the years ended
December 31, 1999, 1998 and 1997
Statement of Comprehensive Income (Loss) for the years ended
December 31, 1999, 1998 and 1997
Statement of Cash Flows for the years ended December 31,
1999, 1998 and 1997
Notes to Financial Statements
Page 1
<PAGE>
PART C: None
(b) Exhibits
1 Certified resolutions regarding organization of Separate Account
VA-1 of The American Franklin Life Insurance Company (the
"Separate Account").*
2 Not applicable. The American Franklin Life Insurance Company
("American Franklin") maintains custody of all assets.
3(a) Sales Agreement between Franklin Financial Services Corporation
("Franklin Financial") and the Separate Account, dated as of
July 30, 1996.*
3(b) Specimen Registered Representative Agreement between Franklin
Financial and registered representatives of Franklin Financial
distributing the Contracts.*
3(c) Schedule of Sales Commissions.*
3(d) Agreement between American Franklin and Franklin Financial, dated
July 30, regarding supervision of agents.*
4(a)(1) Specimen form of Combination Fixed and Variable Annuity Contract
(Form No. T1575).**
4(a)(2) Specimen form of Combination Fixed and Variable Annuity Contract
(Form No. T1575Z) ("unisex" version).**
4(b)(1) Specimen form of Terminal Illness Waiver of Surrender Charges
Rider.**
4(b)(2) Specimen form of Long Term Care Waiver of Surrender Charges
Rider.**
4(c) Specimen form of Qualified Contract Endorsement.*
4(d) Specimen form of Individual Retirement Annuity Endorsement.**
4(e) Specimen form of Section 457 Contract Endorsement.*
4(f) Specimen form of Section 403(b) Annuity Contract Endorsement.**
4(g) Specimen form of Death Benefit Endorsement 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.
Page 2
<PAGE>
6(b) By-Laws of The American Franklin Life Insurance Company (amended
and restated as of April 14, 1998).
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 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.
Page 3
<PAGE>
10(b) Consent of Sutherland Asbill & Brennan LLP.
11 Not applicable.
12 Not applicable.
13 Not applicable.
14 Not applicable.
15 Power of Attorney filed herein (see signature pages).
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 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).
**** 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, 1999 (Reg. No. 333-10489).
Page 4
<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>
<S> <C>
(1) (2)
Name and Principal Business Address Positions and Offices with Depositor
- --------------------------------------------- ----------------------------------------------------------------------
*Rodney O. Martin, Jr. Director, Chairman and Chief Executive Officer
*Donald W. Britton Director and President
*David A. Fravel Executive Vice President
*David L. Herzog Director, Executive Vice President and Chief Financial Officer
*John V. LaGrasse Executive Vice President and Chief Technology Officer
*Paul Mistretta Executive Vice President
**Brian D. Murphy Executive Vice President
*Thomas M. Zurek Director, Executive Vice President and General Counsel
**Wayne A. Barnard Senior Vice President
Robert M. Beuerlein Senior Vice President and Chief Actuary
Barbara J. Fossum Director and Senior Vice President
**Robert F. Herbert, Jr. Senior Vice President
**Simon J. Leech Senior Vice President
Darrell J. Malano Director and Senior Vice President
**Ronald H. Ridlehuber Director
**Steven E. Zimmerman Senior Vice President
*W. Larry Mask Vice President, Real Estate Investment Officer and Assistant Secretary
Mark R. McGuire Director and Vice President
Sylvia A. Miller Vice President
**Rosalia S. Nolan Vice President
*Rembert R. Owen, Jr. Vice President, Real Estate Investment Officer and Assistant Secretary
</TABLE>
Page 5
<PAGE>
<TABLE>
<S> <C>
Dale W. Sachtleben Vice President
*Richard W. Scott Vice President and Chief Investment Officer
Thomas Clay Spires Vice President
Dan E. Trudan Vice President
*Julia S. Tucker Vice President
Christian D. Weiss Vice President, Controller and Treasurer
Diane S. Workman Vice President
*Pauletta P. Cohn Secretary
Elizabeth E. Arthur Associate General Counsel and Assistant Secretary
Deanna D. Osmonson Compliance Officer and Assistant Secretary
Gregory R. Thornton Chief Underwriter
*Roger E. Hahn Investment Officer
*Peter V. Tuters Investment Officer
*D. Lynne Walters Tax Officer
</TABLE>
Page 6
<PAGE>
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
March 31, 2000. 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 (*).
