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1933 Act Registration No. 2-74459
1940 Act Registration No. 811-3289
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 21
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19
FRANKLIN LIFE MONEY MARKET
VARIABLE ANNUITY FUND C
(Exact Name of Registrant)
The Franklin Life Insurance Company
(Name of Insurance Company)
#1 Franklin Square, Springfield, Illinois 62713
(Address of Insurance Company's Principal Executive Offices) (Zip Code)
Insurance Company's Telephone Number, including Area Code: (217) 528-2011
STEPHEN P. HORVAT, JR., ESQ.
Senior Vice President,
Secretary and General Counsel
THE FRANKLIN LIFE INSURANCE COMPANY
#1 Franklin Square
Springfield, Illinois 62713
(Name and Address of Agent for Service)
Copy to:
PETER K. INGERMAN, ESQ.
CHADBOURNE & PARKE LLP
30 Rockefeller Plaza
New York, New York 10112
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/x/ on April 30, 1996 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (i)
/ / on April 30, 1996 pursuant to paragraph (a) (i)
/ / 75 days after filing pursuant to paragraph (a) (ii)
/ / on April 30, 1996 pursuant to paragraph (a) (ii) of
Rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-
effective amendment
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FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
Post-Effective Amendment No. 21
Cross Reference Sheet Required by Rule 495(a)
Registration Item Location in Prospectus ("P") or
Statement of Additional Information
("SAI")
Part A INFORMATION REQUIRED IN PROSPECTUS
Item 1. Cover Page. . . . . . . . . . . Cover Page (P)
Item 2. Definitions . . . . . . . . . . Special Terms
Item 3. Synopsis or Highlights. . . . . Table of Deductions and Charges;
Summary
Item 4. Condensed Financial Information Per Unit Income and Changes in
Accumulation Unit Value
Item 5. General Description of
Registrant and Insurance
Company . . . . . . . . . . . . Cover Page (P); Summary;
Introduction; Description of the
Separate Account; Investment
Policies and Restrictions of
the Fund
Item 6. Management. . . . . . . . . . . Management (P)
Item 7. Deductions and Expenses . . . . Summary; Deductions and Charges
under the Contracts
Item 8. General Description of
Variable Annuity Contracts. . . Summary; Introduction; Deductions
and Charges under the Contracts --
Transfers to and from Other
Contracts; The Contracts; Voting
Rights; Fundamental Changes
Item 9. Annuity Period. . . . . . . . . Summary; Introduction;
The Contracts -- Deferred Variable
Annuity Accumulation Period --
Annuity Period
Item 10. Death Benefit. . . . . . . . . The Contracts -- Deferred Variable
Annuity Accumulation Period
Item 11. Purchases and Contract Value . Summary; Deductions and Charges
Under The Contracts; The
Contracts -- General -- Deferred
Variable Annuity Accumulation
Period; Distribution of the Contracts
Item 12. Redemptions. . . . . . . . . . Summary; The Contracts --
General -- Deferred Variable Annuity
Accumulation Period
Item 13. Taxes. . . . . . . . . . . . . Cover Page (P); Summary;
Introduction; Deductions and Charges
Under the Contracts -- Premium
Taxes; The Contracts; Federal Income
Tax Status; Other Variable
Annuity Contracts; Effect of
Non-Qualification; Limitations on
Settlement Options (SAI)
Item 14. Legal Proceedings. . . . . . . Not Applicable
Item 15. Table of Contents of the
Statement of Additional
Information. . . . . . . . . . Table of Contents of the Statement
of Additional Information
Part B INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
Item 16. Cover Page . . . . . . . . . . Cover Page (SAI)
Item 17. Table of Contents. . . . . . . Table of Contents (SAI)
Item 18. General Information and
History. . . . . . . . . . . . General Information
Item 19. Investment Objectives and
Policies . . . . . . . . . . . Investment Policies and Restrictions
of the Fund (P); Investment Objectives
Item 20. Management . . . . . . . . . . Management (SAI)
Item 21. Investment Advisory and
Other Services . . . . . . . . Summary (P); Deductions and Charges
under the Contracts (P);
Management (P); Management (SAI);
Investment Advisory and Other Services
Item 22. Brokerage Allocation . . . . . Portfolio Turnover and Brokerage
Item 23. Purchase and Pricing of
Securities Being Offered . . . Summary (P); Introduction (P);
Deductions and Charges under the
Contracts -- Administration
Deductions (P); Distribution of the
Contracts (SAI)
Item 24. Underwriters . . . . . . . . . Summary (P); Deductions and Charges
Under the Contracts (P); Distribution
of the Contracts (P); Distribution
of the Contracts (SAI)
Item 25. Calculation of Performance
Date . . . . . . . . . . . . . Yield Information
Item 26. Annuity Payments . . . . . . . The Contracts -- Annuity Period (P)
Item 27. Financial Statements . . . . . Per Unit Income and Changes in
Accumulation Unit Values (P);
Financial Statements; Experts (SAI)
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EXPLANATORY STATEMENT
The Prospectus Supplement set forth on the next page will be attached to
the Prospectus when it is used to offer contracts to participants in the
Texas Optional Retirement Program, as codified in Chapter 830 of Title 8 of
the Government Code of the State of Texas, and is authorized by an order of
the Commission pursuant to Section 6(c) of the Investment Company Act, dated
January 8, 1982 (Investment Company Act Release No. 12150).
<PAGE>
SUPPLEMENT DATED APRIL 30, 1996 TO PROSPECTUS
OF FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
DATED APRIL 30, 1996
The contracts offered by this Prospectus to participants in the Texas
Optional Retirement Program, as codified in Chapter 830 of Title 8 of the
Government Code of the State of Texas, contain restrictions on redemption in
addition to those set forth in the Prospectus under the heading captioned
"Deferred Variable Annuity Accumulation Period -- 5. Redemption." In
accordance with such Chapter, redemption of contracts required by a
participant in the Texas Optional Retirement Program will not be permitted
prior to such participant's termination of employment in the Texas public
institutions of higher education, retirement, death or attainment of age
70-1/2.
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FRANKLIN LIFE MONEY MARKET
VARIABLE ANNUITY FUND C
PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS
[LOGO] #1 Franklin Square
Springfield, Illinois 62713
Telephone (217) 528-2011
THIS PROSPECTUS OFFERS INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE AS
INDIVIDUAL RETIREMENT ANNUITIES OR IN CONNECTION WITH TRUSTS AND RETIREMENT
OR DEFERRED COMPENSATION PLANS WHICH MAY OR MAY NOT QUALIFY FOR SPECIAL
FEDERAL TAX TREATMENT UNDER THE INTERNAL REVENUE CODE (SEE "FEDERAL INCOME
TAX STATUS" ON PAGES 31-35 FOR MORE INFORMATION). THE BASIC PURPOSE OF THE
VARIABLE CONTRACTS IS TO PROVIDE ANNUITY PAYMENTS WHICH WILL VARY WITH THE
INVESTMENT PERFORMANCE OF FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
(THE "FUND").
THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM COMPOUNDING OF
INCOME THROUGH RETENTION AND REINVESTMENT OF INCOME FROM INVESTMENTS IN A
DIVERSIFIED PORTFOLIO OF SHORT-TERM MONEY MARKET SECURITIES YIELDING A HIGH
LEVEL OF CURRENT INCOME TO THE EXTENT CONSISTENT WITH THE PRESERVATION OF
CAPITAL AND THE MAINTENANCE OF LIQUIDITY. THERE IS NO ASSURANCE THAT THIS
OBJECTIVE WILL BE ATTAINED.
THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE FUND THAT A PROSPECTIVE
INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE KEPT FOR FUTURE
REFERENCE. ADDITIONAL INFORMATION ABOUT THE FUND AND THE FRANKLIN IS
CONTAINED IN A STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 30, 1996,
WHICH HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS
AVAILABLE WITHOUT CHARGE UPON WRITTEN OR ORAL REQUEST. A STATEMENT OF
ADDITIONAL INFORMATION MAY BE OBTAINED FROM THE EQUITY ADMINISTRATION
DEPARTMENT OF THE FRANKLIN BY WRITING TO THE ADDRESS OR CALLING THE TELEPHONE
NUMBER SET FORTH ABOVE OR BY RETURNING THE REQUEST FORM ON THE BACK COVER OF
THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED IN THE STATEMENT OF ADDITIONAL
INFORMATION IS INCORPORATED HEREIN BY REFERENCE. THE TABLE OF CONTENTS OF THE
STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON PAGE 39 OF THIS
PROSPECTUS.
AN INVESTMENT IN THE FUND IS NEITHER INSURED NOR GUARANTEED
BY THE UNITED STATES GOVERNMENT.
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 DATE OF THIS PROSPECTUS IS APRIL 30, 1996.
<PAGE>
TABLE OF CONTENTS
Page
Special Terms. . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Deductions and Charges. . . . . . . . . . . . . . . 5
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Per-Unit Income and Changes in Accumulation Unit Value . . . 9
Introduction . . . . . . . . . . . . . . . . . . . . . . . . 10
Description of the Separate Account. . . . . . . . . . . . . 11
Deductions and Charges Under the Contracts . . . . . . . . . 11
A. Administration Deductions. . . . . . . . . . . . . . 11
B. Premium Taxes. . . . . . . . . . . . . . . . . . . . 12
C. Mortality and Expense Risk Charge. . . . . . . . . . 12
D. Investment Management Service Charge . . . . . . . . 12
E. Contingent Deferred Sales Charge . . . . . . . . . . 12
F. Transfers to and from Other Contracts. . . . . . . . 13
G. Miscellaneous. . . . . . . . . . . . . . . . . . . . 14
The Contracts. . . . . . . . . . . . . . . . . . . . . . . . 14
A. General. . . . . . . . . . . . . . . . . . . . . . . 14
B. Deferred Variable Annuity Accumulation Period. . . . 16
C. Annuity Period . . . . . . . . . . . . . . . . . . . 23
Investment Policies and Restrictions of the Fund . . . . . . 25
Federal Income Tax Status. . . . . . . . . . . . . . . . . . 31
Introduction. . . . . . . . . . . . . . . . . . . . . . 31
The Franklin. . . . . . . . . . . . . . . . . . . . . . 31
The Contracts: Qualified Plans. . . . . . . . . . . . . 31
A. Qualified Pension, Profit-Sharing
and Annuity Plans. . . . . . . . . . . . . . . . . 32
B. H. R. 10 Plans (Self-Employed Individuals) . . . . 32
C. Section 403(b) Annuities . . . . . . . . . . . . . 32
D. Individual Retirement Annuities. . . . . . . . . . 33
The Contracts: Non-Qualified Plans. . . . . . . . . . . 34
Aggregation of Contracts. . . . . . . . . . . . . . . . 34
Income Tax Withholding. . . . . . . . . . . . . . . . . 35
Management . . . . . . . . . . . . . . . . . . . . . . . . . 35
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . 36
Distribution of the Contracts. . . . . . . . . . . . . . . . 37
State Regulation . . . . . . . . . . . . . . . . . . . . . . 37
Reports to Owners. . . . . . . . . . . . . . . . . . . . . . 37
Fundamental Changes. . . . . . . . . . . . . . . . . . . . . 38
Registration Statement . . . . . . . . . . . . . . . . . . . 38
Other Variable Annuity Contracts; Effect of
Non-Qualification . . . . . . . . . . . . . . . . . . . . 38
Yield Information. . . . . . . . . . . . . . . . . . . . . . 38
Table of Contents of Statement of Additional Information . . 39
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . 40
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN
AUTHORIZED BY THE FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL
SERVICES CORPORATION OR FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C TO
MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE
CONTAINED IN THIS PROSPECTUS AND IN ANY AUTHORIZED SUPPLEMENTAL SALES
MATERIAL.
2
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SPECIAL TERMS
The following is a glossary of certain terms used in this Prospectus:
ACCUMULATION UNIT -- A measure used to determine the value of a Contract
Owner's interest in the Fund prior to the initial Annuity Payment Date.
ANNUITY PAYMENT DATE -- The date the first monthly Annuity Payment is to be
made to the Variable Annuitant, and the same day of each month thereafter so
long as the annuity is due. Depending on the Settlement Option elected,
Annuity Payment Dates may occur on a periodic basis other than monthly.
ANNUITY PAYMENTS -- Periodic payments made to a Variable Annuitant pursuant
to a Contract. In certain circumstances, Annuity Payments may be paid to a
Beneficiary after the death of a Variable Annuitant.
ANNUITY UNIT -- A measure used to determine the value of Annuity Payments.
BANK DRAFT -- A draft preauthorized by the Contract Owner and a bank of his
or her selection in the amount of a periodic Stipulated Payment, which, at
the time each periodic Stipulated Payment is due, is submitted by The
Franklin directly to such bank for payment.
BENEFICIARY -- The person or persons designated by the Contract Owner to whom
any payment due on death is payable.
CASH VALUE -- The value of all Accumulation Units or Annuity Units
attributable to a Contract.
CODE -- The Internal Revenue Code of 1986, as amended.
CONTRACT -- An individual variable annuity contract issued by Franklin Life
Money Market Variable Annuity Fund C that is offered by this Prospectus.
CONTRACT ANNIVERSARY -- An anniversary of the Effective Date of the Contract.
CONTRACT OWNER -- Except in cases where the Contract is issued to a trustee
of a qualified employees' trust or pursuant to a qualified annuity plan, the
Contract Owner is the individual Variable Annuitant to whom the Contract is
issued. In cases where the Contract is issued to a trustee of a qualified
employees' trust or pursuant to a qualified annuity plan, the Contract Owner
will be respectively the trustee or the employer establishing such trust or
plan, and the employee named as the Variable Annuitant of such Contract is
referred to herein as the employee. When the term "Contract Owner" is used in
the context of voting rights, it includes the owners of all contracts which
depend in whole or in part on the investment performance of the Fund.
CONTRACT YEAR -- Each year starting with the Effective Date and each Contract
Anniversary thereafter.
DEFERRED VARIABLE ANNUITY -- An annuity contract which provides for Annuity
Payments to commence at some future date. Included are periodic payment
deferred contracts and single payment deferred contracts.
EFFECTIVE DATE -- The date shown on the Schedule Page of the Contract as the
date the first Contract Year begins.
FIXED-DOLLAR ANNUITY -- An annuity contract which provides for Annuity
Payments which remain fixed as to dollar amount throughout the Annuity
Payment period.
3
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HOME OFFICE -- The Home Office of The Franklin located at #1 Franklin Square,
Springfield, Illinois 62713.
IMMEDIATE VARIABLE ANNUITY -- An annuity contract which provides for Annuity
Payments to commence immediately rather than at some future date.
INDIVIDUAL RETIREMENT ANNUITY -- An annuity contract described in Section
408(b) of the Code. Individual Retirement Annuities may also qualify as
Simplified Employee Pensions.
NON-QUALIFIED CONTRACTS -- Contracts issued under Non-Qualified Plans.
NON-QUALIFIED PLANS -- Retirement or deferred compensation plans or
arrangements which do not receive favorable tax treatment under the Code.
PERIODIC STIPULATED PAYMENT CONTRACT -- An annuity contract which provides
that payments made to purchase the contract will be made in periodic
instalments rather than in a single sum.
QUALIFIED CONTRACTS -- Contracts issued under Qualified Plans.
QUALIFIED PLANS -- Retirement plans which receive favorable tax treatment
under the Code and which are described on page 10, below.
ROLLOVER CONTRIBUTION -- A transfer pursuant to Sections 402(c)(1),
402(c)(9), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code.
SETTLEMENT OPTION OR OPTIONS -- Alternative terms under which payment of the
amounts due in settlement of the Contracts may be received.
SIMPLIFIED EMPLOYEE PENSION -- An Individual Retirement Annuity which meets
the additional requirements of Section 408(k) of the Code.
SINGLE STIPULATED PAYMENT CONTRACT -- An annuity contract which provides that
the total payment to purchase the contract will be made in a single sum
rather than in periodic instalments. Included are single payment immediate
contracts and single payment deferred contracts.
STIPULATED PAYMENTS -- The payment or payments provided to be made to The
Franklin under a Contract.
THE FRANKLIN -- The Franklin Life Insurance Company, an Illinois legal
reserve stock life insurance company.
VALUATION DATE -- Each date as of which the Accumulation Unit value is
determined. This value is determined on each day (other than a day during
which no Contract or portion thereof is tendered for redemption and no order
to purchase or transfer a Contract is received by the Fund) in which there is
a sufficient degree of trading in the securities in which the Fund invests
that the value of an Accumulation Unit might be materially affected by
changes in the value of the Fund's investments, as of the close of trading on
that day.
VALUATION PERIOD -- The period commencing on a Valuation Date and ending on
the next Valuation Date.
VARIABLE ANNUITANT -- Any natural person with respect to whom a Contract has
been issued and a Variable Annuity has been, will be or (but for death) would
have been effected thereunder. In certain circumstances, a Variable Annuitant
may elect to receive Annuity Payments on a fixed-basis or a combination of a
fixed and variable basis.
VARIABLE ANNUITY -- An annuity contract which provides for a series of
periodic annuity payments, the amounts of which may increase or decrease as a
result of the investment experience of a separate account.
4
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TABLE OF DEDUCTIONS AND CHARGES
Contract Owner Transaction Expenses
Deferred Sales Load (as a percentage of the lesser of (i) the Cash Value
of the part of the Contract surrendered or (ii) the Stipulated Payments
made during the immediately preceding 72 months represented by the part
of the Contract surrendered (or the Stipulated Payment in the case of a
Single Stipulated Payment Contract))
Contract Total Partial
Year Redemption Redemption
-----------------------------------
Single Stipulated
Payment Contract 1 6.00% 6.00%
2 6.00% 6.00%
3 4.00% 4.00%
4 2.00% 4.00%
5 and thereafter 0.00% 4.00%
Periodic Stipulated
Payment Contract 1 8.00% 8.00%
2 8.00% 8.00%
3 8.00% 8.00%
4 6.00% 6.00%
5 4.00% 4.00%
6 2.00% 4.00%
7 and thereafter 0.00% 4.00%
Administration Fee (as a
charge against purchase
payments)
Single Stipulated
Payment Contract $100
Periodic Stipulated
Payment Contract $20 per Contract Year plus $1 per
Stipulated Payment ($.50 if by Bank
Draft or by employer or military
preauthorized automatic deduction)
Annual Expenses
(as a percentage of average net assets)
Management Fees 0.38%
Mortality and Expense Risk Fees
Mortality Fees 0.90%
Expense Risk Fees 0.17%
-----
Total Annual Expenses 1.44%
Example
If you surrender your contract at the end of the applicable
time period: 1 year 3 years 5 years 10 years
You would pay the following expenses on a
$1,000 investment, assuming 5% annual
return on assets:
5
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Single Stipulated Payment Contract $ 169 $ 181 $ 171 $ 255
Periodic Stipulated Payment
Contracts: $ 181 $ 191 $ 221 $ 359
If you do not surrender your contract: 1 year 3 years 5 years 10 years
You would pay the following expenses
on a $1,000 investment, assuming 5%
annual return on assets:
Single Stipulated Payment Contract $ 113 $ 141 $ 171 $ 255
Periodic Stipulated Payment
Contracts: $ 36 $ 106 $ 177 $ 359
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The Table of Deductions and Charges is intended to assist Contract
Owners in understanding the various fees and expenses that they bear directly
or indirectly. Additional deductions may be made from Stipulated Payments for
any premium taxes payable by The Franklin on the consideration received from
the sale of the Contracts. See "Premium Taxes," p. 12, below. For a more
detailed description of such fees and expenses, see "Deductions and Charges
under the Contracts," pp. 11-14, below. The example assumes that a single
Stipulated Payment of $1,000 is made at the beginning of the periods shown.
(It should be noted that The Franklin will not actually issue a Single
Stipulated Payment Contract unless the single payment is at least $2,500.)
This assumption applies even with respect to Periodic Stipulated Payment
Contracts, which would normally require additional payments. The example also
assumes a constant investment return of 5% and the expenses might be
different if the return of the Fund averaged 5% over the periods shown but
fluctuated during such periods. The amounts shown in the example represent
the aggregate amounts that would be paid over the life of a Contract if the
Contract were surrendered at the end of the applicable time periods.
6
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SUMMARY
THE CONTRACTS
The individual variable annuity contracts (the "Contracts") being
offered by this Prospectus are for use as Individual Retirement Annuities or
in connection with trusts and retirement or deferred compensation plans which
may or may not qualify for special tax treatment under the Code. See "Federal
Income Tax Status," pp. 31-35, below. The basic purpose of the Contracts is
to provide Annuity Payments which will vary with the investment performance
of Franklin Life Money Market Variable Annuity Fund C (the "Fund"). The
Contracts provide Annuity Payments for life commencing on an initial Annuity
Payment Date selected by the Contract Owner; other Settlement Options are
provided. See "Introduction," p. 10, and "The Contracts," pp. 14-25, below.
At any time within 10 days after receipt of a Contract, the Contract Owner
may return the Contract and receive a refund of any premium paid on the
Contract. See "Right to Revocation of Contract," p. 16, below.
THE FUND AND ITS INVESTMENT OBJECTIVES
The Fund is an open-end diversified management investment company. The
primary investment objective of the Fund is long-term compounding of income
through retention and reinvestment of income from investments in a
diversified portfolio of short-term money market securities, yielding a high
level of current income to the extent consistent with the preservation of
capital and the maintenance of liquidity. There is no assurance that this
objective will be attained. In keeping with the primary investment objective
of investing in short-term money market securities, at least 80% of the
Fund's portfolio will be invested in securities with maturities or remaining
maturities of one year or less and not more than 20% will be invested in
securities with maturities or remaining maturities of between one and two
years. While preservation of capital is a primary investment objective of the
Fund and the money market securities in which the Fund invests generally are
considered to have low principal risk, such securities are not completely
risk-free. There is the risk of the failure of issuers to meet their
principal and interest obligations. Commercial paper generally carries the
highest risk of money market securities. The Fund may invest in Eurodollar
C.D.'s and in securities issued by the Government of Canada and Canadian
banks, which involve certain risks relating to marketability, possible
adverse political and economic developments and possible restrictions on
international currency transactions. See "Investment Policies and
Restrictions of the Fund," pp. 25-30, below.
SPECIAL INVESTMENT CONSTRAINTS
It is anticipated that the combination of the restrictions on the amount
that the Fund may invest in the securities of any one issuer and the
relatively small and decreasing size of the Fund's assets will make it more
difficult for the Fund's investment adviser to secure appropriate commercial
paper investments, which have historically constituted a substantial portion
of the Fund's investments. It is possible that the shrinking pool of
commercial paper investments available to the Fund due to its size may impair
the future investment performance of the Fund. See "Investment Policies and
Restrictions of the Fund -- Special Investment Contraints," p. 30, below.
INVESTMENT ADVISER; PRINCIPAL UNDERWRITER
The Franklin Life Insurance Company ("The Franklin"), an Illinois legal
reserve stock life insurance company, acts as investment adviser to the Fund.
The Franklin is engaged in the writing of ordinary life policies, annuities
and income protection policies. Franklin Financial Services Corporation, a
wholly-owned subsidiary of The Franklin, is the principal underwriter for the
Fund. The Franklin is an indirect wholly-owned subsidiary of American
General Corporation. See "Investment Management Service Charge," p. 12, and
"Distribution of the Contracts," p. 37, below.
DEDUCTIONS AND CHARGES
The deductions and charges applicable to a Contract are illustrated in
the Table of Deductions and Charges that appears immediately before this
summary. There are no deductions for sales charges made from Stipulated
Payments under the Contracts. However, a contingent deferred sales charge,
applied against the lesser of the Cash Value or Stipulated Payments made
during the immediately preceding 72 months, is deducted in the event of
certain redemptions. In the case of Periodic Stipulated Payment Contracts,
such charges for total redemptions start at 8% for the first three Contract
Years and then decline by 2% increments per year through the sixth Contract
Year, with no such charge being imposed after the end of the sixth Contract
Year. In the case of Single Stipulated Payment Contracts, such charges for
total redemptions start at 6% for the first two Contract Years and then
decline by 2% increments per year through the fourth Contract Year, with no
such charge being imposed after the end of the fourth Contract Year. The
contingent deferred sales charges applied to partial redemptions are
identical to those applied to total redemptions, except that such charges
remain at a constant 4% subsequent to the fifth Contract Year in the case of
Periodic Stipulated Payment Contracts, and the third Contract Year in the
case of Single Stipulated Payment
7
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Contracts. Contingent deferred sales charges are waived in the case of
partial redemptions of an amount in any 12-month period up to 10% of Cash
Value as of the date of the first partial redemption during such 12-month
period, death of the Variable Annuitant and where proceeds of a total
redemption are used to purchase another Variable Annuity, Fixed-Dollar
Annuity or life insurance contract issued by The Franklin. See "Contingent
Deferred Sales Charge," pp. 12-13, "Redemption," p. 18, and "Transfers to
Other Contracts," pp. 13-14, below.
A deduction of $20 per Contract Year (subject to increase by The
Franklin to a maximum of $30 per Contract Year) and a transaction fee of
$1.00 per Stipulated Payment ($.50 if by Bank Draft or by employer or
military preauthorized automatic deduction from compensation) in the case of
Periodic Stipulated Payment Contracts, and a one-time deduction of $100 in
the case of Single Stipulated Payment Contracts, is made from Stipulated
Payments for administrative expenses. Any applicable state or local premium
taxes on the Stipulated Payments (currently up to 5%) are also deducted from
the single or periodic Stipulated Payments. The amount remaining after all
such deductions and fees is allocated to the Fund. See "Redemption," p. 18,
"Administration Deductions," p. 11, "Contingent Deferred Sales Charge," pp.
12-13, and "Premium Taxes," p. 12, below.
The charges for annuity rate and mortality assurances, expense
assurances and investment management services currently aggregate 1.440% on
an annual basis and are made daily against the net asset value of the Fund.
These charges consist of .900% for The Franklin's assurance of annuity rates
or mortality factors, .165% (subject to increase by The Franklin up to a
maximum of .850%) for The Franklin's assurances of expense factors, and .375%
(subject to increase by The Franklin up to a maximum of .500%) for investment
management services by The Franklin. See "Mortality and Expense Risk Charge,"
p. 12, and "Investment Management Service Charge," p. 12, below.
MINIMUM PERMITTED INVESTMENT
Subject to limited exceptions, the minimum single Stipulated Payment is
$2,500. The minimum Periodic Stipulated Payment Contract sold is one under
which the annual payments are $360 and each monthly Stipulated Payment is
$30. See "Purchase Limits," pp. 15-16, below.
NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to
the death of the Variable Annuitant and prior to the Contract's initial
Annuity Payment Date, may, subject to any limitations on early settlement
contained in an applicable Qualified Plan and subject to limitations on early
withdrawals imposed in connection with Section 403(b) annuity purchase plans
(see "Federal Income Tax Status," pp. 31-35, below), redeem all or part of
the Contract and receive the Cash Value (equal to the number of Accumulation
Units credited to the part of the Contract redeemed times the value of an
Accumulation Unit at the end of the Valuation Period in which the request for
redemption is received) less any applicable contingent deferred sales charge,
unpaid administration deductions, and federal income tax withholding. Partial
redemptions must be in amounts not less than $500. For information as to
Accumulation Units, see "Value of the Accumulation Unit," p. 17, below.
Subject to certain limitations, the Contract Owner may elect to have all or a
portion of the amount due upon a total redemption of a Contract applied under
certain Settlement Options or applied toward the purchase of other annuity or
insurance products offered by The Franklin. Federal tax penalties may apply
to certain redemptions. See "Redemption," p. 18, "Contingent Deferred Sales
Charge," pp. 12-13, "Transfers to and from Other Contracts," pp. 13-14,
"Settlement Options," pp. 20-23, and "Federal Income Tax Status," pp. 31-35,
below.
TERMINATION BY THE FRANKLIN
The Franklin reserves the right to terminate Contracts if Stipulated
Payments are less than $360 in each of three consecutive Contract Years
(excluding the first Contract Year) and if the Cash Value is less than $500
at the end of such three-year period. Different termination provisions apply
in the case of Individual Retirement Annuities. See "Termination by The
Franklin," p. 16, below.
8
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
The financial information in this table for the year ended December 31, 1995
has been audited by Ernst & Young LLP, independent auditors. The financial
information in this table for each of the seven years in the period ended
December 31, 1994 was audited by Coopers & Lybrand L.L.P., independent
accountants. The financial information in this table for each of the two
years in the period ended December 31, 1987 was audited by Ernst & Young LLP,
independent auditors. This table should be read in conjunction with the
financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
- --------------------------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $1.203 $.846 $.617 $.746 $1.140 $1.501 $1.542 $1.186 $1.001 $.956
Expenses .309 .303 .294 .286 .278 .265 .244 .230 .218 .233
- --------------------------------------------------------------------------------------------------------------------
Net investment income .894 .543 .323 .460 .862 1.236 1.298 .956 .783 .723
Net increase in
accumulation unit value .894 .543 .323 .460 .862 1.236 1.298 .956 .783 .723
Accumulation unit value:
Beginning of year 21.136 20.593 20.270 19.810 18.948 17.712 16.414 15.458 14.675 13.952
-----------------------------------------------------------------------------------------
End of year $22.030 $21.136 $20.593 $20.270 $19.810 $18.948 $17.712 $16.414 $15.458 $14.675
====================================================================================================================
Ratio of expenses to
average net assets 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.44% 1.63%
Ratio of net investment
income to average
net assets 4.17% 2.58% 1.58% 2.32% 4.46% 6.71% 7.65% 5.98% 5.18% 5.07%
Number of accumulation
units outstanding at
end of year 104,641 132,646 159,929 210,310 247,150 270,271 307,850 362,718 426,830 539,687
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
FINANCIAL STATEMENTS
The financial statements for the Fund and The Franklin and the reports
of the independent auditors and accountants for the Fund and The Franklin are
included in the Statement of Additional Information.
9
<PAGE>
INTRODUCTION
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
The Qualified and Non-Qualified Contracts offered by this Prospectus are
designed primarily to assist in retirement planning for individuals. The
Contracts provide Annuity Payments for life commencing on a selected Annuity
Payment Date; other Settlement Options are available. The amount of the
Annuity Payments will vary with the investment performance of the assets of
the Fund, a separate account which has been established by The Franklin under
Illinois insurance law. For the primary investment objective of the Fund, see
"Investment Policies and Restrictions of the Fund," pp. 25-30, below.
The Qualified Contracts described in this Prospectus will not knowingly
be sold other than for use:
(1) in connection with qualified employee pension and profit-sharing
trusts described in Section 401(a) and tax-exempt under Section 501(a) of the
Code, and qualified annuity plans described in Section 403(a) of the Code;
(2) in connection with qualified pension, profit-sharing and annuity
plans established by self-employed persons ("H.R. 10 Plans");
(3) in connection with annuity purchase plans adopted by public school
systems and certain tax-exempt organizations pursuant to Section 403(b) of
the Code; or
(4) as Individual Retirement Annuities described in Section 408(b) of
the Code, including Simplified Employee Pensions described in Section 408(k)
of the Code.
Pursuant to this Prospectus, The Franklin offers two types of Qualified
and Non-Qualified Contracts: those under which Annuity Payments to the
Variable Annuitant commence immediately -- "Immediate Variable Annuities" --
and those under which Annuity Payments to the Variable Annuitant commence in
the future -- "Deferred Variable Annuities." Deferred Variable Annuities may
be purchased either with periodic Stipulated Payments or with a single
Stipulated Payment, while Immediate Variable Annuities may only be purchased
with a single Stipulated Payment. Periodic Stipulated Payment Contracts are
written to provide various agreed periods during which the Stipulated
Payments are to be made, with a minimum of two years.
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.
On January 31, 1995, American General Corporation ("American General")
through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"),
acquired American Franklin Company ("AFC"), the holding company of The
Franklin, from American Brands, Inc. The address of AFC is #1 Franklin
Square, Springfield, Illinois 62713. 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 the parent company of one of the nation's largest
diversified financial services organizations. American General's operating
subsidiaries are leading providers of retirement annuities, consumer loans,
and life insurance. The company 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.
The discussion of Contract terms herein in many cases summarizes those
terms. Reference is made to the full text of the Contract forms, which are
filed with the Securities and Exchange Commission as exhibits to the
Registration Statement under the Securities Act of 1933 and the Investment
Company Act of 1940 of which this Prospectus is a part. The exercise of
certain of the Qualified Contract rights herein described may be subject to
the terms and conditions of any Qualified Plan under which such Qualified
Contract may be purchased. This Prospectus contains no information concerning
any such Qualified Plan. Further information relating to some Qualified
Plans may be obtained from the disclosure documents required to be
distributed to employees under the Employee Retirement Income Security Act of
1974.
10
<PAGE>
DESCRIPTION OF THE SEPARATE ACCOUNT
The Fund was established as a separate account on July 23, 1981 by
resolution of the Board of Directors of The Franklin pursuant to the
provisions of the Illinois Insurance Code. The Fund is an open-end
diversified management investment company registered with the Securities and
Exchange Commission under the Investment Company Act of 1940. Such
registration does not involve supervision of the management or investment
practices or policies of the Fund or of The Franklin by the Commission. The
Board of Managers of the Fund must be elected annually by Contract Owners. A
majority of the members of the Board of Managers are persons who are not
otherwise affiliated with The Franklin. See "Management," pp. 35-36, below.
The Fund meets the definition of a "Separate Account" under the federal
securities laws.
Under the provisions of the Illinois Insurance Code, the income, gains
or losses of the Fund are credited to or charged against the amounts
allocated to the Fund in accordance with the terms of the Contracts, without
regard to the other income, gains or losses of The Franklin. The assets of
the Fund are not chargeable with liabilities arising out of The Franklin's
other business activities, including liabilities of any other separate
account which may be established. These assets are held with relation to the
Contracts described in this Prospectus and such other Variable Annuity
contracts as may be issued by The Franklin and designated by it as
participating in the Fund. All obligations arising under the Contracts,
including the promise to make Annuity Payments, are general corporate
obligations of The Franklin. Accordingly, all of The Franklin's assets
(except those allocated to other separate accounts which have been or may be
established) are available to meet its obligations and expenses under the
Contracts participating in the Fund.
The Franklin is taxed as a "life insurance company" under the Code. The
Fund is subject to tax as part of The Franklin for federal income tax
purposes. However, the operations of the Fund are considered separately from
the other operations of The Franklin in computing The Franklin's tax
liability and the Fund is not affected by federal income taxes paid by The
Franklin with respect to its other operations. The operations of the Fund are
treated separately from the other operations of The Franklin for accounting
and financial statement purposes. Under existing law, no federal income tax
is payable by The Franklin on investment income and realized capital gains of
the Fund. See "Federal Income Tax Status," pp. 31-35, below.
DEDUCTIONS AND CHARGES UNDER THE CONTRACTS
A. ADMINISTRATION DEDUCTIONS
Deductions from Stipulated Payments will be made as follows for
administrative expenses with respect to the Contracts and the Fund such as
preparation of the Contracts, custodial and transfer fees, salaries, rent,
postage, telephone and legal, accounting and periodic reporting fees:
(1) Under Single Stipulated Payment Contracts, a one-time deduction of
$100.
(2) Under Periodic Stipulated Payment Contracts, a deduction of $20 per
Contract Year (subject to increase at any time by The Franklin to a maximum
of $30 per Contract Year) and a transaction fee of $1.00 per Stipulated
Payment ($.50 if by Bank Draft or by employer or military preauthorized
automatic deduction from compensation).
The above deductions for administrative expenses, and charges for
mortality and expense risk assurances discussed under "Mortality and Expense
Risk Charge," p. 12, below, are made pursuant to an Administration Agreement
dated December 3, 1981 between the Fund and The Franklin. The Administration
Agreement is described under "Investment Advisory and Other Services" in the
Statement of Additional Information.
The administration deductions are designed to cover the actual expenses
of administering the Contracts and the Fund, and The Franklin does not expect
to realize a profit by virtue of these deductions. The aggregate dollar
amounts of the administration deductions for the fiscal years ended December
31, 1993, 1994 and 1995 were $2,560, $1,600 and $1,060, respectively.
11
<PAGE>
B. PREMIUM TAXES
At the time any premium taxes are payable by The Franklin on the
consideration received from the sale of the Contracts, the amount thereof
will be deducted from the Stipulated Payments. Premium taxes ranging up to 5%
as of February 7, 1996 are charged by various jurisdictions in which The
Franklin is transacting business and in which it may, after appropriate
qualification, offer Contracts.
C. MORTALITY AND EXPENSE RISK CHARGE
While Annuity Payments will reflect the investment performance of the
Fund, they will not be affected by adverse mortality experience or by any
excess in the actual expenses of the Contracts and the Fund over the maximum
administration deductions provided for in the Contracts. The Franklin assumes
the risk that Annuity Payments will continue for a longer period than
anticipated because the Variable Annuitant lives longer than expected (or the
Variable Annuitants as a class do so) and also assumes the risk that the
administration deductions may be insufficient to cover the actual expenses of
the administration of the Contracts and of the Fund (except those expenses
listed under "Investment Management Service Charge," immediately below, which
the Fund will bear). The Franklin assumes these risks for the duration of the
Contract and the annuity rate, mortality and expense risk deductions and
charges set forth herein will not be increased beyond the stated maximum with
respect thereto regardless of the actual mortality and expense experience.
The mortality risk charge is imposed regardless of whether or not the payment
option selected involves a life contingency.
For assuming these risks, The Franklin imposes a daily charge against
the value of the Accumulation Unit and the Annuity Unit. (For further
information as to the Accumulation Unit and the Annuity Unit, see "Deferred
Variable Annuity Accumulation Period" and "Annuity Period," pp. 16-23 and pp.
23-25, respectively, below.) These charges are at the current combined annual
rate of 1.065% (.002918% on a daily basis), of which .900% is for annuity
rate and mortality assurances and .165% (subject to increase at any time by
The Franklin up to a maximum of 1.750%) is for expense assurances.
During 1993, 1994 and 1995, The Franklin earned and was paid $40,329,
$32,103 and $27,136, respectively, by reason of these charges. Such charges
during 1995 were equal to 1.059% of average net assets.
D. INVESTMENT MANAGEMENT SERVICE CHARGE
The Franklin acts as investment manager of the Fund. For acting as such,
The Franklin makes a charge against the value of the Accumulation Unit and of
the Annuity Unit at an annual rate of up to .500%. The Franklin has agreed to
forego initially a portion of this charge and currently makes a charge
against the value of the Accumulation Unit and of the Annuity Unit at the
annual rate of .375% (.001027% on a daily basis). This charge may be
increased up to .500% on an annual basis only upon at least 30 days' prior
written notice to Contract Owners. The investment management services are
rendered and the charge is made pursuant to an Investment Management
Agreement executed and dated January 31, 1995, pursuant to approval by the
Contract Owners at their annual meeting held on April 17, 1995, and to be
annually renewed by a vote of the Board of Managers of the Fund commencing in
1997. The Investment Management Agreement is described under "Investment
Advisory and Other Services" in the Statement of Additional Information.
During 1993, 1994 and 1995, The Franklin earned and was paid $14,194,
$11,299 and $9,551, respectively, under the Investment Management Agreement
then in effect.
E. CONTINGENT DEFERRED SALES CHARGE
There are no deductions for sales charges made from Stipulated Payments
under the Contracts. However, commissions on the sale of the Contracts are
paid by The Franklin to agents of Franklin Financial Services Corporation
pursuant to an Agreement dated December 3, 1981. See "Distribution of the
Contracts" in the Statement of Additional Information. In addition, Franklin
Financial Services Corporation incurs certain sales expenses, such as sales
literature preparation and related costs, in connection with the sale of the
Contracts pursuant to a Sales Agreement dated January 31, 1995. Because the
Contracts are normally purchased for the long term, it is expected that these
costs will be recovered over time. If, however, a Contract is totally or
partially redeemed in certain circumstances prior to the initial Annuity
Payment Date, a means is provided for Franklin Financial Services Corporation
to recover sales expenses at that time.
12
<PAGE>
Upon redemption of a Periodic Stipulated Payment Contract, the charges
determined as follows will be applied against the lesser of the Cash Value of
the part of the Contract redeemed or the Stipulated Payments made during the
immediately preceding 72 months represented by that part of the Contract
redeemed:
Contract Percentage Charge
Year Total Redemption Partial Redemption
- -------------------------------------------------------------------------------
1 8% 8%
2 8% 8%
3 8% 8%
4 6% 6%
5 4% 4%
6 2% 4%
7 and thereafter 0% 4%
Upon redemption of a Single Stipulated Payment Contract, the charges
determined as follows will be applied against the lesser of the Cash Value of
the part of the Contract redeemed or the Stipulated Payment:
Contract Percentage Charge
Year Total Redemption Partial Redemption
- -------------------------------------------------------------------------------
1 6% 6%
2 6% 6%
3 4% 4%
4 2% 4%
5 and thereafter 0% 4%
The above charges are not, however, applied to distributions made upon
the death of the Variable Annuitant, to partial redemption of an amount in
any twelve-month period up to 10% of the Cash Value as of the date of the
first partial redemption in such twelve-month period, or to certain transfers
described below. Partial redemptions must be in amounts not less than $500.
In no event will the total amount of contingent deferred sales charges
paid under a Contract exceed 9% of total Stipulated Payments made under such
Contract in the first twelve Contract Years (or such fewer Contract Years
over which Stipulated Payments are made).
The deferred sales charges were $9,195, $1,172 and $108 during 1993,
1994 and 1995, respectively. Franklin Financial Services Corportion paid no
allowances to unaffiliated dealers in connection with the sale of the
Contracts during 1993, 1994 and 1995.
