<PAGE>
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. 24
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 22
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: (800) 528-2011
ROSS D. FRIEND, ESQ.
Senior Vice President, Assistant
Secretary and General Counsel
THE FRANKLIN LIFE INSURANCE COMPANY
#1 Franklin Square
Springfield, Illinois 62713
(Name and Address of Agent for Service)
Copy to:
STEPHEN E. ROTH, ESQ.
SUTHERLAND, ASBILL & BRENNAN LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
Title of Securities Being Registered: individual immediate and deferred variable
annuity contracts.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on April 30, 1998 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (i)
/ / on April 30, 1998 pursuant to paragraph (a) (i)
/ / 75 days after filing pursuant to paragraph (a) (ii)
/ / on April 30, 1998 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.
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
Post-Effective Amendment No. 24
Cross Reference Sheet Required by Rule 495(a)
<TABLE>
<CAPTION>
Registration Item Location in Prospectus ("P") or Statement
of Additional Information ("SAI")
<S> <C>
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 UnitValues (P);
Financial Statements; Experts
(SAI)
</TABLE>
<PAGE>
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, 1998 TO PROSPECTUS
OF FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
DATED APRIL 30, 1998
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.
<PAGE>
FRANKLIN LIFE MONEY MARKET
VARIABLE ANNUITY FUND C
PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS
#1 Franklin Square
Springfield, Illinois 62713
Telephone (800) 528-2011
THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED 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'' BELOW 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 FUND NO LONGER OFFERS NEW CONTRACTS.
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, 1998, 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 FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING
THE TELEPHONE NUMBER (EXTENSION 2591) 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 41 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, 1998.
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
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 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
Required Distributions. . . . . . . . . . . . . . . . . . . . . . . . 35
Aggregation of Contracts. . . . . . . . . . . . . . . . . . . . . . . 35
Future Legislation. . . . . . . . . . . . . . . . . . . . . . . . . . 36
Income Tax Withholding. . . . . . . . . . . . . . . . . . . . . . . . 36
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . . . . 38
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Year 2000 Transition . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Other Variable Annuity Contracts; Effect of Non-Qualification. . . . . . . 40
Yield Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
Table of Contents of Statement of Additional Information . . . . . . . . . 41
Appendix. . .. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
</TABLE>
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
<PAGE>
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 after the
first.
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
<PAGE>
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), 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
<PAGE>
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))
<TABLE>
<CAPTION>
Contract Total Partial
Year Redemption Redemption
---- ---------- ----------
<S> <C> <C> <C>
Single Stipulated Payment 1 6.00% 6.00%
Contract 2 6.00% 6.00%
3 4.00% 4.00%
4 2.00% 4.00%
5 and 0.00% 4.00%
thereafter
Periodic Stipulated Payment 1 8.00% 8.00%
Contract 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 0.00% 4.00%
thereafter
</TABLE>
Administration Fee (as a charge against purchase
payments)
<TABLE>
<S> <C>
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 1.45%
-----
</TABLE>
Example
<TABLE>
<S> <C> <C> <C> <C>
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:
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
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
</TABLE>
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," below. For a more detailed
description of such fees and expenses, see "Deductions and Charges under the
Contracts," 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
<PAGE>
- --------------------------------------------------------------------------------
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," 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," and
"The Contracts," 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," 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," 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 Constraints," 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," and "Distribution of
the Contracts," 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
<PAGE>
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,"
"Redemption," and "Transfers to Other Contracts," 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," "Administration Deductions,"
"Contingent Deferred Sales Charge," and "Premium Taxes," 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," and "Investment Management
Service Charge," 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 periodic Stipulated Payment is $30 ($360 on an annual basis). See "Purchase
Limits," 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," 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," 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," "Contingent
Deferred Sales Charge," "Transfers to and from Other Contracts," "Settlement
Options," and "Federal Income Tax Status," 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 less any surrender charge 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," 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 each of the three years in the
period ended December 31, 1997 has been audited by Ernst & Young LLP,
independent auditors. The financial information in this table for each of the
two years in the period ended December 31, 1994 was audited by Coopers & Lybrand
L.L.P., independent accountants. 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
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment income $ 1.204 $ 1.162 $ 1.203 $ .846 $ .617 $ .746 $ 1.140 $ 1.501 $ 1.542 $ 1.186
Expenses .337 .326 .309 .303 .294 .286 .278 .265 .244 .230
- --------------------------------------------------------------------------------------------------------------------------------
Net investment income .867 .836 .894 .543 .323 .460 .862 1.236 1.298 .956
Net increase in accumulation
unit value .867 .836 .894 .543 .323 .460 .862 1.236 1.298 .956
Acumulation unit value:
Beginning of year 22.866 22.030 21.136 20.593 20.270 19.819 18.948 17.712 16.414 15.458
End of year $23.733 $22.866 $22.030 $21.136 $20.593 $20.270 $19.810 $18.948 $17.712 $16.414
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
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% 1.44%
Ratio of net investment
income to average
net assets 3.73% 3.71% 4.17% 2.58% 1.58% 2.32% 4.46% 6.71% 7.65% 5.98%
Number of accumulation
units outstanding
at end of year 80,944 87,386 104,641 132,646 159,929 210,310 247,150 270,271 307,850 362,718
- --------------------------------------------------------------------------------------------------------------------------------
</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," 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 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.
American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding
shares of common stock of the Franklin. The address of AGC Life is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. 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," below. The Fund meets the definition of a "Separate Account"
under the federal securities laws.
Under the provisions of the Illinois Insurance Code: (i) 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; and (ii) 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," below.
DEDUCTIONS AND CHARGES UNDER THE CONTRACTS
The Franklin deducts the charges described below to cover costs and expenses,
services provided, and risks assumed under the Contracts. The amount of a
charge may not necessarily correspond to the costs associated with providing the
services or benefits indicated by the designation of the charge or associated
with the particular Contract. For example, the contingent deferred sales charge
may not fully cover all of the sales and distribution expenses actually incurred
by The Franklin, and proceeds from other charges, including the mortality and
expense risk charge, may be used in part to cover such expenses.
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," 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.
11
<PAGE>
The administration deductions are designed to cover the actual expenses of
administering the Contracts and the Fund. The aggregate dollar amounts of the
administration deductions for the fiscal years ended December 31, 1995, 1996 and
1997 were $1,060, $820 and $1,512, respectively.
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%
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," 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. If the money collected from this charge is not needed, it will be
to The Franklin's gain and may be used to cover contract distribution expenses.
During 1995, 1996 and 1997, The Franklin earned and was paid $27,136, $23,215
and $20,938, respectively, by reason of these charges. Such charges during 1997
were equal to 1.065% 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 renewal to January 31, 1999 by the Board of Managers of
the Fund at its meeting on January 19, 1998. The Investment Management Agreement
is described under "Investment Advisory and Other Services" in the Statement of
Additional Information.
During 1995, 1996 and 1997, The Franklin earned and was paid $9,551, $8,171
and $7,370, 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
12
<PAGE>
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.
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:
<TABLE>
<CAPTION>
Contract Percentage Charge
Year Total Redemption Partial Redemption
- --------------------------------------------------------------------------------
<S> <C> <C>
1 8% 8%
2 8% 8%
3 8% 8%
4 6% 6%
5 4% 4%
6 2% 4%
7 and thereafter 0% 4%
</TABLE>
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:
<TABLE>
<CAPTION>
Contract Percentage Charge
Year Total Redemption Partial Redemption
- --------------------------------------------------------------------------------
<S> <C> <C>
1 6% 6%
2 6% 6%
3 4% 4%
4 2% 4%
5 and thereafter 0% 4%
</TABLE>
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 $108 during 1995. There were no deferred
sales charges during 1996 and 1997. Franklin Financial Services Corportion
paid no allowances to unaffiliated dealers in connection with the sale of the
Contracts during 1995, 1996 and 1997.
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
13
<PAGE>
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.
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 (or any other contract) is advised to consult a qualified
tax advisor prior to the time of redemption.
G. MISCELLANEOUS
The Fund's total expenses for 1997 were $28,308, or 1.44% of average net
assets during 1997.
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. In the case of Deferred Variable Annuity Contracts, the annuity
rate table is set forth in the Contract (but see below). In the case of
Immediate Variable Annuities, the table is that used by The Franklin on the
date of issue of the Contract. 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," 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
Stipulated Payments can be paid on an annual, semi-annual or quarterly
schedule or, with The Franklin's consent, monthly. The first Stipulated Payment
is due as of the date of issue and each subsequent Stipulated Payment is due on
the first day following the interval covered by the next preceding Stipulated
Payment and on the same date each month as the date of issue. The Contract
Owner may increase the amount of a Stipulated Payment on an annualized basis
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
annualized basis equal to ten times the amount of the first Stipulated Payment
on an annualized 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. Unless otherwise agreed to by The Franklin, the mode of Stipulated
Payment may be changed only on a Contract Anniversary.