Jurisdiction of
Name Incorporation
- -------------------------------------------------- ---------------
AGC Life Insurance Company.................................. Missouri
American General Property Insurance Company/16/............ Tennessee
American General Property Insurance Company of Florida... Florida
American General Life and Accident Insurance Company/6/.... Tennessee
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
Parkway 1999 Trust/17/................................. Maryland
PESCO Plus, Inc/14/.................................... Delaware
American General Gateway Services, L.L.C./15/.......... Delaware
The Variable Annuity Marketing Company................. Texas
American General Financial Advisors, Inc............... Texas
VALIC Retirement Services Company...................... Texas
VALIC Trust Company.................................... Texas
American General Assignment Corporation of New York.... New York
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/13/........ Bermuda
Western National Corporation............................... Delaware
WNL Holding Corp......................................... Delaware
American General Annuity Insurance Company............. Texas
American General Assignment Corporation................ Texas
American General Distributors, Inc..................... Delaware
A.G. Investment Advisory Services, Inc................. Delaware
American General Financial Institution Group, Inc...... Delaware
Page 7
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Jurisdiction of
Name Incorporation
- ------------------------------------------------- ---------------
WNL Insurance Services, Inc.................................... Delaware
American General International, Inc.................................. Delaware
American General Enterprise Services, Inc............................ Delaware
American General Corporation*........................................ Delaware
American General Delaware Management Corporation/1/.................. 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/8/............................. Indiana
American General Finance Group, Inc............................... Delaware
American General Financial Services, Inc./9/.................... Delaware
The National Life and Accident Insurance Company.............. Texas
Merit Life Insurance Co........................................... Indiana
Yosemite Insurance Company........................................ Indiana
American General Finance, Inc....................................... Alabama
A.G. Financial Service Center, Inc.................................. Utah
American General Bank, FSB.......................................... 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/10/.................. Delaware
American General Investment Management, L.P./10/.................... Delaware
American General Investment Management Corporation/10/............... Delaware
American General Realty Advisors, Inc................................ Delaware
American General Realty Investment Corporation....................... Texas
AGLL Corporation/11/................................................ Delaware
American General Land Holding Company............................... Delaware
AG Land Associates, LLC/11/....................................... California
GDI Holding, Inc.*/12/.............................................. 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
North Central Administrators, Inc................................... Minnesota
North Central Life Insurance Company................................ Minnesota
North Central Caribbean Life, Ltd................................. Nevis
The Old Line Life Insurance Company of America...................... Wisconsin
The United States Life Insurance Company in the City of New York.... New York
American General Bancassurance Services, Inc........................ Illinois
USMRP, Ltd........................................................ Turks & Caicos
USLIFE Realty Corporation........................................... Texas
USLIFE Real Estate Services Corporation......................... Texas
USLIFE Systems Corporation.......................................... Delaware
</TABLE>
Page 8
<PAGE>
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)
The foregoing indirectly related agencies are not affiliates or
subsidiaries of AGL under applicable holding company laws, but they are
part of the AGC group of companies under other laws.
/8/ American General Finance Corporation is the parent of an additional 42
wholly-owned subsidiaries incorporated in 25 states for the purpose of
conducting its consumer finance operations, in addition to those noted in
footnote 9 below.