F. TRANSFERS TO OTHER CONTRACTS
Subject to any limitations in a Qualified Plan, Contracts may be
redeemed prior to the death of the Variable Annuitant and the initial Annuity
Payment Date and the Cash Value (less the required amount of federal income
tax withholding, if any) may be applied to the purchase of certain other
Variable Annuities, Fixed-Dollar Annuities or life insurance contracts issued
by The Franklin. Franklin Life Variable Annuity Fund A and Franklin Life
Variable Annuity Fund B, other separate accounts of The Franklin funding
Variable Annuity contracts, no longer issue new contracts. If a Contract is
fully redeemed and such Cash Value is immediately applied to the purchase of
such other contracts, no contingent deferred sales charge for redeeming the
Fund C Contract will apply. Any sales deductions under such other contracts
will apply to amounts transferred as if such amounts were a single stipulated
payment under such other contracts (however, total sales deductions on the
transferred funds will in no instance exceed 9% of all Stipulated Payments
made under the Fund C Contract with respect to such transferred funds);
provided, however, that if such a transfer occurs after the sixth Contract
Year in the case of Periodic Stipulated Payment Contracts or the fourth
Contract Year in the case of Single Stipulated Payment Contracts, The
Franklin will waive the sales deductions of such other contract with respect
to such transferred funds . In addition, in all instances of permitted
transfers set forth above, any administration deductions of such other
contracts will be waived with respect to such transferred
13
<PAGE>
funds. However, any new periodic stipulated payments made under such other
contracts will be subject to the normal sales and administration deductions
applicable to periodic stipulated payments under such other contracts.
It is not clear whether gain or loss will be recognized for federal
income tax purposes upon the redemption of a Fund C Contract, another annuity
contract or life insurance contract issued by The Franklin for purposes of
applying the redemption proceeds to the purchase of another contract issued
by The Franklin. Federal tax penalties may also apply to such redemptions.
Since the income and withholding tax consequences of such redemption and
purchase depend on many factors, any person contemplating redemption of a
Fund C Contract or another contract issued by The Franklin for purposes of
purchasing a different contract issued by The Franklin is advised to consult
a qualified tax advisor prior to the time of redemption.
G. MISCELLANEOUS
The Fund's total expenses for 1995 were $36,687, or 1.44% of average net
assets during 1995.
THE CONTRACTS
A. GENERAL
Certain significant provisions of the Contracts and administrative
practices of The Franklin with respect thereto are discussed in the following
paragraphs.
Contract Owner inquiries may be directed to the Equity Administration
Department of The Franklin at the address or telephone number set forth on
the cover of this Prospectus.
1. ANNUITY PAYMENTS
Variable Annuity Payments are determined on the basis of (i) an annuity
rate table specified in the Contract, and (ii) the investment performance of
the Fund. The amount of the Annuity Payments will not be affected by
mortality experience adverse to The Franklin or by an increase in The
Franklin's expenses related to the Fund or the Contracts in excess of the
expense deductions provided for in the Contracts. The Variable Annuitant
under an annuity with a life contingency or one providing for a number of
Annuity Payments certain will receive the value of a fixed number of Annuity
Units each month, determined as of the initial Annuity Payment Date on the
basis of the applicable annuity rate table and the then value of his or her
account. The value of Annuity Units, and thus the amounts of the monthly
Annuity Payments, will, however, reflect investment gains and losses and
investment income occurring after the initial Annuity Payment Date, and thus
the amount of the Annuity Payments will vary with the investment experience
of the Fund. See "Annuity Period," pp. 23-25, below.
Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS,
have held that the use of gender-based mortality tables to determine benefits
under an employer-related retirement or benefit plan 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 which reflect the age and sex of the Variable Annuitant and the
Settlement 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, in
order to enable subject employers to comply with NORRIS, The Franklin will
provide "unisex" annuity rate tables for use under Contracts purchased in
connection with "employer-related" plans. Persons contemplating purchase of a
Contract, as well as current Contract Owners, should consult a legal advisor
regarding the applicability and implications of NORRIS in connection with
their purchase and ownership of a Contract.
14
<PAGE>
2. INCREASE OR DECREASE BY CONTRACT OWNER IN AMOUNT OR NUMBER OF
PERIODIC STIPULATED PAYMENTS
The Contract Owner may increase the periodic Stipulated Payments under a
Periodic Stipulated Payment Contract (except in the case of an Individual
Retirement Annuity, which cannot be increased above the amounts described
under "Purchase Limits," immediately below) up to an amount on an annual
basis equal to twice the amount of the first Stipulated Payment on an annual
basis. Similarly, subject to the limitations described under "Purchase
Limits," immediately below, the amount of a periodic Stipulated Payment may
be decreased by the Contract Owner on any date a Stipulated Payment is due.
The Contract Owner may continue making Stipulated Payments after the
agreed number of Stipulated Payments has been made, but The Franklin will not
accept Stipulated Payments after age 75. Submission of a Stipulated Payment
in an amount different from that of the previous payment, subject to the
aforesaid limits, will constitute notice of the election of the Contract
Owner to make such change.
3. ASSIGNMENT OR PLEDGE
A Qualified Contract may not be assigned by the Contract Owner except
when issued to a trustee in connection with certain types of plans designed
to qualify under Section 401 of the Code or when made pursuant to a qualified
domestic relations order rendered by a state court in satisfaction of family
support obligations. In general, a pledge or assignment made with respect to
certain Qualified Contracts may, depending on such factors as the amount
pledged or assigned, be treated as a taxable distribution. See "Individual
Retirement Annuities," pp. 33-34, below, for special rules applicable
thereto. Moreover, in certain instances, pledges or assignments of a
Qualified Contract may result in the imposition of certain tax penalties. See
generally "The Contracts: Qualified Plans," pp. 31-34, below.
A Non-Qualified Contract may be assigned by the Contract Owner or
pledged by him or her as collateral security as provided in the Non-Qualified
Contract. Assignments or pledges of a Non-Qualified Contract will be treated
as distributions that may be taxable. Moreover, in certain instances, pledges
or assignments of a Non-Qualified Contract may result in the imposition of
certain tax penalties. See "The Contracts: Non-Qualified Plans," p. 34, below.
Persons contemplating the assignment or pledge of a Qualified Contract
or a Non-Qualified Contract are advised to consult a qualified tax advisor
concerning the federal income tax consequences thereof.
4. PURCHASE LIMITS
No periodic Stipulated Payment may be less than $30 per month ($360 per
year). No single Stipulated Payment may be less than $2,500, except that in
the case of a deferred Single Stipulated Payment Contract to be used as an
Individual Retirement Annuity funded with a Rollover Contribution, the
total Stipulated Payment applicable to the Variable Annuity, prior to
administration deductions, must be at least $1,000 unless with consent of The
Franklin a smaller single Stipulated Payment is permitted. In the case
of a Qualified Contract issued for use as an Individual Retirement
Annuity, annual premium payments may not, in general, exceed $2,000.
However, if the Individual Retirement Annuity is a Simplified Employee
Pension, annual premium payments may not exceed $24,500. Single Stipulated
Payment Contracts are not available as Individual Retirement Annuities except
for those funded with Rollover Contributions and except for those to be used
as Simplified Employee Pensions.
5. TERMINATION BY THE FRANKLIN
The Franklin reserves the right to terminate any Contract, other than a
Contract issued for use as an Individual Retirement Annuity, if total
Stipulated Payments paid are less than $360 in each of three consecutive
Contract Years (excluding the first Contract Year) and if the Cash Value is
less than $500 at the end of such three-year period. The Franklin must give
31 days' notice by mail to the Contract Owner of such termination. The
Franklin will not exercise any right to terminate such Contract if the value
of the Contract declines to less than $500 as a result of a decline in the
market value of the securities held by the Fund.
15
<PAGE>
The Franklin reserves the right to terminate any Contract issued for use
as an Individual Retirement Annuity if no Stipulated Payments have been
received for any two Contract Years and if the first monthly Annuity Payment,
determined at the initial Annuity Payment Date, arising from the Stipulated
Payments received prior to such two-year period would be less than $20.
Upon termination as described above, The Franklin will pay to the
Contract Owner the Cash Value of the Contract, less any unpaid administration
deductions. For certain tax consequences upon such payment, see "Federal
Income Tax Status," pp. 31-35, below.
6. RIGHT TO REVOCATION OF CONTRACt
A Contract Owner has the right to revoke the purchase of a Contract
within 10 days after receipt of the Contract, and upon such revocation will
be entitled to a return of the entire amount paid. The request for revocation
must be made by mailing or hand-delivering the Contract within such 10-day
period either to The Franklin Life Insurance Company, Cashiers Department,
#1 Franklin Square, Springfield, Illinois 62713, or to the agent from whom
the Contract was purchased. In general, notice of revocation given by mail is
deemed to be given on the date of the postmark, or, if sent by certified or
registered mail, the date of certification or registration.
7. NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD
1. CREDITING ACCUMULATION UNITS; DEDUCTION FOR ADMINISTRATIVE EXPENSES
During the accumulation period -- the period before the initial Annuity
Payment Date -- deductions from Stipulated Payments for administrative
expenses are made as specified under "Deductions and Charges Under the
Contracts," pp. 11-14, above. In addition, any applicable premium taxes, also
as specified above under that caption, are deducted from the Stipulated
Payments. The balance of each Stipulated Payment is credited to the Contract
Owner in the form of Accumulation Units.
The number of a Contract Owner's Accumulation Units is determined by
dividing the net amount of Stipulated Payments credited to his or her
Contract by the value of an Accumulation Unit on the day on which the
Stipulated Payment is received, except that, in the case of the original
application for a Variable Annuity Contract, the value of an Accumulation
Unit within two business days after receipt of the application will be used
if the application and all information necessary to process the application
are complete upon receipt. If the application and such information are not
complete upon receipt, The Franklin, within five days after the receipt of an
original application and initial payment at the Home Office of The Franklin,
will attempt to complete the application and will either accept the
application or reject the application and return the initial payment.
The number of Accumulation Units so determined will not be changed by
any subsequent change in the value of an Accumulation Unit, but the dollar
value of an Accumulation Unit may vary from day to day depending upon the
investment experience of the Fund.
16
<PAGE>
2. VALUATION OF A CONTRACT OWNER'S CONTRACT
The Cash Value of a Contract at any time prior to the initial Annuity
Payment Date can be determined by multiplying the total number of
Accumulation Units credited to the account by the current Accumulation Unit
value. The Contract Owner bears the investment risk, that is, the risk that
market values may decline. There is no assurance that the Cash Value of the
Contract will equal or exceed the Stipulated Payments made. A Contract Owner
may obtain from the Home Office of The Franklin information as to the current
value of an Accumulation Unit and the number of Accumulation Units credited
to his or her Contract.
3. VALUE OF THE ACCUMULATION UNIT
The value of an Accumulation Unit was set at $10 effective July 1, 1981.
Accumulation Units currently are valued each Valuation Date (each day in
which there is a sufficient degree of trading in the securities in which the
Fund invests that the value of an Accumulation Unit might be materially
affected by changes in the value of the Fund's investments, other than a day
during which no Contract or portion thereof is tendered for redemption and no
order to purchase or transfer a Contract is received by the Fund, as of the
close of trading on that day). After the close of trading on a Valuation
Date, or on a day when Accumulation Units are not valued, the value of an
Accumulation Unit is equal to its value as of the immediately following
Valuation Date. The value of an Accumulation Unit on the last day of any
Valuation Period is determined by multiplying the value of an Accumulation
Unit on the last day of the immediately preceding Valuation Period by the Net
Investment Factor (defined below) for the current Valuation Period.
At each Valuation Date a gross investment rate for the Valuation Period
then ended is determined from the investment performance of the Fund for the
Valuation Period. Such rate is equal to (i) accrued investment income for the
Valuation Period, plus capital gains and minus capital losses for the period,
whether realized or unrealized, on the assets of the Fund (adjusted by a
deduction for the payment of any applicable state or local taxes as to the
income or capital gains of the Fund) divided by (ii) the value of the assets
of the Fund at the beginning of the Valuation Period. The gross investment
rate may be positive or negative.
The net investment rate for the Valuation Period is then determined by
deducting, currently, .003945% (1.440% on an annual basis) for each day of
the Valuation Period as a charge against the gross investment rate. This
charge is made by The Franklin for providing investment management services,
annuity rate or mortality assurances and expense assurances and may be
increased by The Franklin to a maximum of 2.250% on an annual basis. See
"Deductions and Charges Under the Contracts," pp. 11-14, above.
The net investment factor for the Valuation Period is the sum of
1.00000000 plus the net investment rate for the Valuation Period ("Net
Investment Factor").
The net investment rate may be negative if the combined capital losses,
Valuation Period deductions and increase in the tax reserve exceed investment
income and capital gains. Thus, the net investment factor may be less than
1.00000000, and the value of an Accumulation Unit at the end of a Valuation
Period may be less than the value for the previous Valuation Period.
4. VALUATION OF FUND ASSETS
The value of the assets of the Fund is the value of the securities held
by the Fund plus any cash or other assets minus all liabilities.
The money market securities in which the Fund invests are traded
primarily in the over-the-counter market. Portfolio securities will be valued
using the best method currently available as determined by the Board of
Managers of the Fund. Securities with a maturity or remaining maturity of
60 days or less (including master demand notes) are valued on an amortized
cost basis. Under this method of valuation, the security is initially valued
at cost on the date of purchase (or in the case of securities purchased with
more than 60 days remaining to maturity, the market value on the 61st day
prior to maturity); thereafter the Fund assumes a constant proportionate
amortization in value until maturity of any discount or premium, regardless
of the impact of fluctuating interest rates on the market value of the
security. In periods of declining interest rates, the daily yield on
portfolio securities valued on an amortized cost basis
17
<PAGE>
may tend to be higher than the yield derived by using a method of valuation
based upon market prices and estimates; in periods of rising interest rates,
the daily yield on portfolio securities valued on an amortized cost basis may
tend to be lower than the yield derived by using a method of valuation based
upon market prices and estimates. For purposes of valuation, the maturity of
a variable rate certificate of deposit is deemed to be the next coupon date
on which the interest rate is to be adjusted. Securities with a remaining
maturity of more than 60 days currently are valued on each Valuation Date
generally at the mean between the most recent bid and asked prices or yield
equivalent as obtained from dealers that make markets in such securities.
Investments for which market quotations are not readily available as of the
close of trading on relevant markets on each Valuation Date are valued at
prices deemed best to reflect their fair value as determined in good faith by
or under the direction of the Board of Managers of the Fund in a manner
authorized by the Board of Managers and applied on a consistent basis. The
Board of Managers of the Fund has determined that the fair value of
Eurodollar certificates of deposit generally will be the market price thereof
at the close of trading on European exchanges, unless events between such
close and the close of trading on the New York Stock Exchange require a
different valuation, in which case the Board of Managers will promptly
consider what other method of valuation should be applied to determine fair
value.
The Board of Managers monitors on an ongoing basis the methods of
valuation used to determine what action, if any, should be taken to assure
that portfolio securities of the Fund are valued at fair value as determined
in good faith by the Board of Managers.
5. REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to
the death of the Variable Annuitant and prior to the initial Annuity Payment
Date, may, subject to any limitations on early settlement contained in an
applicable Qualified Plan, redeem the Contract, in whole or in part (but, if
in part, not less than $500), by submission of the Contract and a written
request for its redemption to The Franklin's Home Office, and will receive
the Cash Value of the part of the Contract redeemed, less any applicable
contingent deferred sales charges and unpaid administration deductions
referred to under "Deductions and Charges Under the Contracts," pp. 11-14,
above. Early withdrawal of certain amounts attributable to Contracts issued
pursuant to an annuity purchase plan meeting the requirements of Code Section
403(b) may be prohibited. See "Federal Income Tax Status," pp. 31-35, below.
The Cash Value of a Contract or part thereof redeemed prior to the initial
Annuity Payment Date is the number of Accumulation Units credited to the
Contract (or that part so redeemed) times the value of an Accumulation Unit
at the end of the Valuation Period in which the request for redemption is
received. Except in limited circumstances discussed below, the payment of the
Cash Value will be made within seven days after the date a properly completed
and documented request for redemption is received by The Franklin at its Home
Office. The right of redemption may be suspended or the date of payment
postponed during any periods when the New York Stock Exchange is closed
(other than customary weekend and holiday closings); when trading in the
markets the Fund normally utilizes is restricted, or an emergency exists as
determined by the Securities and Exchange Commission so that disposal of the
Fund's investments or determination of its net asset value is not reasonably
practicable; or for such other periods as the Securities and Exchange
Commission by order may permit to protect Contract Owners.
In lieu of a single payment of the amount due upon redemption of a
Contract, the Contract Owner may elect, at any time prior to the initial
Annuity Payment Date and during the lifetime of the Variable Annuitant, to
have all or any portion of the amount due applied under any available
Settlement Option. See "Settlement Options," pp. 20-23, below. However, no
Settlement Option may be elected upon redemption without surrender of the
entire Contract.
The payment of the Cash Value of a redeemed Contract either in a single
payment or under an available Settlement Option may be subject to federal
income tax withholding and federal tax penalties. See "Federal Income Tax
Status," pp. 31-35, below.
18
<PAGE>
6. PAYMENT OF ACCUMULATED VALUE AT TIME OF DEATH
In the event of the death of the Variable Annuitant prior to the initial
Annuity Payment Date, death benefits payable to the surviving Beneficiary
will be paid by The Franklin within seven days of receipt by The Franklin of
written notice of such death. The death proceeds payable will be the Cash
Value of the Contract determined as of the date on which written notice of
death is received by The Franklin by mail if such date is a Valuation Date;
if such date is not a Valuation Date, the determination will be made on the
next following Valuation Date. There is no assurance that the Cash Value of a
Contract will equal or exceed the Stipulated Payments made. No contingent
deferred sales charge is made in the case of such death. For payment of death
proceeds in the event no Beneficiary is surviving at the death of the
Variable Annuitant, see "Change of Beneficiary or Mode of Payment of
Proceeds; Death of Beneficiaries," p. 20, below. The Code imposes certain
requirements concerning payment of death benefits payable before the initial
Annuity Payment Date in the case of Qualified Contracts issued in connection
with qualified pension and profit-sharing plans under Section 401(a) of the
Code. Under those Contracts, death benefits will be paid as specified in the
governing plan documents. The terms of such documents should be consulted to
determine the death benefits and any limitations the plan may impose.
Subject to the foregoing the Contract Owner may, at any time prior to
the initial Annuity Payment Date, elect that all or any portion of such death
proceeds be paid to the Beneficiary under any one of the available Settlement
Options. See "Settlement Options," pp. 20-23, below. If the Contract Owner
has not made such an election, the Beneficiary may do so after the death of
the Variable Annuitant. The Contract Owner or the Beneficiary, whichever
selects the method of settlement, may designate contingent Beneficiaries to
receive any other amounts due should the first Beneficiary die before
completion of the specified payments. If neither the Contract Owner nor the
Beneficiary elects payment of death proceeds under an available Settlement
Option, payment will be made to the Beneficiary in a single sum.
Death proceeds may be applied to provide variable payments, fixed-dollar
payments or a combination of both.
The payment of death proceeds may be subject to federal income tax
withholding. See "Income Tax Withholding," p. 35, below
In the event of the death of the Variable Annuitant after the initial
Annuity Payment Date, payments under a Contract will be made as described in
"Settlement Options," p. 20-23, below.
7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS
Upon a failure to make a Stipulated Payment under a Periodic Stipulated
Payment Contract, subject to The Franklin's power of termination described
under "Termination by The Franklin," p. 16, above, and subject to the right
of The Franklin to pay the value of the Contract Owner's account in a single
sum at the initial Annuity Payment Date if the value on such date is less
than $2,000, the Contract Owner may elect, prior to the death of the Variable
Annuitant and prior to the initial Annuity Payment Date, either of the
following options:
(a) to exercise any of the available Settlement Options described under
"Settlement Options," pp. 20-23, below, or redeem the Contract as described
under "Redemption," p. 18, above; or
(b) to have the Contract continued from the date of failure to make a
Stipulated Payment as a paid-up annuity to commence on the initial Annuity
Payment Date stated in the Contract.
If no option is elected by the Contract Owner within 31 days after
failure to make a Stipulated Payment, the Contract will automatically be
continued under the paid-up annuity option.
8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS)
A Contract Owner, by making one Stipulated Payment, may reinstate a
Periodic Stipulated Payment Contract as to which there has been a failure to
make a Stipulated Payment, if the Contract at the time of the payment is
being continued as a paid-up annuity. However, such reinstatement does not
automatically reinstate the benefits provided by any riders to the Contract
providing life insurance or disability benefits. Administration deductions
will not accrue during Contract Years in which no Stipulated Payments are
made.
19
<PAGE>
9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF
BENEFICIARIES
While the Contract is in force the Contract Owner may (by filing a
written request at the Home Office of The Franklin) change the Beneficiary
or Settlement Option, or, if agreed to by The Franklin, change to a mode of
payment different from one of the Settlement Options, subject to applicable
limitations under the Code and any governing Qualified Plan.
If any Beneficiary predeceases the Variable Annuitant, the interest of
such Beneficiary will pass to the surviving Beneficiaries, if any, unless
otherwise provided by endorsement. If no Beneficiary survives the Variable
Annuitant and no other provision has been made, then, upon the death of the
Variable Annuitant, the proceeds will be paid in a single sum to the
Contract Owner or, if the Variable Annuitant was the Contract Owner, to the
executors or administrators of the Contract Owner's estate.
10. SETTLEMENT OPTIONS
At any time prior to the initial Annuity Payment Date and during the
lifetime of the Variable Annuitant, the Contract Owner may elect to have all
or a portion of the amount due in settlement of the Contract applied under
any of the available Settlement Options described below. If the Contract
Owner fails to elect a Settlement Option, payment automatically will be made
in the form of a life annuity. See "First Option," p. 21, below, and
"Deferred Variable Annuity Contracts," p. 23, below.
Annuity Payments under a Settlement Option are made to the Variable
Annuitant during his or her lifetime, or for such shorter period that may
apply under the particular Settlement Option. Upon the death of the original
Variable Annuitant after the initial Annuity Payment Date, any remaining
Annuity Payments that are due under the Settlement Option elected will be
continued to the Beneficiary or, if elected by the Contract Owner (or, if so
designated by the Contract Owner, by the Beneficiary), the Cash Value of the
Contract, as described under such Settlement Option below, will be paid to
the Beneficiary in one lump sum. Upon the death of any Beneficiary to whom
payments are being made under a Settlement Option, a single payment equal to
the then remaining Cash Value of the Contract, if any, will be paid to the
executors or administrators of the Beneficiary, unless other provision has
been specified and accepted by The Franklin. For a discussion of payments if
no Beneficiary is surviving at the death of the Variable Annuitant, see
"Change of Beneficiary or Mode of Payment of Proceeds; Death of
Beneficiaries," immediately above.
Payment to a Contract Owner upon redemption of a Contract, and payment of
death proceeds to a Beneficiary upon the death of the Variable Annuitant
prior to the initial Annuity Payment Date, may also be made under an
available Settlement Option in certain circumstances. See "Redemption,"
p. 18, above, and "Payment of Accumulated Value at Time of Death," p. 19,
above.
Available Settlement Options may be selected on a fixed or variable basis
or a combination thereof, except the Seventh Option, which is available on a
fixed basis only. Under an Option which is paid on a fixed basis, there is
no sharing in the investment experience of the Fund and, upon commencement
of payments, participation in the Fund terminates (the subject Contract will
be transferred to the general account of The Franklin). Settlement under the
First, Second, Third, Fourth or Fifth Option below is subject to
satisfactory proof of age of the person or persons to whom the Annuity
Payments are to be made.
The minimum amount of proceeds which may be applied under any Settlement
Option for any person is $2,000 and proceeds of a smaller amount may be paid
in a single sum in the discretion of The Franklin, except in the case of a
deferred Single Stipulated Payment Contract funded with a Rollover
Contribution not in excess of $2,000. See "Purchase Limits," pp. 15-16,
above. Further, if at any time payments under a Settlement Option become
less than $25 per payment, The Franklin has the right to change the
frequency of payment to such intervals as will result in payments of at
least $25.
In the case of Immediate Variable Annuity Contracts, the only Settlement
Options offered are the life annuity, the life annuity with 120, 180 or 240
monthly payments certain, or the joint and last survivor life annuity. See
"First Option," "Second Option" and "Fourth Option," pp. 21-22, below, and
"Immediate Variable Annuity Contracts," p. 23, below.
20
<PAGE>
The distribution rules which Qualified Plans must satisfy in order to be
tax-qualified under the Code may limit the utilization of certain Settlement
Options, or may make certain Settlement Options unavailable, in the case of
Qualified Contracts issued in connection therewith. Similarly, the
distribution rules which Non-Qualified Contracts must satisfy in order to
qualify as "annuity contracts" under the Code may also limit available
Settlement Options under Non-Qualified Contracts. These distribution rules
could affect such factors as the commencement of distributions and the
period of time over which distributions may be made. All Settlement Options
are offered subject to the limitations of the distribution rules.
The Statement of Additional Information describes certain limitations
on Settlement Options based on The Franklin's current understanding of the
distribution rules generally applicable to Non-Qualified Contracts and to
Qualified Contracts purchased under this Prospectus for use as Individual
Retirement Annuities or issued in connection with Section 403(b) annuity
purchase plans. See "Limitations on Settlement Options" in the Statement of
Additional Information. Persons considering the purchase of a Contract and
Contract Owners contemplating election of a Settlement Option are urged to
obtain and read the Statement of Additional Information. Various questions
exist, however, about the application of the distribution rules to
distributions from the Contracts and their effect on Settlement Option
availability thereunder. Persons contemplating the purchase of a Contract
should consult a qualified tax advisor concerning the effect of the
distribution rules on the Settlement Option or Options he or she is
contemplating.
Neither this Prospectus nor the Statement of Additional Information,
however, describes limitations on Settlement Options based on applicable
distribution rules in the case of Qualified Contracts issued in connection
with qualified pension and profit-sharing plans under Section 401(a) of the
Code and annuity plans under Section 403(a) of the Code. Under those
Contracts, available Settlement Options are limited to those Options
specified in the governing plan documents. The terms of such documents
should be consulted to determine Settlement Option availability and any
other limitations the plan may impose on early redemption of the Qualified
Contract, payment in settlement thereof, or similar matters. Generally,
limitations comparable to those described in the Statement of Additional
Information for Individual Retirement Annuities and Section 403(b)
annuity purchase plans also apply with respect to such qualified pension,
profit-sharing and annuity plans (including H.R. 10 Plans).
Persons contemplating election of the Fifth, Sixth or Seventh Option
should consult a qualified tax advisor to determine whether the continuing
right of redemption under any such Option might be deemed for tax purposes
to result in the "constructive receipt" of the Cash Value of the Contract or
proceeds remaining on deposit with The Franklin.
FIRST OPTION -- LIFE ANNUITY. An annuity payable monthly during the
lifetime of the Variable Annuitant, ceasing with the last Annuity Payment
due prior to the death of the Variable Annuitant. This Option offers the
maximum level of monthly Annuity Payments since there is no guarantee of a
minimum number of Annuity Payments or provision for any continued payments
to a Beneficiary upon the death of the Variable Annuitant. It would be
possible under this Option for the Variable Annuitant to receive only one
Annuity Payment if he or she died before the second Annuity Payment Date, or
to receive only two Annuity Payments if he or she died after the second
Annuity Payment Date but before the third Annuity Payment Date, and so forth.
SECOND OPTION -- LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN. An annuity payable monthly during the lifetime of the Variable
Annuitant including the commitment that if, at the death of the Variable
Annuitant, Annuity Payments have been made for less than 120 months,
180 months or 240 months (as selected by the Contract Owner in electing this
Option), Annuity Payments shall be continued during the remainder of the
selected period to the Beneficiary. The cash value under this Settlement
Option is the present value of the current dollar amount of any unpaid
Annuity Payments certain.
THIRD OPTION -- UNIT REFUND LIFE ANNUITY. An annuity payable monthly
during the lifetime of the Variable Annuitant, ceasing with the last Annuity
Payment due prior to the death of the Variable Annuitant, provided that, at
the death of the Variable Annuitant, the Beneficiary will receive a payment
of the then dollar value of the number of Annuity Units equal to the excess,
if any, of (a) over (b) where (a) is the total amount applied under this
Option divided by the Annuity Unit value at the initial Annuity Payment Date
and (b) is the number of Annuity Units represented by each Annuity Payment
multiplied by the number of Annuity Payments made.
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<PAGE>
For example, if $10,000 were applied on the first Annuity Payment Date
to the purchase of an annuity under this Option, the Annuity Unit value at
the initial Annuity Payment Date were $2.00, the number of Annuity Units
represented by each Annuity Payment were 30.55, 10 Annuity Payments were
paid prior to the date of the Variable Annuitant's death and the value of an
Annuity Unit on the Valuation Date following the Variable Annuitant's death
were $2.05, the amount paid to the Beneficiary would be $9,623.73, computed
as follows:
<TABLE>
<S> <C>
($10,000 - (30.55 X 10)) X $2.05 = (5,000 - 305.5) X 2.05 = 4,694.5 X $2.05 = $9,623.73
-------
$2.00
</TABLE>
FOURTH OPTION -- JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity
payable monthly during the joint lifetime of the Variable Annuitant and a
secondary variable annuitant, and thereafter during the remaining lifetime
of the survivor, ceasing with the last Annuity Payment due prior to the
death of the survivor. Since there is no minimum number of guaranteed
payments under this Option, it would be possible under this Option to
receive only one Annuity Payment if both the Variable Annuitant and the
secondary variable annuitant died before the second Annuity Payment Date, or
to receive only two Annuity Payments if both the Variable Annuitant and the
secondary variable annuitant died after the second Annuity Payment Date but
before the third Annuity Payment Date, and so forth.
FIFTH OPTION -- PAYMENTS FOR A DESIGNATED PERIOD. An amount payable
monthly to the Variable Annuitant for a number of years which may be from
one to 30 (as selected by the Contract Owner in electing this Option). At
the death of the Variable Annuitant, payments will be continued to the
Beneficiary for the remaining period. The cash value under this Settlement
Option is the then present value of the current dollar amount of any unpaid
Annuity Payments certain. A Contract under which Annuity Payments are being
made under this Settlement Option may be redeemed in whole or in part (but,
if in part, not less than $500) at any time by the Contract Owner for the
aforesaid cash value of the part of the Contract redeemed. See "Redemption,"
p. 18, above.
It should be noted that, while this Option does not involve a life
contingency, charges for annuity rate assurances, which include a factor for
mortality risks, are included in the computation of Annuity Payments due
under this Option. Further, although not contractually required to do so,
The Franklin currently follows a practice, which may be discontinued at any
time, of permitting persons receiving Annuity Payments under this Option to
elect to convert such payments to a Variable Annuity involving a life
contingency under the First, Second, Third or Fourth Options above if, and
to the extent, such other Options are otherwise available to such person.
SIXTH OPTION -- PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due
will be paid to the Variable Annuitant in equal annual, semiannual,
quarterly or monthly Annuity Payments of a designated dollar amount (not
less than $75 a year per $1,000 of the original amount due) until the
remaining balance (adjusted each Valuation Period by the Net Investment
Factor for the period) is less than the amount of one Annuity Payment, at
which time such balance will be paid and will be the final Annuity Payment
under this Option. Upon the death of the Variable Annuitant, payments will
be continued to the Beneficiary until such remaining balance is paid. The
cash value under this Settlement Option is the amount of proceeds then
remaining with The Franklin. A Contract under which Annuity Payments are
being made under this Settlement Option may be redeemed at any time by the
Contract Owner for the aforesaid cash value.
Annuity Payments made under the Sixth Option may, under certain
circumstances, be converted into a Variable Annuity involving a life
contingency. See the last paragraph under the Fifth Option, above, which
applies in its entirety to the Sixth Option as well.
SEVENTH OPTION -- INVESTMENT INCOME. The amount due may be left on
deposit with The Franklin in its general account and a sum will be paid
annually, semiannually, quarterly or monthly, as selected by the Contract
Owner in electing this Option, which shall be equal to the net investment
rate of 3% stipulated as payable upon fixed-dollar amounts for the period
multiplied by the amount remaining on deposit. Upon the death of the
Variable Annuitant, the aforesaid payments will be continued to the
Beneficiary. The sums left on deposit with The Franklin may be withdrawn at
any time.
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<PAGE>
Periodic payments received under this Option may be treated like
interest for federal income tax purposes. Interest payments are fully
taxable and are not subject to the general rules applicable to the taxation
of annuities described in "Federal Income Tax Status," pp. 31-35, below.
Persons contemplating election of this Seventh Option are advised to consult
a qualified tax advisor concerning the availability and tax effect of its
election.
C. ANNUITY PERIOD
1. ELECTING ANNUITY PAYMENTS AND SETTLEMENT OPTION; COMMENCEMENT OF
ANNUITY PAYMENTS
(a) DEFERRED VARIABLE ANNUITY CONTRACTS
A Contract Owner selects a Settlement Option and an initial Annuity
Payment Date prior to the issuance of the Deferred Variable Annuity
Contract, except that Qualified Contracts issued in connection with
qualified pension and profit-sharing plans (including H.R. 10 Plans) under
Section 401(a) of the Code and annuity plans (including H.R. 10 Plans) under
Section 403(a) of the Code provide for Annuity Payments to commence at the
date and under the Settlement Option specified in the plan. The Contract
Owner may defer the initial Annuity Payment Date and continue the Contract
to a date not later than the Contract Anniversary on which the attained age
of the Variable Annuitant is 75 unless the provisions of the Code or any
governing Qualified Plan require Annuity Payments to commence at an earlier
date. See "Limitations on Settlement Options" in the Statement of Additional
Information. The Franklin will require satisfactory proof of age of the
Variable Annuitant prior to the initial Annuity Payment Date.
(b) IMMEDIATE VARIABLE ANNUITY CONTRACTS
The Franklin offers three forms of Immediate Variable Annuity
Contracts: the life annuity, the life annuity with 120, 180 or 240 monthly
payments certain and the joint and last survivor life annuity. For a
description of these forms of annuity, see the First, Second and Fourth
Options under "Settlement Options," pp. 21-22, above.
Under an Immediate Variable Annuity, the first Annuity Payment is made
to the Variable Annuitant one month after the Effective Date of the
Contract, unless the period selected by the Contract Owner for the frequency
of Annuity Payments is more than one month, in which case the first Annuity
Payment will be made after a period equal to the period so selected from the
Effective Date (subject in every case to the survival of the Variable
Annuitant, except in cases where a guaranteed payment period is provided).
2. THE ANNUITY UNIT
The Annuity Unit is a measure used to value the First Option (including
the automatic life annuity) and the Second, Third, Fourth and Fifth Options,
if elected, on a variable basis.
The value of the Annuity Unit as of July 1, 1981 was fixed at $1.00 and
for each day thereafter is determined by multiplying the value of the
Annuity Unit on the preceding day by the "Annuity Change Factor" for the
Valuation Period ending on the tenth preceding day or by 1.0 if no Valuation
Period ended on the tenth preceding day. The "Annuity Change Factor" for any
Valuation Period is equal to the amount determined by dividing the Net
Investment Factor for that Valuation Period by a number equal to 1.0 plus
the interest rate for the number of calendar days in such Valuation Period
at the effective annual rate of 3-1/2%. The division by 1.0 plus an interest
factor of 3-1/2% in calculating the Annuity Change Factor is effected in
order to cancel out the assumed net investment rate of 3-1/2% per year
which is built into the annuity tables specified in the Contract. See
"Determination of Amount of First Monthly Annuity Payment (Deferred Variable
Annuity Contracts Only)," p. 24, below, and "Assumed Net Investment Rate,"
p. 25, below.
Annuity Units are valued in respect of each Annuity Payment Date as of
a Valuation Date not less than 10 days prior to the Annuity Payment Date in
question in order to permit calculation of amounts of Annuity Payments and
mailing of checks in advance of their due dates.
23
<PAGE>
3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)
When Annuity Payments commence under a Deferred Variable Annuity
Contract, the value of the Contract Owner's account is determined as the
product of the value of an Accumulation Unit on the first Annuity Payment
Date and the number of Accumulation Units credited to the Contract Owner's
account as of such Annuity Payment Date.
The Contract utilizes tables indicating the dollar amount of the first
monthly Annuity Payment under each Settlement Option for each $1,000 of Cash
Value of the Contract. The first monthly Annuity Payment varies according to
the Settlement Option selected (see "Settlement Options," pp. 20-23, above)
and the "adjusted age" of the Variable Annuitant. The first monthly Annuity
Payment may also vary according to the sex of the Variable Annuitant. See
"Annuity Payments," pp. 14-15, above. (The Contracts provide for age
adjustment based on the year of birth of the Variable Annuitant and any
joint Variable Annuitant; a person's actual age when Annuity Payments
commence may not be the same as the "adjusted age" used in determining the
amount of the first Annuity Payment.)
For Contracts utilizing sex-distinct annuity tables, the tables are
determined from the Progressive Annuity Table assuming births in the year
1900 and a net investment rate of 3% a year. The total first monthly Annuity
Payment is determined by multiplying the number of thousands of dollars of
Cash Value of the Contract Owner's Contract by the amount of the first
monthly Annuity Payment per $1,000 of value from the tables in the Contract.
The amount of the first monthly Annuity Payment, determined as above,
is divided as of the initial Annuity Payment Date by the value of an Annuity
Unit to determine the number of Annuity Units represented by the first
Annuity Payment. Annuity Units are valued as of a Valuation Date not less
than 10 days prior to the initial Annuity Payment Date, pursuant to the
procedure discussed under "The Annuity Unit," p. 23, above. Thus, there will
be a double effect of the investment experience of the Fund during the
10-day period referred to in the preceding sentence, since that experience
will be included (as part of the value of an Accumulation Unit) in valuing
the Contract Owner's Contract on the initial Annuity Payment Date and (as
part of the changes in value of an Annuity Unit) in determining the second
monthly Annuity Payment. Also, the number of Annuity Units (and hence the
amount of Annuity Payments) will be affected by the net asset values of the
Fund approximately 10 days prior to the initial Annuity Payment Date even
though changes in those net asset values have occurred during that 10-day
period, and even though the value of the Accumulation Units used to
determine the Cash Value of the Contract will reflect those changes. See
"Amount of Second and Subsequent Monthly Annuity Payments (Deferred Variable
Annuity Contracts Only)," immediately below.
Each Contract contains a provision that the first monthly Annuity
Payment will not be less than 103% of the first monthly Annuity Payment
available under a then currently issued Immediate Variable Annuity of The
Franklin if a single Stipulated Payment were made equal to the value which
is being applied under the Contract to provide annuity benefits. This
provision assures the Variable Annuitant that if at the initial Annuity
Payment Date the annuity rates then applicable to new Immediate Variable
Annuity Contracts are significantly more favorable than the annuity rates
provided in his or her Contract, the Variable Annuitant will be given the
benefit of the new annuity rates.
4. AMOUNT OF SECOND AND SUBSEQUENT MONTHLY ANNUITY PAYMENTS (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)
The number of Annuity Units credited to a Contract on the initial
Payment Date remains fixed during the annuity period, and as of each
subsequent Annuity Payment Date the dollar amount of the Annuity Payment is
determined by multiplying this fixed number of Annuity Units by the then
value of an Annuity Unit.
5. DETERMINATION OF AMOUNT OF ANNUITY PAYMENTS (IMMEDIATE VARIABLE
ANNUITY CONTRACTS ONLY)
In the case of Immediate Variable Annuities, the number of Annuity
Units per month purchased is specified in the Contract. The number of such
units is determined by: (1) multiplying the net single Stipulated Payment
(after deductions for administrative expenses and premium taxes) by the
applicable annuity factor from the annuity
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tables then used by The Franklin for Immediate Variable Annuity Contracts,
and (2) dividing such product by the value of the Annuity Unit as of the
date of issue of the Contract. This number of Annuity Units remains fixed
for each month during the annuity period, and the dollar amount of the
Annuity Payment is determined as of each Annuity Payment Date by multiplying
this fixed number of Annuity Units by the value of an Annuity Unit as of
each such Annuity Payment Date.
Annuity Units are valued as of a Valuation Date not less than 10 days
prior to the Effective Date of the Contract, pursuant to the procedure
discussed under "The Annuity Unit," p. 23, above. Thus, the number of
Annuity Units (and hence the amount of the Annuity Payments) will be
affected by the net asset value of the Fund approximately 10 days prior to
the Effective Date of the Contract, even though changes in those net asset
values have occurred during that 10-day period.
As of the date of this Prospectus, The Franklin was using, in connection
with the determination of the number of Annuity Units per month purchased
under Immediate Variable Annuity Contracts, the 1955 American Annuity Table
with assumed 4-1/2% interest, the purchase rates in such table being
increased by 0.5% (which percentage is decreased 0.2% for each year of age
at the Effective Date in excess of 70 years for male Variable Annuitants and
in excess of 75 years for female Variable Annuitants). However, in lieu of
such table, The Franklin will provide "unisex" annuity rate tables for use
under Contracts purchased in connection with employer-related plans subject
to the decision of the Supreme Court in ARIZONA GOVERNING COMMITTEE v.
NORRIS. See "Annuity Payments," pp. 14-15, above.
The Annuity Change Factors used by The Franklin for Immediate Variable
Annuity Contracts assume a net investment rate of 3-1/2%.
6. ASSUMED NET INVESTMENT RATE
The objective of a Variable Annuity Contract is to provide level
Annuity Payments during periods when the economy, price levels and
investment returns are relatively stable and to reflect as increased Annuity
Payments only the excess investment results flowing from inflation,
increases in productivity or other factors increasing investment returns.
The achievement of this objective will depend in part upon the validity of
the assumption in the annuity factor that a 3-1/2% net investment rate would
be realized in the periods of relative stability assumed. A higher rate
assumption would mean a higher initial Annuity Payment but a more slowly
rising series of subsequent Annuity Payments in the event of a rising actual
investment rate (or a more rapidly falling series of subsequent Annuity
Payments in the event of a lower actual investment rate). A lower assumption
would have the opposite effect. If the actual net investment rate is at the
annual rate of 3-1/2%, the Annuity Payments under Contracts whose Annuity
Payments are measured by Annuity Units will be level.