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," 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," 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," 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 ($360 on an annual
basis). 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 $30,000. 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 less any surrender
charge 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," 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,"
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 at the end of the Valuation Period during 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 dollar 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.
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<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," 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," 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," 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," 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,"
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," below. The
Code imposes certain requirements concerning payment of death benefits payable
before the initial Annuity Payment Date in the case of Qualified Contracts.
Under those Contracts, death benefits will be paid as required by the Code and
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. You should consult your legal counsel and tax advisor regarding these
requirements.
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," 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," 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," 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," 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," below, or redeem the Contract as described under
"Redemption," 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," below, and "Deferred Variable Annuity
Contracts," 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," above, and
"Payment of Accumulated Value at Time of Death," 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," 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," below, and "Immediate
Variable Annuity Contracts," below.
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<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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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>
<CAPTION>
<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," 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," 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,"
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)," below, and "Assumed Net
Investment Rate," 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.
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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," 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," 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 for the
First, Second, Third and Fourth Options are determined from the Progressive
Annuity Table assuming births in the year 1900 and a net investment rate of
3-1/2% a year. The tables for the Fifth Option are based on a net investment
rate of 3% for the General Account and 3-1/2% for the Separate Account. 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," 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," 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," 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," 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,
26
<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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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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<PAGE>
(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,"
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, 1997, the Fund's total assets were $1,921,249 (compared to total
assets of $1,968,663 as of June 30, 1997 and total assets of $2,001,016 as of
December 31, 1996), and the maximum amount that the Fund was permitted to invest
in the commercial paper of any one issuer was approximately $96,062. Due to
market conditions, it is more difficult to purchase an issue of commercial paper
in an amount less than $100,000. 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. However, if changes in the federal tax laws or interpretations thereof
result in The Franklin being taxed on income or gains attributable to the Fund,
then The Franklin may impose a charge against the Fund (with respect to some or
all Contracts) in order to set aside provisions to pay such taxes.
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. These retirement plans may permit the purchase
of the Contracts to accumulate retirement savings under the plans. Adverse tax
consequences to the plan, to the participant, or both may result if this
Contract is assigned or transferred to any individual as a means to provide
benefit payments.
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. However, these payments may be subject to FICA
(Social Security) taxes. 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.
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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.
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 (other
than rollovers), 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).
This deduction is phased out at certain income levels for individuals who are
active participants in employer-related retirement plans. These income levels
vary depending on an individual's marital and tax filing status and are
scheduled to gradually increase in the future. 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.
Individual Retirement Annuities are subject to limitations on the time when
distributions must commence. In addition, the 10% penalty tax on early
withdrawals described under "Qualified Pension, Profit-Sharing and Annuity
Plans," 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 will be includible in the Contract
Owner's gross income for such year.
The sale of a Contract for use with an Individual Retirement Annuity may be
subject to special disclosure requirements of the Internal Revenue Service.
Purchasers of a Contract for use with Individual Retirement Annuities will be
provided with supplemental information required by the Internal Revenue Service
or other appropriate agency. Such purchasers will have the right to revoke
their purchase within 7 days of the earlier of the establishment of the
Individual Retirement Annuity or their purchase. A Qualified Contract issued in
connection with an Individual Retirement Annuity will be amended as necessary to
conform to the requirements of the Code. Purchasers should seek competent
advice as to the suitability of the Contract for use with Individual Retirement
Annuities.
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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
subject to the limitation in Section 408(j). 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, subject to the phaseout discussed
above, if the Simplified Employee Pension meets the qualifications for an
Individual Retirement Annuity.
In general, except as stated in this section, the rules discussed in "Section
408(b) Individual Retirement Annuities," immediately above, 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 generally 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, 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 Code Section 817(h) and
the Treasury regulations thereunder, 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.
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In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The Internal Revenue Service has stated
in published rulings that a variable contract owner will be considered the owner
of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning diversification, that those regulations
"do not provide guidance concerning the circumstances in which investor control
for the investments of a segregated asset account may cause the investor [i.e.,
the Owner], rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular Sub-Accounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no
guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from those described by the Internal Revenue Service in rulings
in which it was determined that contract owners were not owners of separate
account assets. For example, a Contract Owner has additional flexibility in
allocating premium payments and account values. These differences could result
in a Contract Owner being treated as the owner of a pro rata portion of the
assets of the Fund. In addition, The Franklin does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Franklin therefore reserves the
right to modify the Contract as necessary to attempt to prevent a Contract Owner
from being considered the owner of a pro rata share of the assets of the Fund.
REQUIRED DISTRIBUTIONS
In order to be treated as an annuity contract for federal income tax
purposes, section 72(s) of the Code requires Non-Qualified Contracts to provide
that (a) if any Contract Owner dies on or after the annuity date but prior to
the time the entire interest in the Contract has been distributed, the remaining
portion of such interest will be distributed at least as rapidly as under the
method of distribution being used as of the date of such owner's death; and (b)
if any Contract Owner dies prior to the annuity date, the entire interest in the
Contract will be distributed within five years after the date of such owner's
death. These requirements will be considered satisfied as to any portion of an
owner's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of the
Contract Owner's death. The "designated beneficiary" refers to a natural person
designated by the owner as a Beneficiary and to whom ownership of the Contract
passes by reason of death. However, if the "designated beneficiary" is the
surviving spouse of the deceased Contract Owner, the Contract may be continued
with the surviving spouse as the new Contract Owner.
The Non-Qualified Contracts contain provisions which are intended to comply
with the requirements of section 72(s) of the Code, although no regulations
interpreting these requirements have yet been issued. The Franklin intends to
review such provisions and modify them if necessary to assure that they comply
with the requirements of Code section 72(s) when clarified by regulation or
otherwise. Other rules may apply to Qualified Contracts.
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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FUTURE LEGISLATION
Although the likelihood of legislative change is uncertain, there is always
the possibility that the tax treatment of the Contracts could change by
legislation or other means. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of the Contracts. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax adviser
should be consulted with respect to legislative developments and their effect on
the Contract.
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," above, and "The Contracts: Non-Qualified Plans," 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.
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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 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 initial 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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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 ("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
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.
The Fund no longer offers new Contracts. Commissions are paid to registered
representatives of Franklin Financial with respect to Stipulated Payments
received by The Franklin under the Contracts to a maximum of 2% of such
Stipulated Payments.
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," 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.
38
<PAGE>
FUNDAMENTAL CHANGES
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.
The Board of Managers of the Fund, and the respective Board of Managers of
each of Franklin Life Variable Annuity Fund A ("Fund A") and Franklin Life
Variable Annuity Fund B ("Fund B"), have approved resolutions whereby Contract
Owners will be asked during 1998 to approve or to disapprove an Agreement and
Plan of Reorganization ("the Agreement") and related transactions (together, the
Agreement and related transactions are the "Reorganization") whereby: (i) the
Fund will be restructured into a single unit investment trust consisting of
three subaccounts; (ii) the assets of each of the Fund, Fund A and Fund B will
be liquidated and the proceeds transferred to one of the three subaccounts in
the restructured Fund (so that the interests of Contract Owners and of Fund A
and Fund B contract owners will continue as interests in the restructured Fund);
and (iii) each subaccount will invest exclusively in shares of a specified
mutual fund portfolio.
Contract Owners will be provided with a proxy statement describing the
Reorganization in detail. If the Reorganization is approved, then immediately
following the consummation of the Reorganization, each Contract Owner will have
an interest in a number of units in a subaccount of the restructured Fund having
a value equal to the value of the Contract Owner's interest in a Fund
immediately prior to the Reorganization.
YEAR 2000 TRANSITION
Like all financial services providers, The Franklin utilizes systems that may
be affected by Year 2000 transition issues and it relies on service providers,
including banks, custodians, and investment managers that also may be affected.
The Franklin and its affiliates have developed, and are in the process of
implementing, a Year 2000 transition plan, and are confirming that their service
providers are also so engaged. The resources that are being devoted to this
effort are substantial. It is difficult to predict with precision whether the
amount of resources ultimately devoted, or the outcome of these efforts, will
have any negative impact on The Franklin. However, as of the date of this
prospectus, it is not anticipated that Contract Owners will experience negative
effects on their investment, or on the services provided in connection
therewith, as a result of Year 2000 transition implementation. The Franklin
currently anticipates that its systems will be Year 2000 compliant on or about
December 31, 1998, but there can be no assurance that The Franklin will be
successful, or that interaction with other service providers will not impair The
Franklin's services at that time.