Page 9
<PAGE>
/9/ American General Financial Services, Inc., is the direct or indirect parent
of an additional 8 wholly-owned subsidiaries incorporated in 5 states and
Puerto Rico for the purpose of conducting its consumer finance operations.
/10/ American General Investment Management, L.P., a Delaware limited
partnership, is jointly owned by AGIHC and AGIMC. AGIHC holds a 99% limited
partnership interest, and AGIMC owns a 1% general partnership interest.
/11/ 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.
/12/ AGRI owns a 75% interest in GDI Holding, Inc.
/13/ AGCL owns 50% of the common stock of TAG Life. Templeton International,
Inc., a Delaware corporation, owns the remaining 50% of TAG Life. Templeton
International, Inc. is not affiliated with AGC.
/14/ VALIC holds 90% of the outstanding common shares of PESCO Plus, Inc. The
Florida Education Association/United, a Florida teachers union and
unaffiliated third party, holds the remaining 10% of the outstanding common
shares.
/15/ VALIC holds 90% of the outstanding common shares of American General
Gateway Services, L.L.C. Gateway Investment Services, Inc., a California
corporation and an unaffiliated third party, holds the remaining 10% of the
outstanding common shares.
/16/ AGPIC is jointly owned by AGCL and AGLA. AGCL owns 51.85% and AGLA owns
48.15% of the issued and outstanding shares of AGPIC.
/17/ Parkway 1999 Trust was formed as a Maryland business trust to function as
an investment subsidiary. VALIC owns 100% of its common equity.
COMPANY ABBREVIATIONS AS USED IN
REGISTRATION STATEMENT AMENDMENT
<TABLE>
<CAPTION>
State/Jur.
Abb. Company of Domicile
- ------------- -------------------------------------------------------- -----------
<S> <C> <C>
AAL All American Life Insurance Company..................... IL
AAth American Athletic Club, Inc............................. TX
AFLI The American Franklin Life Insurance Company............ IL
AGAIC American General Annuity Insurance Company.............. TX
ASGN-NY American General Assignment Corporation of New York..... NY
AGAC American General Assurance Company...................... IL
AGAS American General Annuity Service Corporation............ TX
AGBS American General Distributors, Inc...................... DE
AGB American General Bank, FSB.............................. UT
AGC American General Corporation............................ TX
AGCL AGC Life Insurance Company.............................. MO
AGDMC American General Delaware Management Corporation........ DE
AGES American General Enterprise Services, Inc............... DE
AGF American General Finance, Inc........................... IN
AGFC American General Finance Corporation.................... IN
AGFCI American General Financial Center, Incorporated......... IN
AGFCT American General Financial Center Thrift Company........ CA
AGFG American General Finance Group, Inc..................... DE
AGF Inv AGF Investment Corp..................................... IN
AGFn A.G. Financial Service Center, Inc...................... UT
AGFnC American General Financial Center, Inc.................. IN
AGFS American General Financial Services, Inc................ DE
AGFA American General Financial Advisors, Inc................ TX
AGFIG American General Financial Institutions Group, Inc...... DE
AGGS American General Gateway Services, L.L.C................ DE
AGIA American General Insurance Agency, Inc.................. MO
AGIAH American General Insurance Agency of Hawaii, Inc........ HI
AGIAM American General Insurance Agency of Massachusetts, Inc. MA
</TABLE>
Page 10
<PAGE>
<TABLE>
<S> <C> <C>
State/Jur.