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND
The long-term compounding of income from investments in a diversified
portfolio of short-term money market securities yielding a high level of
current income to the extent consistent with preservation of capital and the
maintenance of liquidity is the primary investment objective of the Fund.
This objective does not necessarily require investment in long-term
securities since the nature of annuity contracts themselves connotes a
long-term relationship; the continual retention and reinvestment of proceeds
from matured short-term securities provides the long-term compounding of
income. The Board of Managers of the Fund has determined that, in keeping
with the primary investment objective of investing in short-term money
market securities, at least 80% of the Fund's portfolio will be invested in
securities having maturities or remaining maturities of one year or less and
not more than 20% will be invested in securities having maturities or
remaining maturities of between one and two years. The Board of Managers of
the Fund will give consideration to the creditworthiness of the issuers of
all money market securities in which the Fund proposes to invest prior to
such investment. The Fund's investment authority is also limited by
regulations of the Securities and Exchange Commission. See "Legal
Restrictions," p. 30, below.
The following investment policies summarize the instruments in which
the Fund may invest in order to achieve its primary investment objective,
all of which will be in United States dollar obligations:
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(a) OBLIGATIONS OF THE UNITED STATES GOVERNMENT AND ITS AGENCIES:
Obligations issued by or guaranteed as to principal and interest by the
United States Government, its agencies or instrumentalities. These include a
variety of securities issued by the United States Treasury which are direct
obligations of the United States Government and which differ only in their
interest rates, maturities and times of issuance. Treasury Bills have a
maturity of one year or less, Treasury Notes have maturities of one to ten
years and Treasury Bonds generally have maturities of greater than five
years. These also include securities issued or guaranteed by United States
Government agencies or instrumentalities such as the Federal Home Loan
Mortgage Corporation, Federal Home Loan Bank, Federal National Mortgage
Association, Government National Mortgage Association and the Farmers Home
Administration. Some obligations of United States Government agencies and
instrumentalities are supported by the full faith and credit of the United
States Treasury; others, by the right of the issuer or guarantor to borrow
from the United States Treasury; while still others are supported only by
the credit of the agency or instrumentality. Accordingly, depending upon the
particular obligations of United States agencies and instrumentalities
purchased, at any given time the Fund's investment in these obligations may
be supported only by the credit of such agencies or instrumentalities.
(b) BANK OBLIGATIONS: Negotiable time deposits, negotiable
certificates of deposit (including certificates of deposit issued by London
branches of United States banks -- "Eurodollar C.D.'s"), bankers'
acceptances, and short-term notes of banks (domestic or Canadian) having
total assets in excess of one billion dollars (U.S.) as of the date of their
most recently published financial statements (including foreign branches of
domestic banks). While normally these large domestic banks will be members
of the Federal Reserve System and have deposits insured by the Federal
Deposit Insurance Corporation, these are not investment requirements.
Accordingly, the securities purchased by the Fund and issued by domestic
banks may or may not be insured by the Federal Deposit Insurance
Corporation, or, if insured, may not be insured for the full amount
purchased. (The purchase of obligations issued by foreign branches of
domestic banks, including Eurodollar C.D.'s, and by Canadian banks involves
investment considerations that are different in some respects from those
associated with obligations of domestic issuers, including the possible
imposition of withholding taxes on interest income or exchange controls,
expropriation, confiscatory taxation, the possible adoption of foreign
governmental restrictions which might adversely affect the payment of
principal and interest on such obligations, limitations on the removal of
funds, or other adverse political or economic developments. In addition, it
may be more difficult to obtain and enforce a judgment against a Canadian
bank or foreign branch of a domestic bank. To the extent the Fund purchases
Eurodollar C.D.'s, consideration will be given to their marketability and
possible restrictions on international currency transactions.) Eurodollar
C.D.'s will be considered to be one industry for the purpose of the
fundamental restrictions set out below, and thus no more than 25% of the
Fund's assets at the time of purchase will be invested in Eurodollar C.D.'s.
(c) SAVINGS ASSOCIATION OBLIGATIONS: Negotiable time deposits,
negotiable certificates of deposit, and other short-term notes of domestic
mutual savings banks and savings and loan associations having total assets
in excess of one billion dollars (U.S.) as of the date of their most
recently published financial statements. The deposits of these savings
associations may or may not be insured by the Federal Deposit Insurance
Corporation or the Federal Savings and Loan Insurance Corporation.
Accordingly, the securities purchased by the Fund and issued by savings
associations may or may not be insured, or, if insured, may not be insured
for the full amount purchased.
(d) COMMERCIAL PAPER: Short-term obligations of domestic issuers
which at the time of investment are (i) rated A-1 or A-2 by Standard &
Poor's Corporation or Prime-1 or Prime-2 by Moody's Investors Service, Inc.,
or (ii) if not rated, issued by a company which at the date of investment
has any outstanding debt securities rated at least AA by Standard & Poor's
or Aa by Moody's. (See Appendix for an explanation of these ratings.)
Commercial paper obligations may include variable amount master demand notes
which are obligations that permit the investment of fluctuating amounts by
the Fund at varying rates of interest pursuant to direct arrangements
between the Fund, as lender, and the borrower. These notes permit daily
changes in the amounts borrowed. The Fund has the right to increase the
amount under the note at any time up to the full amount provided by the note
agreement, or to decrease the amount, and the borrower may repay up to the
full amount of the note without penalty. The borrower is typically a large
industrial or finance company which also issues commercial paper. Generally
these notes provide that the interest rate is set daily by the borrower; the
rate is usually the same or similar to the interest rate on commercial paper
being issued by the borrower. Because variable amount master demand notes
are direct lending arrangements between the lender and borrower, it is not
generally contemplated that such instruments will be traded,
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<PAGE>
and there is no secondary market for these notes, although they are
redeemable (and thus immediately repayable by the borrower) at the face
value, plus accrued interest, at any time. Accordingly, the Fund's right to
redeem is dependent on the ability of the borrower to pay principal and
interest on demand. In connection with master demand note arrangements, the
Fund considers earning power, cash flow and other liquidity ratios of the
issuer. The Fund will only invest in master demand notes of domestic
issuers. If master demand notes are rated by credit rating agencies, the
Fund will invest in them only if such notes meet the Fund's rating standards
for investment in all commercial paper, described above. If master demand
notes are not rated, the Fund will invest in such notes only if the issuer
thereof has, at the date of investment, any outstanding debt securities
rated at least AA by Standard & Poor's or Aa by Moody's. The Fund does not
have any specific limits on the amount it may invest in master demand notes.
(See Appendix for an explanation of these ratings.)
(e) OTHER CORPORATE DEBT SECURITIES: Other marketable, nonconvertible
corporate debt securities of domestic issuers, including bonds and
debentures, which at the time of purchase have two years or less remaining
to maturity and are rated at least AA by Standard & Poor's or Aa by Moody's.
(See Appendix for an explanation of these ratings.)
(f) CANADIAN GOVERNMENT SECURITIES: United States dollar denominated
securities, such as bonds and Treasury bills, issued or guaranteed by the
Government of Canada, a province of Canada, or their instrumentalities or
political subdivisions. Some of these securities may be supported by the
full faith and credit of the Canadian Government while others may be
supported only by the credit of the province, instrumentality or political
subdivision. Accordingly, depending upon the particular securities issued by
Canadian provinces, instrumentalities or political subdivisions purchased,
at any given time the Fund's investment in these securities may be supported
only by the credit of such provinces, instrumentalities or political
subdivisions. See "Bank Obligations" above regarding investment
considerations involving Canadian issues.
(g) REPURCHASE AGREEMENTS: A short-term investment in which the
purchaser (i.e., the Fund) acquires ownership of a debt security and the
seller agrees to repurchase the obligation at a future time and at a set
price, thereby determining the yield during the purchaser's holding period.
Repurchase agreements usually are for short periods, such as one week or
less, but may be longer. The Fund may enter into repurchase agreements with
a member bank of the Federal Reserve System or a United States securities
dealer. The Fund will not enter into repurchase agreements of more than one
week's duration if more than 10% of its total net assets would then be so
invested-considering only the remaining days to maturity of existing
repurchase agreements. Repurchase agreements are fully collateralized by the
underlying debt securities and are considered to be loans under the
Investment Company Act of 1940. The underlying securities could be any of
those described above (normally securities of the United States Government
or its agencies and instrumentalities).
In addition, the Fund may lend portfolio securities to brokers, dealers
and financial institutions provided that cash, or equivalent collateral,
equal to at least 100% of the market value of the securities loaned is
maintained by the borrower with the Fund. During the time such securities
are on loan, the borrower will pay the Fund any income accruing thereon and
the Fund may invest the cash collateral and earn additional income or the
Fund may receive an agreed-upon fee from the borrower who has delivered
equivalent collateral. Loans will be subject to termination at the Fund's or
the borrower's option. The Fund will retain all rights of beneficial
ownership as to the loaned portfolio securities, including voting rights and
rights to distributions, and will have the right to regain record ownership
of loaned securities to exercise such beneficial rights. The Fund may pay
reasonable administrative and custodial fees in connection with a loan and
may pay a negotiated portion of the interest earned on the cash or
equivalent collateral to the borrower or placing broker.
The Board of Managers of the Fund has set guidelines and standards for
review of investments in repurchase agreements and the creditworthiness of
the seller thereof, and monitors the actions of the Fund's investment
advisor in entering into repurchase agreements. Repurchase agreements may
involve certain risks in the event of bankruptcy or other default by the
seller, including possible delays and expenses in liquidating the
collateral, decline in collateral value and loss of interest.
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<PAGE>
The Fund will make portfolio investments primarily in anticipation of or
in response to changing economic and money market conditions and trends.
Investment yields on relatively short-term obligations such as will
compromise the Fund's portfolio are subject to substantial and rapid
fluctuation. The value of the Fund's assets generally will vary inversely to
changes in interest rates. If interest rates increase after a security is
purchased, the security, if sold, may return less than its cost. Thus,
current yield levels should not be considered representative of yields for
any future period of time. Because of the variability of interest rates and
the risks inherent in investing in money market securities, including those
risks discussed above with respect to securities of foreign branches of
domestic banks and of Canadian banks, there can be no assurance that the
Fund's investment objective will be attained. In addition, to the extent
that investments are made in instruments of non-governmental issuers (and of
governmental issuers, except those instruments backed by the full faith and
credit of that government), these assets, despite their favorable credit
ratings, are subject to some risk of default. Moreover, should many Contract
Owners redeem their Contracts or transfer from the Fund to some other
annuity product of The Franklin at about the same time, the Fund might have
to sell portfolio securities at a time when it would be disadvantageous to
do so, and at a lower price than if such securities were held to maturity.
There can be no assurance that the Cash Value of the Contracts during the
years prior to the Variable Annuitant's initial Annuity Payment Date or the
aggregate amount received during the years following the initial Annuity
Payment Date will equal or exceed the Stipulated Payments made under the
Contracts.
Except as limited by the fundamental investment restrictions below, the
foregoing investment policies are not fundamental and the Board of Managers
of the Fund may change such policies without approval of the Contract
Owners. However, the primary investment objective is fundamental and may not
be changed without such approval.
The following are the fundamental investment restrictions applicable to
the Fund:
(1) The Fund will not concentrate its investments in any one industry
or group of related industries, and no more than 25% of the value of the
Fund's assets at the time of purchase will be invested in any one industry
or group of related industries, except that there is no limitation with
respect to investments in obligations issued or guaranteed by the United
States Government or its agencies or instrumentalities, or in bankers'
acceptances, repurchase agreements or certificates of deposit of domestic
banks. For purposes of this restriction, telephone, gas and electric
utilities each shall be considered a separate industry. In addition, banks,
savings associations, personal credit institutions, business credit
institutions and insurance companies shall each be considered a separate
industry.
(2) The Fund will not issue senior securities, except that the Fund
may borrow money as set forth in paragraph (3), below.
(3) The Fund will not borrow money except for temporary or emergency
purposes, and any such borrowings will not be used to purchase investment
securities and will not exceed 5% of the value of the Fund's assets;
provided, however, that the Fund may borrow money up to one-third of its
assets, not to increase its income but to meet redemption requests which
might otherwise require untimely dispositions of portfolio securities. So
long as such borrowings exceed 5% of the value of the Fund's assets, the
Fund will not make any new investments. In addition, to the extent such
borrowings exceed the 5% limit and cause a subsequent reduction of the
required asset coverage, the Fund will reduce the amount of its borrowings
to comply with the appropriate asset coverage required under the Investment
Company Act of 1940.
(4) The Fund will not pledge, hypothecate, mortgage or otherwise
encumber its assets except in an amount not in excess of 15% of the value of
its assets to secure borrowings made in accordance with investment
restriction (3) above.
(5) The Fund will not underwrite securities of other issuers, except
that the Fund may acquire portfolio securities under circumstances where, if
sold, it might be deemed to be an underwriter for purposes of the Securities
Act of 1933. No such securities will be acquired except where parties other
than the Fund shall have agreed to bear any and all costs of registration
under the Securities Act of 1933. (However, it should be noted that even
though an agreement to register has been obtained, enforcement of such an
agreement may prove unfeasible or may involve delays which could adversely
affect the Fund's ability to resell such securities or the price at which
such securities might be resold.) No more than 10% of the value of the
Fund's assets will at any time be invested in such securities.
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(6) The Fund will not engage in the purchase and sale of interests in
real estate, except that the Fund may engage in the purchase and sale of
money market securities secured by real estate or interests therein or
securities issued by companies that invest in real estate or interests
therein.
(7) The Fund will not engage in the making of loans to other persons,
except that the Fund may acquire qualified debt obligations or other money
market securities and enter into repurchase agreements referred to above
(provided, however, that the aggregate value of repurchase agreements
maturing in more than seven days will not exceed 10% of the Fund's total
assets), and may lend its portfolio securities (provided that such loans do
not in the aggregate exceed 20% of the value of the Fund's assets) if such
loans are made according to the guidelines of the Securities and Exchange
Commission and the Board of Managers of the Fund, including maintaining
collateral from the borrower equal at all times to the current market value
of the securities loaned.
(8) The Fund will not engage in the purchase or sale of commodities or
commodity contracts or invest in oil, gas or other mineral exploration or
development programs.
(9) The Fund will not purchase securities (other than under repurchase
agreements of not more than seven days' duration -- considering only the
remaining days to maturity of each existing repurchase agreement -- or
master demand notes) for which there exists no readily available market, or
for which there are legal or contractual restrictions on resale (excepting
from this restriction securities that are subject to such resale
restrictions but which, in the judgment of The Franklin, are readily
redeemable on demand), if as a result of any such purchase, more than 10% of
the value of the Fund's assets would be invested in such securities.
(10) The Fund will not purchase securities on margin, except for such
short-term credits as are necessary for the clearance of transactions.
(11) The Fund will not make short sales of securities or write,
purchase or sell puts, calls, straddles, spreads or combinations thereof.
(12) The Fund will not purchase the securities of any one issuer,
other than obligations issued or guaranteed by the United States Government
and its agencies or instrumentalities, if such purchase would cause more
than 5% of the Fund's assets to be invested in the securities of such
issuer, except that up to 25% of the Fund's total assets taken at current
value may be invested without regard to such 5% limitation.
(13) The Fund will not acquire more than 10% of the outstanding voting
securities of any one issuer, other than obligations issued or guaranteed by
the United States Government and its agencies or instrumentalities (for this
purpose, all indebtedness of an issuer shall be deemed a single class);
except that up to 25% of the Fund's total assets taken at current value may
be invested without regard to such 10% limitation.
The primary investment objective and the fundamental investment
restrictions stated above may not be changed without approval by a vote of a
majority of the votes available to the Contract Owners. This means that the
objective or restrictions in question may not be changed without the
approval of the lesser of (a) the Contract Owners holding 67% or more of the
voting power of the Contract Owners present or represented at a meeting if
Contract Owners holding more than 50% of the total voting power of all
Contract Owners in the Fund are present or represented by proxy, or (b)
Contract Owners holding more than 50% of the total voting power of all
Contract Owners in the Fund.
The following investment restrictions are not fundamental and may be
changed by action of the Board of Managers of the Fund:
(14) All securities in which the Fund invests shall be permissible for
the Fund under the Illinois Insurance Code. The Illinois Insurance Code
provides that investments of a separate account, like the Fund, are free of
the restrictions or provisions generally applicable to insurance companies
under that Code, and does not currently provide any special investment
restrictions applicable to separate accounts. However, no investment
permitted under the Illinois Insurance Code is thereby exempted from the
other investment restrictions specified under this caption.
(15) The Fund will not invest in companies for the purpose of exercising
control or management.
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(16) The Fund will not invest in the securities of other investment
companies.
(17) The Fund will not invest more than 5% of the value of its assets
in securities of issuers (other than issuers of United States agency
securities) which, with their predecessors, have a record of less than
three years' continuous operation.
If a percentage restriction is adhered to at the time of investment, a
later increase or decrease in percentage beyond the specified limit
resulting from a change in values of portfolio securities or net assets will
not be considered a violation.
LEGAL RESTRICTIONS
The Securities and Exchange Commission imposes restrictions on the
investment authority of money market funds, such as the Fund, which are more
restrictive than the policies and restrictions of the Fund described above.
In general, such restrictions provide that a money market fund may not
purchase any instrument with a remaining maturity greater than 13 months or
maintain a dollar-weighted average portfolio maturity which exceeds ninety
days. In addition, money market funds are limited to making investments in
United States dollar-denominated investments which its board of directors
determines present minimal credit risk and which are at the time of
acquisition rated (or which have been issued by an issuer that has been
rated) in one of the two highest rating categories by at least two national
rating agencies or, if unrated, that the money market fund's board of
directors determines are of comparable quality to a security so rated. Money
market funds are also generally prohibited from acquiring a security if,
after such acquisition, (i) more than 5% of the money market fund's assets
would be invested in the securities of the issuer of the acquired security,
or (ii) if the acquired security is not rated in the highest category by at
least two national rating agencies or is not an unrated security of
comparable quality, more than 1% of the money market fund's assets would be
invested in the securities of the issuer of the acquired security or more
than 5% of the money market fund's assets would be invested in securities
that are not rated in the highest category by at least two national rating
agencies or that are not of comparable quality. The foregoing percentage
restrictions do not apply to securities issued or guaranteed as to principal
by the United States or by an instrumentality of the United States and such
securities may be purchased with remaining maturities of up to two years.
The acquisition of a security that is rated by only one national rating
agency must be approved by the money market fund's board of directors.
SPECIAL INVESTMENT CONSTRAINTS
The amount of assets that the Fund may invest in the securities of any
one issuer is restricted by the Fund's fundamental investment restrictions
and the regulations of the Securities and Exchange Commission and the
Internal Revenue Service. See "Federal Income Tax Status -- The Contracts:
Non-Qualified Plans," p. 34, below. Under the most restrictive of these
provisions, the Fund generally may not invest more than 5% of its assets in
the securities of any issuer, except that it may invest up to 55% of its
assets in securities issued or guaranteed as to principal by the United
States government. It is anticipated that the combination of these
restrictions and the relatively small and decreasing size of the Fund's
assets will make it more difficult for the Fund's investment adviser to
secure appropriate commercial paper investments, which have historically
constituted a substantial portion of the Fund's investments. As of December
31, 1995, the Fund's total assets were $2,308,143 (compared to total assets
of $2,581,103 as of June 30, 1995 and total assets of $2,803,785 as of
December 31, 1994), and the maximum amount that the Fund was permitted to
invest in the commercial paper of any one issuer was approximately $115,400.
Due to market conditions, it is very difficult to purchase an issue of
commercial paper in an amount less than $100,000. The limit on the amount
the Fund may invest in the commercial paper of any one issuer will fall
below $100,000 if the Fund's assets decline below $2,000,000. It is
possible that the shrinking pool of commercial paper investments available
to the Fund due to its size may impair the future investment performance of
the Fund.
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FEDERAL INCOME TAX STATUS
INTRODUCTION
The Contracts are designed for use by individuals in connection with
Qualified Plans or Non-Qualified Plans under the Code. The federal income
tax treatment of the Contracts and payments received thereunder depends on
various factors, including, among other factors, the tax status of The
Franklin, the type of retirement plan or program in connection with which
the Contracts are used and the form in which payments are received. The
discussion of federal income taxes contained in this Prospectus, which
focuses on rules applicable to Contracts purchased under this Prospectus, is
general in nature and is based on existing federal income tax law, which is
subject to change. The tax discussion is not intended as tax advice. The
applicable federal income tax law is complex and contains many special rules
and exceptions in addition to the general rules summarized herein. For these
reasons, various questions about the applicable rules exist. Accordingly,
each person contemplating the purchase of a Contract is advised to consult
with a qualified tax advisor concerning federal income taxes and any other
federal, state or local taxes that may be applicable.
THE FRANKLIN
The Franklin is taxed as a "life insurance company" under the Code.
Since the operations of the Fund are part of the overall operations of The
Franklin, the Fund is subject to tax as part of The Franklin for federal
income tax purposes. Thus, the Fund is not taxed separately as a "regulated
investment company" under the Code.
Under the Code a life insurance company like The Franklin is generally
taxed at regular corporate rates, under a single-phase system, on its
specially-computed life insurance company taxable income. Some special rules
continue to apply, however, in the case of segregated asset accounts like
the Fund.
Investment income and realized capital gains on the assets of the Fund
are reinvested by The Franklin for the benefit of the Fund and are taken
into account in determining the value of Accumulation Units and Annuity
Units. As a result, such income and gains are applied to increase reserves
applicable to the Fund. Under the Code, no federal income tax is payable by
The Franklin on such investment income or on realized capital gains of the
Fund on assets held in the Fund.
THE CONTRACTS: QUALIFIED PLANS
The manner in which payments received under a Contract are taxed for
federal income tax purposes depends on the form of payment. If payments are
received in the form of an annuity, then, in general, under Section 72 of
the Code, such payment is taxable to the recipient as ordinary income to the
extent that such payment exceeds the portion, if any, of the cost basis of
the Contract that is allocable to that payment. A payment received on
account of partial redemption of an annuity contract generally is taxable in
whole or part. The taxation of a partial redemption is governed by complex
rules and a qualified tax advisor should be consulted prior to a proposed
partial redemption. If the Variable Annuitant's life span exceeds his or her
life expectancy, the Variable Annuitant's cost basis will eventually be
recovered, and any payments made after that point will be fully taxable. If,
however, the Annuity Payments cease after the initial Annuity Payment Date
by reason of the death of the Variable Annuitant, the amount of any
unrecovered cost basis in the Qualified Contract will generally be allowed
as a deduction to the Variable Annuitant for his or her last taxable year.
Generally, payment of the proceeds of a Qualified Contract in a lump
sum instead of in the form of an annuity, either at or before maturity, also
is taxable as ordinary income to the extent the lump sum exceeds the cost
basis of the Qualified Contract. Taxation may be deferred, however, to the
extent, if any, that "rollover" treatment is available and elected for a
particular distribution.
The Qualified Contracts are designed for use in connection with several
types of Qualified Plans, as described generally below.
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A. QUALIFIED PENSION, PROFIT-SHARING AND ANNUITY PLANS
Under pension and profit-sharing plans that qualify under Section
401(a) of the Code and annuity purchase plans that qualify under
Section 403(a) of the Code (collectively "Corporate Qualified Plans"),
amounts contributed by an employer to the Corporate Qualified Plan on behalf
of an employee and any gains thereon are not, in general, taxable to the
employee until distribution. Generally, the cost basis of an employee under
a Corporate Qualified Plan will equal the amount of non-deductible
contributions, if any, that the employee made to the Corporate Qualified
Plan.
The Code imposes an additional tax of 10% on the taxable portion of any
early withdrawal from a Corporate Qualified Plan made by a Variable
Annuitant before age 59-1/2, death, or disability. The additional income tax
on early withdrawals will not apply however to certain distributions
including (a) distributions beginning after separation from service that are
part of a series of substantially equal periodic payments made at least
annually for the life of the Variable Annuitant or the joint lives of the
Variable Annuitant and his or her Beneficiary, and (b) distributions made to
Variable Annuitants after attaining age 55 and after separating from
service. Further, additional penalties may apply to distributions made on
behalf of a "5-percent owner" (as defined by Section 416(i)(1)(B) of the
Code).
If a lump sum payment of the proceeds of a Contract qualifies as a
"lump sum distribution" under the Code, special tax rules (including limited
capital gain and income averaging treatment in some circumstances) may apply.
B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS)
Self-employed persons (including members of partnerships) are permitted
to establish and participate in Corporate Qualified Plans under Sections
401(a) and 403(a) of the Code. Corporate Qualified Plans in which
self-employed persons participate are commonly referred to as "H.R. 10
Plans."
The tax treatment of annuity payments and lump sum payments received in
connection with an H.R. 10 Plan is, in general, subject to the same rules
described in "Qualified Pension, Profit-Sharing and Annuity Plans,"
immediately above. Some special rules apply, however, in the case of
self-employed persons which, for example, affect certain "lump sum
distribution" and "rollover" rules.
C. SECTION 403(B) ANNUITIES
Section 403(b) of the Code permits public schools and other tax-exempt
organizations described in Section 501(c)(3) of the Code to purchase annuity
contracts for their employees subject to special tax rules.
If the requirements of Section 403(b) are satisfied, amounts
contributed by the employer to purchase an annuity contract for an employee,
and any gains thereon, are not, subject to certain limitations, taxable to
the employee until distributed to the employee. Generally, the cost basis of
an employee under a Section 403(b) annuity contract will equal the amount of
any non-deductible contributions the employee made toward the contract plus
any employer contributions that were taxable to the employee because they
exceeded excludable amounts.
Federal tax law imposes limitations on distributions from Section
403(b) annuity contracts. Withdrawals of amounts attributable to
contributions made pursuant to a salary reduction agreement in connection
with a Section 403(b) annuity contract will be permitted only (1) when an
employee attains age 59-1/2, separates from service, dies or becomes totally
and permanently disabled or (2) in the case of hardship. A withdrawal made
in the case of hardship may not include income attributable to the
contributions. However, these limitations generally do not apply to
distributions which are attributable to assets held as of December 31, 1988.
In general, therefore, contributions made prior to January 1, 1989, and
earnings on such contributions through December 31, 1988, are not subject to
these limitations. In addition, these limitations do not apply to
contributions made other than by a salary reduction agreement. A number of
questions exist concerning the application of these rules. Anyone
considering a withdrawal from a Contract issued in connection with a Section
403(b) annuity plan should consult a qualified tax advisor.
The 10% penalty tax on early withdrawals described under "Qualified
Pension, Profit-Sharing and Annuity Plans," immediately above, also applies
to Section 403(b) annuity contracts.
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D. INDIVIDUAL RETIREMENT ANNUITIES
1. SECTION 408(B) INDIVIDUAL RETIREMENT ANNUITIES
Under Sections 408(b) and 219 of the Code, special tax rules apply to
Individual Retirement Annuities. As described below, certain contributions
to such annuities (other than Rollover Contributions) are deductible within
certain limits and the gains on contributions (including Rollover
Contributions) are not taxable until distributed. Generally, the cost basis
in an Individual Retirement Annuity will equal the amount of non-deductible
contributions, if any, made to the Individual Retirement Annuity. Under
special rules, all individual retirement plans will be treated as one plan
for purposes of these rules.
Section 408(b) sets forth various requirements that an annuity contract
must satisfy before it will be treated as an Individual Retirement Annuity.
Although final regulations that interpret some of these requirements have
been adopted, other regulations have been proposed that interpret the
additional requirement that, under a Section 408(b) Individual Retirement
Annuity, the premiums may not be fixed. These proposed regulations, which
contain certain ambiguities, may, of course, be changed before they are
issued in final form. ACCORDINGLY, WHILE THE FRANKLIN BELIEVES THAT THE
CONTRACTS OFFERED BY THIS PROSPECTUS MEET THE REQUIREMENTS OF SECTION
408(B), THE FINAL REGULATIONS AND THE CURRENTLY PROPOSED REGULATIONS
THEREUNDER, THERE CAN BE NO ASSURANCE THAT THE CONTRACTS QUALIFY AS
INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408(B) PENDING THE ISSUANCE OF
COMPLETE FINAL REGULATIONS UNDER THAT CODE SECTION.
Individuals who are not "active participants" in an employer-related
retirement plan described in Section 219(g) of the Code will, in general,
be allowed to contribute to an Individual Retirement Annuity and to deduct a
maximum of $2,000 annually (or 100% of the individual's compensation if
less) . In addition, this deduction will be allowed for individuals who are
active participants in Qualified Plans with annual adjusted gross income
that is not above $25,000 ($40,000 for married individuals filing a joint
return). This deduction will be phased out for individuals who are active
participants in Qualified Plans with annual adjusted gross income between
$25,000 and $35,000 ($40,000 and $50,000 for married individuals filing a
joint return), and will not be allowed for such active participants with
annual adjusted gross income above $35,000 ($50,000 for married individuals
filing a joint return). The active participant status of both spouses is
taken into account in determining the deductible limit. In addition, an
individual will not be considered married for a year in which the individual
and the individual's spouse (1) file separate returns and (2) did not live
together at any time during the year. Individuals who may not make
deductible contributions to an Individual Retirement Annuity may, instead,
make non-deductible contributions (up to the applicable maximum described
above) on which earnings will accumulate on a tax-deferred basis. If the
Individual Retirement Annuity includes non-deductible contributions,
distributions will be divided on a pro rata basis between taxable and
non-taxable amounts. Special rules apply if, for example, an individual
contributes to an Individual Retirement Annuity for his or her own benefit
and to another Individual Retirement Annuity for the benefit of his or her
spouse.
The 10% penalty tax on early withdrawals described under "Qualified
Pension, Profit-Sharing and Annuity Plans," p. 32, above, also applies to
Individual Retirement Annuities, except that the circumstances in which the
penalty tax will not apply are different in certain respects. Further, for
any year in which a Contract Owner borrows any money under or by use of the
Individual Retirement Annuity, the Contract ceases to qualify under Section
408(b), and an amount equal to the fair market value of the Contract as of
the first day of such year is includible in the Contract Owner's gross
income for such year.
2. SECTION 408(K) SIMPLIFIED EMPLOYEE PENSIONS
An Individual Retirement Annuity described in Section 408(b) of the Code
that also meets the special requirements of Section 408(k) qualifies as a
Simplified Employee Pension. Under a Simplified Employee Pension, employers
may contribute to the Individual Retirement Annuities of their employees. An
employee may exclude the employer's contribution on his or her behalf to a
Simplified Employee Pension from gross income subject to certain limitations.
Elective deferrals under a Simplified Employee Pension are to be treated like
elective deferrals under a cash or deferred arrangement under Section 401(k)
of the Code and are subject to a $7,000 limitation, adjusted for inflation.
In general, the employee may also contribute and deduct an additional amount
not in excess of the lesser of (a) $2,000 or (b) 100% of compensation if the
employee meets the qualifications for an Individual Retirement Annuity.
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In general, except as stated in this section, the rules discussed in
"Section 408(b) Individual Retirement Annuities," p. 33, apply to a
Simplified Employee Pension.
THE CONTRACTS: NON-QUALIFIED PLANS
In the case of Non-Qualified Contracts issued in connection with
retirement or deferred compensation plans which are Non-Qualified Plans, the
provisions of the Plan determine the tax treatment of Plan participants.
For example, contributions to, or deferred compensation in connection
with, Non-Qualified Plans may or may not be currently taxable to participants.
Payments received under a Non-Qualified Contract are subject to tax
under Section 72 of the Code. If payments are received in the form of an
annuity, then, in general, each payment is taxable as ordinary income to the
extent that such payment exceeds the portion of the cost basis of the annuity
contract that is allocable to that payment. Payment of the proceeds of an
annuity contract in a lump sum either before or at maturity is taxable as
ordinary income to the extent the lump sum exceeds the cost basis of the
annuity contract. If the Variable Annuitant's life span exceeds his or her
life expectancy, the Variable Annuitant's cost basis will eventually be
recovered, and any payments made after that point will be fully taxable. If,
however, the Annuity Payments cease after the initial Annuity Payment Date by
reason of the death of the Variable Annuitant, the amount of any unrecovered
cost basis in the Contract will generally be allowed as a deduction to the
Variable Annuitant for his or her last taxable year.
A payment received on account of a partial redemption of an annuity
contract generally is taxable as ordinary income in whole or in part. Also,
if prior to the initial Annuity Payment Date, (i) an annuity contract is
assigned or pledged, or (ii) a Contract issued after April 22, 1987 is
transferred without adequate consideration, then the amount assigned, pledged
or transferred may similarly be taxable. Special rules may apply with respect
to investments in a Contract made before August 14, 1982. Because the
applicable tax treatment is complex, a qualified tax advisor should be
consulted prior to a partial withdrawal, assignment, pledge, or contract
transfer.
Further, in general, in the case of a payment received under a
Non-Qualified Contract in a taxable year beginning after December 31, 1986, a
penalty may be imposed equal to 10% of the taxable portion of the payment.
However, the 10% penalty does not apply in various circumstances. For
example, the penalty is generally inapplicable to payments that are: (i) made
on or after age 59-1/2; (ii) allocable to investments in the Contract before
August 14, 1982, (iii) made on or after the death of the holder; (iv) made
incident to disability; (v) part of a series of substantially equal periodic
payments (not less frequently than annually) made for the life (or the life
expectancy) of the Variable Annuitant or the joint lives (or joint life
expectancies) of the Variable Annuitant and his or her beneficiary; or (vi)
made under a Contract purchased with a single premium and which has an
annuity starting date commencing no later than one year from the purchase
date of the annuity and which provides for a series of substantially equal
periodic payments (to be made not less frequently than annually) during the
annuity period.
A Non-Qualified Contract will not be treated as an annuity contract for
purposes of certain Code sections, including Section 72, for any period (and
any subsequent period) for which the investments made by the Fund
attributable to such Non-Qualified Contract are not, in accordance with
Treasury regulations, adequately diversified. Although certain questions
exist about the diversification standards, The Franklin believes that the
Fund presently satisfies those standards and intends that the Fund will
continue to be adequately diversified for those purposes.
AGGREGATION OF CONTRACTS
Under a provision of the federal tax law effective for annuity contracts
entered into after October 21, 1988, all annuity contracts (other than
contracts held in connection with Qualified Plans) issued by the same company
(or affiliates) to the same contract owner during any calendar year will
generally be treated as one annuity contract for the purpose of determining
the amount of any distribution, not in the form of an annuity, that is
includable in gross income. This rule may have the effect of causing more
rapid taxation of the distributed amounts from such combination of contracts.
It is not certain how this rule will be applied or interpreted by the
Internal Revenue Service. In particular, it is not clear if or how this rule
applies to Immediate Variable Annuity Contracts or "split" annuity
arrangements. Accordingly, a qualified tax advisor should be consulted about
the application and effect of this rule.
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INCOME TAX WITHHOLDING
Withholding of federal income tax is generally required from
distributions from Qualified Plans and Non-Qualified Plans, or Contracts
issued in connection therewith, to the extent the distributions are taxable
and are not otherwise subject to withholding as wages ("Distributions"). See
"The Contracts: Qualified Plans," pp. 31-34, above, and "The Contracts:
Non-Qualified Plans," p. 34, above, regarding the taxation of Distributions.
Federal income tax is generally required to be withheld from all or any
portion of a Distribution made on or after January 1, 1993 that constitutes
an "eligible rollover distribution." An "eligible rollover distribution"
generally includes any distribution from a qualified trust described in
Section 401(a) of the Code, a qualified annuity plan described in Section
403(a) of the Code or a qualified annuity contract described in Section
403(b) of the Code except for (i) a distribution which is one of a series of
substantially equal periodic instalments payable at least annually for the
life (or over the life expectancy) of the Variable Annuitant or for the joint
lives (or over the joint life expectancies) of the Variable Annuitant and his
or her Beneficiary, or for a specified period of 10 years or more or (ii) a
minimum distribution required pursuant to Section 401(a)(9) of the Code and
(iii) an amount which is not includible in gross income (for example, the
return of non-deductible contributions). Any eligible rollover distribution
which is not rolled over directly from a Section 401(a) qualified trust, a
Section 403(a) qualified annuity plan or a Section 403(b) qualified annuity
contract to an "eligible retirement plan" is subject to mandatory federal
income tax withholding in an amount equal to 20% of the eligible rollover
distribution. An "eligible retirement plan" generally includes a qualified
trust described in Section 401(a) of the Code, a qualified annuity plan
described in Section 403(a) of the Code, an individual retirement account
described in Section 408(a) of the Code or an Individual Retirement Annuity
described in Section 408(b) of the Code. Mandatory federal income tax
withholding is required even if the Variable Annuitant receives an eligible
rollover distribution and rolls it over within 60 days to an eligible
retirement plan. Federal income tax is not required to be withheld from any
eligible rollover distribution which is rolled over directly from a qualified
trust described in Section 401(a) of the Code, a qualified annuity plan
described in Section 403(a) of the Code or a qualified annuity contract
described in Section 403(b) of the Code to an eligible retirement plan.
Except with respect to certain payments delivered outside the United
States or any possession of the United States, federal income tax is not
required to be withheld from any Distribution which does not constitute an
eligible rollover distribution, if the Variable Annuitant or Beneficiary
properly elects in accordance with the prescribed procedures not to have
withholding apply. In the absence of a proper election not to have
withholding apply, the amount to be withheld from a Distribution which is not
an eligible rollover distribution depends upon the type of payment being
made. Generally, in the case of a periodic payment which is not an eligible
rollover distribution, the amount to be withheld from such payment is the
amount that would be withheld therefrom under specified wage withholding
tables if the payment were a payment of wages for the appropriate payroll
period. In the case of a nonperiodic payment which is not an eligible
rollover distribution, the amount to be withheld is generally equal to 10% of
the amount of the Distribution.
The applicable federal law pertaining to income tax withholding from
Distributions is complex and contains many special rules and exceptions in
addition to the general rules summarized above. Special rules apply, for
example, if the Distribution is made to the surviving spouse of a Variable
Annuitant or if the Distribution is an eligible rollover distribution from a
qualified annuity contract under Section 403(b) of the Code. Any Variable
Annuitant or Beneficiary considering a Distribution should consult a
qualified tax advisor.
MANAGEMENT
The Fund is managed by a Board of Managers elected annually by the
Contract Owners. The Board of Managers currently has four members. The
members of the Board of Managers also serve as the Board of Managers of
Franklin Life Variable Annuity Fund A and Franklin Life Variable Annuity Fund
B, separate accounts of The Franklin having investment objectives of
long-term appreciation of capital through investment appreciation and
retention and reinvestment of income derived mainly from investments in
equity securities, particularly common stocks. The assets of Fund A are held
with respect to Variable Annuity contracts used in connection with certain
qualified
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plans and trusts or individual retirement annuities accorded special tax
treatment under the Code and those of Fund B are held with respect to
Variable Annuity contracts used for retirement planning for individuals and
not in connection with qualified plans and trusts, individual retirement
annuities or employer-related plans that are accorded such special tax
treatment.
The affairs of the Fund are conducted in accordance with Rules and
Regulations adopted by the Board of Managers. Under the Rules and
Regulations, the Board of Managers is authorized to take various actions on
behalf of the Fund, including the entry into contracts for the purpose of
services with respect to the Fund under circumstances where the approval of
such contracts is not required to be submitted to the Contract Owners.
Subject to the authority of the Board of Managers, officers and employees of
The Franklin are responsible for overall management of the Fund's business
affairs.
VOTING RIGHTS
All Contract Owners will have the right to vote upon:
(1) The approval of any investment management agreement and any
amendment thereto.
(2) Ratification of an independent auditor for the Fund.
(3) Any change in the primary investment objective or fundamental
investment restrictions of the Fund.
(4) Election of members of the Board of Managers of the Fund
(cumulative voting is not permitted).
(5) Termination of the investment management agreement (such
termination may also be effected by the Board of Managers).
(6) Any other matter submitted to them by the Board of Managers.
The number of votes which a Contract Owner may cast as to any Contract,
except after the initial Annuity Payment Date, is equal to the number of
Accumulation Units credited to the Contract. With respect to any Contract as
to which Annuity Payments measured by Annuity Units have commenced, the
Contract Owner may cast a number of votes equal to (i) the amount of the
assets in the Fund to meet the Variable Annuity obligations related to such
Contract, divided by (ii) the value of an Accumulation Unit. Accordingly,
the voting rights of a Contract Owner will decline during the Annuity Payment
period as the amount of assets in the Fund required to meet the Annuity
Payments decreases and, in addition, will decline as the value of an
Accumulation Unit increases. Fractional votes will be counted.
An employee covered by an H.R. 10 Plan, if not the Contract Owner, will
have the right to instruct the Contract Owner with respect to all votes
attributable to the Qualified Contract. An employee covered by a Qualified
Contract issued in connection with a qualified pension or profit-sharing plan
described in Section 401 of the Code will have the right to instruct the
Contract Owner with respect to votes attributable to his or her payments to
the plan, if any, and, to the extent authorized by the terms of the plan,
with respect to any additional votes under the Qualified Contract. If Annuity
Payments are being made under an annuity to a person who is not a Contract
Owner, that person will have the right to instruct the Contract Owner with
respect to votes attributable to the amount of the assets in the Fund to meet
the Annuity Payments related to the Contract.
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<PAGE>
Qualified Contract Owners will cast votes with respect to which
instructions have been received in accordance with such instructions. Votes
with respect to which employees, Variable Annuitants or other persons to whom
payments are being made under a Qualified Contract are entitled to instruct
the Contract Owner, but for which the Contract Owner has received no
instructions, shall be cast by the Contract Owner for or against each
proposal to be voted on in the same proportion as votes for which
instructions have been received by such Contract Owner. If no one is entitled
to instruct the Contract Owner, or if the Contract Owner receives no
instructions, all votes which the Contract Owner is entitled to cast may be
cast at his or her sole discretion. Neither the Fund nor The Franklin has any
duty to inquire as to the instructions received or the authority of the
Contract Owner to cast such votes; except to the extent that the Fund or The
Franklin has actual knowledge to the contrary, the votes cast by Contract
Owners will be considered valid and effective as among the Fund, The Franklin
and other persons having voting rights with respect to the Fund.