LEGAL PROCEEDINGS
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in substantial
settlements. The Franklin is a defendant in certain purported class action
lawsuits. These claims are being defended vigorously by The Franklin. Given
the uncertain nature of litigation and the early stages of this litigation,
the outcome of these actions cannot be predicted at this time. The Franklin
nevertheless believes that the ultimate outcome of all such pending
litigation should not have a material adverse effect on the Fund or on The
Franklin's financial position; however, it is possible that settlements or
adverse determinations in one or more of these actions or other future
proceedings could have a material adverse effect on The Franklin's results of
operations for a given period. No provision has been made in the
consolidated financial statements related to this pending litigation because
the amount of loss, if any, from these actions cannot be reasonably estimated
at this time.
39
<PAGE>
The Franklin is a party to various other lawsuits and proceedings arising
in the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, The Franklin believes that the total amounts
that will ultimately be paid, if any, arising from these lawsuits and
proceedings will not have a material adverse effect on the Fund or on The
Franklin's results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred by
plaintiffs in jurisdictions like Alabama continues to increase and creates the
potential for an unpredictable judgment in any given suit.
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, unrealized appreciation
and depreciation on investments, and income other than investment income, 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 31, 1997 was 3.93%. 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 substracting one from the result. The effective
yield for the seven calendar day period ended December 31, 1997 was 4.00%. 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.
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,
40
<PAGE>
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," 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," above.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
----------------------
<S> <C>
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 Matters . . . . . . . . . . . . . . . . . . . . . 10
Experts . . . . . . . . . . . . . . . . . . . . . . . . 10
Index to Financial Statements . . . . . . . . . . . . . F-1
</TABLE>
41
<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.
42
<PAGE>
PROSPECTUS
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:
The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: Box 1018
(800) 528-2011, extension 2591
Please send me the Statement of Additional Information dated April 30, 1998 for
Franklin Life Money Market Variable Annuity Fund C.
- --------------------------------------------------------------------------------
(Name)
- --------------------------------------------------------------------------------
(Street)
- --------------------------------------------------------------------------------
(City) (State) (Zip Code)
- --------------------------------------------------------------------------------
<PAGE>
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
ISSUED BY
FRANKLIN LIFE MONEY MARKET THE FRANKLIN LIFE INSURANCE COMPANY
VARIABLE ANNUITY #1 FRANKLIN SQUARE
FUND C SPRINGFIELD, ILLINOIS 62713
TELEPHONE (800) 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, 1998 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 treatment under the
Internal Revenue Code. A copy of the Prospectus may be obtained by writing to
The Franklin Life Insurance Company at the address set forth above (Attention:
Box 1018) or by calling (800) 528-2011, extension 2591.
- --------------------------------------------------------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ
AND RETAINED FOR FUTURE REFERENCE.
- --------------------------------------------------------------------------------
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1998.
<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 Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . 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, 1998 (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.
American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding
shares of common stock of The Franklin. The address of AGC Life is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. 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 March 5, 1998.
INVESTMENT OBJECTIVES
The investment objectives and policies 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, other than those issued
for use as Individual Retirement Annuities, the Contract Owner may not defer the
initial Annuity Payment Date beyond April 1 of the calendar year following the
later of the calendar year in which the Variable Annuitant (i) attains age
70-1/2, or (ii) retires, and must be made in a specified form or manner. In
addition, if the plan participant is a "5 percent owner" (as defined in the
Code), or if the Contract is issued for use as an Individual Retirement Annuity,
distributions generally must begin no later than the date described in (i). 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," below.)
<TABLE>
<CAPTION>
<S><C>
NAME AND ADDRESS PRINCIPAL OCCUPATIONS POSITIONS HELD
DURING PAST 5 YEARS WITH THE FUND
ROBERT G. SPENCER* Officer of The Franklin; currently, Vice Chairman and Member,
#1 Franklin Square President of The Franklin; prior to 1996, Board of Managers
Springfield, Illinois 62713 also Treasurer of The Franklin and
Treasurer and Assistant Secretary of
Franklin Financial Services Corporation.
ELIZABETH E. ARTHUR* Officer of The Franklin; currently, Secretary, Board of Managers
#1 Franklin Square Director, Assistant Secretary and
Springfield, Illinois 62713 Associate General Counsel of The Franklin.
M s. Arthur also serves as Assistant
Secretary of Franklin Financial Services
Corporation.
DR. ROBERT C. SPENCER Visiting Professor of Government, Montana Member, Board of Managers
2303 South 3rd Avenue State University, since 1992; Professor of
Bozeman, Montana 59715 Government and Public Affairs, Sangamon
State University, prior thereto.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
<S><C>
NAME AND ADDRESS PRINCIPAL OCCUPATIONS POSITIONS HELD
DURING PAST 5 YEARS WITH THE FUND
JAMES W. VOTH Chairman, Resource International Corp., Member, Board of Managers
50738 Meadow Green Court South Bend, Indiana (marketing,
Granger, Indiana 46530 manufacturing and engineering service to
industry); prior to 1993, also President
of Resource International Corp.
CLIFFORD L. GREENWALT Director, President and Chief Executive Member, Board of Managers
607 East Adams Street Officer, CIPSCO Incorporated, since
Springfield, Illinois 62739 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.
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 for the year ended December 31, 1997.
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 for the year and, thus, the aggregate
direct remuneration of all such members of the Board of Managers was $4,200
during 1997. It is currently anticipated that the annual aggregate remuneration
of such members of the Board of Managers to be paid during 1998 will not exceed
$4,200.
<TABLE>
<CAPTION>
NAME OF PERSON, POSITION AGGREGATE COMPENSATION TOTAL COMPENSATION
RELATING TO FUND RELATING TO FUND AND
FUND COMPLEX PAID TO
EACH MEMBER
<S> <C> <C>
Each member of the Board
of Managers (except Robert $1,400 (1) $4,200 (1)(2)
G. Spencer)
----------------------------
</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 20, 1998, 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 and was renewed
to January 31, 1999 by the Board of Managers of the Fund at its meeting on
January 19, 1998. 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.
Robert G. Spencer and Elizabeth E. Arthur 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," above.
7
<PAGE>
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,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 last renewed by the
Board of Managers on January 19, 1998. 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 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.
Franklin Financial 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 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.
Elizabeth E. Arthur 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 her with Franklin Financial and the Fund as set
forth in the table under "Management," 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 1997 or 1996 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 1997, 1996 and 1995. 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," 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).
SAFEKEEPER OF SECURITIES
Securities of the Fund are held by State Street Bank and Trust Company
("State Street"), which is located at 1776 Heritage Drive, North Quincy,
Massachusetts, under a Custodian Agreement dated April 17, 1995 to which The
Franklin and State Street are parties. 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.
9
<PAGE>
LEGAL MATTERS
Sutherland, Asbill & Brennan LLP of Washington, D.C. has provided advice
on certain matters relating to the federal securities laws.
EXPERTS
The statement of assets and liabilities, including the portfolio of
investments, as of December 31, 1997 and the related statement of operations for
the year then ended and the statements of changes in contract owners' equity for
each of the two years in the period then ended and the table of per-unit income
and changes in accumulation unit value for each of the three years in the period
then ended of the Fund, appearing herein, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein. The consolidated financial statements of The Franklin at
December 31, 1997 and 1996 and for each of the two years in the period ended
December 31, 1997, the eleven months ended December 31, 1995 and the one month
ended January 31, 1995, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein. The
table of per-unit income and changes in accumulation unit value for each of the
two years in the period ended December 31, 1994 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. 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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, 1997 F-4
Statement of Operations for the year ended
December 31, 1997 F-4
Statements of Changes in Contract Owners' Equity for the
two years ended December 31, 1997 and 1996 F-4
Portfolio of Investments, December 31, 1997 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, 1997 F-7
The Franklin Life Insurance Company and Subsidiaries:*
Report of Independent Auditors F-8
Financial Statements:
Consolidated Statement of Income for the years ended December 31,
1997 and 1996, the eleven months ended December 31, 1995, and the
one month ended January 31, 1995 F-9
Consolidated Balance Sheet, December 31, 1997 and 1996 F-10 - F-11
Consolidated Statement of Shareholder's Equity for the years ended
December 31, 1997 and 1996, the eleven months ended December 31, 1995,
and the one month ended January 31, 1995 F-12
Consolidated Statement of Cash Flows for the years ended
December 31, 1997 and 1996, the eleven months ended December 31,
1995, and the one month ended January 31, 1995 F-13
Notes to Consolidated Financial Statements F-14 - F-38
</TABLE>
*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, 1997, the related statement of operations for
the year then ended, the statements of changes in contract owners' equity for
each of the two years then ended, and the table of per-unit income and changes
in accumulation unit value for each of the three years 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
audits. The table of per-unit income and changes in accumulation unit value for
each of the two years in the period ended December 31, 1994 was audited by other
auditors whose report dated February 1, 1995, expressed an unqualified opinion
on that table.