Abb. Company of Domicile
- ------------- -------------------------------------------------------- -----------
AGIAO American General Insurance Agency of Ohio, Inc.......... OH
AGIAOK American General Insurance Agency of Oklahoma, Inc...... OK
AGIAS A.G. Investment Advisory Services, Inc.................. DE
AGIAT American General Insurance Agency of Texas, Inc......... TX
AGII American General International, Inc..................... DE
AGIHC American General Investment Holding Corporation......... DE
AGIM American General Investment Management, L.P............. DE
AGIMC American General Investment Management Corporation...... DE
AGIND American General Indemnity Company...................... NE
AGL American General Life Insurance Company................. TX
AGLC American General Life Companies ........................ DE
AGLA American General Life and Accident Insurance Company.... TN
AGLH American General Land Holding Company................... DE
AGLL AGLL Corporation........................................ DE
AGNY American General Life Insurance Company of New York..... NY
AGPA American General Life Insurance Company of Pennsylvania. PA
AGPIC American General Property Insurance Company............. TN
AGRA American General Realty Advisors, Inc................... DE
AGRI American General Realty Investment Corporation.......... TX
AGSI American General Securities Incorporated................ TX
AGX American General Exchange, Inc.......................... TN
ASGN American General Assignment Corporation................. TX
FFSC Franklin Financial Services Corporation................. DE
FL The Franklin Life Insurance Company..................... IL
GHC Green Hills Corporation................................. DE
HBDC HBC Development Corporation............................. VA
KC Knickerbocker Corporation............................... TX
ML Merit Life Insurance Co................................. IN
NLA The National Life and Accident Insurance Company........ TX
NCA North Central Administrators, Inc....................... MN
NCL North Central Life Insurance Company.................... MN
NCCL North Central Caribbean Life, Ltd....................... T&C
OLL The Old Line Life Insurance Company of America.......... WI
PKWY Parkway 1999 Trust...................................... MD
PAV Pavilions Corporation................................... DE
PCSC Pebble Creek Service Corporation........................ FL
PIFLA American General Property Insurance Company of Florida.. FL
PPI PESCO Plus, Inc......................................... DE
RMST HSA Residential Mortgage Services of Texas, Inc......... DE
SRHP SR/HP/CM Corporation.................................... TX
TAG Life Templeton American General Life of Bermuda, Ltd......... BA
TI Thrift, Incorporated.................................... IN
UAS American General Bancassurance Services, Inc............ IL
UC USLIFE Corporation...................................... DE
UCLA USLIFE Credit Life Insurance Company of Arizona......... AZ
URC USLIFE Realty Corporation............................... TX
URSC USLIFE Real Estate Service Corporation.................. TX
USC USLIFE Systems Corporation.............................. DE
USL The United States Life Insurance Company in the City of
New York................................................ NY
USMRP USMRP, Ltd.............................................. T&C
VALIC The Variable Annuity Life Insurance Company............. TX
VAMCO The Variable Annuity Marketing Company.................. TX
VRSCO VALIC Retirement Services Company....................... TX
VTC VALIC Trust Company..................................... TX
WA The Winchester Agency Ltd............................... NY
WIS WNL Insurance Services, Inc............................. DE
WNC Western National Corporation............................ DE
WNLH WNL Holding Corp........................................ DE
YIC Yosemite Insurance Company.............................. IN
</TABLE>
Page 11
<PAGE>
ITEM 27. NUMBER OF CONTRACT OWNERS
As of April 14, 2000 there were 5,079 owners of Contracts of the class
covered by this registration statement (2,726 Qualified Contracts and 2,353 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 willful misconduct."
Insofar as indemnification for liability arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
ITEM 29. PRINCIPAL UNDERWRITERS
(a) Registrant's principal underwriter, Franklin Financial Services
Corporation, also acts as principal underwriter for Franklin Life Variable
Annuity Fund A, Franklin Life Variable Annuity Fund B, Franklin Life Money
Market Variable Annuity Fund C, which offer interests in variable
annuities, and Separate Account VUL and Separate Account VUL-2 of The
American Franklin Life Insurance Company, which offer interests in flexible
premium variable life insurance policies.