Should assets be maintained in the Fund with respect to contracts other
than those offered by this Prospectus, contract owners under such contracts
would be entitled to vote, and their votes would be computed in a similar
manner. Assets maintained by The Franklin in the Fund in excess of the
amounts attributable to the Contracts or other contracts of The Franklin will
entitle The Franklin to vote and its vote would be computed in a similar
manner. The Franklin will cast its votes in the same proportion as the votes
cast by Contract Owners and the owners of such other contracts.
The number of votes which each Contract Owner may cast at a meeting
shall be determined as of a record date to be chosen by the Board of Managers
within 120 days of the date of the meeting. At least 20 days' written notice
of the meeting will be given to Contract Owners of record. To be entitled to
vote or to receive notice, a Contract Owner must have been such on the record
date.
DISTRIBUTION OF THE CONTRACTS
Franklin Financial Services Corporation serves as "principal
underwriter" (as that term is defined in the Investment Company Act of 1940)
for the Contracts pursuant to a Sales Agreement with the Fund. The Sales
Agreement is described under "Distribution of The Contracts" in the Statement
of Additional Information. Franklin Financial, located at #1 Franklin Square,
Springfield, Illinois 62713, is organized under the laws of the State of
Delaware and is a wholly-owned subsidiary of The Franklin.
STATE REGULATION
As a life insurance company organized and operated under Illinois law,
The Franklin is subject to statutory provisions governing such companies and
to regulation by the Illinois Director of Insurance. An annual statement is
filed with the Director on or before March 1 of each year covering the
operations of The Franklin for the preceding year and its financial condition
on December 31 of such year. The Franklin's books and accounts are subject to
review and examination by the Illinois Insurance Department at all times, and
a full examination of its operations is conducted by the National Association
of Insurance Commissioners ("NAIC") periodically. The NAIC has divided the
country into six geographic zones. A representative of each such zone may
participate in the examination.
In addition, The Franklin is subject to the insurance laws and
regulations of the jurisdictions other than Illinois in which it is licensed
to operate. Generally, the insurance departments of such jurisdictions apply
the laws of Illinois in determining permissible investments for The Franklin.
For certain provisions of Illinois law applicable to the Fund's
investments, see "Investment Policies and Restrictions of the Fund," pp.
25-30, above.
REPORTS TO OWNERS
The Franklin will mail to the Contract Owner, at the last known address
of record at the Home Office of The Franklin, at least annually, a report
containing such information as may be required by any applicable law or
regulation and a statement showing the then Cash Value of his or her Contract.
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FUNDAMENTAL CHANGES
The Franklin has no present intention of effecting any of the following
fundamental modifications in the operations or status of the Fund. However,
upon compliance with applicable law, including obtaining any necessary
affirmative vote of Contract Owners in each case: (a) the Fund may be
operated in a form other than as a "management company" under the Investment
Company Act of 1940 (including operation as a "unit investment trust"); (b)
the Fund may be deregistered under the Investment Company Act of 1940 in the
event such registration is no longer required; or (c) the provisions of the
Contracts may be modified to assure qualification under the pertinent
provisions of the Code or to comply with other applicable federal or state
laws. In the event of any such fundamental change, The Franklin may make
appropriate amendments to the Contracts to give effect to such change or take
such other action as may be necessary in this respect.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Contracts offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statement and amendments thereto
and exhibits filed as a part thereof, to all of which reference is hereby
made for further information concerning the Fund, The Franklin and the
Contracts offered hereby. Statements contained in this Prospectus as to the
content of Contracts and other legal instruments are summaries. For a
complete statement of the terms thereof, reference is made to such
instruments as filed.
OTHER VARIABLE ANNUITY CONTRACTS; EFFECT OF NON-QUALIFICATION
The Franklin may offer, under other prospectuses, other variable annuity
contracts having interests in the Fund and containing different terms and
conditions from those offered hereby.
In the event that a plan intended to qualify as a Qualified Plan under
the Code fails to meet the applicable qualification requirements under the
Code (including Section 818(a)) or in the event a Qualified Plan ceases to
qualify thereunder, The Franklin shall have the right, upon receiving notice
of such non-qualification, to treat any such Contract issued in connection
with such a plan as a Non-Qualified Contract participating in the Fund.
YIELD INFORMATION
In accordance with regulations adopted by the Securities and Exchange
Commission, the Fund has computed an annualized yield and an effective yield
for a seven-day period ending on the date of the Fund's most recent balance
sheet. The annualized yield is computed by determining the net change,
exclusive of realized gains and losses from the sale of investments and
unrealized appreciation and depreciation on investments, in the value of a
hypothetical pre-existing account having a balance of one Accumulation Unit
at the beginning of the period, dividing the net change in account value by
the value of the account at the beginning of the seven-day period (the "base
period return") and multiplying this result by 365/7 to obtain an annualized
yield. The annualized yield for the seven calendar day period ended December
29, 1995 was 4.00%.The effective yield is computed by compounding the base
period return by adding one, raising the sum to a power equal to 365 divided
by 7, and subtracting one from the result. The effective yield for the seven
calendar day period ended December 29, 1995 was 4.08%. The effective yield is
higher because it represents a compound yield, i.e., it assumes that the
increase in account value represented by the base period return is reinvested.
Yield as determined with respect to a portfolio composed primarily of
money market securities normally will fluctuate on a daily basis and is
affected by changes in interest rates on money market securities, average
portfolio maturities, the type and quality of portfolio securities held and
the expenses of the Fund. Therefore, the yield for any given past period
should not be considered as a representation of the yield for any future
period.
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In addition, although yield information may be useful in reviewing the
Fund's performance and in providing a basis for comparison with other
investment alternatives, it should be kept in mind that the Fund's yield
cannot be compared to the yield on bank deposits and other investments which
pay fixed yields for a stated period of time and that other investment
companies may calculate yield on additional bases. When comparing the yields
of investment companies, consideration should be given to the quality and
maturity of the portfolio of securities of each company as well as to the
type of expenses incurred. In this connection, it should be noted that the
accrued expenses of the Fund differ from those incurred under conventional
money market funds that do not offer variable annuity contracts in that
additional charges are made against the Fund relating to The Franklin's
assumption of mortality and expense risks under the Contract. See "Mortality
and Expense Risk Charge," p. 12, above. In addition, the yield information
contained herein does not reflect administration deductions from Stipulated
Payments or deductions for premium taxes, which would reduce the yield and
effective yield contained herein. Furthermore, unlike investments in
conventional money market funds which may be held on a non-qualified basis by
the investor, investment income earned by the Fund during the accumulation
period is not currently taxable to holders of Contracts. See "Federal Income
Tax Status," pp. 31-35, above.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
----------------------
General Information . . . . . . . . . . . . . 3
Investment Objectives. . . . . . . . . . . . . 3
Limitations on Settlement Options. . . . . . . 3
Management . . . . . . . . . . . . . . . . . . 5
Investment Advisory and Other Services . . . . 7
Distribution of The Contracts. . . . . . . . . 8
Portfolio Turnover and Brokerage . . . . . . . 9
Safekeeper of Securities . . . . . . . . . . . 10
Legal Opinions . . . . . . . . . . . . . . . . 10
Experts. . . . . . . . . . . . . . . . . . . . 10
Index to Financial Statements. . . . . . . . . F-1
39
<PAGE>
APPENDIX -- DEBT SECURITY RATINGS
STANDARD & POOR'S CORPORATION -- BOND RATINGS
AAA -- Highest grade. Capacity to pay principal and interest is
extremely strong. AA -- High grade. Capacity to pay principal and interest is
very strong, and in the majority of instances these bonds differ from AAA
issues only in a small degree. A -- Strong capacity to pay principal and
interest, although they are somewhat more susceptible to the adverse effects
of changes in circumstances and economic conditions.
MOODY'S INVESTORS SERVICE, INC. -- BOND RATINGS
Aaa -- Best quality. These securities carry the smallest degree of
investment risk and are generally referred to as "gilt-edge." Interest
payments are protected by a large or by an exceptionally stable margin and
principal is secure. While the various protective elements are likely to
change, such changes as can be visualized are most unlikely to impair the
fundamentally strong position of such issues. Aa -- High quality by all
standards. They are rated lower than the best bonds because margins of
protection may not be as large as in Aaa securities, fluctuation of
protective elements may be of greater amplitude, or there may be other
elements present which make the long-term risks appear somewhat larger.
A -- Upper medium grade. Factors giving security to principal and interest
are considered adequate but elements may be present which suggest a
susceptibility to impairment sometime in the future.
COMMERCIAL PAPER RATINGS
A Standard & Poor's commercial paper rating is a current assessment of
the likelihood of timely payment of debt considered short-term in the
relevant market. An A-1 rating (highest quality) by Standard & Poor's
indicates that the degree of safety regarding timely repayment is strong. An
A-2 rating indicates that capacity for timely payment is satisfactory,
although the relative degree of safety is not as high as for issues
designated A-1. An A-3 rating indicates adequate capacity for repayment but
with more vulnerability to the adverse effects of changes in circumstances
than obligations carrying the higher designations.
Moody's short-term debt ratings are opinions of the ability of issuers
to repay punctually senior debt obligations which have an original maturity
not exceeding one year. Issuers (or institutions supplying credit support)
rated Prime-1 (Moody's highest rating) have a superior ability for repayment
of senior short-term debt obligations. Prime-1 repayment ability will often
be evidenced by many of the following characteristics: (1) leading market
positions in well-established industries; (2) high rates of return on funds
employed; (3) conservative capitalization structure with moderate reliance on
debt and ample asset protection; (4) broad margins in earnings coverage of
fixed financial charges and high internal cash generation; and (5) well
established access to a range of financial markets and assured sources of
alternate liquidity. Issuers (or institutions supplying credit support) rated
Prime-2 have a strong ability for repayment of senior short-term debt
obligations. This will normally be evidenced by many of the characteristics
cited above but to a lesser degree. Earnings trends and coverage ratios,
while sound, may be more subject to variation. Capitalization
characteristics, while still appropriate, may be more affected by external
conditions. Ample alternate liquidity is maintained. Issuers (or institutions
supplying credit support) rated Prime-3 have an acceptable ability for
repayment of senior short-term obligations. The effect of industry
characteristics and market compositions may be more pronounced. Variability
in earnings and profitability may result in changes in the level of debt
protection measurements and may require relatively high financial leverage.
Adequate alternate liquidity is maintained.
40
<PAGE>
PROSPECTUS
[LOGO]
FRANKLIN LIFE MONEY
MARKET VARIABLE
ANNUITY FUND C
INDIVIDUAL VARIABLE
ANNUITY CONTRACTS
ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
Complete and return this form to:
Supply Department
The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
(217) 528-2011
Please send me the Statement of Additional Information dated April 30, 1996
for Franklin Life Money Market Variable Annuity Fund C.
_______________________________________________________________________________
(Name)
_______________________________________________________________________________
(Street)
_______________________________________________________________________________
(City) (State) (Zip Code)
<PAGE>
[LOGO] INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY
FRANKLIN LIFE MONEY MARKET THE FRANKLIN LIFE INSURANCE COMPANY
VARIABLE ANNUITY #1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
FUND C TELEPHONE (217) 528-2011
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus and should
be read in conjunction with the Prospectus dated April 30, 1996 relating to
the offering of individual variable annuities for use as individual
retirement annuities or in connection with trusts and retirement or deferred
compensation plans which may or may not qualify for special federal tax
treatement under the Internal Revenue Code. A copy of the Prospectus may be
obtained by writing to the Equity Administration Department of The Franklin
Life Insurance Company at the address set forth above or by calling (217)
528-2011.
- -------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ AND RETAINED FOR
FUTURE REFERENCE.
- -------------------------------------------------------------------------------
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1996.
<PAGE>
TABLE OF CONTENTS
PAGE
General Information . . . . . . . . . . . . 3
Investment Objectives. . . . . . . . . . . . 3
Limitations on Settlement Options. . . . . . 3
Management . . . . . . . . . . . . . . . . . 5
Investment Advisory and Other Services . . . 7
Distribution of The Contracts. . . . . . . . 8
Portfolio Turnover and Brokerage . . . . . . 9
Safekeeper of Securities . . . . . . . . . . 10
Legal Opinions . . . . . . . . . . . . . . . 10
Experts. . . . . . . . . . . . . . . . . . . 10
Index to Financial Statements. . . . . . . . F-1
2
<PAGE>
GENERAL INFORMATION
The individual variable annuity contracts offered by the Prospectus
dated April 30, 1996 (the "Prospectus") are designed primarily to provide
annuity payments which will vary with the investment performance of Franklin
Life Money Market Variable Annuity Fund C (the "Fund"), a separate account
which has been established by The Franklin Life Insurance Company ("The
Franklin") under Illinois insurance law. Reference is made to the Prospectus,
which should be read in conjunction with this Statement of Additional
Information. Capitalized terms not otherwise defined in this Statement of
Additional Information shall have the meanings designated in the Prospectus.
On January 31, 1995, American General Corporation ("American General")
through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"),
acquired American Franklin Company ("AFC"), the holding company of The
Franklin, from American Brands, Inc. The address of AFC is #1 Franklin
Square, Springfield, Illinois 62713. 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 the parent company of one of the nation's largest
diversified financial services organizations. American General's operating
subsidiaries are leading providers of retirement annuities, consumer loans,
and life insurance. The company 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.
American General has advised the Fund that there was no person who was
known to it to be the beneficial owner of 10% or more of the voting power of
American General as of February 15, 1996.
INVESTMENT OBJECTIVES
The investment objectives of the Fund are described under "Investment
Policies and Restrictions of the Fund" in the Prospectus.
LIMITATIONS ON SETTLEMENT OPTIONS
A. LIMITATIONS ON CHOICE OF SETTLEMENT OPTION
Described below are certain limitations on Settlement Options based on
The Franklin's current understanding of the distribution rules generally
applicable to Non-Qualified Contracts and to Qualified Contracts purchased
for use as Individual Retirement Annuities or issued in connection with
Section 403(b) annuity purchase plans. Various questions exist, however,
about the application of the distribution rules to distributions from the
Contracts and their effect on Settlement Option availability thereunder.
The Internal Revenue Service has proposed regulations relating to
required distributions from qualified plans, individual retirement plans, and
annuity contracts under Section 403(b) of the Code. These proposed
regulations may limit the availability of the Settlement Options in Contracts
purchased for use as Individual Retirement Annuities or issued in connection
with Section 403(b) annuity purchase 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 Settlement Option or Options he or
she is contemplating.
FIRST OPTION -- LIFE ANNUITY. Under Qualified Contracts issued for use
as Individual Retirement Annuities or in connection with Section 403(b)
annuity purchase plans, if the Variable Annuitant dies before Annuity
Payments have commenced, this Option is not available to a Beneficiary unless
distributions to the Beneficiary begin not later than one year after the date
of the Variable Annuitant's death (except that distributions to a Beneficiary
who is the surviving spouse of the Variable Annuitant need not commence
earlier than the date on which the Variable
3
<PAGE>
Annuitant would have attained age 70-1/2). If the surviving spouse of the
Variable Annuitant is the Beneficiary and such surviving spouse dies before
Annuity Payments to such spouse have commenced, the surviving spouse will be
treated as the Variable Annuitant for purposes of the preceding rule.
Under Non-Qualified Contracts, the limitations of the preceding
paragraph (other than the parenthetical clause) apply.
SECOND OPTION -- LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS
CERTAIN. Under Qualified Contracts issued for use as Individual Retirement
Annuities or in connection with Section 403(b) annuity purchase plans, this
Option is not available unless the selected period does not extend beyond the
life expectancy of the Variable Annuitant (or the life expectancy of the
Variable Annuitant and his or her Beneficiary). Further, if the Variable
Annuitant dies before Annuity Payments have commenced, this Option is not
available to a Beneficiary unless (i) the selected period does not extend
beyond the life expectancy of the Beneficiary and (ii) the distribution to
the Beneficiary commences not later than one year after the date of the
Variable Annuitant's death (except that distributions to a Beneficiary who is
the surviving spouse of the Variable Annuitant need not commence earlier than
the date on which the Variable Annuitant would have attained age 70-1/2). If
the surviving spouse of the Variable Annuitant is the Beneficiary and the
surviving spouse dies before Annuity Payments to such spouse have commenced,
the surviving spouse will be treated as the Variable Annuitant for purposes
of the preceding sentence. This Option is also not available under Individual
Retirement Annuities or in connection with Section 403(b) annuity purchase
plans unless certain minimum distribution incidental benefit requirements of
the proposed regulations are met.
Under Non-Qualified Contracts the limitations of the second and third
sentences of the preceding paragraph (other than the parenthetical clause)
apply.
THIRD OPTION -- UNIT REFUND LIFE ANNUITY. This Option is not available
under Qualfied Contracts issued for use as Individual Retirement Annuities.
Also, under Qualified Contracts issued in connection with Section 403(b)
annuity purchase plans, if the Variable Annuitant dies before Annuity
Payments have commenced, this Option is not available to a Beneficiary unless
distributions to the Beneficiary begin not later than one year after the date
of the Variable Annuitant's death (except that distributions to a Beneficiary
who is the surviving spouse of the Variable Annuitant need not commence
earlier than the date on which the Variable Annuitant would have attained age
70-1/2). If the surviving spouse of the Variable Annuitant is the Beneficiary
and such surviving spouse dies before Annuity Payments to such spouse have
commenced, the surviving spouse will be treated as the Variable Annuitant for
purposes of the preceding rule. This Option is also not available in
connection with Section 403(b) annuity purchase plans unless certain minimum
distribution incidental benefit requirements of the proposed regulations are
met.
Under Non-Qualified Contracts the limitations of the second and third
sentences of the preceding paragraph (other than the parenthetical clause)
apply.
FOURTH OPTION -- JOINT AND LAST SURVIVOR LIFE ANNUITY. Under Qualified
Contracts issued for use as Individual Retirement Annuities or in connection
with Section 403(b) annuity purchase plans, this Option is not available
unless the secondary variable annuitant is the spouse of the Variable
Annuitant or unless certain minimum distribution incidental benefit
requirements of the proposed regulations are met. Further, if the Variable
Annuitant dies before Annuity Payments have commenced, this Option is not
available to a Beneficiary under a Non-Qualified Contract or a Qualified
Contract issued for use as Individual Retirement Annuities or in connection
with Section 403(b) annuity purchase plans.
FIFTH OPTION -- PAYMENTS FOR A DESIGNATED PERIOD. Under Qualified
Contracts issued for use as Individual Retirement Annuities or in connection
with Section 403(b) annuity purchase plans, this Option is not available
unless the limitations described in the Second Option, above, applicable to
such Qualified Contracts, are satisfied, except that this Option is otherwise
available to a Beneficiary where the Variable 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 Variable Annuitant or the
substituted surviving spouse, as the case may be. In addition, this 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
Variable Annuitant at the initial Annuity Payment Date would exceed 95.
4
<PAGE>
Under Non-Qualified Contracts this Option is not available to a
Beneficiary where the Variable 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 Variable Annuitant or the substituted surviving spouse, as the
case may be.
SIXTH OPTION -- PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Option is
not available under Qualified Contracts issued for use as Individual
Retirement Annuities or in connection with Section 403(b) annuity purchase
plans. This Option also is not available to a Beneficiary under a
Non-Qualified Contract where the Variable 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 such Non-Qualified Contracts, or which terminates not
more than five years after the death of the Variable Annuitant or the
substitute surviving spouse, as the case may be.
SEVENTH OPTION -- INVESTMENT OPTION. This Option is not available under
Qualified Contracts issued in connection with any Qualified Plan. If the
Variable Annuitant dies before Annuity Payments have commenced, this Option
also is not available to a Beneficiary under a Non-Qualified Contract.
B. LIMITATIONS ON COMMENCEMENT OF ANNUITY PAYMENTS
The Contract Owner may defer the initial Annuity Payment Date and
continue the Contract to a date not later than age 75 unless the provisions
of the Code or any governing Qualified Plan require Annuity Payments to
commence at an earlier date. For example, under Qualified Contracts, the
Contract Owner may not defer the initial Annuity Payment Date beyond April 1
of the calendar year following the calendar year in which the Variable
Annuitant attains age 70-1/2. The Franklin will require satisfactory proof of
age of the Variable Annuitant prior to the initial Annuity Payment Date.
MANAGEMENT
The following persons hold the positions designated with respect to the
Board of Managers. The table also shows any positions held with The Franklin
and Franklin Financial Services Corporation, a wholly-owned subsidiary of The
Franklin which serves as distributor for the Contracts. (See "Distribution of
the Contracts," pp. 8-9, below.)
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATIONS POSITIONS HELD
DURING PAST 5 YEARS WITH THE FUND
<S> <C> <C>
ROBERT G. SPENCER* Officer of The Franklin; currently, Chairman and Member,
#1 Franklin Square Vice President of The Franklin; prior Board of Managers
Springfield, Illinois 62713 to 1996, also Treasurer of The
Franklin and Treasurer and Assistant
Secretary of Franklin Financial
Services Corporation.
STEPHEN P. HORVAT, JR.*+ Officer of The Franklin; currently, Secretary, Board of Managers
#1 Franklin Square Senior Vice President, Secretary and
Springfield, Illinois 62713 General Counsel and a director of The
Franklin. Mr. Horvat also serves as
Vice President, Secretary and a
director of Franklin Financial
Services Corporation.
DR. ROBERT C. SPENCER Visiting Professor of Government, Member, Board of Managers
2303 South 3rd Avenue Montana State University, since 1992;
Bozeman, Montana 59715 Professor of Government and Public
Affairs, Sangamon State University,
prior thereto.
</TABLE>
5
<PAGE>
<TABLE>
<S> <C> <C>
JAMES W. VOTH Chairman, Resource International Member, Board of Managers
50738 Meadow Green Court Corp., South Bend, Indiana
Granger, Indiana 46530 (marketing, manufacturing and
engineering service to industry);
prior to 1993, also President of
Resource International Corp.
CLIFFORD L. GREENWALT Director, President and Chief Member, Board of Managers
607 East Adams Street Executive Officer, CIPSCO
Springfield, Illinois 62739 Incorporated, since October, 1990
(utility holding company); Director,
President and Chief Executive
Officer, Central Illinois Public
Service Company, Springfield,
Illinois (a subsidiary of CIPSCO
Incorporated); Director, Electric
Energy, Inc., Joppa, Illinois;
Director, First of America Bank,
Kalamazoo, Michigan; Director, First
of America Bank - Illinois, N.A. (a
subsidiary of First of America Bank).
</TABLE>
*DENOTES INDIVIDUALS WHO ARE "INTERESTED PERSONS" (AS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940) OF THE FUND, THE FRANKLIN OR FRANKLIN
FINANCIAL SERVICES CORPORATION BY REASON OF THE CURRENT POSITIONS HELD BY
THEM AS SET FORTH IN THE ABOVE TABLE AND, WITH RESPECT TO MR. HORVAT, BY
VIRTUE OF HIS POSITION AS A DIRECTOR OF AMERICAN FRANKLIN COMPANY AS
DESCRIBED IN THE FOLLOWING FOOTNOTE.
+MR. HORVAT SERVES AS AN ASSISTANT SECRETARY AND DIRECTOR OF AMERICAN
FRANKLIN COMPANY, WHICH OWNS ALL THE CAPITAL STOCK OF THE FRANKLIN AND WHICH
IS A WHOLLY-OWNED SUBSIDIARY OF AMERICAN GENERAL CORPORATION. SEE "GENERAL
INFORMATION," P. 3, ABOVE.
The following table sets forth a summary of compensation paid for
services to the Fund and certain other entities that are deemed to be part of
the same "Fund Complex" in accordance with the rules of the Securities and
Exchange Commission to all members of the Board of Managers during the year
ended December 31, 1995. Pursuant to the terms of its agreement to assume
certain of the Fund's administrative expenses, The Franklin pays all
compensation received by the members of the Board of Managers and the
officers of the Fund. Members of the Board of Managers or officers of the
Fund who are also officers, directors or employees of The Franklin do not
receive any remuneration for their services as members of the Board of
Managers or officers of the Fund. Other members of the Board of Managers
received a fee of $1,400 ($1,050 where the member did not serve for the
entire year) for the year and, thus, the aggregate direct remuneration of all
such members of the Board of Managers was $3,850 during 1995. It is
currently anticipated that the annual aggregate remuneration of such members
of the Board of Managers to be paid during 1996 will not exceed $4,200.
<TABLE>
<CAPTION>
Name of Aggregare Pension or Estimated Annual Total Compensation
Person, Position Compensation From Retirement Benefits Benefits Upon From Fund and
Fund Accrued as Part Retirement Fund Complex Paid
of Fund Expenses to Directors
<S> <C> <C> <C> <C>
All members of the $3,850(1) -0- -0- $11,550(1)(2)
Board of Managers
as a group (4 persons)
</TABLE>
(1) Paid by The Franklin pursuant to an agreement to assume certain Fund
administrative expenses.
(2) Includes amounts paid to members of the Board of Managers who are not
officers, directors or employees of The Franklin for service on the Boards
of Managers of Franklin Life Variable Annuity Fund A and Franklin Life
Variable Annuity Fund B.
6
<PAGE>
Neither any member of the Board of Managers nor the Secretary of the Fund
was, as of April 15, 1996, the owner of any contract participating in the
investment experience of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
The Franklin acts as investment manager of the Fund pursuant to an
Investment Management Agreement executed and dated January 31, 1995, which
was approved by Contract Owners at their annual meeting held on April 17,
1995. The method of determining the advisory charge is described in the
Prospectus under "Investment Management Service Charge."
The Investment Management Agreement:
(1) May not be terminated by The Franklin without the prior approval
of a new investment management agreement by a "majority" (as that term is
defined in the Investment Company Act of 1940) of the votes available to the
Contract Owners, and may be terminated without the payment of any penalty on
60 days' written notice by a vote of the Board of Managers of the Fund or by
a vote of a majority of the votes available to the Contract Owners.
(2) Shall continue in effect from the date of its execution until the
second anniversary of such execution date and thereafter shall continue in
effect from year to year but only if such continuance is specifically
approved at least annually by the Board of Managers or by a vote of a
majority of the votes available to Contract Owners, provided that in either
case the continuation is also approved by the vote of a majority of the
Board of Managers who are not "interested persons" (as that term is defined
in the Investment Company Act of 1940) of the Fund or of The Franklin, cast
in person at a meeting called for the purpose of voting on such approval.
(3) Shall not be amended without prior approval by a majority of the
votes available to the Contract Owners.
(4) Shall terminate automatically on "assignment" (as that term is
defined in the Investment Company Act of 1940).
A "majority" of the votes available to the Contract Owners is defined
in the Investment Company Act of 1940 as meaning the lesser of (i) Contract
Owners holding 67% or more of the voting power of the Contract Owners
present at a meeting if Contract Owners holding more than 50% of the total
voting power of all Contract Owners in the Fund are present or represented
by proxy, or (ii) Contract Owners holding more than 50% of the total voting
power of all Contract Owners in the Fund. For the voting rights of Contract
Owners, see "Voting Rights," in the Prospectus.
Under the Investment Management Agreement, The Franklin, subject to the
control of the Board of Managers of the Fund, is authorized and has the duty
to manage the investment of the assets of the Fund, subject to the Fund's
investment policies and the restrictions on investment activities set forth
in the Prospectus, and to order the purchase and sale of securities on
behalf of the Fund. In carrying out its obligations to manage the investment
of the assets of the Fund, The Franklin is committed by the Agreement, so
long as it remains in force, to pay all investment expenses of the Fund
other than the following, which the Fund will bear: (i) taxes, if any, based
on the income of, capital gains of assets in, or existence of, the Fund;
(ii) taxes, if any, in connection with the acquisition, disposition or
transfer of assets of the Fund; (iii) commissions or other capital items
payable in connection with the purchase or sale of the Fund's investments;
and (iv) interest on account of any borrowings by the Fund.
Messrs. Robert G. Spencer and Stephen P. Horvat, Jr. are "affiliated
persons," as defined in the Investment Company Act of 1940, of both The
Franklin and the Fund by reason of the positions held by them with The
Franklin and the Fund as set forth in the table under "Management," pp. 5-6,
above.
The Administration Agreement discussed under "Deductions and Charges
Under the Contracts -- Administration Deduction" in the Prospectus provides
that The Franklin will provide all services and will assume all expenses
required for the administration of the Contracts, including expenses for
legal and accounting services to the Fund and the cost of such
indemnification of members of the Board of Managers and officers, agents, or
employees of the Fund as is provided by the Fund in its Rules and
Regulations. The Franklin is not,
7
<PAGE>
however, obligated under the Administration Agreement to pay the investment
management service charge discussed under "Investment Management Service
Charge," in the Prospectus. The Administration Agreement also provides that
The Franklin will from time to time adjust the assets of the Fund by
withdrawing sums in cash or by transferring cash to the Fund so that the
assets of the Fund will be equal to the actuarial value of the amounts
payable under all outstanding Contracts having an interest in the Fund. The
Administration Agreement may be amended or terminated at any time by mutual
consent of the Fund and The Franklin.
DISTRIBUTION OF THE CONTRACTS
Franklin Financial Services Corporation ("Franklin Financial"), #1
Franklin Square, Springfield, Illinois 62713, is organized under the laws of
the State of Delaware and is a wholly-owned subsidiary of The Franklin.
Franklin Financial serves as "principal underwriter" (as that term is
defined in the Investment Company Act of 1940) for the Contracts, pursuant
to a Sales Agreement with the Fund. The present Sales Agreement was approved
by the Board of Managers of the Fund, and came into effect, on January 31,
1995. It was renewed by the Board of Managers on January 15, 1996. Franklin
Financial's employment will continue thereunder if specifically approved at
least annually by the Board of Managers of the Fund, or by a majority of
votes available to Contract Owners, provided that in either case the
continuance of the Sales Agreement is also approved by a majority of the
members of the Board of Managers of the Fund who are not "interested
persons" (as that term is defined in the Investment Company Act of 1940) of
the Fund or Franklin Financial. The employment of Franklin Financial as
principal underwriter automatically terminates upon "assignment" (as that
term is defined in the Investment Company Act of 1940) of the Sales
Agreement and is terminable by either party on not more than 60 days' and
not less than 30 days' notice.
The Fund no longer issues new Contracts. To the extent that Stipulated
Payments continue to be made on Contracts, the Fund may nevertheless be
deemed to be offering interests in Contracts on a continuous basis.
Contracts are sold primarily by persons who are insurance agents or brokers
for The Franklin authorized by applicable law to sell life and other forms
of personal insurance and who are similarly authorized to sell Variable
Annuities. Pursuant to an Agreement, dated December 3, 1981, between The
Franklin and Franklin Financial, Franklin Financial has agreed to employ and
supervise agents chosen by The Franklin to sell the Contracts and to use its
best efforts to qualify such persons as registered representatives of
Franklin Financial, which is a broker-dealer registered with the Securities
and Exchange Commission under the Securities Exchange Act of 1934 and a
member of the National Association of Securities Dealers, Inc. Franklin
Financial also may enter into agreements with The Franklin and each such
agent with respect to the supervision of such agent. The Contracts also may
be sold by persons who are registered representatives of other registered
broker-dealers who are members of the National Association of Securities
Dealers, Inc., and with whom Franklin Financial may enter into a selling
agreement. If Contracts are sold by other dealers, the maximum allowance
which will be made to them by Franklin Financial will be 5% in the case of
Periodic Stipulated Payment Contracts and 4% in the case of Single
Stipulated Payment Contracts.
Franklin Financial incurs certain sales expenses, such as sales
literature preparation and related costs, in conneciton with the sale of the
Contracts pursuant to a Sales Agreement with the Fund. Surrender charges
imposed in connection with the redemption of a Contract and certain partial
redemptions are paid to Franklin Financial as a means to recover sales
expenses. Surrender charges are not necessarily related to Franklin
Financial's actual sales expenses in any particular year. To the extent
sales expenses are not covered by surrender charges, Franklin Financial will
cover them from other assets.
Pursuant to an Agreement between The Franklin and Franklin Financial,
The Franklin has agreed to pay commissions earned by registered
representatives of Franklin Financial on the sale of the Contracts and
Franklin Financial has agreed to remit to The Franklin the excess of all
surrender charges paid to Franklin Financial over the sales or promotional
expenses incurred by Franklin Financial to the extent necessary to reimburse
The Franklin for commissions or other remuneration paid in connection with
sales of the Contracts. Such agreement also provides that the amount of such
commissions and other remuneration not so reimbursed shall be deemed to have
been contributed by The Franklin to the capital of Franklin Financial.
Commissions and other remuneration will be paid by The Franklin from its
General Account to the extent it does not receive reimbursement from
Franklin Financial.
8
<PAGE>
Registration as a broker-dealer does not mean that the Securities and
Exchange Commission has in any way passed upon the financial standing,
fitness or conduct of any broker or dealer, upon the merits of any
securities offering or upon any other matter relating to the business of any
broker or dealer. Salesmen and employees selling Contracts, where required,
are also licensed as securities salesmen under state law.
Stephen P. Horvat, Jr. is an "affiliated person" (as that term is
defined in the Investment Company Act of 1940) of both Franklin Financial
and the Fund by reason of the positions held by him with Franklin Financial
and the Fund as set forth in the table under "Management," pp. 5-6, above.
PORTFOLIO TURNOVER AND BROKERAGE
Since the Fund's assets will be invested in securities with short
maturities, the Fund's portfolio of money market instruments is expected to
turn over several times a year. A meaningful portfolio turnover rate for
1995 or 1994 is not able to be calculated as a result of the short
maturities of the assets in which the Fund invested during those periods.
Decisions to buy or sell securities for the Fund will be made by The
Franklin, as the Fund's investment manager, subject to the control of the
Fund's Board of Managers. The Franklin, as investment manager, also is
responsible for placing the brokerage business of the Fund and, where
applicable, negotiating the amount of the commission rate paid, subject to
the control of the Fund's Board of Managers. Portfolio securities normally
will be purchased directly from the issuer or from an underwriter or market
maker for the securities. Thus, there usually will be no brokerage
commissions paid by the Fund for such purchases. Purchases from
underwriters of portfolio securities will include a commission or
concession paid by the issuer to the underwriter, and purchases from
dealers serving as market makers will include the spread between the bid
and asked price. The Fund has no formula for the distribution of brokerage
business in connection with the placing of orders for the purchase and sale
of investments for the Fund. It is The Franklin's intention to place such
orders, consistent with the best execution, to secure the highest possible
price on sales and the lowest possible price on purchases of securities.
Portfolio transactions executed in the over-the-counter market will be
placed directly with the primary market makers unless better executions are
available elsewhere. Subject to the foregoing, The Franklin may give
consideration in the allocation of brokerage business to services performed
by a broker or dealer in furnishing statistical data and research to it.
The Franklin may thus be able to supplement its own information and to
consider the views and information of other research organizations in
arriving at its investment decisions. Any such services would also be
available to The Franklin in the management of its own assets and those of
any other separate account. To the extent that such services are used by
The Franklin in performing its investment management functions with respect
to the Fund, they may tend to reduce The Franklin's expenses. However, the
dollar value of any information which might be received is
indeterminable and may, in fact, be negligible. The Franklin does not
consider the value of any research services provided by brokers or dealers
in negotiating commissions. No brokerage commissions were paid during 1995,
1994 and 1993. No officer or director of The Franklin or Franklin Financial
(the principal underwriter for the Contracts), and no member of the Board
of Managers, is affiliated with any brokerage firm (except with Franklin
Financial Services Corporation, as described under "Investment Management
Service Charge," in the Prospectus, and "Distribution of the Contracts,"
p. 8-9, above) and no beneficial owner of 5% or more of the total voting
power of The Franklin or any of its parents is known to be affiliated with
any brokerage firm utilized by the Fund (except with Franklin Financial).
9
<PAGE>
SAFEKEEPER OF SECURITIES
Securities of the Fund are held by State Street Bank and Trust Company
("State Street"), which is located in Boston, Massachusetts, under a
Custodian Agreement dated April 17, 1995 to which The Franklin and State
Street are parties. The Franklin has requested that the Illinois Insurance
Department approve an arrangement under which State Street would hold the
securities of the Fund as sub-custodian under an agreement that would be
entered into by The Franklin, State Street Bank and Trust Company of
Connecticut, as custodian, and State Street, as sub-custodian.
Representatives of the Securities and Exchange Commission, the Illinois
Insurance Department and the NAIC zonal examination committee have access
to such securities in the performance of their official duties.
LEGAL OPINIONS
Legal matters concerning federal securities laws applicable to the
issue and sale of the variable annuity contracts offered hereby have been
passed upon by Messrs. Chadbourne & Parke LLP, 30 Rockefeller Plaza, New
York, New York 10112. All matters of Illinois law, including The
Franklin's right and power to issue such contracts, have been passed upon
by Stephen P. Horvat, Jr., Esq., Senior Vice President, General Counsel,
Secretary and a director of The Franklin, a director and Secretary of
Franklin Financial, and Secretary to the Board of Managers of the Fund.
EXPERTS
The statement of assets and liabilities, including the portfolio of
investments, as of December 31, 1995 and the related statements of
operations and changes in contract owners' equity and the table of per-unit
income and changes in accumulation unit value for the year then ended of
the Fund, appearing herein, have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report thereon appearing
elsewere herein. The consolidated balance sheet as of December 31, 1995 of
The Franklin, and the related consolidated statements of income,
shareholder's equity and cash flows for the eleven months ended December
31, 1995 and the one month ended January 31, 1995, appearing herein, have
been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein. The statement of changes
in contract owners' equity for the year ended December 31, 1994 and the
table of per-unit income and changes in accumulation unit value for each of
the four years in the period then ended of the Fund, appearing herein, have
been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report thereon appearing elsewhere herein. The consolidated
balance sheet of The Franklin as of December 31, 1994 and the consolidated
statements of income, shareholder's equity and cash flows of The Franklin
for each of the two years in the period then ended, appearing herein, have
been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report thereon appearing elsewhere herein. Such financial
statements and tables of per-unit income and changes in accumulation unit
value referred to above are included in reliance upon such reports given
upon the authority of such firms as experts in accounting and auditing.
10
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Franklin Life Money Market Variable Annuity Fund C:
Reports of Independent Auditors and Accountants F-2 - F-3
Financial Statements:
Statement of Assets and Liabilities, December 31, 1995 F-4
Statement of Operations for the year ended
December 31, 1995 F-4
Statements of Changes in Contract Owners' Equity for the
two years ended December 31, 1995 and 1994 F-4
Portfolio of Investments, December 31, 1995 F-5
Notes to Financial Statements F-6
Supplementary Information -- Per-Unit Income and Changes in
Accumulation Unit Value for the five years ended
December 31, 1995 F-7
The Franklin Life Insurance Company and Subsidiaries:*
Reports of Independent Auditors and Accountants F-8 - F-9
Financial Statements:
Consolidated Balance Sheet, December 31, 1995 and 1994 F-10 - F-11
Consolidated Statement of Income for the eleven months
ended December 31, 1995, one month ended
January 31, 1995 and years ended December 31, 1994
and 1993 F-12
Consolidated Statement of Shareholder's Equity for the
eleven months ended December 31, 1995, one month ended
January 31, 1995 and years ended December 31, 1994
and 1993 F-13
Consolidated Statement of Cash Flows for the eleven months
ended December 31, 1995, one month ended January 31, 1995
and years ended December 31, 1994 and 1993 F-14
Notes to Consolidated Financial Statements F-15 - F-44
*The consolidated financial statements of The Franklin contained herein
should be considered only as bearing upon the ability of The Franklin to
meet its obligations under the Contracts.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Franklin Life Money Market Variable Annuity Fund C
We have audited the accompanying statement of assets and liabilities
of Franklin Life Money Market Variable Annuity Fund C, including the
portfolio of investments, as of December 31, 1995 and the related
statements of operations, changes in contract owners' equity, and the table
of per-unit income and changes in accumulation unit value for the year then
ended. These financial statements and the table of per-unit income and
changes in accumulation unit value are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the table of per-unit income and changes in accumulation
unit value based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and the
table of per-unit income and changes in accumulation unit value 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 investments held by
the custodian as of December 31, 1995. 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 audit provides a reasonable basis for
our opinion.