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 held by the custodian as of December 31,
1997. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the 1997, 1996 and 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, 1997 and the results of its
operations for the year then ended, and the changes in its contract owners'
equity for each of the two years then ended, and per-unit income and changes in
accumulation unit value for each of the three years then ended in conformity
with generally accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 30, 1998
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 table of per-unit income and changes in
accumulation unit value of Franklin Life Money Market Variable Annuity Fund C
for each of the two years in the period ended December 31, 1994. This table of
per-unit income and changes in accumulation unit value is the responsibility of
the Fund's management. Our responsibility is to express an opinion on this
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 table of per-unit income and changes in
accumulation unit value is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the table of per-unit income and changes in accumulation unit value. An audit
also includes assessing the accounting principles used by management as well as
evaluating the overall presentation of the table of per-unit income and changes
in accumulation unit value. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the table of per-unit income and changes in accumulation unit
value referred to above presents fairly, in all material respects, the per-unit
income and changes in accumulation unit value for each of the two years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
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, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Investments-at amortized cost which approximates fair value
Corporate short-term notes $ 933,287
U.S. Government short-term note 917,547
----------
1,850,834
Cash on deposit 60,830
Interest receivable 9,585
----------
Total Assets 1,921,249
Liability-due to The Franklin Life Insurance Company 150
----------
Contract owners' equity
Value of 80,944.385 accumulation units outstanding,
equivalent to $23.73356211 per unit $1,921,099
----------
----------
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Investment Income-Interest $ 101,478
Expenses
Mortality and expense charges $20,938
Investment management services 7,370
-------
Total expenses 28,308
----------
Net investment income $ 73,170
----------
----------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------------
<S> <C> <C>
Net investment income $ 73,170 $ 80,603
Net contract purchase payments 28,598 38,349
Reimbursement for contract guarantees 227 51
Withdrawals (177,568) (425,220)
Administrative expense charges (1,512) (820)
------------------------------
Net decrease in contract owners' equity (77,085) (307,037)
Contract owners' equity at beginning of
year 1,998,184 2,305,221
------------------------------
Contract owners' equity at end of year $1,921,099 $1,998,184
------------------------------
------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
Principal Carrying
Amount Value
------------- ------------
<S> <C>
CORPORATE SHORT-TERM NOTES
(48.58%)
AUTOMOTIVE (14.73%)
$95,000 Ford Motor Credit Corporation
5.70%, due 1/12/98 $94,263
95,000 General Motors Acceptance
Corporation, 5.82%, due 1/20/98 94,247
95,000 Chrysler Financial Corporation
5.83%, due 1/22/98 94,339
------------
282,849
FINANCE COMPANIES - CONSUMER (14.21%)
95,000 Associates Corporation of North America
5.75%, due 2/3/98 94,287
95,000 Household Finance Corporation
5.72%, due 1/29/98 94,336
85,000 Norwest Financial, Inc.
5.55%, due 1/5/98 84,384
------------
273,007
FINANCIAL SAVINGS & SERVICE (4.91%)
95,000 American Express Credit Corporation
5.70%, due 1/21/98 94,338
Principal Carrying
Amount Value
------------- ------------
<S> <C>
MACHINERY - INDUSTRIAL & CONSTRUCTION
(4.91%)
$95,000 John Deere Capital Corporation
5.70%, due 1/27/98 $94,353
OILS & OIL RELATED PRODUCTS (4.91%)
95,000 Chevron USA, Inc.
5.50%, due 2/11/98 94,376
RETAIL (4.91%)
95,000 Sears Roebuck Acceptance
Corporation 5.74%, due
2/19/98 94,364
------------
TOTAL CORPORATE SHORT-TERM
NOTES (COST-$933,287) 933,287
U.S. GOVERNMENT SHORT-TERM NOTE
(47.76%)
925,000 United States Treasury Bill
5.18%, due 1/8/98 (cost-$917,547) 917,547
------------
TOTAL INVESTMENTS (96.34%)
(COST-$1,850,834) 1,850,834
CASH AND RECEIVABLE, LESS LIABILITY (3.66%)
70,265
------------
TOTAL CONTRACT OWNERS' EQUITY (100%) $1,921,099
------------
------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE MONEY MARKET
VARIABLE ANNUITY FUND C CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
F-5
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE
ANNUITY FUND C
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Money Market Variable Annuity Fund C (the 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 amortized 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 YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
-----------------------------------------------------
Units Amount Units Amount
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
beginning of
year 87,386 $1,998,184 104,641 $2,305,221
Purchases 1,238 28,598 1,740 38,349
Net
investment
income - 73,170 - 80,603
Withdrawals (7,651) (177,568) (18,962) (425,220)
Reimbursement
for contract
guarantees - 227 - 51
Administrative
expense charges (29) (1,512) (33) (820)
-----------------------------------------------------
Balance at end
of year 80,944 $1,921,099 87,386 $1,998,184
-----------------------------------------------------
-----------------------------------------------------
</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>
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)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
--------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $1.204 $1.162 $1.203 $.846 $.617
Expenses .337 .326 .309 .303 .294
--------------------------------------------
Net investment income .867 .836 .894 .543 .323
Accumulation unit value:
Beginning of year 22.866 22.030 21.136 20.593 20.270
--------------------------------------------
End of year $23.733 $22.866 $22.030 $21.136 $20.593
--------------------------------------------
--------------------------------------------
Ratio of expenses to average net 1.44% 1.44% 1.44% 1.44% 1.44%
assets
Ratio of net investment income to 3.73% 3.71% 4.17% 2.58% 1.58%
average net assets
Number of accumulation units
outstanding at end of year 80,944 87,386 104,641 132,646 159,929
- --------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
-----------------------------
Board of Directors
and Shareholder
The Franklin Life Insurance Company
We have audited the accompanying consolidated balance sheet of The Franklin
Life Insurance Company (an indirect wholly-owned subsidiary of American
General Corporation) (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholder's equity and cash
flows for the years ended December 31, 1997 and 1996, the eleven months ended
December 31, 1995 and the one month ended January 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Franklin
Life Insurance Company at December 31, 1997 and 1996 and the consolidated
results of its operations and its cash flows for the years ended December 31,
1997 and 1996, the eleven months ended December 31, 1995 and the one month
ended January 31, 1995, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 23, 1998
F-8
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
--------------------------------------------------------------------------
1997 1996 1995 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $ 370.2 $ 418.6 $ 449.6 $ 34.5
Net investment income 518.6 521.5 468.8 41.3
Realized investment gains (losses) 12.8 2.5 7.2 (7.6)
Other 75.8 68.3 55.9 4.1
--------------------------------------------------------------------------
Total revenues 977.4 1,010.9 981.5 72.3
Benefits and expenses
Benefits paid or provided
Death claims and other policy
benefits 250.6 240.6 236.3 21.5
Investment-type contracts 169.4 173.3 168.3 14.0
Dividends to policyholders 86.3 81.9 85.6 7.5
Change in policy reserves 54.6 95.9 148.5 11.0
Increase in participating policy-
holders' interests 4.7 12.0 11.0 1.0
Commissions 106.5 110.2 108.0 7.6
Operating costs and expenses 33.5 35.7 17.3 2.8
Amortization of deferred policy
acquisition costs 11.5 10.7 8.3 5.8
Amortization of cost of insurance
purchased, net of deferrals 45.3 51.1 29.0 0.8
--------------------------------------------------------------------------
Total benefits and expenses 762.4 811.4 812.3 72.0
--------------------------------------------------------------------------
Income before income tax expense 215.0 199.5 169.2 0.3
Income tax expense
Current 74.8 94.7 39.7 4.9
Deferred (benefit) (0.4) (25.3) 21.1 (4.7)
--------------------------------------------------------------------------
Total income tax expense 74.4 69.4 60.8 0.2
--------------------------------------------------------------------------
Net income $ 140.6 $ 130.1 $ 108.4 $ 0.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
ASSETS 1997 1996
--------------------------------
<S> <C> <C>
Investments
Fixed maturity securities (amortized cost:
$5,157.7; $5,152.3) $ 5,615.2 $ 5,476.5
Mortgage loans on real estate 621.6 607.0
Equity securities (cost: $1.1; $2.0) 4.4 5.0
Policy loans 332.7 327.4
Other long-term investments 46.3 47.6
--------------------------------
Total investments 6,620.2 6,463.5
Cash and cash equivalents 39.5 24.6
Accrued investment income 100.3 99.7
Note receivable from parent 116.4 116.4
Preferred stock of affiliates, at cost 8.5 8.5
Receivable from brokers 26.5 17.7
Receivable from agents, less allowance 14.4 18.3
($4.3; $0.4)