(b) The directors and principal officers of the principal underwriter are:
Position and Offices
with Underwriter,
Name and Principal Franklin Financial
Business Address Services Corporation
- ---------------- --------------------
F. Paul Kovach, Jr. Chairman and Chief
American General Securities Incorporated Executive Officer
2727 Allen Parkway
Houston, TX 77019
Gary D. Osmonson Director and President
#1 Franklin Square
Springfield, Illinois 62713-0001
Page 12
<PAGE>
Ronald H. Ridlehuber Director
#1 Franklin Square
Springfield, Illinois 62713-0001
Daniel E. Trudan Vice President and Assistant
#1 Franklin Square Secretary
Springfield, Illinois 62713-0001
Donald W. Britton Assistant Vice President
2929 Allen Parkway
Houston, Texas 77019
Thomas M. Zurek Assistant Vice President
2929 Allen Parkway
Houston, Texas 77019
T. Clay Spires Assistant Tax Officer
2727A Allen Parkway
Houston, Texas 77019
(c) Not Applicable.
ITEM 30. LOCATION OF RECORDS
All records referenced under Section 31(a) of the 1940 Act, and Rules 31a-1
through 31a-3 thereunder, are maintained and in the custody of The American
Franklin Life Insurance Company at its principal executive office located at #1
Franklin Square, Springfield, Illinois 62713 or at American Franklin's
Administrative Office located at 2727-A Allen Parkway 3-50, Houston, Texas
77019-2191.
ITEM 31. MANAGEMENT SERVICES
All management services agreements relating to Separate Account VA-1 and
the Contracts are described in the Prospectus or Statement of Additional
Information forming a part of this Registration Statement.
ITEM 32. UNDERTAKINGS AND REPRESENTATIONS
The Registrant undertakes:
(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;
Page 13
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(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.
Page 14
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POWERS OF ATTORNEY
Each person whose signature appears below hereby appoints Thomas M. Zurek,
Robert Herbert, Jr. and Pauletta P. Cohn and each of them, any one of whom may
act without the joinder of the others, as his/her attorney-in-fact to sign on
his/her behalf and in the capacity stated below and to file all amendments to
this Registration Statement, which amendment or amendments may make such
changes and additions to this Registration Statement as such attorney-in-fact
may deem necessary or appropriate.
SIGNATURES
As required by the Securities Act of 1933 and the Investment Company Act of
1940, the Registrant, American Franklin Life Insurance Company through the
Separate Account VA-1, certifies that it meets the requirements of Securities
Act Rule 485(b) for effectiveness of this amended Registration Statement and has
duly caused this Registration Statement to be signed on its behalf, in the City
of Houston, and State of Texas, on the 24th day of April, 2000.
THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
SEPARATE ACCOUNT VA-1
(Registrant)
BY: THE AMERICAN FRANKLIN LIFE
INSURANCE COMPANY
(On behalf of the Registrant and itself)
BY: /s/ David L. Herzog
---------------------------------------
David L. Herzog
Executive Vice President and
Chief Financial Officer
[SEAL]
ATTEST: /s/ Julie A. Cotton
------------------------------
Julie A. Cotton
Assistant Secretary
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following officers and directors
of the American Franklin Life Insurance Company in the capacities and on the
dates indicated.
Signature Title Date
- --------- ----- ----
/s/ Rodney O. Martin, Jr. Chairman and Chief April 24, 2000
- ---------------------------- Executive Officer
Rodney O. Martin, Jr.
<PAGE>
/s/ Thomas M. Zurek Director April 24, 2000
- ----------------------------
Thomas M. Zurek
/s/ Donald W. Britton Director April 24, 2000
- ----------------------------
Donald W. Britton
/s/ Barbara J. Fossum Director April 24, 2000
- ----------------------------
Barbara J. Fossum
/s/ David L. Herzog Director April 24, 2000
- ---------------------------- Executive Vice President,
David L. Herzog Chief Financial Officer
/s/ Darrell J. Malano Director April 24, 2000
- ----------------------------
Darrell J. Malano
/s/ Mark R. McGuire Director April 24, 2000
- ----------------------------
Mark R. McGuire
/s/ Ronald H. Ridlehuber Director April 24, 2000
- ----------------------------
Ronald H. Ridlehuber
<PAGE>
EXHIBIT INDEX
6(b) By-Laws of The American Franklin Life Insurance Company (amended and
restated as of April 14, 1998).