In our opinion, the 1995 financial statements and the 1995 table of
per-unit income and changes in accumulation unit value referred to above
present fairly, in all material respects, the financial position of
Franklin Life Money Market Variable Annuity Fund C at December 31, 1995,
and the results of its operations, changes in its contract owners' equity
and per-unit income and changes in accumulation unit value for the year
then ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
February 2, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Managers and Contract Owners
Franklin Life Money Market Variable Annuity Fund C
Springfield, Illinois
We have audited the accompanying statement of changes in contract
owners' equity of Franklin Life Money Market Variable Annuity Fund C for
the year ended December 31, 1994, and the table of per-unit income and
changes in accumulation unit value for each of the four years in the period
then ended. This financial statement and the table of per-unit income and
changes in accumulation unit value are the responsibility of the Fund's
management. Our responsibility is to express an opinion on this financial
statement and the table of per-unit income and changes in accumulation unit
value based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements and
the table of per-unit income and changes in accumulation unit value 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 investments and cash held by the
custodian as of December 31, 1994. 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 statement and the table of per-unit income and
changes in accumulation unit value referred to above present fairly, in all
material respects, the changes in contract owners' equity of Franklin Life
Money Market Variable Annuity Fund C for the year ended December 31, 1994,
and per-unit income and changes in accumulation unit value for each of the
four years in the period then ended, in conformity with generally accepted
accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 1, 1995
F-3
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<S> <C>
Assets
Investments -- at cost which approximates fair value
Corporate short-term notes $1,211,625
U.S. Government short-term note 1,016,533
----------
2,228,158
Cash on deposit 71,869
Interest receivable 8,116
----------
Total Assets 2,308,143
Liability-Due to The Franklin Life Insurance Company 2,922
----------
Contract Owners' Equity
Value of 104,641 Accumulation Units outstanding,
equivalent to $22.029796 per unit $2,305,221
==========
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<S> <C> <C>
Investment Income-Interest $ 142,957
Expenses
Mortality and expense charges $27,136
Investment management services 9,551
-------
Total Expenses 36,687
----------
Net Investment Income $ 106,270
==========
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
----------------------
<S> <C> <C>
Net investment income $ 106,270 $ 77,768
Net contract purchase payments 36,795 60,519
Payment for contract guarantees (148) (187)
Withdrawals (640,200) (626,293)
Administrative expense charges (1,060) (1,600)
----------------------
Net Decrease in Contract Owners' Equity (498,343) (489,793)
Contract Owners' Equity at Beginning of Year 2,803,564 3,293,357
----------------------
Contract Owners' Equity at End of Year $2,305,221 $2,803,564
======================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
PRINCIPAL FAIR
AMOUNT VALUE
- --------- ----------
<C> <S> <C>
CORPORATE SHORT-TERM NOTES (52.8%)
AUTOMOTIVE (5.0%)
$ 115,000 Ford Motor Credit Corporation
5.76%, due 1/24/96 $ 114,227
FINANCE COMPANIES -- CONSUMER (19.2%)
115,000 Associates Corporation of North America
5.73%, due 1/3/96 114,121
115,000 Beneficial Corporation
5.80% due 1/29/96 114,222
100,000 Household Finance Corporation
5.50%, due 2/7/96 99,267
115,000 Norwest Financial, Inc.
5.75%, due 1/10/96 114,339
----------
441,949
FINANCE COMPANIES -- COMMERCIAL (8.6%)
100,000 CIT Group Holdings, Inc.
5.75%, due 1/17/96 99,345
100,000 General Electric Capital Corporation
5.25%, due 2/5/96 99,279
----------
198,624
FINANCIAL SAVINGS & SERVICE (5.0%)
115,000 American Express Credit Corporation
5.65%, due 1/23/96 114,224
MACHINERY -- INDUSTRIAL & CONSTRUCTION (5.0%)
115,000 John Deere Capital Corporation
5.63%, due 1/4/96 114,191
OFFICE EQUIPMENT & SERVICES (5.0%)
115,000 IBM Credit Corporation
5.60%, due 1/8/96 114,159
OIL & OIL RELATED PRODUCTS (5.0%)
115,000 Chevron Oil Finance Company
5.72%, due 1/16/96 114,251
----------
TOTAL CORPORATE SHORT-TERM NOTES
(COST -- $1,211,625) 1,211,625
----------
U.S. GOVERNMENT SHORT-TERM NOTE (44.2%)
1,025,000 United States Treasury Bill
due 2/1/96 (cost -- $1,016,533) 1,016,533
----------
TOTAL INVESTMENTS (97.0%)
(COST -- $2,228,158) 2,228,158
----------
CASH AND RECEIVABLE, LESS LIABILITY (3.0%) 77,063
----------
TOTAL CONTRACT OWNERS' EQUITY (100%) $2,305,221
==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Money Market Variable Annuity Fund C (Fund) is a segregated
investment account of The Franklin Life Insurance Company (The Franklin) and
is registered as an open-end diversified management investment company under
the Investment Company Act of 1940, as amended. The Fund no longer issues
new contracts. Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS: Securities with remaining maturities of 60 days
or less are valued at cost, which is equivalent to fair value. Securities
purchased with more than 60 days to maturity are valued at fair value until
the 61st day prior to maturity. Thereafter, any discount or premium from
that fair value to maturity value is recognized by constant, proportionate
amortization until maturity.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment
transactions are accounted for on the trade date. Interest income is
recorded on the accrual basis.
FEDERAL INCOME TAXES: Operations of the Fund will form a part of, and be
taxed with those of, The Franklin, which is taxed as a "life insurance
company" under the Internal Revenue Code. Under current law, no federal
income taxes are payable with respect to the Fund.
NOTE B -- EXPENSES
Amounts are paid to The Franklin for investment management services at the
rate of .001027% of the current value of the Fund per day (.375% on an
annual basis) and for mortality and expense risk assurances at the rate of
.002918% of the current value of the Fund per day (1.065% on an annual
basis). The investment management service charge and the mortality and
expense risk charge may be increased to maximum rates, on an annual basis,
of .500% and 1.750%, respectively.
Certain other deductions are made from the Fund and paid to The Franklin
including administrative fees and contingent deferred sales charges on
certain amounts withdrawn. These deductions are more fully described in the
Fund's prospectus.
NOTE C -- SUMMARY OF CHANGES IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
--------------------------------------------------
Units Amount Units Amount
-------- ---------- ------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of year 132,646 $2,803,564 159,929 $3,293,357
Purchases 1,801 36,795 2,949 60,519
Net investment income -- 106,270 -- 77,768
Withdrawals (29,757) (640,200) (30,155) (626,293)
Payment for contract
guarantees -- (148) -- (187)
Administrative expense
charge (49) (1,060) (77) (1,600)
--------------------------------------------------
Balance at end of year 104,641 $2,305,221 132,646 $2,803,564
==================================================
</TABLE>
NOTE D -- REMUNERATION OF MANAGEMENT
No person receives any remuneration from the Fund because The Franklin pays
the fees of members of the Board of Managers and officers and employees of
the Fund pursuant to expense assurances. Certain members of the Board of
Managers and officers of the Fund are also directors, officers or employees
of The Franklin or Franklin Financial Services Corporation. Amounts paid by
the Fund to The Franklin and to Franklin Financial Services Corporation are
disclosed in this report.
F-6
<PAGE>
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED DECMEBER 31
1995 1994 1993 1992 1991
-------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $ 1.203 $ .846 $ .671 $ .746 $ 1.140
Expenses .309 .303 .294 .286 .278
-------------------------------------------------------
Net investment income .894 .543 .323 .460 .862
Accumulation unit value:
Beginning of year 21.136 20.593 20.270 19.810 18.948
-------------------------------------------------------
End of year $22.030 $21.136 $20.593 $20.270 $19.810
=======================================================
Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment income to average net assets 4.17% 2.58% 1.58% 2.32% 4.46%
Number of accumulation units outstanding at end of year 104,641 132,646 159,929 210,310 247,150
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
------------------------------------
Board of Directors
and Shareholder
The Franklin Life Insurance Company
We have audited the consolidated balance sheet of The Franklin Life
Insurance Company (a wholly-owned subsidiary of American Franklin Company,
which is an indirect wholly-owned subsidiary of American General
Corporation) and subsidiaries (the Company) as of December 31, 1995, and the
related consolidated statements of income, shareholder's equity and cash
flows for the eleven months ended December 31, 1995 and the one month ended
January 31, 1995. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Franklin Life Insurance Company and subsidiaries at December 31, 1995 and
the consolidated results of their operations and their cash flows for the
eleven months ended December 31, 1995 and the one month ended January 31,
1995, in conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, in
January 1995, the Company changed its method of accounting for mortgage
loans.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
February 12, 1996
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholder of
The Franklin Life Insurance Company
We have audited the consolidated balance sheet of The Franklin Life
Insurance Company (a wholly owned subsidiary of American Franklin Company
which, through January 31, 1995 was a wholly owned subsidiary of American
Brands, Inc.) and Subsidiaries as of December 31, 1994, and the related
consolidated statements of income, shareholder's equity and cash flows for
each of the two years in the period then ended. These consolidated
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the Consolidated Financial Statements, on
January 31, 1995, American Brands, Inc. completed the sale of American
Franklin Company and Subsidiaries (including The Franklin Life Insurance
Company) to American General Corporation. These financial statements have
been prepared on a basis consistent with prior years and have not been
adjusted to reflect the effects of this sale.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Franklin Life Insurance Company and Subsidiaries as of December 31, 1994,
and the consolidated results of their operations and their cash flows for
each of the two years in the period then ended, in conformity with generally
accepted accounting principles.
As discussed in the Notes to Consolidated Financial Statements in 1993,
the Company changed its methods of accounting for post retirement benefits
other than pensions, certain investments in debt and equity securities, and
reinsurance contracts.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
203 North LaSalle Street
Chicago, Illinois
February 1, 1995
F-9
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions, except share data)
<TABLE>
<CAPTION>
Predecessor
Basis
------------
December 31
-----------------------
ASSETS 1995 1994
-----------------------
<S> <C> <C>
Investments
Fixed maturity securities
Fair value (amortized cost: $5,109.5; $180.0) $ 5681.8 $ 164.4
Amortized cost (fair value: $4,612.5) - 4896.8
Mortgage loans on real estate 595.3 636.2
Equity securities (cost: $2.4; $177.7) 3.7 176.5
Policy loans 322.8 334.2
Other long-term investments 51.0 60.6
-----------------------
Total investments 6654.6 6268.7
-----------------------
Cash and cash equivalents 13.8 149.8
Accrued investment income 103.4 106.8
Note receivable from parent 116.0 -
Preferred stock of affiliates (amortized cost: $8.5) 8.5 -
Receivable from brokers 34.4 -
Receivables from agents, less allowance (1995 - $0.4) 18.3 17.9
Amounts recoverable from reinsurers 19.0 23.2
Deferred policy acquisition costs 47.5 510.6
Cost of insurance purchased 353.0 174.7
Property and equipment, at cost, less accumulated
depreciation ($3.4; $36.1) 20.1 20.2
Acquisition - related goodwill - 79.8
Other assets 30.7 18.8
Assets held in separate accounts 118.3 104.3
-----------------------
Total assets $ 7537.6 $ 7474.8
-----------------------
-----------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions, except share data)
<TABLE>
<CAPTION>
Predecessor
Basis
------------
December 31
-----------------------
LIABILITIES 1995 1994
-----------------------
<S> <C> <C>
Insurance liabilities
Life, annuity and accident and health reserves $ 2791.4 $ 2733.3
Policy and contract claims 41.2 39.1
Investment-type contract deposits
and dividend accumulations 2993.0 2897.3
Participating policyholders' interests 199.2 190.7
Other 48.4 55.8
Income taxes
Current (12.0) 6.0
Deferred 49.8 (22.0)
Intercompany payables 0.6 -
Accrued expenses and other liabilities 145.5 110.7
Liabilities related to separate accounts 118.3 104.3
-----------------------
Total liabilities 6375.4 6115.2
-----------------------
SHAREHOLDER'S EQUITY
Common stock ($2 par value;
30,000,000 shares authorized,
21,002,000 shares issued and outstanding) 42.0 42.0
Paid-in capital 884.3 803.0
Net unrealized gains (losses) on securities 187.5 (8.1)
Retained earnings 48.4 522.7
-----------------------
Total shareholder's equity 1162.2 1359.6
-----------------------
Total liabilities and shareholder's equity $ 7537.6 $ 7474.8
-----------------------
-----------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
----------------------------------------
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------------
1995 1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $ 449.6 $ 34.5 $ 502.7 $ 462.2
Net investment income 468.8 41.3 478.7 465.4
Investment gains (losses) 7.2 (7.6) (14.4) 92.6
Other 55.9 4.1 68.5 50.8
----------------------------------------------------------
Total revenues 981.5 72.3 1035.5 1071.0
----------------------------------------------------------
Benefits and expenses
Benefits paid or provided
Death claims and other policy
benefits 236.3 21.5 233.0 259.5
Investment-type contracts 168.3 14.0 170.5 169.1
Dividends to policyholders 85.6 7.5 87.0 92.3
Change in policy reserves 148.5 11.0 218.1 122.2
Increase in participating policy-
holders' interests 11.0 1.0 12.0 12.2
----------------------------------------------------------
649.7 55.0 720.6 655.3
Operating costs and expenses 125.3 10.2 119.8 120.3
Amortization of deferred policy
acquisition costs 8.3 5.8 71.3 68.0
Amortization of cost of insurance
purchased 29.0 0.8 9.0 7.9
Amortization of acquisition-related
goodwill - 0.2 3.3 3.3
----------------------------------------------------------
Total benefits and expenses 812.3 72.0 924.0 854.8
----------------------------------------------------------
Income before income tax expense
and cumulative effect of accounting
changes 169.2 0.3 111.5 216.2
----------------------------------------------------------
Income tax expense (benefit)
Current 39.7 4.9 75.6 97.8
Deferred 21.1 (4.7) (31.9) (18.7)
----------------------------------------------------------
Total income tax expense 60.8 0.2 43.7 79.1
----------------------------------------------------------
Income before cumulative effect of
accounting changes 108.4 0.1 67.8 137.1
Cumulative effect of accounting changes - - - 17.9
----------------------------------------------------------
Net income $ 108.4 $ 0.1 $ 67.8 $ 119.2
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
----------------------------------------
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------------
1995 1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 42.0 $ 42.0 $ 42.0 $ 42.0
----------------------------------------------------------
Paid-in capital
Balance at beginning of period 884.3 803.0 803.0 803.0
Adjustment for the acquisition - 81.3 - -
----------------------------------------------------------
Balance at end of period 884.3 884.3 803.0 803.0
----------------------------------------------------------
Net unrealized gains (losses)
on available-for-sale securities
Balance at beginning of period - (8.1) 5.3 10.5
Change during the period 187.5 1.4 (13.4) (5.2)
Adjustment for the acquisition - 6.7 - -
----------------------------------------------------------
Balance at end of period 187.5 - (8.1) 5.3
----------------------------------------------------------
Retained earnings
Balance at beginning of period - 522.7 492.7 418.7
Net income 108.4 0.1 67.8 119.2
Dividends paid to parent (60.0) (250.0) (37.8) (45.2)
Adjustment for the acquisition - (272.8) - -
----------------------------------------------------------
Balance at end of period 48.4 - 522.7 492.7
----------------------------------------------------------
Total shareholder's equity
at end of period $ 1162.2 $ 926.3 $ 1359.6 $ 1343.0
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
----------------------------------------
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------------
1995 1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income before cumulative effect
of accounting changes $ 108.4 $ 0.1 $ 67.8 $ 137.1
Reconciling adjustments to net cash
provided by operating activities
Insurance liabilities 155.4 19.9 232.8 141.1
Deferred policy acquisition costs (59.4) (2.7) (40.1) (32.6)
Investment (gains) losses (11.4) (0.9) 14.4 (92.6)
Investment write-downs and reserves 4.2 8.5 - -
Cost of insurance purchased and intangibles 29.0 1.0 12.3 11.2
Interest credited, net of charges on investment
contract deposits 153.7 12.0 153.0 155.1
Purchase of trading securities - (1.5) (183.3) -
Proceeds from sale of trading securities - 85.5 247.0 -
Other, net 8.5 (7.1) (37.3) (20.0)
----------------------------------------------------------
Net cash provided by operating activities 388.4 114.8 466.6 299.3
----------------------------------------------------------
Investing activities
Investments purchases
Held-to-maturity - (0.8) (621.8) -
Available-for-sale (1055.8) - (57.3) -
Other investments (95.7) (27.2) (224.3) (2079.6)
Affiliated (124.5) - - -
Investment calls, maturities and sales
Held-to-maturity - 24.9 470.0 -
Available-for-sale 832.0 0.2 8.1 -
Other investments 127.1 6.3 72.6 1708.2
Additions to property and equipment (3.5) (0.5) (5.0) (6.5)
----------------------------------------------------------
Net cash provided by (used for) investing activities (320.4) 2.9 (357.7) (377.9)
----------------------------------------------------------
Financing activities
Policyholder account deposits 357.8 29.2 336.6 386.0
Policyholder account withdrawals (366.2) (32.6) (337.0) (268.5)
Proceeds from intercompany borrowings 105.2 - - -
Repayments of intercompany borrowings (105.1) - - -
Dividend payments (60.0) (250.0) (37.8) (45.2)
----------------------------------------------------------
Net cash provided by (used for) financing activities (68.3) (253.4) (38.2) 72.3
----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (0.3) (135.7) 70.7 (6.3)
Cash and cash equivalents at
beginning of period 14.1 149.8 79.1 85.4
----------------------------------------------------------
Cash and cash equivalents at end of period $ 13.8 $ 14.1 $ 149.8 $ 79.1
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
1.1 NATURE OF OPERATIONS
The Franklin Life Insurance Company (Franklin) and its subsidiaries,
headquartered in Springfield, Illinois, provide life insurance and
annuity products to middle income customers throughout the United
States. Franklin serves this customer base through 3,500 agents.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) and include the
accounts of Franklin, a wholly-owned subsidiary of American Franklin
Company (AFC), and its significant subsidiaries, The American Franklin
Life Insurance Company (AMFLIC) and The Franklin United Life Insurance
Company (FULIC). All material intercompany transactions have been
eliminated in consolidation. To conform with the 1995 presentation,
certain items in the prior years' financial statements and notes have
been reclassified.
On December 31, 1995, Franklin completed the sale of FULIC to American
General Life Insurance Company of New York (AGNY), an affiliated entity.
Franklin received $8.5 million of preferred stock of American General Life
Insurance Company, the parent of AGNY, as consideration with no gain or
loss recognized on the transaction.
The preparation of financial statements requires management to make
estimates and assumptions that affect (1) the reported amounts of assets
and liabilities, (2) disclosures of contingent assets and liabilities, and
(3) the reported amounts of revenues and expenses during the reporting
periods. Ultimate results could differ from those estimates.
1.3 ACQUISITION
On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of
American General Corporation (AGC), acquired AFC for a purchase price of
$1.17 billion.
F-15
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.3 ACQUISITION (CONTINUED)
The purchase price consisted of $920 million paid in cash at closing and a
$250 million extraordinary cash dividend paid by AFC to Franklin's former
parent prior to closing. In addition, $6.3 million of acquisition costs
were capitalized as part of the acquisition. These transactions received
the required regulatory approvals from the Illinois and New York Insurance
Departments.
The acquisition was accounted for using the purchase method of accounting
in accordance with the provisions of Accounting Principles Board Opinion
16, "Business Combinations", and other existing accounting literature
pertaining to purchase accounting. Under purchase accounting, the total
purchase cost was allocated to the assets and liabilities acquired based on
a determination of their fair value. Franklin's consolidated balance sheet
at December 31, 1995, and the consolidated statements of income,
shareholder's equity and cash flows for the eleven months then ended, are
reported under the purchase method of accounting and, accordingly, are not
consistent with the basis of presentation of the previous periods'
financial statements (Predecessor Basis).
The fair values of Franklin's consolidated assets and liabilities at
January 31, 1995 were as follows (in millions):
Fixed maturity securities $ 4862.3
Other investments 1126.0
Other assets 300.7
Cost of insurance purchased 656.6
Federal income taxes 76.5
Insurance liabilities (5891.5)
Other liabilities (204.3)
-----------
Net assets $ 926.3
-----------
-----------
F-16
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.4 ACCOUNTING CHANGES
CURRENT YEAR. Effective January 1, 1995, Franklin adopted Statement of
Financial Accounting Standards (SFAS 114), "Accounting by Creditors for
Impairment of a Loan." SFAS 114 requires that certain impaired loans be
reported at the present value of expected future cash flows discounted
using the loan's initial effective interest rate, the loan's observable
market price, or the fair value of underlying collateral. The initial
effect of adopting this statement was recorded as part of realized
investment losses and resulted in a one-time reduction of net income of
$5.5 million ($8.5 million pretax) for the one month ended January 31, 1995.
Effective January 31, 1995, Franklin adopted SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". The adoption of this statement did not have a material impact on
Franklin's consolidated financial statements.
Effective January 31, 1995, Franklin adopted SFAS 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises
for Certain Long-Duration Participating Contracts". SFAS 120 requires that
benefit reserves for participating life insurance contracts be computed on
a net level premium basis using nonforfeiture interest and mortality rates.
The interest assumption used to compute estimated gross profits was 8.5% at
December 31, 1995. The initial effect of adopting this statement was
recorded as part of purchase accounting.
PRIOR YEARS. Effective January 1, 1993, Franklin adopted SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
which requires accrual of a liability for postretirement benefits other
than pensions, and SFAS 112, "Employers' Accounting for Postemployment
Benefits," which requires accrual of a liability for benefits provided to
employees after employment but before retirement.
Franklin elected to recognize the one-time transition obligation charge
resulting from the adoption of SFAS 106 on the immediate recognition basis.
The transition obligation at January 1, 1993 was $31.5 million. The
cumulative change in accounting principle for the adoption of SFAS 106 and
SFAS 112, net of $11.0 million of deferred income taxes, was a $20.5
million increase to net income in 1993.
F-17
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.4 ACCOUNTING CHANGES (CONTINUED)
Effective December 31, 1993, Franklin adopted SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." This standard requires
that fixed maturity and equity securities be classified into one of three
categories: (1) held-to-maturity, (2) available-for-sale, or (3) trading.
Securities classified as held-to-maturity are carried at amortized cost
while those classified as available-for-sale or trading are carried at fair
value. The unrealized gain (loss) on those securities classified as
available-for-sale is recorded as an adjustment to shareholder's equity,
while the unrealized gain (loss) on those securities classified as trading
is recorded as an adjustment to income. At December 31, 1994 and 1993,
Franklin classified all equity securities as trading and a portion of its
fixed maturity securities as available-for-sale, with the remainder
classified as held-to-maturity. The cumulative change in accounting
principle, net of $1.5 million of deferred income taxes, was a $2.6 million
increase to net income in 1993.
Effective January 1, 1993, Franklin adopted SFAS 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts".
The adoption of this statement did not have a material impact on Franklin's
consolidated financial statements.
1.5 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES. Concurrent with the sale of
Franklin, and in conjunction with purchase accounting, effective January
31, 1995, Franklin has classified all fixed maturity securities and all
equity securities as available-for-sale and recorded them at fair value.
After adjusting related balance sheet accounts as if the unrealized gains
(losses) had been realized, the net fair value adjustment is recorded in
net unrealized gains (losses) on securities within shareholder's equity.
If the fair value of a security classified as available-for-sale declines
below its cost and this decline is considered to be other than temporary,
the security is reduced to its fair value, and the reduction is recorded as
a realized loss.
MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of an
allowance for losses. The allowance for losses covers all non-performing
loans, consisting of loans delinquent 60 days or more. The allowance also
covers loans for which there is a concern based on management's assessment
of risk factors, such as potential non-payment or non-monetary default.
The allowance is based on a loan-specific review and a formula that
reflects past results and current trends.
Impaired loans, those for which Franklin determines that it is probable
that all amounts due under the contractual terms will not be collected, are
reported at the lower of amortized cost or fair value of the underlying
collateral less estimated costs to sell.
F-18
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.5 INVESTMENTS (CONTINUED)
POLICY LOANS. Policy loans are reported at unpaid principal balance and
are adjusted periodically for any differences between face value and unpaid
principal balance, and for possible uncollectible amounts.
INVESTMENT INCOME. Interest on fixed maturity securities and performing
mortgage loans is recorded as income when earned and is adjusted for any
amortization of premium or discount. Interest on restructured mortgage
loans is recorded as income when earned based on the new contractual rate.
Interest on delinquent mortgage loans is recorded as income on a cash
basis. Dividends are recorded as income on ex-dividend dates.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are
recognized using the specific identification method and include declines in
the fair value of investments below cost that are considered other than
temporary and the net unrealized holding gain or loss on trading
securities.
1.6 CASH AND CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or less
are included in cash and cash equivalents. The carrying amount
approximates fair value.
1.7 DEFERRED POLICY ACQUISITION COSTS (DPAC)
The costs of writing an insurance policy, including agents' commissions and
underwriting and marketing expenses, are deferred and included in the DPAC
asset.
DPAC associated with interest-sensitive life insurance, participating life
insurance and investment contracts is charged to expense in relation to the
estimated gross profits of those contracts. DPAC associated with all
other insurance contracts is charged to expense over the premium-paying
period or as the premiums are earned over the life of the contract.
Gross profits include realized investment gains (losses). In addition,
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 net unrealized
gains (losses) on securities within shareholder's equity.
F-19
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.7 DEFERRED POLICY ACQUISITION COSTS (DPAC) (CONTINUED)
Franklin reviews the carrying amount of DPAC on at least an annual basis.
In determining whether the carrying amount is appropriate, Franklin
considers estimated future gross profits or future premiums, as applicable
for the type of contract. In all cases, Franklin considers expected
mortality, interest earned and credited rates, persistency, and expenses.
1.8 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to insurance contracts in force at the acquisition date
is referred to as CIP. CIP is charged to expense using the same
assumptions as DPAC. Interest is accreted on the unamortized balance of
CIP at rates of 7% to 8.5%. CIP is also adjusted for the impact of net
unrealized gains (losses) on securities in the same manner as DPAC.
Franklin reviews the carrying amount of CIP on at least an annual basis
using the same methods used to evaluate DPAC.
1.9 ACQUISITION-RELATED GOODWILL
Prior to January 31, 1995, acquisition-related goodwill was charged to
expense in equal amounts over 40 years. At December 31, 1994, accumulated
amortization was $53.0 million. Acquisition-related goodwill was
attributable to a previous acquisition of AFC and was eliminated in
purchase accounting.
1.10 SEPARATE ACCOUNTS
Separate accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the holder of the
contract rather than Franklin. Consequently, the insurer's liability for
these accounts equals the value of the account assets. Investment income,
realized investment gains (losses), and policyholder account deposits and
withdrawals related to separate accounts are excluded from the consolidated
statements of income and cash flows. Assets held in separate accounts are
carried at fair value.
1.11 INSURANCE LIABILITIES
Substantially all of Franklin's insurance liabilities relate to
long-duration contracts, which generally require performance over a period
of more than one year. The contract provisions normally cannot be changed
or canceled by Franklin during the contract period.
F-20
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.11 INSURANCE LIABILITIES (CONTINUED)
For interest-sensitive life insurance and investment contracts, reserves
equal the sum of the policy account balance and deferred revenue charges.
Reserves for other non-participating long-duration contracts are based on
estimates of the cost of future policy benefits to be paid as a result of
present and future claims due to death, disability, surrender of a policy,
or payment of an endowment. Reserves are determined using the net level
premium method. Interest assumptions used to compute reserves ranged from
2.0% to 8.5% at December 31, 1995.
1.12 PREMIUM RECOGNITION
Most receipts for annuities and interest-sensitive life insurance contracts
are classified as deposits instead of revenues. Revenues for these
contracts consist of the mortality, expense, and surrender charges assessed
against the account balance. Policy charges that are designed to
compensate Franklin for future services are deferred and recognized in
income over the period earned, using the same assumptions used to amortize
DPAC.
For limited-payment contracts, net premiums are recorded as revenue, and
the difference between the gross premium received and the net premium is
deferred and recognized in income in a constant relationship to insurance
in force. For all other long-duration contracts, premiums are recognized
when due.
1.13 INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in effect
when the temporary differences reverse. The effect of a tax rate change is
recognized in income in the period of enactment. State income taxes are
included in income tax expense.
A change in deferred taxes related to fluctuations in fair value of
available-for-sale securities is included in net unrealized gains (losses)
on securities in shareholder's equity.
F-21
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.14 PARTICIPATING LIFE INSURANCE
Participating life insurance contracts contain dividend payment provisions
that entitle the policyholders to participate in the earnings of the
contracts. Participating life insurance accounted for 48% and 49% of life
insurance in force at December 31, 1995 and 1994, respectively, and 58%,
69%, 61%, and 65% of premiums and other considerations for the eleven
months ended December 31, 1995, the one month ended January 31, 1995, and
the years ended December 31, 1994 and 1993, respectively.
The portion of earnings allocated to participating policyholders which
cannot be expected to inure to Franklin's shareholder is excluded from net
income and shareholder's equity.
The amount of dividends to be paid on participating life insurance
contracts is determined annually, based on estimates of amounts incurred
for the contracts in effect during the period.
2. Investments
2.1 INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------------
IN MILLIONS 1995 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 394.3 $ 33.9 $ 400.8 $ 394.4
Mortgage loans on real estate 54.3 4.6 54.9 47.7
Policy loans 18.6 1.7 18.3 17.8
Other investments 9.1 1.2 12.2 11.9
----------------------------------------------------------
Gross investment income 476.3 41.4 486.2 471.8
Investment expense 7.5 0.1 7.5 6.4
----------------------------------------------------------
Net investment income $ 468.8 $ 41.3 $ 478.7 $ 465.4
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
The carrying value of investments that produced no investment income during
1995 totaled $30.3 million, or less than 0.5% of total invested assets.
The ultimate disposition of these assets is not expected to have a material
effect on Franklin's consolidated results of operations and financial
position.
F-22
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.2 REALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for fixed maturity and equity
securities, net of participating policyholders' interest, and DPAC and CIP
amortization were as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------------
IN MILLIONS 1995 1995 1994 1993
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 13.8 $ - $ 17.4 $ 79.1
Gross losses (1.9) - (0.9) (8.9)
----------------------------------------------------------
Total fixed maturity securities 11.9 - 16.5 70.2
----------------------------------------------------------
Equity securities
Gross gains 1.9 4.1 23.2 59.1
Gross losses (0.5) (5.4) (49.4) (32.5)
----------------------------------------------------------
Total equity securities 1.4 (1.3) (26.2) 26.6
----------------------------------------------------------
Other - (6.3) (4.7) (4.2)
Adjustment to DPAC and CIP (6.1) - - -
----------------------------------------------------------
Realized investment gains
(losses) $ 7.2 $ (7.6) $ (14.4) $ 92.6
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
Voluntary sales of investments resulted in:
<TABLE>
<CAPTION>
Realized
--------------------------
In millions Proceeds Gains Losses
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ELEVEN MONTHS ENDED AVAILABLE-FOR-SALE $ 268.7 $ 8.5 $ (0.4)
DECEMBER 31, 1995
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
ONE MONTH ENDED HELD-TO-MATURITY $ - $ - $ -
JANUARY 31, 1995 AVAILABLE-FOR-SALE $ - $ - $ -
TRADING $ 84.7 $ 4.1 $ (5.4)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 Available-for-sale $ - $ - -
Trading $ 236.7 $ 23.2 $ (49.4)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
Year Ended December 31, 1993 Fixed maturity
and equity securities $ 34.1 $ 1.0 $ (0.2)
- ------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
F-23
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES
VALUATION. Amortized cost and fair value of available-for-sale and
held-to-maturity securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In millions COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Fixed maturity securities
Corporate bonds
Investment grade $ 2872.1 $ 304.2 $ (3.5) $ 3172.8
Below investment grade 188.1 11.9 (0.7) 199.3
Public utilities 1241.5 156.6 - 1398.1
Mortgage-backed 500.4 61.5 - 561.9
Foreign governments 101.5 17.7 - 119.2
U.S. Government 191.8 23.7 - 215.5
States/political subdivisions 13.6 0.9 - 14.5
Redeemable
preferred stocks 0.5 - - 0.5
----------------------------------------------------------
Total fixed maturity securities 5109.5 576.5 (4.2) 5681.8
----------------------------------------------------------
EQUITY SECURITIES 2.4 1.3 - 3.7
----------------------------------------------------------
Total available-for-sale securities $ 5111.9 $ 577.8 $ (4.2) $ 5685.5
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
F-24
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
IN MILLIONS COST GAINS LOSSES VALUE
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES
Fixed maturity securities
Corporate securities
Investment grade $ 2511.1 $ 41.8 $ (137.4) $ 2415.5
Below investment grade 189.0 0.6 (5.0) 184.6
Public utilities 1549.5 16.8 (128.9) 1437.4
Mortgage-backed 464.0 3.8 (68.4) 399.4
Foreign governments 113.7 1.8 (6.8) 108.7
U.S. Government 49.0 0.7 (2.8) 46.9
States/political subdivisions 18.0 0.2 (1.2) 17.0
Redeemable
preferred stocks 2.5 0.6 (0.1) 3.0
----------------------------------------------------------
Total held-to-maturity 4896.8 66.3 (350.6) 4612.5
----------------------------------------------------------
</TABLE>
F-25
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
IN MILLIONS COST GAINS LOSSES VALUE
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Fixed maturity securities
Foreign government 3.4 - (0.6) 2.8
U.S. Government 176.6 1.7 (16.7) 161.6
----------------------------------------------------------
Total available-for-sale
securities 180.0 1.7 (17.3) 164.4
----------------------------------------------------------
Total fixed maturity
securities $ 5,076.8 68.0 $ (367.9) $ 4,776.9
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
F-26
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
MATURITIES. The contractual maturities of fixed maturity securities, at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
AMORTIZED FAIR
In millions COST VALUE
- ----------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 66.0 $ 66.8
Due after one year through five years 871.8 928.6
Due after five years through ten years 1932.1 2134.7
Due after ten years 1739.2 1989.8
Mortgage-backed securities 500.4 561.9
---------------------------
Totals $ 5109.5 $ 5681.8
---------------------------
---------------------------
</TABLE>
Actual maturities may differ from contractual maturities since borrowers may
have the right to call or prepay obligations. Corporate requirements and
investment strategies may result in the sale of investments before maturity.
F-27
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.4 NET UNREALIZED GAINS (LOSSES) ON SECURITIES
Net unrealized gains (losses) on available-for-sale securities included in
shareholder's equity at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1995 1994
-----------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 577.8 $ 1.7
Gross unrealized losses (4.2) (17.3)
DPAC fair value adjustment (11.7) -
CIP fair value adjustment (270.0) -
Participating policyholders'
interest (3.4) 1.8
Deferred federal income taxes (101.0) 5.7
Net unrealized gains (losses) -------------------------------
on securities $ 187.5 $ (8.1)
-------------------------------
-------------------------------
</TABLE>
The change in net unrealized holding gain or loss on trading securities
which was included in earnings during the one month ended January 31, 1995
and for the year ended December 31, 1994 and recorded as part of the
cumulative effect of a change in accounting principle for 1993 was as
follows:
<TABLE>
<CAPTION>
ONE MONTH Years
ENDED Ended
JANUARY 31 December 31
--------------------------------------
In millions 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C>
Change in unrealized
holding gain or loss
on trading securities $ 2.2 $ (5.3) $ 4.1
Deferred income taxes (0.8) 1.9 (1.5)
------------------------------------
Change in net unrealized
holding gain or loss on
trading securities $ 1.4 $ (3.4) $ 2.6
------------------------------------
------------------------------------
</TABLE>
F-28
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE
DIVERSIFICATION. Diversification of the geographic location and type of
property collateralizing mortgage loans reduces the concentration of credit
risk. For new loans, Franklin requires loan-to-value ratios of 79% or
less, based on management's credit assessment of the borrower. At December
31, the mortgage loan portfolio was distributed as follows:
<TABLE>
<CAPTION>
In millions 1995 1994
-----------------------------------------------------------------
<S> <C> <C>
Geographic distribution
East North Central $ 135.3 $ 148.5
East South Central 39.1 37.3
Mid Atlantic 17.9 19.0
Mountain 42.9 45.2
New England 20.6 22.4
Pacific 102.0 103.0
South Atlantic 153.8 162.7
West North Central 40.2 47.4
West South Central 56.2 50.7
Allowance for losses (12.7) -
--------------------------------
Total $ 595.3 $ 636.2
--------------------------------
--------------------------------
Property type
Retail $ 296.3 $ 295.5
Office 159.7 177.9
Industrial 99.9 109.9
Residential and other 52.1 52.9
Allowance for losses (12.7) -
--------------------------------
Total $ 595.3 $ 636.2
--------------------------------
--------------------------------
</TABLE>
F-29
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
IMPAIRED LOANS. The carrying value of impaired mortgage loans on real
estate and related interest income were as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE
ELEVEN MONTHS
ENDED
DECEMBER 31
------------------
In millions 1995
-------------------------------------------------------
<S> <C>
Impaired loans
With allowance (a) $ 5.3
Without allowance 17.8
------------------
Total impaired loans $ 23.1
------------------
------------------
Average investment $ 27.4
Interest income earned 1.3
</TABLE>
(a) Represents gross amounts before allowance for mortgage loan losses of
$1.6 million. Franklin had no impaired loans at December 31, 1994 and
1993.
ALLOWANCE. The allowance for mortgage loan losses was as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH
ENDED ENDED
DECEMBER 31 JANUARY 31
--------------------------------
In millions 1995 1995
-----------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 8.5 $ -
Net additions(a) 4.2 8.5
---------------------------------
Balance at end of period $ 12.7 $ 8.5
---------------------------------
---------------------------------
</TABLE>
(a) Charged to realized investment gains (losses).
F-30
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.6 INVESTMENTS ON DEPOSIT
As of December 31, 1995 and 1994, bonds and other investments carried
at $25.0 million and $24.8 million, respectively, were on deposit with
regulatory authorities to comply with state insurance laws.
2.7 INVESTMENT RESTRICTIONS
Franklin is restricted by the insurance laws of its domiciliary state as to
the amount which it can invest in any entity. At December 31, 1995 and
1994, Franklin's largest investment in any one entity other than U.S.
Government obligations and related party amounts was $66.1 million and
$40.7 million, respectively.
3. Fair Value of Financial Instruments
Carrying amounts and fair values for certain of Franklin'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 the Company's
assets and liabilities, and (2) the reporting of investments at fair value
without a corresponding revaluation of related policyholder liabilities can
be misinterpreted.
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1995 1994
------------------------------------------------
CARRYING FAIR Carrying Fair
In millions AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Available-for-sale
fixed maturity
securities $ 5681.8 $ 5681.8 $ 164.4 $ 164.4
Held-to-maturity
fixed maturity
securities - - 4896.8 4612.5
Mortgage loans on
real estate 595.3 628.6 636.2 624.3
Equity securities 3.7 3.7 176.5 176.5
Liabilities
Insurance investment
contracts (1985.0) (1901.3) (1908.0) (1823.5)
</TABLE>
F-31
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Fair Value of Financial Instruments (continued)
The methods and assumptions used to estimate fair value were as follows:
FIXED MATURITY AND EQUITY SECURITIES. Fair values of fixed maturity and
equity securities were based on quoted market prices, where available. For
investments not actively traded, fair values were estimated using values
obtained from independent pricing services or in the case of some private
placements, by discounting expected future cash flows using current market
rates applicable to the yield, credit quality, and the average life of the
investments.
MORTGAGE LOANS ON REAL ESTATE. Fair value of mortgage loans was estimated
primarily using discounted cash flows, based on contractual maturities and
discount rates that were based on U.S. Treasury rates for similar maturity
ranges, adjusted for risk, based on property type.
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
on policy loans was 6% in 1995 and 1994.
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts, which do not subject Franklin to significant risks arising from
policyholder mortality or morbidity, was estimated using cash flows
discounted at market interest rates. Care should be exercised in drawing
conclusions from the estimated fair value, since the estimates are based on
assumptions regarding future economic activity.
F-32
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Deferred Policy Acquisition Costs (DPAC)
Analysis of the changes in the DPAC asset is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
-------------------------------------------------
In millions 1995 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ - $ 510.6 $ 470.5 $ 437.9
Capitalization 67.7 8.5 111.4 100.6
Amortization (8.3) (5.8) (71.3) (68.0)
Effect of unrealized gains
on securities (11.7) - - -
Effect of realized investment
gains (0.2) - - -
Adjustment for the
acquisition (a) - (513.3) - -
-------------------------------------------------
End of period balance $ 47.5 $ - $ 510.6 $ 470.5
-------------------------------------------------
-------------------------------------------------
</TABLE>
(a) Represents the necessary elimination of the historical DPAC asset
required by purchase accounting
.
F-33
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP)
An analysis of the changes in the CIP asset is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------
In millions 1995 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period
balance $ 656.6 $ 174.7 $ 169.9 $ 175.6
Interest accretion 49.0 2.0 24.9 25.5
Additions 41.3 - 13.8 2.2
Amortization (118.0) (2.8) (33.9) (33.4)
Effect of unrealized
gains on securities (270.0) - - -
Effect of realized
investment gains (5.9) - - -
Incremental adjustment
for the acquisition (a) - 482.7 - -
----------------------------------------------------
End of period balance $ 353.0 $ 656.6 $ 174.7 $ 169.9
----------------------------------------------------
----------------------------------------------------
</TABLE>
(a) Represents the incremental amount necessary to recognize the new CIP asset
attributable to the January 31, 1995 acquisition.
Accumulated CIP amortization at December 31, 1995 and 1994 was $29.0 million
and $140.0 million, respectively.
CIP amortization, net of accretion and additions, expected to be recorded in
each of the next five years is $33.4 million, $32.1 million, $29.6 million,
$25.6 million and $23.7 million.
F-34
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Separate Accounts
Franklin administers four separate accounts. Three of these issue variable
annuity contracts and the fourth has issued a group deposit administration
contract for the Franklin employees' pension plan. AMFLIC administers two
separate accounts in connection with the issue of its Variable Universal
Life product.
7. Income Taxes
Franklin and its life insurance company subsidiaries are subject to the
life insurance company provisions of the federal tax law. Prior to
February 1, 1995, Franklin and its subsidiaries filed a consolidated
federal income tax return with their former parent company. The method of
allocation of tax expense was based upon separate return calculations with
current credit for net losses and tax credits. Consolidated Alternative
Minimum Tax, if any, was allocated separately. Intercompany tax balances
were to be settled no later than thirty (30) days after the date of filing
the consolidated return.
After January 31, 1995 Franklin will file a life/life consolidated return
which includes Franklin, FULIC (prior to the date of sale) and AMFLIC.
Franklin Financial Services Corporation, a broker-dealer and wholly-owned
subsidiary of Franklin, will file a separate return. The tax allocation
agreement is in the process of being drafted, executed and approved by the
Board of Directors.
7.1 DEFERRED TAXES
Components of deferred tax liabilities and assets at December 31, were as
follows:
<TABLE>
<CAPTION>
In millions 1995 1994
-----------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of investments $ 151.9 $ 5.6
DPAC and CIP 99.5 204.1
Other 27.0 11.1
----------------------------
Total deferred tax liabilities 278.4 220.8
----------------------------
Deferred tax assets, applicable to:
Policy reserves (115.6) (141.2)
Participating policyholders' interests (69.9) (67.0)
Postretirement benefits (4.0) (12.9)
Basis differential of investments (14.4) (1.3)
Other (24.7) (20.4)
----------------------------
Total deferred tax assets (228.6) (242.8)
----------------------------
Net deferred tax liabilities (assets) $ 49.8 $ (22.0)
----------------------------
----------------------------
</TABLE>
FLIC expects adequate future taxable income to realize the net deferred tax
assets. Accordingly, no valuation allowance is considered necessary.