Amounts recoverable from reinsurers 41.5 84.0
Deferred policy acquisition costs 111.7 82.0
Cost of insurance purchased 303.9 407.8
Property and equipment, at cost, less
accumulated depreciation ($10.2; $7.2) 23.4 20.6
Other assets 27.4 29.6
Assets held in Separate Accounts 239.6 134.9
--------------------------------
Total assets $ 7,673.3 $ 7,507.6
--------------------------------
--------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (CONTINUED)
(In millions, except share data)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------------------
LIABILITIES 1997 1996
--------------------------------
<S> <C> <C>
Insurance liabilities
Life, annuity and accident and health reserves $ 2,882.8 $ 2,864.7
Policy and contract claims 34.4 38.1
Investment-type contract deposits
and dividend accumulations 2,907.6 2,992.7
Participating policyholders' interests 211.4 209.7
Other 50.7 49.5
Income taxes
Current 2.2 6.4
Deferred 4.5 (19.0)
Intercompany payables 0.5 0.8
Accrued expenses and other liabilities 109.6 116.6
Liabilities related to Separate Accounts 239.6 134.9
--------------------------------
Total liabilities 6,443.3 6,394.4
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 886.1 886.1
Net unrealized gains on securities 150.8 106.6
Retained earnings 151.1 78.5
--------------------------------
Total shareholder's equity 1,230.0 1,113.2
--------------------------------
Total liabilities and shareholder's equity $ 7,673.3 $ 7,507.6
--------------------------------
--------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------------------------------------
1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 42.0 $ 42.0 $ 42.0 $ 42.0
----------------------------------------------------------------------------
Paid-in capital
Balance at beginning of period 886.1 884.3 884.3 803.0
Paid in during the period - 1.8 - -
Adjustment for the acquisition - - - 81.3
----------------------------------------------------------------------------
Balance at end of period 886.1 886.1 884.3 884.3
----------------------------------------------------------------------------
Net unrealized gains (losses)
on securities
Balance at beginning of period 106.6 187.5 - (8.1)
Change during the period 44.2 (80.9) 187.5 1.4
Adjustment for the acquisition - - - 6.7
----------------------------------------------------------------------------
Balance at end of period 150.8 106.6 187.5 -
----------------------------------------------------------------------------
Retained earnings
Balance at beginning of period 78.5 48.4 - 522.7
Net income 140.6 130.1 108.4 0.1
Dividends paid to parent (68.0) (100.0) (60.0) (250.0)
Adjustment for the acquisition - - - (272.8)
----------------------------------------------------------------------------
Balance at end of period 151.1 78.5 48.4 -
----------------------------------------------------------------------------
Total shareholder's equity
at end of period $ 1,230.0 $ 1,113.2 $ 1,162.2 $ 926.3
----------------------------------------------------------------------------
----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
--------------------------------------------------------------------------
1997 1996 1995 1995
--------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 140.6 $ 130.1 $ 108.4 $ 0.1
Reconciling adjustments
Insurance liabilities 33.4 121.5 155.4 19.9
Deferred policy acquisition costs (40.4) (45.5) (59.4) (2.7)
Investment (gains) losses (6.1) (4.7) (11.4) (0.9)
Investment write-downs and reserves (6.7) 2.2 4.2 8.5
Cost of insurance purchased and intangibles 45.3 51.1 29.0 1.0
Interest credited, net of charges on investment
contract deposits 92.5 103.2 153.7 12.0
Purchase of trading securities - - - (1.5)
Proceeds from sale of trading securities - - - 85.5
Other, net (5.4) (107.9) 14.3 (7.1)
--------------------------------------------------------------------------
Net cash provided by operating activities 253.2 250.0 394.2 114.8
--------------------------------------------------------------------------
INVESTING ACTIVITIES
Investment purchases
Available-for-sale (891.8) (5,479.1) (1,055.8) -
Held-to-maturity - - - (0.8)
Other investments (125.2) (122.6) (95.7) (27.2)
Affiliated - - (124.5) -
Investment calls, maturities and sales
Available-for-sale 978.0 5,526.3 832.0 0.2
Held-to-maturity - - - 24.9
Other investments 70.7 65.1 127.1 6.3
Additions to property and equipment (6.7) (4.6) (3.5) (0.5)
--------------------------------------------------------------------------
Net cash provided by (used for)
investing activities 25.0 (14.9) (320.4) 2.9
--------------------------------------------------------------------------
FINANCING ACTIVITIES
Policyholder account deposits 194.5 165.3 357.8 29.2
Policyholder account withdrawals (389.8) (297.1) (366.2) (32.6)
Additional capital contribution - 1.8 - -
Proceeds from intercompany borrowings 230.4 62.0 105.2 -
Repayments of intercompany borrowings (230.4) (62.1) (105.1) -
Dividend payments (68.0) (100.0) (60.0) (250.0)
--------------------------------------------------------------------------
Net cash used for financing activities (263.3) (230.1) (68.3) (253.4)
--------------------------------------------------------------------------
Net increase (decrease) in cash and cash
equivalents 14.9 5.0 5.5 (135.7)
Cash and cash equivalents at beginning of period 24.6 19.6 14.1 149.8
--------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 39.5 $ 24.6 $ 19.6 $ 14.1
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<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 3,200 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, and its subsidiaries, The American Franklin Life Insurance
Company (AMFLIC), Franklin Financial Services Corporation (FFSC) and prior
to December 31, 1995, The Franklin United Life Insurance Company (FULIC).
Franklin was formerly a wholly-owned subsidiary of American Franklin
Company (AFC), and is now an indirect, wholly-owned subsidiary of American
General Corporation (AGC) following the dissolution of AFC in June of 1996.
All material intercompany transactions have been eliminated in
consolidation.
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. No gain or loss
was recognized on the transaction.
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities. Ultimate
results could differ from these estimates.
1.3 ACQUISITION
On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of
AGC, acquired AFC for $1.17 billion. The purchase price consisted of $920
million in cash and a $250 million extraordinary cash dividend paid by AFC
to its former parent prior to closing. In addition, $6.3 million of
acquisition costs were capitalized as part of the acquisition.
F-14
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.3 ACQUISITION (CONTINUED)
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 statements of
income, shareholder's equity and cash flows for the years ended December
31, 1997 and 1996, and the eleven months ended December 31, 1995, are
reported under the purchase method of accounting and, accordingly, are not
consistent with the basis of presentation of the "Predecessor Basis"
consolidated statements of income, shareholder's equity and cash flows for
the one month ended January 31, 1995.
1.4 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES. All fixed maturity securities and
equity securities are classified as available-for-sale and recorded at fair
value. After adjusting related balance sheet accounts as if unrealized
gains (losses) had been realized, the net adjustment is recorded in 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 and loans for which management has 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.
Loans for which Franklin determines that collection of all amounts due
under the contractual terms is not probable are considered to be impaired.
Franklin generally looks to the underlying collateral for repayment of
impaired loans. Therefore, impaired loans are considered to be collateral
dependent and are reported at the lower of amortized cost or fair value of
the underlying collateral, less estimated cost to sell.
POLICY LOANS. Policy loans are reported at unpaid principal balance.
INVESTMENT INCOME. Interest on fixed maturity securities, policy loans and
performing and restructured mortgage loans is recorded as income when
earned and is adjusted for any amortization of premium or discount.
Interest on delinquent mortgage loans is recorded as income when received.
Dividends are recorded as income on ex-dividend dates.
F-15
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.4 INVESTMENTS (CONTINUED)
OTHER LONG TERM INVESTMENTS. Other long term investments represent
investments in joint ventures and limited partnerships and are reported on
the equity method.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are
recognized using the specific identification method.
1.5 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.
1.6 DEFERRED POLICY ACQUISITION COSTS (DPAC)
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life contracts, insurance
investment contracts, and participating life insurance contracts is charged
to expense in relation to the estimated gross profits of those contracts.
The interest assumptions used to compute estimated gross profits with
respect to participating life insurance contracts were 7.75% at December
31, 1997 and 1996, and 8.5% at December 31, 1995. DPAC associated with all
other insurance contracts is charged to expense over the premium-paying
period or as the premiums are earned over the life of the contract.
DPAC is adjusted for the impact on estimated future gross profits as if net
unrealized gains (losses) on securities had been realized at the balance
sheet date. The impact of this adjustment is included in net unrealized
gains (losses) on securities within shareholder's equity.