10(a) Consent of Ernst & Young LLP.
10(b) Consent of Sutherland Asbill & Brennan LLP.
<PAGE>
EXHIBIT 6(b)
BYLAWS OF
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
(Amended and Restated as of April 14, 1998)
ARTICLE I
MEETING OF STOCKHOLDERS
Section 1. The regular annual meeting of the Stockholders of the Company
shall be held at the Home Office of the Company, in the City of
Springfield, Illinois or at such other place within or without
the State of Illinois as may be determined by the Board of
Directors from time to time, on or before April 30 of each year,
as shall be fixed by the President.
Section 2. Special meetings of the Stockholders may be called at any time by
the President and Secretary or by the holders of not less than a
majority of the then outstanding stock by mailing to each
Stockholder a written notice (stating the time, place, and object
of the meeting) at least five (5) days prior to the date fixed
therefor.
Section 3. At any meeting of Stockholders the holders of the majority of the
capital stock issued and outstanding, present in person or
represented by proxy, shall constitute a quorum for all purposes.
If the holders of the amount of stock necessary to constitute a
quorum shall fail to attend in person or by proxy at the time and
place fixed by these Bylaws for an annual meeting, or fixed by
notice as provided for a special meeting, a majority in interest
(although less than a quorum) of the Stockholders present in
person or by proxy may adjourn, from time to time, without notice
other than by announcement at the meeting. At any such adjourned
meeting at which a quorum shall be present any business may be
transacted which might have been transacted at the meeting as
originally fixed or notified.
ARTICLE II
DIRECTORS
Section 1. The Board of Directors of the Company shall consist of not less
than five (5) nor more than ten (10) members, as determined by
the Board from time to time, at least three (3) of whom shall be
residents and citizens of the State of Illinois at the time of
their election and that the number of Directors for the ensuing
year shall be the number elected by the Stockholders at their
annual meeting for the term of one year each or until their
successors are elected and qualified, or at any regular or
special meeting to hold such office until the next annual meeting
of Stockholders and until their successors have been elected and
qualified.
Section 2. Vacancies in the Board of Directors may be filled by the
Stockholders at any regular
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or special meeting of Stockholders, that any Director so elected
by the Board of Directors to fill a vacancy shall hold office for
the remainder of the full term of the Director whose departure
from the Board created the vacancy, and that any vacancy
occurring in the Board of Directors and any directorship to be
filled by reason of an increase in the number of Directors may be
filled by election at an annual meeting or at any regular or
special meeting of Stockholders called for that purpose.
Section 3. Regular meetings of the Directors may be held as provided by the
Board. Any meeting of the Board of Directors shall be held at the
home office of the Company or at such other place or places,
within or without the State of Illinois, as the Board of
Directors may designate. Notice of each meeting shall be given to
each member of the Board by the President or Secretary at least
three days prior to the meeting date. A majority of all of the
Directors shall constitute a quorum for the transaction of
business but when a quorum is not present, one or more Directors
present may adjourn and continue to adjourn such meeting from
time to time, but not to a time beyond the date of the next
regular meeting.
Section 4. Special meetings of the Board of Directors may be called by the
President and Secretary, or by a majority of the Directors, by
mailing to each Director a written notice (stating the time,
place and object of the meeting) at least two days prior to the
date fixed therefor. A majority of all Directors shall constitute
a quorum.