F-35
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.1 DEFERRED TAXES (CONTINUED)
A portion of life insurance income earned prior to 1984 is not taxable
unless it exceeds certain statutory limitations or is distributed as
dividends. Such income, accumulated in policyholders' surplus accounts,
totaled $200 million at December 31, 1995. At current corporate rates, the
maximum amount of tax on such income is approximately $70 million.
Deferred income taxes on these accumulations are not required because no
distributions are expected.
7.2 TAX EXPENSE
A reconciliation between the federal income tax rate and the effective
income tax rate follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
--------------------------------------------
1995 1995 1994 1993
--------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0 % 35.0 % 35.0 % 35.0 %
State taxes, net 0.9 36.3 1.1 1.0
Tax-exempt investment income (0.6) (39.3) 0.7 (0.7)
Amortization of goodwill - 34.3 1.0 0.5
Other 0.6 0.4 1.4 0.8
--------------------------------------------
Effective tax rate 35.9 % 66.7 % 39.2 % 36.6 %
--------------------------------------------
--------------------------------------------
</TABLE>
7.3 TAXES PAID
Federal income taxes paid for the eleven months ending December 31, 1995,
and for the years ended December 31, 1994 and 1993 were $53 million, $65
million, and $84 million, respectively. State income taxes paid for the
eleven months ended December 31, 1995, were $1 million, and $3 million for
each of the years ended December 31, 1994 and 1993, respectively.
There were no federal or state income taxes paid during January 1995.
F-36
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.4 TAX RETURN EXAMINATIONS
The Internal Revenue Service (IRS) has completed examinations of Franklin's
returns through 1989. All resolved issues have been settled within the
amounts previously provided in the consolidated financial statements.
Adequate provision has been made for unresolved issues.
8. Benefit Plans
8.1 PENSION PLANS
Franklin and its subsidiaries have a defined benefit pension plan covering
substantially all employees. On January 1, 1996, this plan was merged with
the plan sponsored by American General Corporation. At that time, the
benefits to employees were frozen and no future accrual or accretion of
interest will occur. The plan provides for the payment of retirement
benefits; normally commencing at age 65, and also for the payment of
certain disability benefits. After meeting certain qualifications, an
employee acquires a vested right to future benefits. Pension benefits are
based on the participant's average monthly compensation and length of
credited service. Annual contributions made to the plan are sufficient to
satisfy legal funding requirements.
Fixed maturity securities constitute the majority of the plan's assets at
December 31, 1995.
The pension plan has purchased annuity contracts from Franklin to provide
benefits for its retirees. For the eleven months ended December 31, 1995,
the one month ended January 31, 1995 and for the years ended December 31,
1994 and 1993, these contracts provided approximately $3.9, $0.3, $4.0, and
$4.0 million annually for retiree benefits, respectively.
During the fourth quarter of 1995, Franklin sponsored a program of special
incentives to those employees age 55 and over who elected early retirement.
The program concluded December 31, 1995. A withdrawal of $26.5 million was
made from the plan in 1995 to provide full retirement benefits for these
employees who elected by December 31, 1995 to retire under the program.
F-37
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
Net pension cost included the following components:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
--------------------------------------------
In millions 1995 1995 1994 1993
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned) $ 0.9 $ 0.2 $ 2.8 $ 2.7
Interest cost 3.7 0.4 4.2 4.4
Actual return on plan assets (11.5) (0.4) 2.5 (5.9)
Net amortization and deferral 6.3 - (6.7) 2.8
--------------------------------------------
Pension expense (income) $ (0.6) $ 0.2 $ 2.8 $ 4.0
--------------------------------------------
--------------------------------------------
</TABLE>
F-38
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
The funded status of the plan and the prepaid pension expense included in
other assets at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1995 1994
-------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation,
primarily vested $ 27.6 $ 35.9
Effect of increase in
compensation levels - 16.1
---------------------------------
Projected benefit obligation 27.6 52.0
Plan assets at fair value 31.3 49.6
---------------------------------
Plan assets at fair value in
excess of (less than) projected
benefit obligation 3.7 (2.4)
Unrecognized net loss 7.4 4.7
---------------------------------
Prepaid pension expense $ 11.1 $ 2.3
---------------------------------
---------------------------------
Weighted-average discount rate
on benefit obligation 7.25 % 8.75 %
Rate of increase in compensation
levels 4.00 5.00
Expected long-term rate of
return on plan assets 10.00 9.50
</TABLE>
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Franklin has life, medical, supplemental major medical and dental plans for
certain retired employees and agents. Most plans are contributory with
retiree contributions adjusted annually to limit employer contributions to
predetermined amounts. Franklin has reserved the right to change or
eliminate these benefits at any time.
F-39
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The life plans are fully insured. The plan's funded status and the accrued
postretirement benefit cost included in other liabilities at December 31
were as follows:
<TABLE>
<CAPTION>
In millions 1995 1994
--------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligation
Retirees $ 8.9 $ 18.1
Active plan participants
Fully eligible 1.1 5.7
Other 2.5 15.5
---------------------
Accumulated postretirement
benefit obligation (APBO) 12.5 39.3
Plan assets at fair value - -
---------------------
APBO in excess of plan assets
at fair value 12.5 39.3
Unrecognized net gain (1.4) -
---------------------
Accrued benefit cost $ 11.1 $ 39.3
---------------------
---------------------
Weighted-average discount
rate on benefit obligation 7.25 % 7.25 %
</TABLE>
Effective January 31, 1995, as part of purchase accounting, the
postretirement benefit obligation was revalued using AGC assumptions and
anticipated plan revisions. As a result of this revaluation, the
accumulated postretirement benefit obligation was reduced by $28.8 million.
Postretirement benefit expense is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
-------------------------------------------------
In millions 1995 1995 1994 1993
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost
(benefits earned) $ 0.1 $ - $ 1.1 $ 0.8
Interest cost 0.9 (0.2) 2.8 2.6
-------------------------------------------------
Postretirement
benefit expense
(income) $ 1.0 $ (0.2) $ 3.9 $ 3.4
-------------------------------------------------
-------------------------------------------------
</TABLE>
F-40
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
For measurement purposes, a 12% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996; the rate was
assumed to decrease gradually to 6% by the year 2007 and remain at that
level. A 1% increase in the assumed rate results in a $0.2 million
increase in the accumulated postretirement benefit obligation and no
increase in postretirement benefit expense.
9. Statutory Accounting
State insurance laws prescribe accounting practices for calculating
statutory net income and equity. In addition, state regulators may allow
permitted statutory accounting practices that differ from prescribed
practices.
During 1995 Franklin, with the approval of the Illinois Insurance
Department, reclassified $203 million of its statutory surplus from
contributed to unassigned surplus.
At December 31, 1995 and 1994 Franklin had statutory shareholder's equity
of $386.0 million and $606.7 million, respectively. Statutory net income
was $100.2 million, $28.7 million, and $87.2 million for 1995, 1994 and
1993, respectively.
As determined on a statutory basis, the statutory shareholder's equity and
net income of subsidiaries, in millions of dollars, were reported as
follows:
<TABLE>
<CAPTION>
STATUTORY
----------------------------------------
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Shareholder's Equity $ 9.9 $ 17.5 $ 20.1
----------------------------------------
----------------------------------------
Net Income $ (4.7) $ (4.8) $ (3.6)
----------------------------------------
----------------------------------------
</TABLE>
Generally, Franklin is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends,
loans, or advances without the approval of the Illinois Insurance
Department. During 1995, Franklin received approval to loan $116.0 million
to AGCL. Franklin also received approval to pay an extraordinary dividend
of $250 million to its former parent as part of the 1995 acquisition.
During December 1995, Franklin received approval to pay an extraordinary
dividend of $60 million to AGCL. Under these restrictions, loans or
advances in excess of $96.5 million and dividends in any twelve-month
period aggregating in excess of $100.2 million will require the approval of
the Illinois Insurance Department.
F-41
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Consolidated Statement of Cash Flows
In addition to the cash activities shown in the consolidated statement of
cash flows, the following transactions, in millions of dollars, occurred:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
1995 1995 1994 1993
---------------------------------------------
<S> <C> <C> <C> <C>
Interest added to annuity
and other financial products $ 168.3 $ 14.0 $ 170.5 $ 169.0
---------------------------------------------
---------------------------------------------
Fair value of assets acquired
under certain assumed
reinsurance treaties $ 14.7 $ - $ 18.3 $ 204.3
Unearned revenue - - - 9.3
---------------------------------------------
Insurance liabilities assumed $ 14.7 $ - $ 18.3 $ 195.0
---------------------------------------------
---------------------------------------------
</TABLE>
11. Reinsurance
Franklin is routinely involved in reinsurance transactions. Ceded
insurance becomes a liability of the reinsurer that assumes the risk. If
the reinsurer could not meet its obligations, Franklin would reassume the
liability. The likelihood of a material reinsurance liability being
reassumed by Franklin is considered to be remote. Franklin and its
insurance subsidiaries diversify their risk of exposure to reinsurance loss
by using a number of life reinsurers that have strong claims-paying ability
ratings. The maximum retention on one life for individual life insurance
is $1.0 million.
Amounts paid or deemed to have been paid in connection with ceded
reinsurance contracts are recorded as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is recognized over the life
of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
F-42
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance (continued)
Reinsurance premiums included in premiums and other considerations were as
follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
--------------------------------------------------
In millions 1995 1995 1994 1993
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct premiums
and other considerations
other considerations $ 500.1 $ 36.8 $ 507.1 $ 466.9
Reinsurance assumed 44.2 (0.8) 114.7 97.1
Reinsurance ceded (94.7) (1.5) (119.1) (101.8)
--------------------------------------------------
Premiums and
other considerations
considerations $ 449.6 $ 34.5 $ 502.7 $ 462.2
--------------------------------------------------
--------------------------------------------------
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $63.3 million, $1.4
million, $69.6 million and $65.9 million for the eleven months ended December
31, 1995, the one month ended January 31, 1995 and the years ended December 31,
1994 and 1993, respectively. The amount of reinsurance recoverable (payable) on
paid and unpaid losses was $0.4 million and $(1.0) million at December 31, 1995
and 1994, respectively.
12. Related Party Transactions
During 1995, the following transactions occurred with related parties:
+ Franklin purchased a 6.75% promissory note from AGCL for $116.0
million to mature in 2005.
+ Franklin borrowed $105.2 million and repaid $105.1 million through its
participation in the AGC short-term borrowing program. The remaining
balance was paid in January 1996. Interest was paid on the
outstanding balances based on the Federal Reserve Board's monthly
average H.15 rate for 30-day commercial paper.
+ Franklin received $8.5 million of 8% non-voting preferred stock of
American General Life Insurance Company as consideration for the sale
of FULIC.
Additionally, Franklin has entered into indefinite contracts for the
performance of all investment management services as well as cost
allocation agreements with its ultimate parent. Total expenses under these
agreements were $2.3 million in the eleven months ended December 31, 1995.
F-43
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Legal Proceedings
Franklin and certain of its subsidiaries are defendants in various lawsuits
and proceedings arising in the normal course of business. Although no
assurances can be given and no determination can be made at this time as to
the outcome of any particular lawsuit or proceeding, Franklin and its
subsidiaries believe that there are meritorious defenses for all of these
claims and are defending them vigorously. The Company also believes that
the total amounts that would ultimately be paid, if any, arising from these
claims would have no material effect on the Company's consolidated results
of operations and financial position.
14. State Guaranty Associations
State guaranty fund expense included in operating costs and expenses was
$0.2 million, $0.6 million, $2.3 million and $2.1 million for the eleven
months ended December 31, 1995, one month ended January 31, 1995, and the
years ended December 31, 1994 and 1993, respectively. Amounts assessed
Franklin by state life and health insurance guaranty funds resulting from
paid industry insolvencies were $0.1 million, $0.6 million, $2.3 million
and $2.1 million for the eleven months ended December 31, 1995, one month
ended January 31, 1995, and the two years ended December 31, 1994 and 1993.
These assessments are expected to be partially recovered against the
payment of future premium taxes.
The accrued liability for anticipated assessments was $8.5 million at
December 31, 1995. Franklin has recorded a receivable of $11.2 million for
expected recoveries against the payment of future premium taxes. In prior
periods, no accrual was recorded for anticipated assessments.
The 1995 liability was estimated by Franklin using the latest information
available from the National Organization of Life and Health Insurance
Guaranty Associations. Although the amount accrued represents Franklin's
best estimate of its liability, this estimate may change in the future.
Additionally, changes in state laws could decrease the amount recoverable
against future premium taxes.
F-44
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
<PAGE>
PART C
OTHER INFORMATION
ITEM 28. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements:
Included in the Prospectus:
Franklin Life Money Market Variable Annuity Fund C:
Per-Unit Income and Changes in Accumulation Unit Value for the ten
years ended December 31, 1995
Included in the Statement of Additional Information:
Franklin Life Money Market Variable Annuity Fund C:
Reports of Independent Auditors and Accountants
Financial Statements:
Statement of Assets and Liabilities, December 31, 1995
Statement of Operations for the year ended December 31, 1995
Statements of Changes in Contract Owners' Equity for the two years
ended December 31, 1995
Portfolio of Investments, December 31, 1995
Notes to Financial Statements
Supplementary Information - Per-Unit Income and Changes in
Accumulation Unit Value for the five years ended December 31, 1995
The Franklin Life Insurance Company and Subsidiaries:
Reports of Independent Auditors and Accountants
Financial Statements:
Consolidated Balance Sheet, December 31, 1995 and 1994
Consolidated Statement of Income for the eleven months ended
December 31, 1995, one month ended January 31, 1995,
and years ended December 31, 1994 and 1993
Consolidated Statement of Shareholder's Equity for the eleven
months ended December 31, 1995, one month ended
January 31, 1995, and years ended December 31, 1994 and 1993
Consolidated Statement of Cash Flows for the eleven months ended
December 31, 1995, one month ended January 31, 1995, and years
ended December 31, 1994 and 1993
Notes to Consolidated Financial Statements
Schedules to the Financial Statements have been omitted because they are
not required under the related instructions or are not applicable, or the
information has been shown elsewhere.
(b) Exhibits:
1 - Resolution of The Franklin Life Insurance Company's Board of
Directors creating Franklin Life Money Market Variable Annuity
Fund C is incorporated herein by reference to Exhibit 1 of
Registrant's Registration Statement on Form N-1, filed October 15,
1981 (File No. 2-74459).
2 - Rules and Regulations adopted by Registrant, as amended, are
incorporated herein by reference to Exhibit 2 of Registrant's
Registration Statement Amendment No. 2 on Form N-1, filed
December 18, 1981 (File No. 2-74459).
C-1
<PAGE>
3 - Custodian Agreement dated April 17, 1995 between The Franklin Life
Insurance Company and State Street Bank and Trust Company.
4 - Investment Management Agreement dated January 31, 1995 between
Registrant and The Franklin Life Insurance Company is incorporated
herein by reference to Exhibit 4 of Registrant's Post-Effective
Amendment No. 19 on Form N-3, filed March 2, 1995.
5(a)- Sales Agreement dated January 31, 1995 between Registrant and
Franklin Financial Services Corporation is incorporated herein by
reference to Exhibit 5(a) of Registrant's Post-Effective Amendment
No. 19 on Form N-3, filed March 2, 1995.
(b)- Form of Agreement to be entered into among The Franklin Life
Insurance Company, Franklin Financial Services, and agents is
incorporated herein by reference to Exhibit 6(b) of Registrant's
Registration Statement Amendment No. 2 on Form N-1, filed December 18,
1981 (File No. 2-74459).
6(a)- Amended specimen copy of Form 1175, periodic payment deferred
variable annuity contract, is incorporated herein by reference to
Exhibit 4(a) of Registrant's Registration Statement Amendment No. 2
on Form N-1, filed December 18, 1981 (File No. 2-74459).
(b)- Amended specimen copy of Form 1176, single payment deferred variable
annuity contract, is incorporated herein by reference to Exhibit 4(b)
of Registrant's Registration Statement Amendment No. 2 on Form N-1,
filed December 18, 1981 (File No. 2-74459).
(c)- Specimen of copy of Form 1177, single payment immediate life variable
annuity contract, is incorporated herein by reference to Exhibit 4(c)
of Registrant's Registration Statement on Form N-1, filed October 15,
1981 (File No. 2-74459).
(d)- Specimen copy of Form 1178, single payment immediate life variable
annuity contract with guaranteed period, is incorporated herein by
reference to Exhibit 4(d) of Registrant's Registration Statement on
Form N-1, filed October 15, 1981 (File No. 2-74459).
(e)- Specimen copy of Form 1179, single payment immediate joint and last
survivor life variable annuity contract, is incorporated herein by
reference to Exhibit 4(e) of Registrant's Registration Statement on
Form N-1, filed October 15, 1981 (File No. 2-74459).
(f)- Specimen copy of Form 4840, "Endorsement to Make Contract
Nontransferable," attached as endorsement to Forms 1175, 1176, 1177,
1178 and 1179, is incorporated herein by reference to Exhibit 4(f) of
Registrant's Registration Statement on Form N-1, filed October 15,
1981 (File No. 2-74459).
(g)- Specimen copy of Form 6012, "Waiver of Stipulated Payment Disability
Benefit, for use as endorsement to Form 1175, is incorporated herein by
reference to Exhibit 4(g) of Registrant's Registration Statement on
Form N-1, filed October 15, 1981 (File No. 2-74459).
(h)- Specimen copy of Form 6275-A, "Variable Annuity Endorsement,"
attached as endorsement to Forms 1175, 1176, 1177, 1178 and 1179 when
such contracts are issued to variable annuitants in the State of Texas,
is incorporated herein by reference to Exhibit 4(h) of Registrant's
Registration Statement on Form N-1, filed October 15, 1981 (File
No. 2-74459).
(i)- Specimen copy of Form 6296, "Amendments to this Contract," attached
as endorsement to Forms 1175, 1176, 1177, 1178 and 1179 when such
contracts are issued to variable annuitants in the State of New
Jersey, is incorporated herein by reference to Exhibit 4(i) of
Registrant's Registration Statement on Form N-1, filed October 15,
1981 (File No. 2-74459).
(j)- Specimen copy of endorsement to Forms 1175, 1176, 1177, 1178 and 1179
when such contracts are issued to variable annuitants in the State of
Texas is incorporated herein by reference to Exhibit 6 (j) to
Post-Effective Amendment No. 13 to Registrant's Registration
Statement on Form N-3, filed March 1, 1990 (File No. 2-74459).
7 - The applications for Forms 1175, 1176, 1177, 1178 and 1179 set forth
in Exhibit 6 are included as parts of the respective contract forms.
8(a)- Certificate of Incorporation of The Franklin Life Insurance Company
is incorporated herein by reference to Exhibit 8(a) to Post-Effective
Amendment No. 13 to Registrant's Registration Statement on Form N-3,
filed March 1, 1990 (File No. 2-74459).
(b)- By-Laws of The Franklin Life Insurance Company are incorporated
herein by reference to Exhibit 8(b) of Registrant's Post-Effective
Amendment No. 20 on Form N-3, filed February 28, 1996.
9 - Not applicable.
10 - Not applicable.
11(a)- Administration Agreement dated December 3, 1981 between The Franklin
Life Insurance Company and Franklin Financial Services Corporation is
hereby incorporated by reference to Exhibit 9(a) of Registrant's
Registration Statement Amendment No. 2 on Form N-1, filed December
18, 1981 (File No. 2-74459).
C-2
<PAGE>
(b)- Agreement dated December 3, 1981 between The Franklin Life Insurance
Company and Franklin Financial Services Corporation is incorporated
herein by reference to Exhibit 9(b) of Registrant's Registration
Statement Amendment No. 2 on Form N-1, filed December 18, 1981 (File
No. 2-74459).
12 - Opinion and consent dated April 2, 1986 of Stephen P. Horvat, Jr.,
Esq., Senior Vice President, General Counsel and Secretary of The
Franklin Life Insurance Company is incorporated herein by reference
to Exhibit 10(b) of Registrant's Post-Effective Amendment No. 8 of
Form N-1, filed April 29, 1986 (File No. 2-74459).
13(a)- List of Consents Pursuant to Rule 483(c).
(b)- Consent of Ernst & Young LLP, Independent Auditors.
(c)- Consent of Coopers & Lybrand L.L.P., Independent Accountants.
(d)- Consent of Messrs. Chadbourne & Parke LLP.
(e)- Consent of Stephen P. Horvat, Jr.
14 - Not applicable.
15 - Contribution Agreement dated as of October 30, 1981 between
Registrant and The Franklin Life Insurance Company is incorporated
herein by reference to Exhibit 13 of Registrant's Registration
Statement Amendment No. 2 on Form N-1, filed December 18, 1981 (File
No. 2-74459).
16 - Computation of performance data set forth under "Yield Information"
in the Prospectus (unaudited).
17 - Power of Attorney is incorporated herein by reference to Exhibit 17
of Registrant's Post-Effective Amendment No. 20 on Form N-3, filed
February 28, 1996.
27 - Financial Data Schedule meeting the requirements of Rule 483.
ITEM 29. DIRECTORS AND OFFICERS OF INSURANCE COMPANY
Information concerning the name, principal business address and positions
and offices with The Franklin of each officer and director of The Franklin is
hereby incorporated herein by reference to Item 33. Information concerning
the positions and offices with the Fund of Messrs. Robert G. Spencer and
Stephen P. Horvat, the only directors or officers of The Franklin who hold
positions or offices with the Fund, is hereby incorporated herein by
reference to the table under "Management" in the Statement of Additional
Information.
ITEM 30. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE INSURANCE
COMPANY OR REGISTRANT.
There is no person controlled by or under common control with Registrant.
The Franklin is an indirect wholly-owned subsidiary of American General
Corporation ("AGC"). A list of the subsidiaries of AGC is set forth below.
The following chart sets forth the identities of, and the
interrelationships among, AGC and all affiliated persons within the holding
company system.
The following is a list of American General Corporation's subsidiaries as
of February 29, 1996 (1). 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 INSURER
- -------------------------------------------------------------------------------
AGC Life Insurance Company (2) MO Yes
American Franklin Company DE No
The Franklin Life Insurance Company IL Yes
The American Franklin Life Insurance Company IL Yes
Franklin Financial Services Corporation DE No
C-3
<PAGE>
JURISDICTION OF
NAME INCORPORATION INSURER
- -------------------------------------------------------------------------------
American General Life and Accident
Insurance Company TN Yes
American General Exchange, Inc. TN No
American General Life Insurance Company TX Yes
American General Annuity Service Corporation TX No
American General Life Insurance Company of
New York NY Yes
The Winchester Agency Ltd. NY No
American General Securities Incorporated (3) TX No
American General Insurance Agency, Inc. MO No
American General Insurance Agency of
Hawaii, Inc. HI No
American General Insurance Agency of
Massachusetts, Inc. MA No
The Variable Annuity Life Insurance Company TX Yes
The Variable Annuity Marketing Company TX No
Independent Investment Advisory Services, Inc. FL No
The Independent Life and Accident Insurance
Company FL Yes
Independent Fire Insurance Company FL Yes
Herald Underwriters, Inc. FL No
Independent Fire Insurance Company of Florida FL Yes
Independent Service Company FL No
Old Faithful General Agency, Inc. TX No
Independent Property & Casualty Insurance Company FL Yes
Independent Real Estate Management Corporation FL No
Allen Property Company DE No
Florida Westchase Corporation DE No
Greatwood Development, Inc. DE No
Greatwood Golf Club, Inc. TX No
Highland Creek Golf Club, Inc. NC No
Hunter's Creek Communications Corporation FL No
Pebble Creek Corporation DE No
Pebble Creek Development Corporation FL No
Westchase Development Corporation DE No
Westchase Golf Corporation FL No
American General Capital Services, Inc. DE No
American General Delaware Management
Corporation ("AGDMC")(1) DE No
American General Finance, Inc. IN No
AGF Investment Corp. IN No
American General Auto Finance, Inc. DE No
American General Finance Corporation (4) IN No
American General Finance Group, Inc. DE No
American General Financial Services, Inc. (5) DE No
The National Life and Accident Insurance
Company TX Yes
Merit Life Insurance Co. IN Yes
Yosemite Insurance Company CA Yes
American General Finance, Inc. AL No
American General Financial Center UT No
American General Financial Center, Inc.* IN No
American General Financial Center, Incorporated* IN No
American General Financial Center Thrift Company* CA No
Thrift, Incorporated* IN No
C-4
<PAGE>
JURISDICTION OF
NAME INCORPORATION INSURER
- -------------------------------------------------------------------------------
American General Investment Corporation DE No
American General Mortgage Company DE No
American General Realty Investment Corporation TX No
American Athletic Club, Inc. TX No
Hope Valley Farms Recreation Association, Inc. NC No
INFL Corporation DE No
Ontario Vineyard Corporation DE No
Pebble Creek Country Club Corporation FL No
Pebble Creek Service Corporation FL No
SR/HP/CM Corporation TX No
American General Mortgage and Land Development, Inc. DE No
American General Land Development, Inc. DE No
American General Realty Advisors, Inc. DE No
American General Property Insurance Company TN Yes
Bayou Property Company DE No
AGLL Corporation ("AGLL")(6) DE No
American General Land Holding Company ("AGLH") DE No
AG Land Associates, LLC(6) CA No
Hunter's Creek Realty, Inc.* FL No
Summit Realty Company, Inc. SC No
Financial Life Assurance Company of Canada Canada Yes
Florida GL Corporation DE No
GPC Property Company DE No
Cinco Ranch Development Corporation TX No
Cinco Ranch East Development, Inc. DE No
Cinco Ranch West Development, Inc. DE No
The Colonies Development, Inc. DE No
Fieldstone Farms Development, Inc. DE No
Hickory Downs Development, Inc. DE No
Lake Houston Development, Inc. DE No
South Padre Development, Inc. DE No
Green Hills Corporation DE No
Knickerbocker Corporation TX No
Lincoln American Corporation DE No
Pavilions Corporation DE No
American General Finance Foundation, Inc., is not included on this list.
It is a non-profit corporation.
(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) The following companies became approximately 40% owned by AGC Life
Insurance Company ("AGCL") on December 23, 1994:
Western National Corporation ("WNC")
WNL Holding Corporation
Western National Life Insurance Company
WesternSave (401K Plan)
C-5
<PAGE>
Independent Advantage Financial & Insurance Services, Inc.
WNL Investment Advisory Services, Inc.
Conseco Annuity Guarantee Corp.
WNL Brokerage Services, Inc.
WNL Insurance Services, Inc.
Accordingly, these companies became AGCL affiliates under insurance
holding company laws. However the WNC stock is held for investment
purposes by AGCL and there are no plans for AGCL to direct the operations
of any of these companies.
(3) The following companies are controlled indirectly by American General
Securities Incorporated: American General Insurance Agency of Ohio,
Inc., American General Insurance Agency of Texas, Inc., and American
General Insurance Agency of Oklahoma, Inc.
(4) American General Finance Corporation is the parent of an additional 41
wholly owned subsidiaries incorporated in 26 states for the purpose of
conducting its consumer finance operations.
(5) American General Financial Services, Inc. is the parent of an additional
7 wholly owned subsidiaries incorporated in 4 states and Puerto Rico for
the purpose of conducting its consumer finance operations.
(6) AG Land Associates, LLC is jointly owned by AGLH and AGLL. AGLH holds a
98.75% managing interest and AGLL owns a 1.25% managing interest.
ITEM 31. NUMBER OF HOLDERS OF SECURITIES.
As of February 15, 1996, the number of record holders of the sole class of
securities of Registrant was as indicated below:
(1) (2)
TITLE OF CLASS NUMBER OF RECORD HOLDERS
- -------------------------------------------------------------------------------
Accumulation Units Under 371
Variable Annuity Contracts
ITEM 32. INDEMNIFICATION.
The information called for by this item has not changed from that provided
in Registrant's initial Registration Statement on Form N-1 (1933 Act File No.
2-74459 and 1940 Act File No. 811-3289) filed with the Commission on October
19, 1981, as amended by Amendment No. 1 filed with the Commission on November
6, 1981 and Amendment No. 2 filed with the Commission on December 22, 1981.
ITEM 33. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER.
The Franklin Life Insurance Company ("The Franklin") is an Illinois legal
reserve stock life insurance company engaged in the writing of ordinary life
policies, annuities and income protection policies. The Franklin also acts as
investment adviser to Franklin Life Variable Annuity Fund A and Franklin Life
Variable Annuity Fund B. The business, profession, vocation or employment of
a substantial nature in which the directors and officers of The Franklin are
or have been, at any time during the past two fiscal years, engaged for their
own account or in the capacity of director, officer, employee, partner or
trustee are described below:
<TABLE>
<CAPTION>
(1) (2)
NAME BUSINESS OR EMPLOYMENT
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Vickie J. Alton . . . . . . . Vice President, The Franklin
Elizabeth E. Arthur . . . . . Vice President, Associate General Counsel and Assistant Secretary,
The Franklin
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
(1) (2)
NAME BUSINESS OR EMPLOYMENT
- -------------------------------------------------------------------------------------------------------------
<S> <C>
Robert M. Beuerlein . . . . . Senior Vice President-Actuarial and Director, The Franklin
Barbara S. Butler . . . . . . Vice President, The Franklin
Mark R. Butler. . . . . . . . Vice President -- Management Development Director, The Franklin
Thomas J. Byerly. . . . . . . Executive Vice President, Chief Marketing Officer and Director, The Franklin;
prior to February 22, 1995, also Chief Operating Officer, The Franklin
Philip D. Calderwood. . . . . Vice President and Actuary, The Franklin
Eldon R. Canary . . . . . . . Division Vice President -- Actuarial, The Franklin
Robert M. Devlin. . . . . . . Director and Senior Chairman, The Franklin since February 22, 1995; President and
a director, American General Corporation, 2929 Allen Parkway, Houston, Texas
77019; Vice Chairman, American General Corporation, prior to October 26, 1995
Steve A. Dmytrack . . . . . . Vice President, The Franklin since August 24, 1995; Assistant Vice President, The
Franklin, prior thereto
Paul C. Ely . . . . . . . . . Vice President, The Franklin
Stephen H. Field. . . . . . . Vice President, The Franklin, since December 22, 1995; President and Chief
Executive Officer, American General Mortgage and Land Development, Inc., 2929
Allen Parkway, Houston, Texas 77019
Barbara Fossum. . . . . . . . Vice President, The Franklin, since June, 1995; Vice President, American General
Life Insurance Company, prior thereto
Robert J. Gibbons . . . . . . Chief Executive Officer, The Franklin, since November 30, 1995; Director and
President, The Franklin since February 22, 1995; President and Chief Executive
Officer, American General Life Insurance Company of New York prior to February
22, 1995; Senior Vice President and Chief Marketing Officer, American General
Life Insurance Company of New York, prior to June, 1994
Harold S. Hook. . . . . . . . Director and Senior Chairman, The Franklin since February 22, 1995; Chairman,
Chief Executive Officer and a director, American General Corporation, 2929
Allen Parkway, Houston, Texas 77019
Stephen P. Horvat, Jr. . . . Senior Vice President, Secretary, General Counsel and Director, The Franklin
</TABLE>
C-7
<PAGE>
<TABLE>
<CAPTION>
(1) (2)
NAME BUSINESS OR EMPLOYMENT
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Howard C. Humphrey. . . . . . Chairman of the Board, The Franklin; prior to November 30, 1995, also Chief
Executive Officer, The Franklin; prior to February 22, 1995, also President,
The Franklin; prior to January 31, 1995 Vice President -- Life Insurance of
American Brands, Inc., 1700 East Putnam Avenue, P.O. Box 811, Old Greenwich, CT
06870-0811; Director, BANC One Corp. (IL.) (bank holding company), E. Old State
Capital Plaza, Springfield, IL. 62701
Jerry P. Jourdan. . . . . . . Director of Information Services - Technical Support, The Franklin since January
31, 1996; Assistant Vice President, The Franklin, prior thereto
Darrell J. Malano . . . . . . Division Vice President, The Franklin
Margaret L. Manola. . . . . . Vice President, The Franklin
Thomas K. McCracken . . . . . Vice President, The Franklin
Sylvia A. Miller. . . . . . . Vice President, The Franklin since July, 1994; Assistant Vice President, The
Franklin, prior thereto
Cheryl E. Morton. . . . . . . Division Vice President -- Actuarial, The Franklin
Jon P. Newton . . . . . . . . Director and Vice Chairman, The Franklin, since January 31, 1996; Vice Chairman
and General Counsel, American General Corporation, 2929 Allen Parkway, Houston,
Texas 77019 since October 26, 1995; Senior Vice President and General Counsel,
American General Corporation, prior thereto
Randall E. O'Brien. . . . . . Division Vice President, The Franklin
James R. Philpott . . . . . . Vice President, The Franklin
Jeffrey D. Pirmann. . . . . . Vice President, Controller and Treasurer, The Franklin
John M. Pruitt. . . . . . . . Vice President and Director of Sales Services, The Franklin
James M. Quigley. . . . . . . Division Vice President, The Franklin; prior to August 24, 1995, Vice President,
The Franklin
Gary D. Reddick . . . . . . . Director and Executive Vice President, The Franklin since February 22, 1995;
Senior Vice President, American General Corporation, Houston, Texas, prior to
February, 1995; Senior Vice President, American General Life Insurance Company,
prior to October 28, 1994
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
(1) (2)
NAME BUSINESS OR EMPLOYMENT
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Dale W. Sachtleben. . . . . . Division Vice President, The Franklin
John E. Sartore . . . . . . . Vice President, The Franklin
Robert G. Spencer . . . . . . Vice President, The Franklin; prior to 1996, also Treasurer, The Franklin
Peter V. Tuters . . . . . . . Director, Vice President and Chief Investment Officer, The Franklin since February
22, 1995; Senior Vice President since 1992 and Chief Investment Officer since
December, 1993, American General Corporation, 2929 Allen Parkway, Houston,
Texas 77019
J. Alan Vala. . . . . . . . . Vice President and Agency Secretary, The Franklin
David G. Vanselow . . . . . . Division Vice President, The Franklin
Raymond P. Weber. . . . . . . Vice President and Associate General Counsel, The Franklin
</TABLE>
C-9
<PAGE>
ITEM 34. PRINCIPAL UNDERWRITERS.
(a) Franklin Life Variable Annuity Fund A, Franklin Life Variable Annuity
Fund B 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 (The American Franklin Life Insurance
Company is a wholly-owned subsidiary of The Franklin), are the only
investment companies (other than Registrant) for which Franklin Financial
Services Corporation, the principal underwriter of Registrant, also acts as
principal underwriter, depositor, sponsor or investment adviser.
(b) Information required with respect to each director or officer of the
principal underwriter of Registrant is set forth below. The principal
business address of each individual is c/o The Franklin Life Insurance
Company, #1 Franklin Square, Springfield, Illinois 62713.
<TABLE>
<CAPTION>
(1) (2) (3)
NAME POSITIONS AND OFFICES POSITIONS AND OFFICES
WITH UNDERWRITER WITH REGISTRANT
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Robert M. Beuerlein Director None
Thomas J. Byerly Director and Senior Vice President None
Robert J. Gibbons Chairman of the Board, President None
and Chief Executive Officer
Stephen P. Horvat, Jr. Director, Vice President Secretary to the
and Secretary Board of Managers
Randall E. O'Brien Vice President-Marketing None
Deanna Osmonson Vice President-Administration None
and Assistant Secretary
Gary D. Osmonson Senior Vice President-Sales and None
Compliance Officer
Jeffrey D. Pirmann Vice President, Treasurer None
and Chief Financial Officer
Gary D. Reddick Director and Executive Vice President None
J. Alan Vala Vice President and Assistant Secretary None
</TABLE>
(c) Information regarding commissions and other compensation received by
each principal underwriter, directly or indirectly, from Registrant during
1995, Registrant's last fiscal year, is set forth below:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
NAME OF NET UNDERWRITING COMPENSATION
PRINCIPAL DISCOUNTS AND ON REDEMPTION BROKERAGE OTHER
UNDERWRITERS COMMISSIONS OR ANNUITZATION COMMISSIONS COMPENSATION
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Franklin Financial
Services Corporation -0- $108 -0- -0-
</TABLE>
C-10
<PAGE>
ITEM 35. LOCATION OF ACCOUNTS AND RECORDS.
The information called for by this item has not changed from that provided
in Registrant's initial Registration Statement on Form N-1 (1933 Act File No.
2-74459 and 1940 Act File No. 811-3289) filed with the Commission on October 19,
1981, as amended by Amendment No. 1 filed with the Commission on November 6,
1981 and Amendment No. 2 filed with the Commission on December 22, 1981.
ITEM 36. MANAGEMENT SERVICES.
Registrant has no management-related service contract not discussed in Part
A or Part B hereof.
ITEM 37. UNDERTAKINGS.
(b) The Registrant hereby undertakes 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.
(c) The Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the prospectus, a space that
the applicant can check to request a Statement of Additional Information, or
(2) 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.
(d) The Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form N-3 promptly upon written or oral request.
(e) 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 issued 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. The Registrant represents that it has complied with the
requirement of numbered paragraphs (1) through (4) of such "no-action" letter.
C-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 ("1933 Act") and
the Investment Company Act of 1940 ("1940 Act"), Franklin Life Money Market
Variable Annuity Fund C certifies that it meets the requirements of 1933 Act
Rule 485(b) for effectiveness of this Registration Statement and has duly
caused this Post-Effective Amendment to the Registration Statement under the
1933 Act and this Amendment to the Registration Statement under the 1940 Act
to be signed on its behalf by the undersigned, thereunto duly authorized, in
the City of Springfield, and State of Illinois, on the 18th day of April,
1996.
FRANKLIN LIFE MONEY MARKET
VARIABLE ANNUITY FUND C
By /s/ S. P. Horvat, Jr.
---------------------------------------------
(S.P. Horvat, Jr., Secretary, Board of Managers)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ Clifford L. Greenwalt * Member, Board April 18, 1996
- ------------------------------ of Managers
(Clifford L. Greenwalt)
/s/ R. C. Spencer * Member, Board April 18, 1996
- ------------------------------ of Managers
(R.C. Spencer)
/s/ R. G. Spencer * Chairman, Board April 18, 1996
- ------------------------------ of Managers
(R.G. Spencer)
/s/ J. W. Voth * Member, Board April 18, 1996
- ------------------------------ of Managers
(J.W. Voth)
/s/ S. P. Horvat, Jr. Secretary, Board April 18, 1996
- ------------------------------ of Managers
(S.P. Horvat, Jr.)
/s/ Stephen P. Horvat, Jr.
- ------------------------------
* By Stephen P. Horvat, Jr.,
ATTORNEY-IN-FACT
C-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 ("1933 Act") and
the Investment Company Act of 1940 ("1940 Act"), The Franklin Life Insurance
Company certifies that it meets the requirements of 1933 Act Rule 485(b) for
effectiveness of this Registration Statement and has duly caused this
Post-Effective Amendment to the Registration Statement under the 1933 Act and
this Amendment to the Registration Statement under the 1940 Act to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of
Springfield, and State of Illinois, on the 18th day of April, 1996.
THE FRANKLIN LIFE INSURANCE COMPANY
By /s/ S. P. Horvat, Jr.
--------------------------------------------
(S.P. Horvat, Jr., Senior Vice President,
General Counsel and Secretary)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ R. M. Beuerlein* Senior Vice President- April 18, 1996
- ------------------------------ Actuarial and Director
(R. M. Beuerlein)
/s/ T. J. Byerly* Executive Vice President April 18, 1996
- ------------------------------ and Director
(T.J. Byerly)
- ------------------------------ Senior Chairman and Director , 1996
(R.M. Devlin)
/s/ R. J. Gibbons * President, Chief Executive April 18, 1996
- ------------------------------ Officer and Director
(R.J. Gibbons) (principal executive officer)
- ------------------------------ Senior Chairman and Director , 1996
(H.S. Hook)
/s/ S. P. Horvat, Jr. Senior Vice President April 18, 1996
- ------------------------------ General Counsel, Secretary
(S.P. Horvat, Jr.) and Director
/s/ H. C. Humphrey* Chairman of the Board April 18, 1996
- ------------------------------
(H.C. Humphrey)
- ------------------------------ Director and Vice Chairman , 1996
(J.P. Newton)
/s/ J. D. Pirmann* Vice President, Controller April 18, 1996
- ------------------------------ and Treasurer (principal
(J.D. Pirmann) financial officer and principal
accounting officer)
/s/ G. D. Reddick* Executive Vice President April 18, 1996
- ------------------------------ and Director
(G.D. Reddick)
- ------------------------------ Vice President, Chief , 1996
(P.V.Tuters) Investment Officer
and Director
/s/ Stephen P. Horvat, Jr.
- ------------------------------
* By Stephen P. Horvat, Jr.,
ATTORNEY-IN-FACT
C-13
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT PAGE
- -------
<S> <C>
1 -- Resolution of The Franklin Life Insurance Company's Board of Directors
creating Franklin Life Money Market Variable Annuity Fund C is
incorporated herein by reference to Exhibit 1 of Registrant's
Registration Statement on Form N-1, filed October 15, 1981 (File
No. 2-74459).
2 -- Rules and Regulations adopted by Registrant, as amended, are
incorporated herein by reference to Exhibit 2 of Registrant's
Registration Statement Amendment No. 2 on Form N-1, filed
December 18, 1981 (File No. 2-74459).
3 -- Custodian Agreement dated April 17, 1995 between The Franklin Life
Insurance Company and State Street Bank and Trust Company.