Franklin reviews the carrying amount of DPAC on at least an annual basis.
Management considers estimated future gross profits or future premiums,
expected mortality, interest earned and credited rates, persistency, and
expenses in determining whether the carrying amount is recoverable.
1.7 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to certain insurance contracts in force at January 31,
1995 is reported as CIP. Interest is accreted on the unamortized balance
of CIP at rates of 7.0% to 8.5%. CIP is charged to expense and adjusted
for the impact of net unrealized gains (losses) on securities in the same
manner as DPAC. Franklin reviews the carrying amount of CIP on at least an
annual basis using the same methods used to evaluate DPAC.
F-16
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.8 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the contract
holder. Therefore, Franklin'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.
Assets held in Separate Accounts are carried at fair value.
1.9 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.
For interest-sensitive life insurance and insurance investment contracts,
reserves equal the sum of the policy account balances and deferred revenue
charges. Reserves for 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, 1997. The liability for future policy
benefits on participating life insurance contracts is a net level reserve
using the nonforfeiture interest rate and mortality table of the plan of
insurance.
1.10 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 mortality, expense, and surrender charges. 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.
F-17
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.11 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 46% and 47% of life
insurance in force at December 31, 1997 and 1996 respectively, and 70%,
62%, 58%, and 69% of premiums and other considerations for the years ended
December 31, 1997 and 1996, the eleven months ended December 31, 1995, and
the one month ended January 31, 1995, respectively.
The portion of earnings allocated to participating policyholders that
cannot be expected to inure to Franklin's shareholder is excluded from net
income and shareholder's equity. Dividends to be paid on participating
life insurance contracts are determined annually based on estimates of the
contracts' earnings.
1.12 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.
1.13 RECLASSIFICATION
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.
1.14 NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. Beginning in 1998, Franklin must adopt this statement for all
periods presented. Application of this statement will not change
recognition or measurement of net income and, therefore, will not impact
Franklin's consolidated results of operations or financial position.
F-18
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Investments
2.1 INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
--------------------------------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 435.5 $ 434.6 $ 394.3 $ 33.9
Mortgage loans on real estate 58.3 58.8 54.3 4.6
Policy loans 19.3 18.9 18.6 1.7
Other investments 9.5 13.5 9.1 1.2
--------------------------------------------------------------------------
Gross investment income 522.6 525.8 476.3 41.4
Investment expense 4.0 4.3 7.5 0.1
--------------------------------------------------------------------------
Net investment income $ 518.6 $ 521.5 $ 468.8 $ 41.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
The carrying value of investments that produced no investment income during
1997 totaled $12.4 million, or less than .19% of total invested assets at
December 31, 1997. The ultimate disposition of these assets is not expected
to have a material effect on Franklin's consolidated results of operations or
financial position.
F-19
<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 DPAC and CIP amortization were as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
--------------------------------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 15.4 $ 25.0 $ 13.8 $ -
Gross losses (6.2) (17.6) (1.9) -
--------------------------------------------------------------------------
Total fixed maturity securities 9.2 7.4 11.9 -
--------------------------------------------------------------------------
Equity securities
Gross gains 1.0 1.8 1.9 4.1
Gross losses - - (0.5) (5.4)
--------------------------------------------------------------------------
Total equity securities 1.0 1.8 1.4 (1.3)
--------------------------------------------------------------------------
Other 2.6 (6.7) (6.1) (6.3)
--------------------------------------------------------------------------
Realized investment gains (losses) $ 12.8 $ 2.5 $ 7.2 $ (7.6)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
Voluntary sales of investments resulted in the following realized gains
(losses):
<TABLE>
<CAPTION>
Realized
----------------------
In millions Category Proceeds Gains Losses
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1997 AVAILABLE-FOR-SALE $ 577.6 $ 10.5 $ 3.1
- -----------------------------------------------------------------------------------------------
Year Ended
December 31, 1996 Available-for-sale $ 807.0 $ 21.8 $ 15.4
- -----------------------------------------------------------------------------------------------
Eleven Months Ended
December 31, 1995 Available-for-sale $ 268.7 $ 8.5 $ 0.4
- -----------------------------------------------------------------------------------------------
One Month Ended
January 31, 1995 Trading $ 84.7 $ 4.1 $ 5.4
- -----------------------------------------------------------------------------------------------
</TABLE>
F-20
<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 fixed maturity and equity
securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In millions COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $ 2,845.2 $ 228.9 $ 0.3 $ 3,073.8
Below investment grade 307.8 13.7 1.1 320.4
Public utilities 972.3 116.1 - 1,088.4
Mortgage-backed 750.7 67.4 0.1 818.0
Foreign governments 90.0 15.4 0.4 105.0
U.S. government 186.7 17.7 - 204.4
States/political subdivisions 4.8 0.2 - 5.0
Redeemable preferred stocks 0.2 - - 0.2
-------------------------------------------------------
Total fixed maturity securities $ 5,157.7 $ 459.4 $ 1.9 $ 5,615.2
-------------------------------------------------------
-------------------------------------------------------
Equity securities $ 1.1 $ 3.3 $ - $ 4.4
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
F-21
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In millions Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $ 2,747.7 $ 170.2 $ 6.3 $ 2,911.6
Below investment grade 239.7 9.0 1.4 247.3
Public utilities 1,064.7 86.9 - 1,151.6
Mortgage-backed 802.1 41.9 1.4 842.6
Foreign governments 96.2 11.0 - 107.2
U.S. government 190.1 13.9 0.1 203.9
States/political subdivisions 11.5 0.5 - 12.0
Redeemable preferred stocks 0.3 - - 0.3
-------------------------------------------------------
Total fixed maturity securities $ 5,152.3 $ 333.4 $ 9.2 $ 5,476.5
-------------------------------------------------------
-------------------------------------------------------
Equity securities $ 2.0 $ 3.0 $ - $ 5.0
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
F-22
<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, 1997 were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
In millions COST VALUE
- -------------------------------------------------------------------------------
<S> <C> <C>
FIXED MATURITY SECURITIES, EXCLUDING MORTGAGE-
BACKED SECURITIES, DUE
In one year or less $ 55.0 $ 55.4
In years two through five 785.0 825.8
In years six through ten 1,993.5 2,140.3
After ten years 1,573.5 1,775.7
Mortgage-backed securities 750.7 818.0
------------------------
Total fixed maturity securities $5,157.7 $5,615.2
------------------------
------------------------
</TABLE>
Actual maturities may differ from contractual maturities since borrowers may
have the right to call or prepay obligations. Corporate requirements and
investment strategies may result in the sale of investments before maturity.
2.4 NET UNREALIZED GAINS ON SECURITIES
Net unrealized gains on available-for-sale securities included in
shareholder's equity at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- -----------------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 462.7 $ 336.4
Gross unrealized losses (1.9) (9.2)
DPAC fair value adjustment (10.4) (0.4)
CIP fair value adjustment (215.7) (160.9)
Participating policyholders'
interest (2.5) (1.8)
Deferred federal income taxes (81.4) (57.5)
------------------------
Net unrealized gains
on securities $ 150.8 $ 106.6
-------------------------
-------------------------
</TABLE>
F-23
<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 75% or
less, based on management's credit assessment of the borrower. At
December 31, the mortgage loan portfolio was distributed as follows:
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------------------
In millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Geographic distribution
East North Central $ 119.6 $ 120.0
East South Central 36.2 37.8
Mid Atlantic 35.5 21.5
Mountain 53.5 58.1
New England 22.5 19.2
Pacific 99.5 104.3
South Atlantic 175.2 167.7
West North Central 34.3 35.4
West South Central 53.5 57.9
Allowance for losses (8.2) (14.9)
- --------------------------------------------------------------------------------
Total $ 621.6 $ 607.0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Property type
Retail $ 333.5 $ 312.3
Office 131.9 147.5
Industrial 96.7 89.4
Residential and other 67.7 72.7
Allowance for losses (8.2) (14.9)
- --------------------------------------------------------------------------------
Total $ 621.6 $ 607.0
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
</TABLE>
F-24
<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 as of and for the year
ended December 31:
<TABLE>
<CAPTION>
In millions 1997 1996 1995
----------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans
With allowance * $ 8.0 $ 21.4 5.3
Without allowance 8.1 - 17.8
-------------------------------------
Total impaired loans $ 16.1 $ 21.4 23.1
-------------------------------------
-------------------------------------
Average investment $ 18.8 $ 22.3 27.4
-------------------------------------
-------------------------------------
Interest income earned $ 0.8 $ 1.5 1.3
-------------------------------------
-------------------------------------
</TABLE>
* Represents gross amounts before allowance for mortgage loan losses of
$3.0 million, $4.9 million, and $1.6 million at December 31, 1997,
1996, and 1995, respectively. There were no impaired loans as of
January 31, 1995.