Section 5. The Board of Directors, at its first meeting following the
regular annual meeting of the Stockholders in each year, shall
elect one of its members as Chairman of the Board to serve for
one year or until his successor is elected. The Chairman shall
preside at all meetings of the Stockholders and of the Board of
Directors and shall perform such other duties as may be required
of him by the Board or by the Executive Committee. In case of a
vacancy in the office of Chairman the same may be filled for the
unexpired term by the Board of Directors at any regular meeting
or at any special meeting called for that purpose. In the event
of the absence or inability of the Chairman his duties shall be
performed by the President. In the event of the absence or
inability of the Chairman and the President the duties of the
Chairman shall be performed by a Vice President designated by the
Board of Directors.
Section 6. The Board of Directors shall have the power to elect or appoint,
and to remove at pleasure, all officers, committees and members
of committees, and shall fix the salaries of all officers and
committee members and prescribe their duties.
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<PAGE>
ARTICLE III
STANDING COMMITTEES
Section 1. The Board of Directors may, at its first meeting following the
regular annual meeting of the Stockholders in each year, appoint
the following standing committees: an Executive Committee of not
less than three members or more than seven members; an Investment
Committee of not less than three members or more than nine
members; an Interest Rates Committee of not less than three
members or more than five members; a Reinsurance Committee of not
less than three and not more than eight members, one of which
shall be a Director; and a Stockholder Dividends Committee of not
less than three members or more than five members. All members
shall serve for a term of one year or until their successors may
be appointed. Vacancies may be filled by the Board of Directors
at any regular meeting, or at any special meeting called for that
purpose. Said Committees shall make written reports of their
transactions to the Board, and their acts shall be subject to
review by the Board of Directors. A majority of the members of
any committee shall be a quorum for the transactions of business.
Section 2. In addition to these committees, the Board of Directors, by
resolution adopted by a majority of the full Board of Directors,
may designate such other committees as it shall deem to be
appropriate, each of which shall have and may exercise that
authority of the Board of Directors which shall have been
delegated to it in the resolution creating such committee, except
as may be prohibited by law.
ARTICLE IV
EXECUTIVE OFFICERS
Section 1. The Executive Officers of the Company shall consist of a
President, one or more Vice Presidents, a Secretary, one or more
Assistant Secretaries, a Treasurer, and one or more Assistant
Treasurers, who shall be elected by the Board of Directors at
their first meeting after the annual meeting of the Stockholders,
and they shall, subject to these Bylaws, serve for a term of one
year each or until their successors are duly elected. In case of
a vacancy in any of the offices named in this section the same
may be filled for the unexpired term by the Board of Directors at
any regular meeting, or at a special meeting called for that
purpose.
Section 2. The President shall perform such duties as usually pertain to his
office or may be required of him by the Board of Directors or by
the Executive Committee.
Section 3. The Vice Presidents, in the order designated by the President,
shall perform the duties of the President in case of his absence
or inability to act. In event the President shall fail to make
such designation the order shall be designated by the Board of
Directors, and in event of the absence or inability of the
President and the Vice Presidents, the Board of Directors
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<PAGE>
may select one of its members as President Pro Tem. The Vice
Presidents shall perform such other duties as may be required of
them by the Board of Directors or by the Executive Committee.
Section 4. The Secretary shall keep a record of the meetings of the
Stockholders and of the Board of Directors, and shall perform
such duties as usually pertain to his office, or as may be
required of him by the Board of Directors or by the Executive
Committee.
Section 5. The Assistant Secretaries, in the order designated by the
Secretary, shall perform the duties of the Secretary in case of
his absence or inability to act. In event the Secretary shall
fail to make such designation the order shall be designated by
the Board of Directors, and in the event of the absence or
inability of the Secretary and the Assistant Secretaries, the
Board of Directors may select one of its members as Secretary Pro
Tem. The Assistant Secretaries shall perform such other duties as
may be required of them by the Board of Directors or by the
Executive Committee.
Section 6. The Treasurer shall perform such duties as may be required of him
by the Board of Directors, or by the Executive Committee.