4 -- Investment Management Agreement dated January 31, 1995 between
Registrant and The Franklin Life Insurance Company is incorporated
herein by reference to Exhibit 4 of Registrant's Post-Effective
Amendment No. 19 on Form N-3, filed March 2, 1995.
5(a)-- Sales Agreement dated January 31, 1995 between Registrant and
Franklin Financial Services Corporation is incorporated herein by
reference to Exhibit 5(a) of Registrant's Post-Effective Amendment
No. 19 on Form N-3, filed March 2, 1995.
(b)-- Form of Agreement to be entered into among The Franklin Life
Insurance Company, Franklin Financial Services, and agents is
incorporated herein by reference to Exhibit 6(b) of Registrant's
Registration Statement Amendment No. 2 on Form N-1, filed December
18, 1981 (File No. 2-74459).
6(a)-- Amended specimen copy of Form 1175, periodic payment deferred
variable annuity contract, is incorporated herein by reference to
Exhibit 4(a) of Registrant's Registration Statement Amendment No. 2
on Form N-1, filed December 18, 1981 (File No. 2-74459).
(b)-- Amended specimen copy of Form 1176, single payment deferred variable
annuity contract, is incorporated herein by reference to Exhibit 4(b)
of Registrant's Registration Statement Amendment No. 2 on Form N-1,
filed December 18, 1981 (File No. 2-74459).
(c)-- Specimen of copy of Form 1177, single payment immediate life variable
annuity contract, is incorporated herein by reference to Exhibit 4(c)
of Registrant's Registration Statement on Form N-1, filed October 15,
1981 (File No. 2-74459).
(d)-- Specimen copy of Form 1178, single payment immediate life variable
annuity contract with guaranteed period, is incorporated herein by
reference to Exhibit 4(d) of Registrant's Registration Statement on
Form N-1, filed October 15, 1981 (File No. 2-74459).
(e)-- Specimen copy of Form 1179, single payment immediate joint and last
survivor life variable annuity contract, is incorporated herein by
reference to Exhibit 4(e) of Registrant's Registration Statement on
Form N-1, filed October 15, 1981 (File No. 2-74459)
(f)-- Specimen copy of Form 4840, "Endorsement to Make Contract
Nontransferable," attached as endorsement to Forms 1175, 1176, 1177,
1178 and 1179, is incorporated herein by reference to Exhibit 4(f)
of Registrant's Registration Statement on Form N-1, filed October 15,
1981 (File No. 2-74459).
(g)-- Specimen copy of Form 6012, "Waiver of Stipulated Payment Disability
Benefit," for use as endorsement to Form 1175, is incorporated herein
by reference to Exhibit 4(g) of Registrant's Registration Statement
on Form N-1, filed October 15, 1981 (File No. 2-74459).
</TABLE>
<PAGE>
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6(h)-- Specimen copy of Form 6275-A, "Variable Annuity Endorsement,"
attached as endorsement to Forms 1175, 1176, 1177, 1178 and 1179
when such contracts are issued to variable annuitants in the State
of Texas, is incorporated herein by reference to Exhibit 4(h) of
Registrant's Registration Statement on Form N-1, filed October 15,
1981 (File No. 2-74459).
(i)-- Specimen copy of Form 6296, "Amendments to this Contract," attached
as endorsement to Forms 1175, 1176, 1177, 1178 and 1179 when such
contracts are issued to variable annuitants in the State of New
Jersey, is incorporated herein by reference to Exhibit 4(i) of
Registrant's Registration Statement on Form N-1, filed October 15,
1981 (File No. 2-74459).
(j)-- Specimen copy of endorsement to Forms 1175, 1176, 1177, 1178 and 1179
when such contracts are issued to variable annuitants in the State of
Texas is incorporated herein by reference to Exhibit 6 (j) to Post-
Effective Amendment No. 13 to Registrant's Registration Statement on
Form N-3, filed March 1, 1990 (File No. 2-74459).
7 -- The applications for Forms 1175, 1176, 1177, 1178 and 1179 set forth
in Exhibit 6 are included as parts of the respective contract forms.
8(a)-- Certificate of Incorporation of The Franklin Life Insurance Company
is incorporated herein by reference to Exhibit 8 (a) to
Post-Effective Amendment No. 13 to Registrant's Registration
Statement on Form N-3, filed March 1, 1990 (File No. 2-74459).
(b)-- By-Laws of The Franklin Life Insurance Company are incorporated
herein by reference to Exhibit 8(b) of Registrant's Post-Effective
Amendment No. 20 on Form N-3, filed February 28, 1996.
9 -- Not applicable.
10 -- Not applicable.
11(a)-- Administration Agreement dated December 3, 1981 between The Franklin
Life Insurance Company and Franklin Financial Services Corporation is
hereby incorporated by reference to Exhibit 9(a) of Registrant's
Registration Statement Amendment No. 2 on Form N-1, filed December
18, 1981 (File No. 2-74459).
(b)-- Agreement dated December 3, 1981 between The Franklin Life Insurance
Company and Franklin Financial Services Corporation is incorporated
herein by reference to Exhibit 9(b) of Registrant's Registration
Statement Amendment No. 2 on Form N-1, filed December 18, 1981 (File
No. 2-74459).
12 -- Opinion and consent dated April 2, 1986 of Stephen P. Horvat, Jr.,
Esq., Senior Vice President, General Counsel and Secretary of The
Franklin Life Insurance Company is incorporated herein by reference
to Exhibit 10(b) of Registrant's Post-Effective Amendment No. 8 of
Form N-1, filed April 29, 1986 (File No. 2-74459).
13(a)-- List of Consents Pursuant to Rule 483(c).
(b)-- Consent of Ernst & Young LLP, Independent Auditors.
(c)-- Consent of Coopers & Lybrand L.L.P., Independent Accountants.
</TABLE>
<PAGE>
<TABLE>
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(d)-- Consent of Messrs. Chadbourne & Parke LLP.
(e)-- Consent of Stephen P. Horvat, Jr.
14 -- Not applicable.
15 -- Contribution Agreement dated as of October 30, 1981 between Registrant
and The Franklin Life Insurance Company is incorporated herein by
reference to Exhibit 13 of Registrant's Registration Statement
Amendment No. 2 on Form N-1, filed December 18, 1981 (File No.
2-74459).
16 -- Computation of performance data set forth under "Yield Information"
in the Prospectus (unaudited).
17 -- Power of Attorney is incorporated herein by reference to Exhibit 17
of Registrant's Post-Effective Amendment No. 20 on Form N-3, filed
February 28, 1996.
27 -- Financial Data Schedule meeting the requirements of Rule 483.
</TABLE>
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
CUSTODIAN AGREEMENT
between
THE FRANKLIN LIFE INSURANCE COMPANY
and
STATE STREET BANK AND TRUST COMPANY
dated
as of
April 17, 1995
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1. CUSTODIAN............................................................... 2
1.1 Appointment of Custodian........................................... 2
1.2 Form of Securities Delivered to State Street....................... 3
1.3 Powers and Duties of Custodian..................................... 3
1.3-1 Safekeeping.............................................. 3
1.3-1.1 Insurance Boards, Commissions or Departments............. 4
1.3-2 Use of a System for the Central Handling of Securities... 6
1.3-3 Registered Name, Nominee................................. 9
1.3-4 Purchases................................................ 9
1.3-5 Liability for Payment in Advance of Receipt of the
Securities Purchased..................................... 10
1.3-6 Exchanges................................................ 11
1.3-7 Sales and Delivery of Securities......................... 12
1.3-8 Communications Relating to Securities.................... 14
1.3-9 Proxies, Notices, Etc.................................... 15
1.3-10 Incurrence of Expenses................................... 15
2. ADDITIONAL POWERS AND DUTIES OF CUSTODIAN............................... 15
2.1 Bank Account....................................................... 15
2.2 Collections........................................................ 16
2.3 Stock Dividends, Rights, Etc....................................... 18
2.4 Other Proper Purposes.............................................. 18
2.5 Recordkeeping and Reports.......................................... 18
2.6 Transaction Information............................................ 20
2.7 Segregated Accounts................................................ 21
3. INSTRUCTIONS............................................................ 21
3.1 Proper Instructions................................................ 21
4. ADDITIONAL AGREEMENTS................................................... 22
4.1 Indemnification.................................................... 22
4.2 Appointment of Agents.............................................. 25
4.3 Appointment of Sub-Custodians...................................... 25
4.4 Fee Schedule....................................................... 26
4.5 Effective Period, Termination and Amendment, and Interpretive and
Additional Provisions.............................................. 26
4.6 Compliance With Law................................................ 27
4.7 Successor Custodian................................................ 28
4.8 Disclosure of Information.......................................... 29
4.9 Assignment......................................................... 29
5. MASSACHUSETTS LAW TO APPLY.............................................. 30
6. NOTICE.................................................................. 30
7. EXECUTED ORIGINALS...................................................... 30
Exhibit A- Custodian Affidavit (on deposit with State Street)
Exhibit B- Custodian Affidavit (on deposit with DTC)
Exhibit C- Custodian Affidavit (book-entry account)
Exhibit D- Daily Activity and Investory Reports
Exhibit E- State Street Bank Insurance Program
Exhibit F- Delegation of Authority (non-variable annuity fund matters)
Exhibit G- Delegation of Authority (variable annuity fund matters)
<PAGE>
CUSTODIAN AGREEMENT
THIS AGREEMENT made as of the 17th day of April, 1995, between THE FRANKLIN
LIFE INSURANCE COMPANY, an Illinois corporation, having its principal address at
No. 1 Franklin Square, Springfield, Illinois 62713 (hereinafter called "the
Corporation"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking
corporation regulated by state banking laws, having corporate trust powers and
being duly authorized to act as a custodian with its principal place of business
at 225 Franklin Street, Boston, Massachusetts 02110 (hereinafter called "State
Street") shall serve to set forth certain custodial arrangements between State
Street and the Corporation with respect to (i) the establishment of a custody
account (the "Custody Account") in the name of the Corporation with State Street
as custodian, which Custody Account is established for the deposit by the
Corporation of any or all of its Securities and/or Moneys, as such terms are
hereinafter defined, and (ii) the participation by the Corporation, through
State Street, in the book-entry programs or systems of any "Securities System,"
as defined in Section 1.3-2, with respect to the Securities held hereunder which
are eligible for deposit with any such "Securities System."
The term "Securities," as used herein, shall mean and include all
investments held for the Corporation, including but not limited to the
following: futures, options, repurchase agreements, common stocks, preferred or
preference stocks, notes, bonds, debentures, or other evidences of indebtedness
of private, corporate or public issuers and any certificates, receipts, warrants
or other instruments representing rights to receive, purchase, or subscribe for
the same, or evidencing or representing any other rights or interest therein, or
in any property or assets, owned by the Corporation (whether ownership by the
Corporation thereof is evidenced, or to be evidenced, by (i) a physical
certificate registered as provided in
<PAGE>
Section 1.3-3, or (ii) a credit, to the account of State Street, entered on the
books of account and records of any Securities System, as defined in
Section 1.3-2).
The terms "held" and "hold," when applied to Securities referred to herein,
shall mean Securities of the Corporation deposited by the Corporation with or in
the custody of State Street, any agent of State Street appointed pursuant to
Section 4.2 hereof, any sub-custodian appointed pursuant to Section 4.3 hereof,
or any duly authorized third person, including but not limited to Securities
held in any "Securities System," as defined in Section 1.3-2, to which State
Street may give custody of such Securities.
WITNESSETH THAT:
WHEREAS, State Street is a member of the Federal Reserve System; and
WHEREAS, the Corporation has the power and authority to enter into and
perform under this Agreement; and
WHEREAS, this form of Agreement and its terms and conditions do not require
the prior approval of any regulatory body or authority having jurisdiction over
the Corporation;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto, intending to be legally bound, hereby
agree as follows:
- 2 -
<PAGE>
1. CUSTODIAN
1.1 APPOINTMENT OF CUSTODIAN. The Corporation hereby appoints and employs
State Street as its custodian for the purposes of this Agreement and State
Street hereby accepts such appointment. As said custodian, State Street agrees
to hold the Securities as the Corporation may from time to time deliver to it,
subject to the terms and conditions herein set forth, as custodian for the
Corporation, in the Custody Account. Notwithstanding anything to the contrary
herein, pursuant to Illinois insurance laws and regulations, the Custody Account
shall be the undivided responsibility of State Street. State Street further
agrees to hold, subject to the terms and conditions herein set forth, as said
custodian for the Corporation all moneys of the Corporation delivered to State
Street ("Moneys") in the Bank Account, as such term is defined in Section 2.1.
Securities and Moneys shall be held by State Street subject to the
instructions of the Corporation and shall be withdrawable at any time upon the
demand of the Corporation, except that Securities designated in writing to be
used to meet deposit requirements set forth in applicable insurance laws shall
be under control of the appropriate insurance regulatory authority as specified
in such writing and shall not be withdrawn by the Corporation without the
approval of the appropriate insurance regulatory authority.
1.2 FORM OF SECURITIES DELIVERED TO STATE STREET. Unless otherwise
directed by Proper Instructions, all Securities accepted by State Street on
behalf of the Corporation under the terms of this Agreement shall be in "street
delivery" or other good delivery form. The Corporation shall from time to time
furnish State Street appropriate
- 3 -
<PAGE>
instruments to enable State Street to register in the name of the nominee of
State Street any Securities (other than bearer Securities) held by State Street
hereunder which may be registered in the name of the Corporation.
1.3 POWERS AND DUTIES OF CUSTODIAN. As Custodian, State Street shall have
and perform the following powers and duties:
1.3-1 SAFEKEEPING. To hold in the Custody Account for the
account of the Corporation and segregate both physically and on its official
records from its own securities and from those of any and all of its other
customers all non-cash property, including all Securities held hereunder and
owned by the Corporation, other than Securities which are maintained pursuant to
Section 1.3-2 hereof in a "Securities System" as defined in such section. State
Street shall receive delivery of certificates for safekeeping and maintain
records of all receipts, deliveries and locations of such Securities, together
with a current inventory thereof and shall conduct periodic physical inspection
of certificates representing Securities held by it under this Agreement in such
manner as State Street shall determine from time to time to be advisable in
order to verify the accuracy of such inventory. State Street will promptly
report to the Corporation the results of such inspections, indicating any
shortages or discrepancies uncovered thereby, and take appropriate action to
remedy any such shortages or discrepancies.
1.3-1.1 INSURANCE BOARDS, COMMISSIONS OR DEPARTMENTS. The
parties acknowledge that the Corporation is subject to the laws, rules and
regulations of various state insurance
- 4 -
<PAGE>
codes, boards, commissions, or departments and that as a result, certain
activities of the Corporation may, among other things, require the approval of
or review by the various state insurance boards, commissions, or departments.
Except for Securities which are maintained pursuant to Section 1.3-2 in a
Securities System, State Street shall not commingle certificates representing
Securities owned by the Corporation, but shall keep said certificates separate
and physically apart from all other securities held under custodial or trust
agreements by State Street and State Street shall not merge certificates
representing Securities owned by the Corporation into or with one or more
certificates of a larger denomination representing certificates of the same
class of the same issuer constituting assets owned by the Corporation and other
companies.
State Street shall on request by the Corporation or the
representative of the appropriate regulatory body, certify in writing that the
Securities are held by State Street as a fiduciary for the Corporation for which
State Street serves as a custodian. Such certification shall include the name
of the issuer of each Security, the class of Security, the "Cusip" number of
each Security, the number of shares or units or face amount in which the
Corporation has vested ownership, and specific uses or purposes for which such
shares, units or face amount of any part thereof have been segregated as
required by any statute, law or rule
- 5 -
<PAGE>
promulgated by any state insurance board, commission or department. In
addition, State Street shall also furnish any additional information requested
pursuant to this paragraph. The Corporation consents to any disclosure required
pursuant to this section.
State Street shall provide, upon Proper Instructions, as
defined in Section 3.1 hereof, or upon request by the representative of the
appropriate regulatory body, the appropriate affidavits, substantially in the
forms attached hereto as Exhibits A, B and C with respect to Securities of the
Custody Account.
The representative of the appropriate regulatory body shall
have the right to make direct inquiry to State Street concerning Securities or
Moneys held hereunder, including, but not limited to, detailed inventories of
Securities or Moneys and to examine and audit all Securities or Moneys held
hereunder, but only upon furnishing State Street with advance written
notification to such effect signed by an appropriate officer of the Corporation.
The Corporation consents to any and all disclosures given by State Street to the
representative of the appropriate regulatory body pursuant to this section.
- 6 -
<PAGE>
In the event the representative of the appropriate
regulatory body determines that this Agreement does not comply
with the rules and regulations of the board, commission or
department of insurance or that the customs or practices of the
parties hereto do not comply with the rules and regulations of
the board, commission or department of insurance, then this
Agreement shall immediately be modified in a manner acceptable to
the appropriate regulatory body and State Street and the
Corporation will cooperate with the appropriate regulatory body
in complying with the rules and regulations of the board,
commission or department of insurance.
1.3-2 USE OF A SYSTEM FOR THE CENTRAL HANDLING OF SECURITIES.
To deposit and/or maintain the Securities pursuant to this Agreement
(i) in the "book-entry" program of The Depository Trust Company or of
any clearing corporation; or (ii) in any "book-entry" system
authorized by the United States Department of the Treasury and certain
federal agencies including the Federal Reserve Book-Entry System
(collectively, the "Securities System"), and subject to the following
provisions:
(1) State Street may keep the Securities in a Securities
System, provided that the Securities are represented in an
account ("Account") of State Street in the Securities System
which shall not include any assets of State Street other than
assets held as a fiduciary, custodian or otherwise for customers;
- 7 -
<PAGE>
(2) The official records of State Street with respect to
the Securities which are maintained in a Securities System shall
identify (i) the Securities as belonging to the Corporation and
(ii) the name of any clearing agency maintaining the Securities;
(3) Such Securities System may be used to hold, receive,
exchange, release, deliver and otherwise deal with eligible
Securities and to remit to State Street all income and other
payments thereon and to take all steps necessary and proper in
connection with the collection thereof;
(4) Payment for eligible Securities purchased and sold may
be through the clearing medium employed by the Securities System
for transactions of participants acting through them;
(5) State Street shall pay for the Securities purchased for
the Account of the Corporation upon (i) receipt of an electronic
advice from the Securities System that such Securities have been
transferred to the Account, and (ii) the making of an entry on
the official records of State Street to reflect such payment and
transfer for the Account of the Corporation. State Street shall
transfer the Securities sold for the Account of the Corporation
upon (i) receipt of an electronic advice from the Securities
System that payment for such Securities has been transferred to
the Account, and (ii) the making of an entry on the official
records of State Street to reflect such transfer and payment for
the Account of the Corporation. Copies of all such advices from
the Securities System regarding transfers of the Securities for
- 8 -
<PAGE>
the Account of the Corporation shall identify the Corporation, be
maintained for the Corporation by State Street and the
information contained in such advices shall be promptly provided
to the Corporation at its request. State Street shall
(a) furnish the Corporation with a report of all transfers to or
from the Account of the Corporation; (b) furnish to the
Corporation, electronically, copies of daily transaction sheets
reflecting each day's transactions in the Securities System for
the Account of the Corporation; and (c) furnish the Corporation
any other information required pursuant to Section 2.6 hereof;
(6) State Street shall provide the Corporation with any
material report, including but not limited to all reports
received from a clearing corporation or the Federal Reserve
book-entry system on their respective systems of internal
accounting control and any reports prepared by outside auditors
on State Street's or its agents' internal accounting control of
custodied Securities; and
(7) Anything to the contrary in this Agreement
notwithstanding, the use of a Securities System will not affect
any of State Street's responsibilities under this Agreement and
State Street shall be liable to the Corporation for any loss or
damage to the Corporation resulting from use of the Securities
System by reason of any negligence, misfeasance or misconduct of
State Street or any Agent appointed pursuant to Section 4.2
hereof or any Sub-Custodian appointed pursuant to Section 4.3
hereof, or of any of its or
- 9 -
<PAGE>
their employees or from failure of State Street or any such Agent
or Sub-Custodian to enforce effectively such rights as it or the
Corporation may have against the Securities System or any
participant of the Securities System; at the election of the
Corporation, it shall be entitled to be subrogated to the rights
of State Street with respect to any claim against the Securities
System or any participant of the Securities System or any other
person which State Street may have as a consequence of any such
loss or damage if and to the extent that the Corporation has not
been made whole for any such loss or damage.
1.3-3 REGISTERED NAME, NOMINEE. To register Securities of the
Custody Account held by State Street (other than bearer securities) in
the name of a nominee of State Street or in the name of any Agent or
any nominee of such Agent appointed pursuant to Section 4.2 hereof or
in the name of any Sub-Custodian or any nominee of any such Sub-
Custodian appointed pursuant to Section 4.3 hereof; provided that any
nominee shall be used exclusively for the Securities of the
Corporation; and provided further that all Securities relating to
private placements shall be kept in full company name.
1.3-4 PURCHASES. Upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties to
this Agreement, and insofar as Moneys are available for the purpose,
to accept and pay for specified Securities for the account of the
Custody Account and otherwise pay out Moneys as directed by Proper
Instructions; provided, however, that except
- 10 -
<PAGE>
upon receipt of Proper Instructions to the contrary, State Street
shall pay out Moneys upon the purchase of such Securities only:
(a) against delivery of such Securities to State Street (or any bank,
banking firm, responsible commercial agent or trust company doing
business in the United States and/or any foreign country and appointed
by State Street pursuant to Section 4.2 hereof as State Street's Agent
for this purpose or appointed as Sub-Custodian pursuant to Section 4.3
hereof), registered as provided in Section 1.2 hereof or in the proper
form for transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in
Section 1.3-2; or (c) in the case of repurchase agreements, against
delivery of such Securities as provided in (a) or (b) above. All
Securities accepted by State Street shall be accompanied by payment
of, or a "due bill" for, any dividends, interests or other
distributions of the issuer, due the purchaser.
1.3-5 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF THE
SECURITIES PURCHASED. In any and every case where payment for
purchase of Securities for the account of the Custody Account is made
by State Street in advance of receipt of the Securities purchased
(i.e., in advance of the time specified in Section 1.3-4), in the
absence of Proper Instructions to so pay in advance, State Street
shall be absolutely liable to the Corporation for such Securities to
the same extent as if the Securities had been received by State
Street, except that in the case of repurchase agreements entered into
by the Corporation with a bank which is a member of the Federal
Reserve System, State Street may
- 11 -
<PAGE>
transfer funds to the account of such bank prior to the receipt of
(i) written evidence that the Securities subject to such repurchase
agreement have been transferred by book-entry into a segregated
non-proprietary account of State Street with the Federal Reserve Bank
of Boston or (ii) the safe-keeping receipt, provided that in the event
of clause (i) or (ii) hereof, such Securities have in fact been so
transferred by book-entry.
1.3-6 EXCHANGES. Upon receipt of Proper Instructions, to
exchange Securities or interim receipts or temporary Securities held
by it or by any Agent appointed by it pursuant to Section 4.2 hereof
or by any Sub-Custodian appointed pursuant to Section 4.3 hereof or
held in any Securities System for the account of the Custody Account
for other Securities alone or for other Securities and Moneys, and to
expend Moneys insofar as Moneys are available, in connection with any
merger, consolidation, reorganization, recapitalization, split-up of
shares, changes of par value, conversion or in connection with the
exercise of warrants, subscription or purchase rights, or otherwise;
to deposit any such Securities and Moneys in accordance with the terms
of any reorganization or protective plan or otherwise, and to deliver
Securities to the designated depository or other receiving agent in
response to tender offers or similar offers to purchase received in
writing. Except as instructed by Proper Instructions received in
timely enough fashion for State Street to act thereon prior to any
expiration date (which shall be presumed to be three (3) business days
prior to such date unless State Street has advised the Corporation of
a different period) and giving full details of the
- 12 -
<PAGE>
time and method of submitting Securities in response to any tender or
similar offer, exercising any subscription or purchase right or making
any exchange pursuant to this Section and subject to State Street
having fulfilled its obligations under Section 1.3-8 hereof, State
Street shall be under no obligation regarding any tender or similar
offer, subscription or purchase right or exchange except to exercise
its best efforts. When such Securities are in the possession of an
Agent appointed by State Street pursuant to Section 4.2 hereof, the
Proper Instructions referred to in the preceding sentence must be
received by State Street in timely enough fashion (which shall be
presumed to be four (4) business days unless State Street has advised
the Corporation of a different period) for State Street to notify the
Agent in sufficient time to permit such Agent to act prior to any
expiration date. When the Securities are in the possession of a
Sub-Custodian appointed pursuant to Section 4.3 hereof, the Proper
Instructions must be received by the Sub-Custodian in a timely enough
fashion, as advised to the Corporation by State Street or the
Sub-Custodian, to permit the Sub-Custodian to act prior to any
expiration date.
1.3-7 SALES AND DELIVERY OF SECURITIES. Only upon receipt of
Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, to release and deliver Securities owned by
the Corporation held by State Street or in an Account of State Street,
and only in the following cases:
(1) Upon sale of such Securities for the account of the
Corporation and receipt of payment therefor;
- 13 -
<PAGE>
(2) Upon the receipt of payment in connection with any
repurchase agreement related to such Securities entered into by
the Corporation;
(3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section 1.3-2
hereof;
(4) To the depository agent in connection with tender or
other similar offers for such Securities;
(5) To the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable;
provided that in any such case, cash or other consideration is to
be delivered to State Street;
(6) To the issuer thereof, or its agent, for transfer into
the name of a nominee, in accordance with the conditions
specified in Section 1.3-3; or for exchange for a different
number of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; or for exchange of
interim receipts or temporary Securities for definitive
Securities; provided that, in any such case, the new Securities
are to be delivered to State Street;
(7) Upon the sale of such securities for the account of
the Corporation, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, State Street shall have
no responsibility or liability for any loss arising from the
delivery of such securities prior to
- 14 -
<PAGE>
receiving payment for such securities except as may arise from
State Street's own negligence or willful misconduct;
(8) For exchange or conversion pursuant to Section 1.3-6
hereof; provided that, in any such case, the new Securities and
Moneys, if any, are to be delivered to State Street;
(9) In the case of warrants, rights or similar Securities,
the surrender thereof upon the exercise of such warrants, rights
or similar Securities or the surrender of interim receipts or
temporary Securities for definitive Securities; provided that, in
any such case, the new Securities and Moneys, if any, are to be
delivered to State Street;
(10) For delivery in connection with any loans of
Securities made by the Corporation, but only against receipt of
adequate collateral as specified from time to time by the
Corporation, which may be in the form of cash or obligations
issued by the United States government, its agencies or
instrumentalities, except that in connection with any loans for
which collateral is to be credited to State Street's account in
the book-entry system authorized by the U.S. Department of the
Treasury, State Street will not be held liable or responsible for
the delivery of Securities owned by the Corporation prior to the
receipt of such collateral; or
- 15 -
<PAGE>
(11) For any other proper purpose, but only upon receipt of
Proper Instructions from an Authorized Person, as defined in
Section 3.1, to be specified in the Delegation of Authority from
time to time in effect, the form of which is attached hereto as
Exhibit F.
In delivering any Securities pursuant to this Section 1.3-7, State
Street shall credit the Moneys or other property received therefor to
the Bank Account of the Corporation except to the extent that State
Street may be instructed otherwise by Proper Instructions.
1.3-8 COMMUNICATIONS RELATING TO SECURITIES. To transmit
promptly to the Corporation all written information (including,
without limitation, pendency of calls and maturities of Securities and
expirations of rights in connection therewith) received by State
Street from issuers of the Securities being held for the Corporation.
With respect to tender or exchange offers, State Street shall transmit
promptly to the Corporation all written information received by State
Street from issuers of the Securities held hereunder whose tender or
exchange is sought and from the party (or his agents) making the
tender or exchange offer.
1.3-9 PROXIES, NOTICES, ETC. Upon receipt of Proper
Instructions, which may be continuing instructions when deemed
appropriate by the parties, to cause to be promptly executed by the
registered holder of such Securities, if such Securities are
registered otherwise than in the name of the Corporation or a nominee
of the Corporation, all proxies, without indication of the manner in
which such proxies are to be voted, and to promptly deliver to the
Corporation such proxies, all proxy soliciting
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materials and all notices relating to such Securities. Neither State
Street nor any Agent or Sub-Custodian, nor any nominee thereof shall
vote upon any of the Securities.
1.3-10 INCURRENCE OF EXPENSES. Except as directed by the
Corporation, at no time may State Street make payments to itself or
others out of Securities, Moneys or other funds of the Corporation for
expenses relating to its duties under this Agreement. Expenses
include the expenses and fees incurred in the custody account, bank
account, cash dividend account, sweep account, and any other accounts.
2. ADDITIONAL POWERS AND DUTIES OF CUSTODIAN. As custodian, State Street
shall have and perform the following additional powers and duties:
2.1 BANK ACCOUNT. To retain all Moneys, subject to receipt of Proper
Instructions to the contrary, in the banking department of State Street in
a separate demand deposit account or accounts in the name of the
Corporation (the "Bank Account"), subject only to draft or order by State
Street acting pursuant to the terms of this Agreement. If and when
authorized by Proper Instructions, State Street may open and maintain an
additional demand deposit account or accounts in such other bank or trust
companies as may be designated by such instructions, such account or
accounts, however, to be in the name of the Corporation and subject only to
State Street's draft or order in accordance with the terms of this
Agreement. If as a result of this Agreement, State Street incurs any cost
for daylight overdrafts, the Corporation will compensate State Street in a
manner reasonable and customary in the banking industry. If and when
authorized by Proper Instructions, State Street may take any appropriate
actions to establish and maintain "sweep" accounts for the Corporation or
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to effect repurchase agreement transactions initiated by the Corporation.
The Bank may not invade the Bank Account for expenses without express
written authority for each specific instance.
2.2 COLLECTIONS. Unless otherwise instructed by receipt of Proper
Instructions, to collect and receive all income, other payments and
distributions with respect to registered Securities held hereunder to which
the Corporation shall be entitled either by law or pursuant to custom in
the securities business, and to collect all income, other payments and
distributions with respect to bearer Securities if, on the date of payment
by the issuer, such Securities are held by State Street or an Agent or
Sub-Custodian thereof or are maintained pursuant to Section 1.3-2 in a
Securities System on such date of payment and to credit such income into
the Corporation's Bank Account maintained pursuant to Section 2.1 hereof.
Income due the Corporation on securities loaned pursuant to the provisions
of Section 1.3-7 (10) shall be the responsibility of the Corporation.
State Street will have no duty or responsibility in connection therewith,
other than to provide the Corporation with such information or data as may
be necessary to assist the Corporation in arranging for the timely delivery
to State Street of the income to which the Corporation is properly
entitled.
In the event the purchase of a Security in the amount of $10 million
or less fails to settle on the contractual settlement date not as a result
of any act or failure to act on the part of State Street, State Street
shall retain any Moneys made available by the Corporation for such purchase
for five (5) business days thereafter (during which time the Corporation
will forego interest on such amounts) and then immediately return such
Moneys to the Corporation. In the event a purchase exceeding
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<PAGE>
$10 million fails to settle on the contractual settlement date, State
Street shall return on such date any Moneys made available by the
Corporation for such purchase. In either case, if such Moneys are not so
returned to the Corporation, State Street will pay interest in an amount to
be agreed upon from time to time on such Moneys until such time as State
Street has returned such Moneys to the Corporation.
In the event the sale of a Security fails on the contractual
settlement date relating to that Security due to the failure of the
Corporation to deliver such Security, and State Street has credited the
Corporation's Bank Account for such sale, State Street is hereby authorized
to collect interest from the Corporation on such amount so credited in an
amount to be agreed upon from time to time until the actual settlement
date.
State Street shall execute and cause to be executed by any Agent or
Sub-Custodian ownership and other certificates and affidavits for all
federal and state tax purposes in connection with the collection of bond
and note coupons, the receipt of income or other payments with respect to
Securities of the Custody Account held by it, and the transfers of
Securities, and to do all other things necessary or proper in connection
with the collection of such income, and without limiting the generality of
the foregoing, to:
(1) Detach and present for payment on the date of payment all
coupons and other income items requiring presentation as and when they
become due and collect interest when due on Securities held hereunder;
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(2) Present for payment all Securities which may mature or be
called, redeemed, retired or otherwise become payable on the date such
Securities become payable; and
(3) Endorse and deposit for collection only, in the name of the
Corporation, checks, drafts, or other negotiable instruments on the
same day as received.
2.3 STOCK DIVIDENDS, RIGHTS, ETC. To receive and collect all stock
dividends, rights and other items of like nature, and to deal with the
same pursuant to Proper Instructions relative thereto.
2.4 OTHER PROPER PURPOSES. Upon receipt of Proper Instructions, to
make or cause to be made, insofar as Moneys are available, disbursements
for any other purpose (in addition to the purposes specified in Sections
1.3-4, 1.3-5 and 1.3-6 of this Agreement) which the Corporation declares
is a proper purpose pursuant to the Proper Instructions described in
Section 3.1 below.
2.5 RECORDKEEPING AND REPORTS. State Street shall create and
maintain all records relating to its activities and obligations under this
Agreement in such manner as is reasonably satisfactory to the Corporation
and as will meet the obligations of the Custody Account, if any, under
applicable federal and state tax laws, state insurance laws and
regulations and any other law or administrative rules or procedures which
may be applicable to the Corporation. All such records shall remain the
property of the Corporation, and shall be open to the inspection and audit
at reasonable times by duly authorized officers, employees or agents of
the Corporation, independent certified public accountants designated by
the Corporation, and any representatives of an appropriate regulatory body
as hereafter described. State Street shall maintain records sufficient to
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dete mine and verify information relating to Securities and property
held by State Street subject to this Agreement.
During the course of State Street's regular banking hours, any
representative of an appropriate regulatory body (including, without
limitation, representatives of one or more state insurance boards,
commissions or departments or the National Association of Insurance
Commissioners or employees or agents of the Securities and Exchange
Commission) shall be entitled to examine State Street's premises and
securities and records related to the Custody Account, but only upon
furnishing State Street with written instructions to that effect from
the Treasurer, the Controller, any Assistant Treasurer or any
Vice-President in the Treasury Department of the Corporation and a
certificate of incumbency as to such officer executed by an Authorized
Person, Secretary or Assistant Secretary of the Corporation.
State Street and each Agent and each Sub-Custodian shall provide the
Corporation at least annually and, at such other times as the
Corporation may reasonably require, with reports by State Street and
each Agent and each Sub-Custodian and by independent certified public
accountants regarding the accounting system, internal accounting
controls and procedures for safeguarding Securities including the
Securities deposited and/or maintained in a Securities System, relating
to the services provided by State Street and each Agent and each
Sub-Custodian under this Agreement; such reports shall be of sufficient
scope and in sufficient detail as may reasonably be required by the
Corporation and shall provide reasonable assurance that any material
inadequacies would be disclosed by such examination and shall state in
detail any material inadequacies disclosed by such examination, and, if
there are no such
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inadequacies, shall so state. Such examination is to be conducted in
accordance with generally accepted auditing standards.
State Street presently maintains the forms of insurance as set forth
in Exhibit E attached hereto and intends to continue to maintain such
insurance in substantially the same form and amount. State Street
hereby agrees to provide the Corporation with at least thirty (30) days
written notice prior to any reduction or cancellation of such insurance
and will use its best efforts to replace the form and amount reflected
on Exhibit E as the same may be modified from time to time. State
Street will provide the Corporation with a certificate or other evidence
of such insurance within thirty (30) days of the end of each calendar
year.
2.6 TRANSACTION INFORMATION. State Street shall provide to the
Corporation a daily accounting of all activity concerning transactions
described in Sections 1.3-4, 1.3-6, 1.3-7, 2.2, 2.3 and 2.4.
Corresponding debits and credits to the Bank Account will be provided on
all transactions within two (2) business days. Such daily activity
reports shall include, without limitation, all settled transactions and
all transactions pending future settlement of which State Street has
been notified. State Street shall, within seven (7) business days after
the last calendar day of each month, furnish to the Corporation, a
monthly accounting of all activity concerning transactions described in
Sections 1.3-4, 1.3-6, 1.3-7, 2.2, 2.3 and 2.4 hereof, inventory
reports, reflecting the balance of all Securities held by State Street,
as custodian for the Corporation (whether ownership by the Corporation
thereof is evidenced by (i) a physical certificate registered as
provided in Section 1.3-3, or (ii) a credit, to the account of State
Street, entered on the books of account and records of DTC, The Federal
Reserve
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Book-Entry System or any Securities System). The daily activity report
(Blotter) shall reflect receipts, deliveries and any other Security
movement affecting the position of the Custody Account and interest,
dividends and similar distributions with respect to Securities
including total number of shares for each Security acquired or
disposed of and distributions credited to the Bank Account, for the
Custody Account. State Street shall, promptly upon request,
furnish all other such information or documentation the Corporation
may reasonably request.
Daily activity and inventory reports available to the Corporation to
be supplied by State Street pursuant to Section 2.6 of this Agreement
are listed in Exhibit D attached hereto.
2.7 SEGREGATED ACCOUNTS. To maintain the assets of variable
annuity funds, pensions and reinsurance programs each in segregated
accounts.
3. INSTRUCTIONS.
3.1 PROPER INSTRUCTIONS. "Proper Instructions" as used throughout
this Agreement, the method of instruction, the number of signatures
required and a list of persons as shall be authorized from time to time
to act pursuant to this Agreement (an "Authorized Person") and their
specimen signatures are to be specified in the Delegations of Authority
from time to time in effect, the forms of which are attached hereto as
Exhibits F and G. Persons authorzied to act with respect to matters
related solely to variable annuity fund assets are identified on Exhibit
G. Persons authorized to act for all other purposes of this Agreement
are identified on Exhibit G. All Proper Instructions shall be in
writing signed by two (2) Authorized Persons (except as may otherwise be
provided on Exhibit G). Each such writing shall set forth the specific
transaction or type of
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transaction involved. Oral instructions will be considered Proper
Instructions if State Street reasonably believes them to have been given
by two (2) Authorized Persons (except as may otherwise be provided on
Exhibit G). The Corporation shall cause all oral instructions to be
confirmed in writing on the same day. Any oral instructions not
confirmed in writing shall be reported immediately to the Corporation,
Attention: Corporate Audit. Proper Instructions may include
communications effected directly between electro-mechanical or
electronic devices, provided that the Corporation and State Street are
satisfied that such procedures afford adequate safeguards for the
Corporation's assets. In the event of a conflict between instructions
effected directly between electro-mechanical or electronic devices and
written instructions signed in accordance with the appropriate
Delegation of Authority, such written instructions shall control,
provided that actions taken by State Street in reliance upon such
electro-mechanical or electronic devices shall not be voided by
subsequent written instructions. All requests, designations, notices,
agreements, execution of documents and other actions which may be taken
by the Corporation hereunder shall be deemed to have been effected by
the Corporation when such actions have been taken by two (2) Authorized
Persons.
4. ADDITIONAL AGREEMENTS. State Street and the Corporation further agree
as follows:
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4.1 INDEMNIFICATION. So long as and to the extent that it is in
the exercise of reasonable care, State Street shall not be responsible
for the title, validity or genuineness of any property or evidence of
title thereto delivered to it or by it pursuant to this Agreement and
shall be held harmless in acting upon any notice, request, consent,
certificate or other instrument reasonably believed by it to be genuine
and to be signed by the proper party or parties or to have been properly
executed in accordance with Section 3.1 hereof.
Notwithstanding the foregoing, State Street, as custodian, shall
indemnify the Corporation for any losses, damages and expenses as a
result of any actions taken or not taken or things done or not done by
it in carrying out the terms and provisions of this Agreement as set
forth below:
(1) State Street shall be held to the exercise of reasonable
care in carrying out the provisions of this Agreement. State Street
shall indemnify and hold harmless the Corporation for all damages and
expenses reasonably incurred as a result of the negligent action,
negligent failure to act, bad faith or willful misconduct of State
Street or any of its officers, nominees, employees, or any Agent or
Sub-Custodian appointed hereunder, in the performance of any of their
responsibilities hereunder; but State Street shall be indemnified by
and shall be without liability to the Corporation for any other action
taken or omitted by State Street or any of its officers or employees
or any Agent or Sub-Custodian in good faith in the performance of any
of their responsibilities hereunder. It shall be entitled to rely on
and may act upon advise of counsel (who may be counsel for the
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Corporation) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
(2) Subject to the standard of care and liability specified in
paragraph (1) of this Section 4.1, and without in any way modifying
the responsibility of State Street provided for therein, the losses
referred to in said paragraph (1) shall include losses occasioned by
computer or other mechanical failure, the dishonesty of State Street's
officers or employees, burglary, robbery, holdup, theft, or mysterious
disappearance, and loss by damage or destruction. However, in the
case of computer or mechanical failure liability for such losses shall
be limited to the restoration of all customer records and data and the
correction of all errors resulting from the performance of State
Street; however, in any event, State Street shall implement such
restoration and correction in compliance with all regulatory law and
authority and consistent with any State Street internal policy and
provided further that State Street shall use its reasonable best
efforts to implement such restoration and correction within 48 hours
of the event causing such failure. State Street will not be liable to
the Corporation, and the Corporation will not be liable to State
Street, for consequential damages arising from computer or mechanical
failure. In no case shall computer or mechanical failure excuse State
Street from maintaining records as specified in Section 2.5.
(3) In the event of the loss of Securities held by State Street,
as custodian for the Corporation, for which loss State Street is
liable under paragraphs (1) or (2) of this Section 4.1,
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Securities in replacement thereof, or, at the option of State Street,
funds in an amount equal to the market value of the Securities and
brokerage commissions which would be incurred in replacing such
Securities at the date of discovery of such loss, shall be remitted
promptly to the Corporation, together with funds in an amount equal to
any lost interest payments, dividends, or other distributions, as the
case may be, with respect to such Securities, and, so far as may be
lawful, interest upon such lost interest payments, dividends, or other
distributions, at a rate equal to the rate as announced by State
Street in Massachusetts from time to time as its prime commercial
lending rate.