ALLOWANCE. Activity in the allowance for mortgage loan losses was as
follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $ 14.9 $ 12.7 8.5 -
Net change in allowance * (6.7) 2.2 4.2 8.5
-------------------------------------------------------
Balance at end of period $ 8.2 $ 14.9 12.7 8.5
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
* Charged to realized investment gains (losses).
F-25
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.6 INVESTMENTS ON DEPOSIT
At December 31, 1997 and 1996, bonds and other investments carried at $19.3
million and $22.6 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, 1997 and
1996, Franklin's largest investment in any one entity other than U.S.
government obligations and related party amounts was $62.8 million and
$64.6 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 Franklin'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
---------------------------------------------------------
1997 1996
---------------------------------------------------------
CARRYING FAIR Carrying Fair
In millions AMOUNT VALUE Amount Value
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $ 5,615.2 $ 5,615.2 $ 5,476.5 $ 5,476.5
Mortgage loans on real estate 621.6 659.4 607.0 637.7
Equity securities 4.4 4.4 5.0 5.0
Liabilities
Insurance investment contracts $ 1,881.4 $ 1,813.3 $ 1,967.9 $ 1,892.9
Dividend accumulations $ 780.1 $ 780.1 $ 755.9 $ 755.9
</TABLE>
F-26
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used to estimate the fair value
of financial instruments.
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 a current
market rate applicable to yield, credit quality, and 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
risk-adjusted discount rates.
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 1997 and 1996.
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts was estimated using cash flows discounted at market interest
rates.
DIVIDEND ACCUMULATIONS. Fair value disclosed for dividend accumulations
equals the amount of dividends payable on demand at the reporting date.
F-27
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Deferred Policy Acquisition Costs (DPAC)
An analysis of the changes in the DPAC asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ 82.0 $ 47.5 $ - $ 510.6
Capitalization 51.9 56.2 67.7 8.5
Amortization (11.5) (10.7) (8.3) (5.8)
Effect of unrealized gains on
securities (10.0) 11.3 (11.7) -
Effect of realized investment
gains (0.7) (0.4) (0.2) -
Adjustment for the
acquisition (a) - - - (513.3)
Other - (21.9) - -
-------------------------------------------------------
End of period balance $ 111.7 $ 82.0 $ 47.5 $ -
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
(a) Represents the necessary elimination of the historical DPAC asset
required by purchase accounting.
F-28
<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
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ 407.8 $ 353.0 $ 656.6 $ 174.7
Interest accretion 47.3 51.8 49.0 2.0
Additions 15.1 13.6 41.3 -
Amortization (107.7) (116.5) (118.0) (2.8)
Effect of unrealized gains
on securities (54.8) 109.1 (270.0) -
Effect of realized investment
gains (3.8) (3.2) (5.9) -
Incremental adjustment for
the acquisition (a) - - - 482.7
-------------------------------------------------------
End of period balance $ 303.9 $ 407.8 $ 353.0 $ 656.6
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
(a) Represents the incremental amount necessary to recognize the new CIP
asset attributable to the January 31, 1995 acquisition.
CIP amortization, net of interest accretion and additions, expected to
be recorded in each of the next five years is $41.7 million, $38.4
million, $35.3 million, $32.4 million, and $29.8 million.
6. Separate Accounts
Franklin administers three Separate Accounts for variable annuity
contracts. AMFLIC administers three Separate Accounts in connection
with the issuance of its Variable Universal Life and Variable Annuity
products.
F-29
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes
Franklin files a life/life consolidated return which includes Franklin and
AMFLIC. FFSC, a broker-dealer and wholly-owned subsidiary of Franklin,
files a separate return.
The method of allocation of tax expense is subject to a written agreement.
Allocation is based upon separate return calculations with current credit
for net losses and tax credits. Consolidated alternative minimum tax,
excise tax or surtax, if any, is allocated separately. The tax liability
of each subsidiary under this agreement shall not exceed the amount such
subsidiary would have paid if it had filed on a separate return basis.
Intercompany tax balances are to be settled no later than thirty (30) days
after the date of filing the consolidated return.
7.1 DEFERRED TAXES
Components of deferred tax liabilities and assets at December 31, were as
follows:
<TABLE>
<CAPTION>
In millions 1997 1996
--------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of investments $ 122.8 $ 63.1
DPAC and CIP 98.6 124.6
Other 10.2 15.7
-----------------------
Total deferred tax liabilities 231.6 203.4
-----------------------
Deferred tax assets, applicable to:
Policy reserves (124.5) (128.3)
Participating policyholders' interests (74.0) (73.6)
Postretirement benefits (3.4) (4.0)
Basis differential of investments (7.5) (7.7)
Other (17.7) (8.8)
-----------------------
Total deferred tax assets (227.1) (222.4)
-----------------------
Net deferred tax liability (asset) $ 4.5 $ (19.0)
-----------------------
-----------------------
</TABLE>
Franklin expects adequate future taxable income to realize the deferred tax
assets. Accordingly, no valuation allowance is considered necessary.
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, 1997. At current corporate income tax
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.
F-30
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.2 TAX EXPENSE
A reconciliation between the federal income tax rate and the effective tax
rate follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------
1997 1996 1995 1995
-------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0% 35.0%
State taxes, net 0.9 0.3 0.9 36.3
Tax-exempt investment income (0.5) (0.7) (0.6) (39.3)
Amortization of goodwill - - - 34.3
Other (0.8) 0.2 0.6 0.4
-------------------------------------------------------
Effective tax rate 34.6% 34.8% 35.9% 66.7%
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
7.3 TAXES PAID
Federal income taxes paid for the years ended December 31, 1997 and 1996,
and the eleven months ended December 31, 1995, were $77 million, $74
million, and $53 million, respectively. State income taxes paid for the
years ended December 31, 1997 and 1996, and the eleven months ended
December 31, 1995, were $2 million, $2 million, and $1 million,
respectively. There were no federal or state income taxes paid during
January 1995.
8. Benefit Plans
8.1 PENSION PLANS
On January 1, 1996, Franklin's existing defined benefit pension plan (The
Franklin Plan) was merged with the plan sponsored by AGC (the AGC Plan).
The AGC Plan is a non-contributory defined benefit plan covering most
Franklin employees. Under the AGC Plan, pension benefits are based on the
participant's compensation and length of credited service. AGC's funding
policy is to contribute annually no more than the maximum deductible for
federal income tax purposes.
Equity and fixed maturity securities were 63% and 28%, respectively, of the
AGC Plan's assets at the Plan's most recent balance sheet date.
Additionally, 5% of the Plan's assets were invested in general investment
accounts of AGC's subsidiaries through deposit administration insurance
contracts.
F-31
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (continued)
The net pension (income)/expense and the computation of the projected
benefit obligation for years prior to January 1, 1996 were based on the
provisions of the Franklin Plan. The Franklin Plan provided 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 acquired a vested right to future benefits.
Pension benefits were based on the participant's average monthly
compensation and length of credited service. Annual contributions made to
the plan were sufficient to satisfy legal funding requirements.
At December 31, 1995, fixed maturity securities constituted the majority of
The Franklin Plan's assets.
Prior to January 1, 1996, The Franklin Plan purchased annuity contracts
from Franklin to provide benefits for its retirees. For the eleven months
ended December 31, 1995, and the one month ended January 31, 1995, these
contracts provided approximately $3.9 million and $0.3 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 Franklin Plan in 1995 to provide full retirement benefits for
these employees who elected to retire under the program.
Net pension (income)/expense included the following components:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned) $ 0.7 $ 0.8 $ 0.9 $ 0.2
Interest cost 1.9 2.0 3.7 0.4
Actual return on plan assets (8.4) (7.8) (11.5) (0.4)
Net amortization and deferral 5.0 4.6 6.3 -
-------------------------------------------------------
Pension (income) expense $ (0.8) $ (0.4) $ (0.6) $ 0.2
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
F-32
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (continued)
The funded status and the prepaid pension expense (included in other
assets) at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
--------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation, primarily vested $ 27.7 $ 27.0
Effect of increase in compensation levels 0.5 0.2
------------------
Projected benefit obligation 28.2 27.2
Plan assets at fair value 43.8 35.5
------------------
Plan assets at fair value in excess of projected
benefit obligation 15.6 8.3
Other unrecognized items, net (3.5) 3.0
------------------
Prepaid pension expense $ 12.1 $ 11.3
------------------
------------------
Weighted-average discount rate on benefit obligation 7.25% 7.50%
Rate of increase in compensation levels 4.00 4.00
Expected long-term rate of return on plan assets 10.00 10.00
</TABLE>
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
On January 1, 1996, the assets in Franklin's voluntary employees'
beneficiary association (Franklin VEBA) for the retiree health and welfare
plan were transferred to the AGC VEBA Plan. No changes in assumptions or
plan provisions were made as a result of the transfer.