Section 7. The Assistant Treasurers, in the order designated by the
Treasurer, shall perform the duties of the Treasurer in case of
his absence or inability to act. In event the Treasurer shall
fail to make such designation the order shall be designated by
the Board of Directors, and in the event of the absence or
inability of the Treasurer and the Assistant Treasurers, the
Board of Directors may select one of its members as Treasurers
Pro Tem. The Assistant Treasurers shall perform such other duties
as may be required of them by the Board of Directors or by the
Executive Committee.
Section 8. The Officers of this Company shall comply with the Rules of the
Illinois Insurance Department respecting Internal Security
Standards and Fidelity Bonds as now defined in Rule 9.04 of the
Illinois Insurance Department.
ARTICLE V
TRANSFERRING REAL ESTATE, SECURITIES, ETC.
Section 1. The President or a Vice President or an Assistant Vice President
or the General Counsel or the Treasurer or the Assistant
Treasurer and the Secretary or an Assistant Secretary are
authorized for and on behalf of the Company.
(a) To execute, acknowledge, and deliver deeds to real estate when such
real estate has been sold.
Page 4 of 6
<PAGE>
(b) To assign, transfer, and cancel evidence of indebtedness and notes
secured by mortgage upon real estate when such notes have been paid or
sold.
(c) To execute releases of mortgages upon real estate when the notes such
mortgages were given to secure have been paid, and to execute partial
releases, easements, and subordinations.
(d) To transfer bonds, stocks, and/or other securities held as collateral
security for loans when such loans have been paid or sold.
(e) To transfer bonds, stocks and/or other assets or securities when such
bonds, stocks and/or other assets or securities have been sold or
called for payment.
(f) To execute such other instruments from time to time as may be
necessary or expedient to carry on the business of the Company.
Section 2. The President, a Vice President, an Assistant Vice President, the
General Counsel or the Secretary is authorized to negotiate and
enter into any leasing agreement for any real estate owned by the
Company and to execute the same for and on behalf of the Company,
and to do and perform any and all other acts that may be
necessary to effectively accomplish the purposes mentioned.
ARTICLE VI
ACTUARIES, MEDICAL DIRECTORS, ETC.
Section 1. The Board of Directors may appoint one or more Actuaries, one or
more Associate Actuaries, and one or more Assistant Actuaries,
one or more Medical Directors, one or more Associate Medical
Directors, or one or more Assistant Medical Directors and such
other officers and department heads as it may deem necessary and
expedient, who shall perform such duties as may be required of
them by the Board of Directors or by the Executive Committee.
ARTICLE VII
SALARIES
Section 1. All salaries, compensations or emolument to be paid to any
officer or Director of the Company, and all salaries,
compensations, or emolument amounting in any year to more than
forty thousand dollars ($40,000.00) to any person, firm, or
corporation, shall be first authorized by a vote of the Board of
Directors, which vote shall be by roll call at regular meeting of
said Board, and which vote shall be duly recorded in the records
of the Company.
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<PAGE>
ARTICLE VIII
AMENDMENTS
Section 1. These Bylaws may be amended, repealed, or altered in whole or in
part by the Board of Directors at any regular meeting, or at any
special meeting called for that purpose.
ARTICLE IX
INDEMNIFICATION FOR OFFICERS AND DIRECTORS
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 persons 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 willful misconduct.
* * * * * * * *
Page 6 of 6
<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 9, 2000 with respect to the financial
statements of Separate Account VA-1 of The American Franklin Life Insurance
Company and our report dated February 18, 2000, with respect to the financial
statements of The American Franklin Life Insurance Company, in this Post-
Effective Amendment No. 6 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 24, 2000
<PAGE>
Exhibit 10(b)
[Letterhead of SUTHERLAND ASBILL & BRENNAN LLP]
April 25, 2000
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 Post-Effective
Amendment No. 6 to 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/ Stephen E. Roth
---------------------
Stephen E. Roth, Esq.