(4) Without limiting the generality of the foregoing, State
Street shall be under no duty or obligation to inquire into, and shall
not be liable for (i) the validity of the issue of any Securities
purchased by or for the account of, the Corporation, the legality of
the purchase thereof, or the propriety of the amount paid therefor, or
(ii) the legality of the sale by or on behalf of the Corporation of
any Securities, or the propriety of the amount for which such
Securities may be sold.
If in any case a party may be asked to indemnify the other
hereunder, the party seeking indemnification shall fully and promptly
advise the other party of all pertinent facts concerning the situation
in question, and identify and notify the other party promptly
concerning any situation which presents or appears likely to present
the probability of such a claim for indemnification against the other
party. The party against whom indemnification is sought shall have
the option to defend against any claim which may
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be the subject of the request for indemnification, and in the event
that the party against whom indemnification is sought so elects, it
will so notify the other party, and thereupon the party against whom
indemnification is sought shall take over complete defense of the
claim, and the other party shall sustain no further legal or other
expenses in such situation for which it shall seek indemnification.
Neither party shall confess any claim or make any compromise in any
case in which the indemnifying party will be asked to indemnify the
other party except with the other party's consent.
4.2 APPOINTMENT OF AGENTS. State Street, as custodian, may at any
time or times appoint (and may at any time remove) any other bank, trust
company or responsible commercial agent, including, but not limited to
subsidiaries and affiliates of State Street, to act as its agent to
carry out such of the provisions of this Agreement as State Street may
from time to time direct; provided, however, that (i) the appointment of
such agent ("Agent") shall not relieve State Street of any of its
responsibilities under this Agreement and there is an agreement between
State Street and the Agent to this effect, and (ii) the Agent is duly
authorized to act as a custodian or trustee and is organized under the
laws of the United States of America or any state thereof and (a) is a
member of the Federal Reserve System, (b) is a member of or is eligible
to receive deposits which are insured by the Federal Deposit Insurance
Corporation or (c) maintains an account with a Federal Reserve Bank and
is subject to supervision and examination by the Board of Governors of
the Federal Reserve System.
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4.3 APPOINTMENT OF SUB-CUSTODIANS. Upon receipt of Proper
Instructions, State Street, as custodian, may from time to time employ
one or more sub-custodian agents ("Sub-Custodians"), provided that (i)
the appointment of such Sub-Custodian shall not relieve State Street of
any of its responsibilities under this Agreement and there is an
agreement between State Street and the Sub-Custodian to this effect; and
(ii) the Sub-Custodian (a) is a member of the Federal Reserve System,
(b) is a member of or is eligible to receive deposits which are insured
by the Federal Deposit Insurance Corporation or (c) maintains an account
with a Federal Reserve Bank and is subject to supervision and
examination by the Board of Governors of the Federal Reserve System.
4.4 FEE SCHEDULE. State Street shall be entitled to receive fees
provided for in a schedule agreed upon from time to time between the
Corporation and State Street; once agreed upon, the schedule shall
remain effective until a different schedule is agreed upon.
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4.5 EFFECTIVE PERIOD, TERMINATION AND AMENDMENT, AND INTERPRETIVE
AND ADDITIONAL PROVISIONS. This Agreement shall become effective as of
the date of its execution, shall continue in full force and effect until
terminated as hereinafter provided, may be amended at any time by mutual
written agreement of the parties hereto and may be terminated by either
party by an instrument in writing delivered or mailed by registered
mail, postage prepaid, to the other party, such termination to take
effect in accordance with the provisions of this Section 4.5. Either
party may terminate this Agreement for any reason within thirty (30)
days from the date of its execution. After such time, unless otherwise
provided by this Agreement, this Agreement may be terminated (a) by the
Corporation no sooner than ninety (90) days after the date of delivery
or mailing of such notice of termination or (b) by State Street no
sooner than six (6) months after the date of delivery or mailing of such
notice of termination. Notwithstanding the above, neither State Street
nor the Corporation shall amend or terminate this Agreement in
contravention of any applicable Federal or State laws or regulations;
and further provided, that the Corporation may at any time (i)
substitute another bank or trust company for State Street by giving
notice as described above to State Street or (ii) immediately terminate
this Agreement in the event State Street shall have a material adverse
change in its financial condition, assets, liabilities, earnings or
business prospects, or become bankrupt or insolvent or shall invoke the
benefit of, or be subjected to, any laws for the protection,
rehabilitation or liquidation of insolvent debtors, or in the event of
the appointment of a conservator or receiver for State Street by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
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jurisdiction. In the event of such immediate termination, the
Corporation shall be entitled to the immediate return of all Securities
then held in the Custody Account inclusive of any other accounts
established with State Street pursuant to this Agreement (whether
ownership by the Corporation of such Securities is evidenced by (i) a
physical certificate registered as provided in Section 1.3-3, or (ii) a
credit, to the account of State Street, entered on the books of account
and records of any Securities System).
4.6 COMPLIANCE WITH LAW. It is the intention of the parties hereto
that the terms of this Agreement comply with insurance laws, rules and
regulations and the requirements of insurance regulatory bodies
("Insurance Requirements") as in effect from time to time and applicable
to the Corporation's performance under the Agreement and the rules of
bank regulatory authorities ("Banking Requirements") as in effect from
time to time applicable to State Street's performance under this
Agreement. In the event that any provision hereof is capable of a
number of interpretations, such provision shall be interpreted in such
fashion as to be consistent with the Insurance Requirements and Banking
Requirements as in effect from time to time.
It is also the intention of the parties hereto that the terms of
this Agreement and the performance of the parties hereunder comply with
the Internal Revenue Code of 1986 as amended from time to time and all
rules and regulations promulgated thereunder (the "Code"), including but
not limited to the satisfaction of all conditions set forth in Treasury
Regulation Section 1.165-12(c) and (d), which relate to Securities which
are referred to therein as "registration-required obligations" in bearer
form. State Street agrees to satisfy all applicable conditions contained
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therein, including the making of returns of information to the Internal
Revenue Service, if required, and hereby covenants with the Corporation
that it will deliver all Securities which are "registration-required
obligations" in bearer form (as that term is used in applicable
regulations) in accordance with the requirements set forth in Treasury
Regulation Section 1.165-12(c)(1)(ii) or (iv). State Street and the
Corporation shall agree on a written memorandum setting forth the
material terms for State Street's compliance with the requirements of
the Code referred to in this paragraph. State Street shall rely on such
written memorandum until it is withdrawn or modified in writing by
mutual agreement and shall be under no duty to take independent notice
of any change in the Code and shall be without liability to the
Corporation for loss, claim or expense under this paragraph except for
that which may arise from State Street's failure, through negligence or
bad faith, to follow the terms of the memorandum.
4.7 SUCCESSOR CUSTODIAN. Upon termination hereof the Corporation
shall pay to State Street such compensation as may be due under the fee
schedule in effect between the parties hereto at that time.
If a successor custodian is appointed by the Corporation, State
Street shall, upon termination, deliver to such successor custodian at
the office of State Street, duly endorsed and in form for transfer, all
Securities then held hereunder and all Moneys or other properties of the
Custody Account deposited with or held by it hereunder. If no such
successor custodian is appointed by the Corporation, State Street shall,
upon termination, deliver all properties of the Custody Account to the
Corporation pursuant to Proper Instructions.
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This Agreement shall be binding on and shall inure to the benefit of
the Corporation and State Street and their respective successors. Any
bank or trust company into which State Street or any successor may be
merged, converted or with which it or any successor may be consolidated
or any bank or trust company resulting from any merger, conversion or
consolidation to which State Street or any successor shall be a party or
any bank or trust company succeeding to the business of State Street or
any successor shall be substituted as successor under this Agreement and
any amendments thereof, without the execution of any instrument or any
further act on the part of the Corporation or State Street or any
successor. Any such successor to State Street shall have all powers,
duties and obligations of the preceding custodian under this Agreement
and any amendments thereof and shall succeed to all the exemptions and
privileges of the preceding custodian under this Agreement and any
amendments thereof. All records regarding the Corporation's accounts
will be transferred to the successor custodian, including those records
relating to the Securities System.
4.8 DISCLOSURE OF INFORMATION. Unless required by this Agreement or
applicable law or regulation, State Street is not authorized to disclose
the Corporation's name, address and securities position to any person or
any issuer of securities when requested to do so by them without the
prior written approval of the Corporation.
4.9 ASSIGNMENT. This Agreement may not be assigned by State Street
without the prior written consent of the Corporation.
5. MASSACHUSETTS LAW TO APPLY. THIS INSTRUMENT IS EXECUTED AND DELIVERED
IN THE COMMONWEALTH OF MASSACHUSETTS AND, EXCEPT AS PROVIDED IN SECTION 4.6,
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SHALL BE SUBJECT TO AND BE CONSTRUED ACCORDING TO THE LAWS OF SAID COMMONWEALTH.
6. NOTICE. Notices and other writings delivered or mailed postage prepaid
to The Franklin Life Insurance Company, c/o American General Corporation,
Attention: Jamileh Soufan at 2929 Allen Parkway, Houston, Texas 77019 or to
State Street, Attention: Kenneth A. Bergeron at 225 Franklin Street, Boston,
Massachusetts 02110 or to such address as the Corporation or State Street may
hereafter specify, shall be deemed to have been properly delivered or given
hereunder to the respective address.
7. EXECUTED ORIGINALS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by duly authorized persons as of the
day and year first above written.
THE FRANKLIN LIFE INSURANCE
COMPANY
By:
- -------------------------------------
James L. Gleaves, Authorized Person
By:
- -------------------------------------
Jamileh Soufan, Authorized Person
STATE STREET BANK AND TRUST COMPANY
ATTEST:
By: By:
---------------------------------
- ---------------------------------
Title: Title:
-------------------------------
- ---------------------------------
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<PAGE>
EXHIBIT A
CUSTODIAN AFFIDAVIT
(for securities which have not been redeposited elsewhere)
STATE OF )
) SS:
COUNTY OF )
__________________________, being duly sworn deposes and says that he is
__________ of __________________, a banking corporation organized under and
pursuant to the laws of the _______, with a principal place of business at
_______________________ (the "Bank");
That his duties involve supervision of activities of the Bank as custodian and
maintenance of records relating to such custodian activities;
That the Bank is custodian for certain securities of The Franklin Life
Insurance Company, which has its principal place of business at
________________________ (the "Insurance Company"), pursuant to a Custodian
Agreement dated as of April 17, 1995 between the Bank and the Insurance
Company, as such may be amended from time to time (the "Agreement");
That the schedule attached hereto is a true and complete statement of securities
(other than those caused to be deposited with the Depository Trust Company or
like entity or a Federal Reserve Bank under the Federal Reserve book-entry
procedure) which were in the custody of the Bank for the account of the
Insurance Company as of the close of business on ______________________; that,
unless otherwise indicated on the schedule, the next maturing and all subsequent
coupons were then either attached to coupon bonds or in the process of
collection; and that, unless otherwise shown on the schedule, all such
securities were in bearer form or in registered form in the name of the
Insurance Company or its nominee or a nominee of the Bank, or were in the
process of being registered in such form;
That the Bank as custodian has the responsibility for the safekeeping of such
securities as specifically set forth in the Agreement; and
That to the best of his knowledge and belief, unless otherwise shown on the
schedule, said securities were the property of said Insurance Company and were
free of all liens, claims or encumbrances whatsoever.
Subscribed and sworn to
before me this _______
day of _______ ___, 19___.
(L.S.)
-------------------------
Vice President or other
authorized officer
<PAGE>
EXHIBIT B
CUSTODIAN AFFIDAVIT
(for use with securities on deposit with The Depository Trust Company or like
entity)
STATE OF )
) SS:
COUNTY OF )
________________________, being duly sworn deposes and says that he is
__________ of _____________________, a banking corporation organized under and
pursuant to the laws of the _______, with a principal place of business at ____
__________________ (the "Bank");
That his duties involve supervision of activities of the Bank as custodian and
maintenance of records relating to such custodian activities;
That the Bank is custodian for certain securities of The Franklin Life Insurance
Company, which has its principal place of business at _______________________
(the "Insurance Company"), pursuant to a Custodian Agreement dated as of _____
April 17, 1995 between the Bank and the Insurance Company, as such may be
amended from time to time (the "Agreement");
That the Bank has caused the securities set forth on the schedule attached
hereto to be deposited with _________________________, and such shcedule is a
true and complete statement of the securities of the Insurance Company of which
the Bank was custodian, and which were so deposited, as of the close of business
on _________________________;
That the Bank as custodian has the same responsibility for the safekeeping of
such securities, whether possession of the Bank or deposited, as specifically
set forth in the Agreement; and
That, to the best of his knowledge and belief, unless otherwise shown on the
schedule, said securities were the property of the Insurance Company and were
free of all liens, claims or encumbrances whatsoever.
Subscribed and sworn to
before me this ___________
day of __________, 19__.
(L.S.)
-------------------------
Vice President or other
authorized officer
<PAGE>
EXHIBIT C
CUSTODIAN AFFIDAVIT
(for use where ownership is evidenced by a book-entry account at a Federal
Reserve Bank)
STATE OF )
) SS:
COUNTY OF )
_______________________, being duly sworn deposes and says that he is
___________ of __________________, a banking corporation organized under and
pursuant to the laws of the _______, with a principal place of business at
_____________________ (the "Bank");
That his duties involve the supervision of activities of the Bank as custodian
and maintenance of records relating to such custodian activities;
That the Bank is custodian for certain securities of The Franklin Life Insurance
Company, which has its principal place of business at _______________________
(the "Insurance Company"), pursuant to a Custodian Agreement dated as of
April 17, 1995 between the Bank and the Insurance Company, as the same may be
amended from time to time (the "Agreement");
That it has caused the securities set forth on the attached schedule to be
credited to its book-entry account with a Federal Reserve Bank under the Federal
Reserve book-entry system, and such schedule is a true and complete statement of
the securities of the Insurance Company of which the Bank was custodian, and
which were in a "General" book-entry account maintained in the name of the Bank
on the books and records of a Federal Reserve Bank, at the close of business on
__________________________________;
That the Bank has the same responsibility for safekeeping such securities,
whether in the possession of the Bank or in said "General" book-entry account,
as specifically set forth in the Agreement.
Subscribed and sworn to
before me this __________
day of ____________, 19__.
(L.S.)
-------------------------
Vice President or other
authorized officer
<PAGE>
EXHIBIT D
Daily Activity and Inventory Reports
DAILY
1. Cash Blotter
2. Corporate Action Report
WEEKLY
1. Outstanding Security Loans (and Month-end)
2. Open Trades Report (and Month-end)
3. Corporate Action Report
MONTHLY
1. Open Trades Report
2. Vaulting Report
3. Past Due Report
4. Special Deposit Report
5. Asset Master Reference Data
MASTER TRUST REPORTS: Monthly
1. Computation of NAV
2. Cash Transaction Report
3. Cash Transaction Report Summary
4. Working Trial Balance
5. Account Position Appraisal
6. Purchases Report
7. Sales Report
8. Realized Gain/Loss Report
9. Principal Paydowns
10. Open Transaction Summary
11. Interest Receivable Report
12. Earned Income Detail Report
<PAGE>
EXHIBIT E
STATE STREET BANK INSURANCE PROGRAM
1. COMPREHENSIVE CRIME PROGRAM
LIMITS: $75,000,000
DEDUCTIBLE: 1,500,000
COVERAGES: BANKERS BLANKET BOND
1. Fidelity - Loss by reason of any dishonest or
fraudulent act of any employee, including loss of
property through such acts.
2. On Premises - Loss of property as defined (i.e.,
currency, securities, bullion, etc.) through
burglary, robbery, etc.
3. Transit - Loss of property while in transit except
while in the mail.
4. Forgery or Alteration - Loss by reason of forgery
or alteration of checks, or other similar
instruments.
5. Securities Forgery - Loss through the insured
having in good faith and in the course of business
given value or otherwise acted upon any securities
or other written documents.
2. COMPUTER CRIME COVERAGES
LIMIT: $75,000,000
DEDUCTIBLE: 1,500,000
COVERAGE: This policy covers direct financial loss sustained by
the insured by reason of having transferred, paid or
delivered any funds or property or established any
credit or given any value as the result of certain
defined criminal acts. The policy encompasses the
following insuring agreements:
Agreement 1 Computer Systems
Agreement 2 Electronic Computer Instructions
Agreement 3 Electronic Data and Media
Agreement 4 Electronic Communication
Agreement 5 Assured's Service Bureau Operations
Agreement 6 Electronic Transmission
Agreement 7 Customer Voice Initiated Transfers
3. EXCESS "ALL RISK" SECURITIES COVERAGE
LIMIT: $425,000,000
DEDUCTIBLE: Bankers Professional Liability deductible applies
($10,000,000)
<PAGE>
EXHIBIT E
- 2 -
COVERAGE: All Risk Physical Loss on negotiable and nonnegotiable
securities and all documents of value.
4. LOST INSTRUMENT BOND
LIMIT: $ 1,500,000
DEDUCTIBLE: Bankers Blanket Bond deductible applies
($1,500,000)
COVERAGE: This type of Bond has application where the Bank loses
or misplaces a security whose value is within the
deductible of the Bankers Blanket Bond. In such a
case, the Bank would obtain a Lost Instrument Bond in
order to facilitate the replacing of the missing
security. Under such a Bond the Bank is principal and
agrees to indemnify, among others, the issuer of the
replacement security for any loss that it might incur
by reason of the issuance of a replacement for the lost
security.
5. BANKERS PROFESSIONAL LIABILITY
LIMIT: $ 30,000,000
DEDUCTIBLE: 10,000,000 Corporation
COVERAGE: This policy provides indemnification for all losses
incurred as a result of any claim against the insured
relating to wrongful acts and errors or omissions in
the Bank's performance of professional services.
<PAGE>
EXHIBIT F
(non-variable annuity fund matters)
DELEGATION OF AUTHORITY
You are to follow any and all written instructions given you jointly by any one
(1) Authorized Person designated in GROUP B below AND any one (1) Authorized
Person designated in GROUP C below (two signatures) (a) in respect to the
delivery, transfer, sale, exchange or other disposition of any or all of the
securities or other property, including income and proceeds at any time held by
you for the account of the Corporation, (b) in respect to any securities
transfer for the purpose of a pledge to any state provided that specific written
proper instructions are furnished as to the joint tenancy or control between the
Corporation and the affected state, (c) in respect to the investment of any cash
at any time held by you (whether in the Corporation's checking account or
otherwise), or the purchase or acquisition by exchange or otherwise, on behalf
of the Corporation, of any securities or other property, and (d) in respect to
any other action taken pursuant to the Agreement that you are a party of with
the Corporation (the "Agreement"), hereby granting unto all of the below-named
Authorized Persons full power and authority in the premises, and ratifying and
confirming all that said Authorized Persons shall do, or cause to be done by
virtue hereof.
NOTWITHSTANDING THE FOREGOING, all deliveries of securities by you to a third
party must be either conditioned upon or against receipt of funds therefor
except as provided in the Agreement and unless you have previously received
specific written proper instructions signed jointly by any one (1) Authorized
Person designated in GROUP A below AND any one (1) Authorized Person designated
in GROUP B below AND any one (1) Authorized Person designated in GROUP C below
(three signatures). Under no circumstances should securities be delivered to
any individual at the Corporation or any of its affiliates other than those
persons listed in GROUP C below.
This Delegation of Authority may be revoked only by notice in writing or
substituted Delegation of Authority delivered to you; and in the event of death
or other termination of your authority by operation of law, the Corporation for
the purpose of inducing you to act hereunder hereby agrees that you shall be
saved harmless from any loss suffered, or liability incurred, by reason of any
action taken by you prior to receipt of actual notice of such termination.
All instructions relating to securities movements shall be in writing signed by
the number of Authorized Persons specified herein. Each such writing shall set
forth the specific transaction or type of transaction involved. Oral
instructions will be considered proper instructions if the Custodian reasonably
believes them to have been given by the Authorized Persons. The Corporation
shall cause all oral instructions to be confirmed in writing on the same day.
Any oral instructions not confirmed in writing shall be reported immediately to
the Corporation, Attention: Corporate Audit. Proper instructions may include
communications effected directly between electro-mechanical or electronic
devices, provided that the Corporation and the Custodian are satisfied that such
procedures afford adequate safeguards for the Corporation's assets.
<PAGE>
AUTHORIZED PERSONS
GROUP A GROUP B GROUP C
- ------- ------- -------
Executive Investment Treasury
- --------------------- -------------------- ------------------
Nicholas R. Rasmussen Roger E. Hahn C. Jeffery Gay
----------------------
C. Scott Inglis
------------------
James L. Gleaves
- --------------------- ----------------------
Peter V. Tuters Gordon S. Massie
----------------------- ------------------
Michael L. McEachern Joy A. Kendall
- --------------------- ----------------------- ------------------
Austin P. Young Julia S. Tucker Jamileh B. Soufan
Acknowledged by: ---------------------------------
Custodian's Name: ---------------------------------
Date: ---------------------------------
<PAGE>
EXHIBIT G
(variable annuity fund matters)
DELEGATION OF AUTHORITY
You are to follow any and all written instructions given you jointly by any
two (2) Authorized Persons designated below (a) in respect to the delivery,
transfer, sale, exchange or other disposition of any or all of the securities
or other property, including income and proceeds at any time held by you for
the account of the Corporation, (b) in respect to any securities transfer for
the purpose of a pledge to any state provided that specific written proper
instructions are furnished as to the joint tenancy or control between the
Corporation and the affected state, (c) in respect to the investment of any
cash at any time held by you (whether in the Corporation's checking account
or otherwise), or the purchase or acquisition by exchange or otherwise, on
behalf of the Corporation, of any securities or other property, and (d) in
respect to any other action taken pursuant to the Agreement that you are a
party of with the Corporation (the "Agreement"), hereby granting unto all of
the below-named Authorized Persons full power and authority in the premises,
and ratifying and confirming all that said Authorized Persons shall do, or
cause to be done by virtue hereof.
NOTWITHSTANDING THE FOREGOING, all deliveries of securities by you to a
third party must be either conditioned upon or against receipt of funds
therefor except as provided in the Agreement and unless you have previously
received specific written proper instructions signed jointly by any three (3)
Authorized Persons designated below. Under no circumstances should securities
be delivered to any individual at the Corporation or any of its affiliates
other than those persons listed below.
This Delegation of Authority may be revoked only by notice in writing or
substituted Delegation of Authority delivered to you; and in the event of
death or other termination of your authority by operation of law, the
Corporation for the purpose of inducing you to act hereunder hereby agrees
that you shall be saved harmless from any loss suffered, or liability
incurred, by reason of any action taken by you prior to receipt of actual
notice of such termination.
All instructions relating to securities movements shall be in writing signed
by the number of Authorized Persons specified herein. Each such writing shall
set forth the specific transaction or type of transaction involved. Oral
instructions will be considered proper instructions if the Custodian
reasonably believes them to have been given by the Authorized Persons. The
Corporation shall cause all oral instructions to be confirmed in writing on
the same day. Any oral instructions not confirmed in writing shall be
reported immediately to the Corporation, Attention: Corporate Audit. Proper
instructions may include communications effected directly between
electro-mechanical or electronic devices, provided that the Corporation and
the Custodian are satisfied that such procedures afford adequate safeguards
for the Corporation's assets.
<PAGE>
AUTHORIZED PERSONS
-----------------------------------------
Robert J. Gibbons
-----------------------------------------
Robert G. Spencer
-----------------------------------------
Stephen P. Horvat, Jr.
-----------------------------------------
Elizabeth E. Arthur
-----------------------------------------
Jeffrey D. Pirmann
Acknowledged by:
-------------------------
Custodian's Name:
------------------------
Date:
------------------------
<PAGE>
MEMORANDUM OF AGREEMENT
This Memorandum of Agreement is made as of the 17th day of April, 1995 by
and between the corporation listed as a signatory hereto (the "Corporation"),
and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking corporation
("State Street").
The Corporation and State Street entered into a Custodian Agreement dated
as of April 17, 1995 (referred to as a "Custodian Agreement") providing for the
establishment of a Custody Account in the name of the Corporation with State
Street as custodian. The Custody Account was established for the deposit by the
Corporation of any and all of its Securities and/or Moneys and the participation
by the Corporation, through State Street, in the book-entry programs or systems
of any Securities System with respect to the Securities, held under the
Custodian Agreement, eligible for deposit with such Securities System.
Capitalized terms used but not defined herein are defined in the Custodian
Agreement.
Section 4.6 of the Custodian Agreement provides in part:
It is also the intention of the parties hereto that the terms of
this Agreement and the performance of the parties hereunder comply
with the Internal Revenue Code of 1986, as amended from time to time,
and all rules and regulations promulgated thereunder (the "Code"),
including but not limited to the satisfaction of all conditions set
forth in Treasury Regulation Section 1.165-12(c) and (d), which relate
to Securities which are referred to therein as "registration-required
obligations" in bearer form. State Street agrees to satisfy all
applicable conditions contained therein, including the making of
returns of information to the Internal Revenue Service, if required,
and hereby covenants with the Corporation that it will deliver all
Securities which are "registration-required obligations" in bearer
form (as that term is used in applicable regulations) in accordance
with the requirements set forth in Treasury Regulation
Section 1.165-12(c)(1)(ii) or (iv). State Street and the Corporation
shall agree on a written memorandum setting forth the material terms
for State Street's compliance with the requirements of the Code
referred to in this paragraph. State Street shall rely on such
written memorandum until it is withdrawn or modified in writing by
mutual agreement and shall be under no duty to take independent notice
of any change in the Code and shall be without liability to the
Corporation for loss, claim or expense under this paragraph except for
that which may arise from State Street's failure, through negligence
or bad faith, to follow the terms of the memorandum.
Page 1 of 6
<PAGE>
This Memorandum of Agreement sets forth the memorandum described in Section 4.6
of the Custodian Agreement.
1. Treasury Regulation Section 1.165-12(a) provides that the term
"registration-required obligation" has the meaning given to that term in section
163(f)(2) of the Code, except that section 163(f)(2)(A)(iv) of the Code shall
not apply. Section 163(f)(2)(A)(i) through (iii) of the Code provides that the
term "registration-required obligation" means any obligation (including any
obligation issued by a governmental entity) other than an obligation which (i)
is issued by a natural person, (ii) is not of a type offered to the public, or
(iii) has a maturity (at issue) of not more than one year.
2. Treasury Regulation Section 1.165-12(b)(1) provides that with respect
to any obligation originally issued after September 21, 1984, the term
"registered form" has the meaning given that term in section 103(j)(3) of the
Code and the regulations thereunder. Therefore, an obligation that would
otherwise be in registered form is not considered to be in registered form if it
can be transferred at that time or at any time until its maturity by any means
not described in Treasury Regulation Section 5f.103-1(c). An obligation that,
as of a particular time, is not considered to be in registered form because
it can be transferred by any means not described in Treasury Regulation
Section 5f.103-1(c) is considered to be in registered form at all times during
the period beginning with a later time and ending with the maturity of the
obligation in which the obligation can be transferred only by a means described
in Treasury Regulation Section 5f.103-1(c). Treasury Regulation
Section 5f.103-1(c) provides that an obligation is in registered form if (i) the
obligation is registered both as to principal and any stated interest with the
issuer (or its agent) and transfer of the obligation may be effected only by
surrender of the old instrument and either the reissuance by the issuer of the
old instrument to the new holder or the issuance by the issuer of a new
instrument to the new holder, (ii) the right to the principal of, and stated
interest on, the obligation may be transferred only through a book-entry system
maintained by the issuer (or its agent) as described in Treasury Regulation
Section 5f.103-1(c)(2), or (iii) the obligation is registered as to both
principal and any stated interest with the issuer (or its agent) and may be
transferred through both of the methods described in (i) and (ii) above.
Treasury Regulation Section 5f.103-1(c)(2) provides that an obligation shall be
considered transferable through a book-entry system if the ownership of an
interest in the obligation is required to be reflected in a book-entry, whether
or not physical securities are issued; a book-entry is a record of ownership
that identifies the owner of an interest in the obligation.
3. Treasury Regulation Section 1.165-12(b)(2) provides that with respect
to any obligation originally issued after December 31, 1982 and on or before
September 21, 1984 (or an obligation originally issued after September 21, 1984
pursuant to the exercise of a warrant or the conversion of a convertible
obligation, which warrant or obligation (including conversion privilege) was
issued after December 31, 1982 and on or before September 21, 1984), that
obligation will be considered in registered form if it satisfies either the
provisions of Treasury Regulation Section 5f.103-1 (set forth in part in
paragraph 2 above) or the proposed regulations provided in Treasury Regulation
Section 1.163-5(c) published in the Federal Register on September 2, 1983 (48 FR
39953).
Page 2 of 6
<PAGE>
4. Treasury Regulation Section 1.165-12(c) sets forth the conditions under
which the holder of a registration-required obligation will not be subject to
certain tax sanctions notwithstanding the fact that the obligation is not in
registered form. Treasury Regulation Section 1.165-12(c)(3) provides that the
holder of a registration-required obligation that is not in registered form will
not be subject to such tax sanctions if the holder purchases and holds the
registration-required obligation in bearer form through a financial institution
with which the holder maintains a customer, custodial or nominee relationship
and such institution agrees to satisfy, and does in fact satisfy, the following
conditions:
(i) The financial institution makes a return of information to
the Internal Revenue Service with respect to any interest payments
received. The financial institution must report original issue
discount includable in the holder's gross income for the taxable year
on any obligation so held, but only if the obligation appears in an
Internal Revenue Service publication of obligations issued at an
original issue discount and only in an amount determined in accordance
with information contained in that publication. An information return
for any interest payment shall be made on a Form 1099 for the calendar
year. It shall indicate the aggregate amount of the payment received,
the name, address and taxpayer identification number of the holder,
and such other information as is required by the form.
(ii) The financial institution makes a return of information on
Form 1099B with respect to any disposition by the holder of such
obligation. The return shall show the name, address, and taxpayer
identification number of the holder of the obligation, the Committee
on Uniform Security Information Procedures (CUSIP), gross proceeds,
sale date, and such other information as may be required by the form.
(iii) In the case of a bearer obligation offered for resale
or resold in the United States, the financial institution may resell
the obligation only to another financial institution for its own
account or for the account of an exempt organization.
(iv) The financial institution covenants with the holder that the
financial institution will deliver the obligation in bearer form in
accordance with the requirements set forth in Treasury Regulation
Section 1.165-12(c)(1)(ii) and (iv).
(v) The financial institution delivers the obligation in bearer
form in accordance with Treasury Regulation Section 1.165-12(c)(1)(ii)
and (iv) as if the financial institution delivering the obligation
were the holder referred to in such regulation.
5. Treasury Regulation Section 1.165-12(c)(1)(ii) provides that the holder
must offer to sell, sell and deliver the obligation in bearer form only outside
of the United States except that a holder that is a registered broker-dealer
(registered under Federal or State law or exempted from registration by the
provisions of such law because it is a bank) that holds the obligation for sale
to customers in the ordinary course of its trade or business may offer to sell
and sell the obligation in bearer form inside the United States to a financial
institution for its own account or for the account of another financial
institution or exempt organization as defined in section 501(c)(3) of the Code
if the transaction consists of the purchase of a block of obligations the total
denominations of which are at least $1,000,000.
Page 3 of 6
<PAGE>
6. Treasury Regulation Section 1.165-12(c)(1)(iv) provides that the holder
may deliver an obligation in bearer form that is offered or sold inside the
United States only if the holder delivers it to a financial institution that
states that it is a financial institution as defined in Treasury Regulation
Section 1.165-12(c)(1)(v) that is purchasing for its own account or for the
account of another financial institution or exempt organization, that will
comply with the requirements of section 165(j)(3)(A), (B), or (C) of the Code
and the regulations thereunder and the holder has no actual knowledge that the
statement is false. The statement must contain the name and address of the
person entitled to delivery and must be signed by such person under penalties of
perjury. A form of such statement is attached hereto as Exhibit A. The holder
may deliver an obligation in bearer form that is offered and sold outside the
United States to a financial institution if it delivers to such person a
confirmation stating that any United States taxpayer who holds this obligation
in bearer form and who is not exempt under section 165(j)(3)(A), (B), or (C) of
the Code and the regulations thereunder will, for purposes of the United States
income tax, be denied a deduction for any loss incurred with respect to the
obligation and will be denied capital gain treatment with respect to the
obligation. The holder may deliver a registration-required obligation in bearer
form that is offered and sold outside the United States to a person other than a
financial institution only if the holder has documentary evidence as described
in Treasury Regulation Section 35a.9999-4T, A-5(iii) that the person is not a
United States person. For this purpose, "deliver" includes the transfer of an
obligation evidenced by a book-entry including a book-entry notation by a
clearing organization evidencing transfer of the obligation from one member of
the organization to another member, but does not include a transfer of an
obligation to the issuer or its agent for cancellation or extinguishment. If a
holder that is a member of a clearing organization (as defined in Treasury
Regulation Section 1.163-5(c)(2)(i)(B)(4)) delivers an obligation to another
member of the same or another clearing organization by transfer of the
obligation between the clearing organization accounts of such members, the
selling member shall receive the statement from the purchasing member (in the
case of obligations offered or sold inside the United States) or send the
confirmation to the purchasing member (in the case of obligations offered or
sold outside the United States).
7. Treasury Regulation Section 1.165-12(c)(1)(v) defines the term
"financial institution" to mean a person which itself is, or more than 50% of
the total combined voting power of all classes of whose stock entitled to vote
is owned by a person which is, (A) engaged in the conduct of a banking,
financing, or similar business within the meaning of section 954(c)(3)(B) of the
Code as in effect before the Tax Reform Act of 1986, and the regulations
thereunder; (B) engaged in business as a broker or dealer in securities; (C) an
insurance company; (D) a person that provides pensions or other similar benefits
to retired employees; (E) primarily engaged in the business of rendering
investment advice; (F) a regulated investment company or other mutual fund; or
(G) a finance corporation a substantial part of the business of which consists
of making loans (including the acquisition of obligations under a lease which is
entered into primarily as a financing transaction), acquiring accounts
receivable, notes or installment obligations arising out of the sale of tangible
personal property or the performance of services, or servicing debt obligations.
8. Treasury Regulation Section 1.163-5(c)(2)(i)(B)(4) defines a clearing
organization as an entity which is in the business of holding obligations for
member organizations and transferring obligations among such members by credit
or debit to the account of a member without the necessity of physical delivery
of the obligation.
Page 4 of 6
<PAGE>
9. With respect to any registration-required obligation (as defined in
paragraph 1 above) which is not in registered form (as defined in paragraph 2 or
3 above), which is held by State Street as custodian under the Custodian
Agreement, State Street shall:
(i) make the return of information described in paragraph 4(i)
above;
(ii) make the return of information described in paragraph 4(ii)
above; and
(iii) in connection with the offer for resale, resale, or
delivery of the obligation, comply with the requirements set forth in
paragraph 4(iii), (iv) and (v) and paragraph 5 or 6 above.
This Memorandum of Agreement may be executed in any number of counterparts,
each of which shall be deemed an original and all of which together shall be
deemed one and the same document.
Page 5 of 6
<PAGE>
IN WITNESS WHEREOF, the Corporation and State Street have executed this
Memorandum of Agreement.
THE AMERICAN FRANKLIN LIFE INSURANCE
COMPANY
By:
----------------------------------------
James L. Gleaves, Authorized Person
By:
----------------------------------------
Jamileh Soufan, Authorized Person
STATE STREET BANK AND TRUST COMPANY
ATTEST:
By: By:
---------------------- --------------------------------------
Title:
--------------------------------------
Page 6 of 6
<PAGE>
Exhibit A
, 19
--------------------- --
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Attention:
--------------------
Re: Purchase of $ face amount of obligations issued by
----------
------------------------------------------------------------
Gentlemen:
In connection with our purchase of the above-referenced obligations, the
undersigned hereby certifies under penalties of perjury that:
(i) the undersigned is a financial institution as defined in
section 1.165-12(c)(1)(v) of the United States Treasury
regulations,
(ii) the undersigned is purchasing the obligations for its own
account or for the account of another financial institution or
exempt organization (within the meaning of section
1.165-12(c)(1)(iv) of the regulations), and
(iii) the undersigned will comply with the requirements of section
165(j)(3)(A), (B), or (C) of the United States Internal Revenue
Code of 1986, as amended, and the regulations thereunder.
Very truly yours,
----------------------------------------
(Name of Financial Institution)
----------------------------------------
(Address)
----------------------------------------
(City, State and Zip Code)
By:
-----------------------------------
(Signature of Responsible
Officer)
-----------------------------------
(Title)
<PAGE>
Exhibit 13(a)
LIST OF CONSENTS PURSUANT TO RULE 483(c)
Consent of Ernst & Young LLP, independent auditors, appears as Exhibit 13(b)
hereto.
Consent of Coopers & Lybrand L.L.P., independent accountants, appears as
Exhibit 13(c) hereto.
Consent of Messrs. Chadbourne & Parke LLP appears as Exhibit 13(d) hereto.
Consent of Stephen P. Horvat, Jr., Esq., Senior Vice President and General
Counsel of The Franklin Life Insurance Company, appears as Exhibit 13(e)
hereto.
<PAGE>
Exhibit 13(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Per-Unit
Income and Changes in Accumulation Unit Value" and "Experts" and to the use
of our report dated February 2, 1996, with respect to the financial
statements and table of per-unit income and changes in accumulation unit
value of Franklin Life Money Market Variable Annuity Fund C for the year
ended December 31, 1995, and our report dated February 12, 1996, with respect
to the consolidated financial statements of The Franklin Life Insurance
Company and subsidiaries as of December 31, 1995 and for the eleven months
ended December 31, 1995 and one month ended January 31, 1995, in this
Post-Effective Amendment to the Registration Statement on Form N-3 (No.
2-74459) under the Securities Act of 1933 and Registration Statement (No.
811-3289) under the Investment Company Act of 1940 and related Prospectus and
Statement of Additional Information of Franklin Life Money Market Variable
Annuity Fund C.
/s/ Ernst & Young LLP
-------------------------
ERNST & YOUNG LLP
Chicago, Illinois
April 29, 1996
<PAGE>
Exhibit 13(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form N-3
(File No. 2-74459) and related Prospectus and Statement of Additional
Information of Franklin Life Money Market Variable Annuity Fund C of:
(1) Our report dated February 1, 1995, accompanying the statement of
changes in contract owner's equity ofFranklin Life Money Market Variable
Annuity Fund C for the year ended December 31, 1994 and the table of
per-unit income and changes in accumulation unit value for each of the
four years in the period then ended; and
(2) Our report dated February 1, 1995, accompanying the consolidated
financial statements of The Franklin Life Insurance Company and
Subsidiaries as of December 31, 1994, and for the years ended December
31, 1994 and 1993.
We also consent to the references to our firm under the captions "Per
Unit Income and Changes in Accumulation Unit Value" and "Experts".
/s/ Coopers & Lybrand L.L.P.
----------------------------------
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 29, 1996
<PAGE>
Exhibit 13(d)
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Legal
Opinions'' in the Statement of Additional Information constituting a part of
this Post-Effective Amendment No. 21 to the Registration Statement under the
Securities Act of 1933 and Amendment No. 19 to the Registration Statement
under the Investment Company Act of 1940.
/s/ Chadbourne & Parke LLP
------------------------------
CHADBOURNE & PARKE LLP
New York, New York
April 18, 1996
<PAGE>
Exhibit 13(e)
CONSENT OF COUNSEL
I hereby consent to the use of my name under the caption "Legal
Opinions" in the Statement of Additional Information constituting a part of
this Post-Effective Amendment No. 21 to the Registration Statement under the
Securities Act of 1933 and Amendment No. 19 to the Registration Statement
under the Investment Company Act of 1940 and to the incorporation herein by
reference of my opinion dated April 2, 1986 filed as part of Post-Effective
Amendment No. 8 to the Registration Statement under the Securities Act of
1933 (File No. 2-74459) and Amendment No. 7 to the Registration Statement
under the Investment Company Act of 1940 (File No. 811-3289) on Form N-1,
filed on April 29, 1986.
/s/ Stephen P. Horvat, Jr.
--------------------------------
STEPHEN P. HORVAT, JR.
Senior Vice President and General Counsel
The Franklin Life Insurance Company
Springfield, Illinois
April 18, 1996
<PAGE>
Exhibit 16
COMPUTATION OF PERFORMANCE DATA
SET FORTH UNDER "YIELD INFORMATION"
IN THE PROSPECTUS (Unaudited)
<TABLE>
<C> <S>
Annualized Yield Computation
December 29, 1995 Unit Value (A) 22.02979638
less December 22, 1995 Unit Value (B) 22.01289355
.01690283
Base Period Return = (A minus B) .01690283
Divided by December 22, 1995 Unit Value DIVIDED BY 22.01289355
= .00076786
Annualized Yield = (Base Period Return)
x 365/7 (.00076786) x 365/7
= 4.00%
Effective Yield Computation
December 29, 1995 Unit Value (A) 22.02979638
less December 22, 1995 Unit Value (B) 22.01289355
.01690283
Base Period Return = (A minus B) .01690283
Divided by December 22, 1995 Unit Value DIVIDED BY 22.01289355
= .00076786
Effective Yield = (1 + Base Period Return) (365/7) - 1 (1 + .00076786)(365/7) - 1
4.08%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE YEAR ENDING 12-31-95 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 2,228,158
<INVESTMENTS-AT-VALUE> 2,228,158
<RECEIVABLES> 8,116
<ASSETS-OTHER> 71,869
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 2,308,143
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,922
<TOTAL-LIABILITIES> 2,922
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 2,305,221
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 142,957
<OTHER-INCOME> 0
<EXPENSES-NET> 36,687
<NET-INVESTMENT-INCOME> 106,270
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 106,270
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,801
<NUMBER-OF-SHARES-REDEEMED> 29,757
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