Under the AGC VEBA Plan, 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.
The life plans are fully insured for a two-year period. A portion of the
retiree medical and dental plans is funded through the AGC VEBA Plan; the
remainder is unfunded and self-insured. All of the retiree medical and
dental plans' assets held in the AGC VEBA Plan were invested in readily
marketable securities.
F-33
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
The funded status and the accrued postretirement benefit cost (included in
other liabilities) at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
----------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligation
Retirees $ 7.2 $ 7.3
Active plan participants
Fully eligible 0.3 0.2
Other 2.0 1.8
-----------------------------
Accumulated postretirement
benefit obligation (APBO) 9.5 9.3
Plan assets at fair value 0.2 -
-----------------------------
APBO in excess of plan assets
at fair value 9.3 9.3
Unrecognized net gain 0.5 2.2
-----------------------------
Accrued benefit cost $ 9.8 $ 11.5
-----------------------------
-----------------------------
Weighted-average discount
rate on benefit obligation 7.25% 7.50%
</TABLE>
Postretirement benefit expense (income) was as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned) $ 0.1 $ 0.1 $ 0.1 $ -
Interest cost 0.7 0.7 0.9 (0.2)
-------------------------------------------------------
Postretirement benefit expense
(income) $ 0.8 $ 0.8 $ 1.0 $ (0.2)
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998; the rate was
assumed to decrease gradually to 5% by the year 2005 and remain at that
level. A 1% increase in the assumed rate results in a $0.1 million
increase in the accumulated postretirement benefit obligation and no
increase in postretirement benefit expense.
F-34
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Statutory Accounting
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity. In addition, state regulators
may permit statutory accounting practices that differ from prescribed
practices.
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, and also
received approval to pay an extraordinary dividend of $60 million to AGCL.
At December 31, 1997 and 1996, Franklin had statutory shareholder's equity
of $521.0 million and $431.0 million, respectively. Statutory net income
was $129.7 million, $123.2 million, and $100.2 million for the years ended
December 31, 1997, 1996, and 1995, respectively.
As determined on a statutory basis, the statutory shareholder's equity and
net income of subsidiaries, were reported as follows:
<TABLE>
<CAPTION>
STATUTORY
-----------------------------------------
In millions 1997 1996 1995
---------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder's Equity $ 17.7 $ 18.1 $ 9.9
-----------------------------------------
-----------------------------------------
Net Income $ (0.6) $ (1.9) $ (4.7)
-----------------------------------------
-----------------------------------------
</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. Under these restrictions, during 1998, loans or advances in
excess of $130.3 million and dividends in any twelve-month period
aggregating in excess of $129.7 million will require the approval of the
Illinois Insurance Department.
10. Consolidated Statement of Cash Flows
In addition to the cash activities shown in the consolidated statement of
cash flows, the following transactions, occurred:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest added to annuity and other
financial products $ 169.4 $ 173.3 $ 168.3 $ 14.0
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
F-35
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance
Franklin limits its exposure to loss on any single insured to $2.1 million
by ceding additional risks through reinsurance contracts with other
insurers. Franklin diversifies its risk of reinsurance loss by using a
number of reinsurers that have strong claims-paying ability ratings. 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.
A receivable is recorded for the portion of benefits paid and insurance
liabilities that have been reinsured. Reinsurance recoveries on ceded
reinsurance contracts were $41.5 million, $67.3 million, $63.3 million and
$1.4 million for the years ended December 31, 1997 and 1996, the eleven
months ended December 31, 1995, and the one month ended January 31, 1995,
respectively. The amount of reinsurance recoverable (payable) on paid and
unpaid losses was $(0.5) million and $1.8 million at December 31, 1997 and
1996, respectively. The cost of reinsurance is recognized over the life of
the reinsured policies using assumptions consistent with those used to
account for the underlying policies.
Reinsurance premiums included in premiums and other considerations were as
follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct premiums and other
considerations $415.3 $491.5 $500.1 $36.8
Reinsurance assumed 8.3 15.9 44.2 (0.8)
Reinsurance ceded (53.4) (88.8) (94.7) (1.5)
- --------------------------------------------------------------------------------------------------
Premiums and other
considerations $ 370.2 $ 418.6 $ 449.6 $ 34.5
- --------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------
</TABLE>
12. Related Party Transactions
Franklin participates in a program of short-term borrowing with AGC to
maintain its long-term commitments. Franklin borrowed $230.4 million and
$62.0 million, and repaid $230.4 million and $62.1 million in 1997 and
1996, respectively. Interest was paid on the outstanding balances based on
the rate as stipulated in the program.
During 1995, Franklin purchased a 6.75% promissory note from AGCL for
$116.0 million to mature in 2005 (see Note 9).
During 1995, Franklin received $8.5 million of 8% non-voting preferred
stock of American General Life Insurance Company as consideration for the
sale of FULIC.
F-36
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Related Party Transactions (continued)
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 $2.5
million and $2.3 million for the years ended December 31, 1997 and 1996,
respectively, and $1.1 million for the eleven months ended December 31,
1995.
13. Legal Proceedings
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in
substantial settlements. Franklin is a defendant in such purported class
action lawsuits filed in 1997, asserting claims related to pricing and
sales practices. These claims are being defended vigorously by Franklin.
Given the uncertain nature of litigation and the early stages of this
litigation, the outcome of these actions cannot be predicted at this time.
Franklin management nevertheless believes the ultimate outcome of all such
pending litigation should not have a material adverse effect on Franklin's
financial position. It is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings
could have a material adverse effect on results of operations for a given
period. No provision for any adverse determinations in this pending
litigation has been made in the consolidated financial statements because
the amount of loss, if any, from these actions cannot be reasonably
estimated at this time.
Franklin is a party to various other lawsuits and proceedings arising in
the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, Franklin management believes the total
amounts that will ultimately be paid, if any, arising from these lawsuits
and proceedings will not have a material adverse effect on Franklin's
results of operations and financial position. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred
by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any given suit.
F-37
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guaranty Fund Assessments
Information about state guaranty fund assessments was as follows as of and
for the:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expense, included in
operating costs and
expenses $1.2 $0.7 $0.2 $0.6
Liability for anticipated
assessments 3.6 7.5 8.5 -
Receivable for expected
recoveries against future
premium taxes 7.4 11.2 11.2 -
- --------------------------------------------------------------------------------------------------
</TABLE>
Changes in state laws could decrease the amount recoverable against future
premium taxes.
F-38
<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, 1997
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, 1997
Statement of Operations for the year ended December 31, 1997
Statements of Changes in Contract Owners' Equity for the two
years ended December 31, 1997
Portfolio of Investments, December 31, 1997
Notes to Financial Statements
Supplementary Information - Per-Unit Income and Changes in
Accumulation Unit Value for the five years ended
December 31, 1997
The Franklin Life Insurance Company and Subsidiaries:
Report of Independent Auditors
Financial Statements:
Consolidated Statement of Income for the years ended
December 31, 1997 and 1996, the eleven months ended
December 31, 1995, and the one month ended January 31, 1995
Consolidated Balance Sheet, December 31, 1997 and 1996
Consolidated Statement of Shareholder's Equity for the years
ended December 31, 1997 and 1996, the eleven months ended
December 31, 1995, and the one month ended January 31, 1995
Consolidated Statement of Cash Flows for the years ended
December 31, 1997 and 1996, the eleven months ended
December 31, 1995, and the one month ended January 31, 1995
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
is incorporated herein by reference to Exhibit 3 to
Post-Effective Amendment No. 21 to Registrant's Registration
Statement on Form N-3, filed April 30, 1996 (File No.
2-74459).
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 (File No. 2-74459).
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 (File No.
2-74459).
(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) to
Post-Effective Amendment No. 22 to Registrant's Registration
Statement on Form N-3, filed April 30, 1997 (File No.
2-74459).
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 Sutherland, Asbill & Brennan LLP.
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 to Post-Effective Amendment No. 23 to Registrant's
Registration Statement on Form N-3, filed February 26, 1998
(File No. 2-74459).
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 Robert G. Spencer and Elizabeth E.
Arthur, 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
(1,2,3,4) as of December 31, 1997. All subsidiaries listed are corporations,
unless otherwise indicated. Subsidiaries of subsidiaries are indicated by
indentations and unless otherwise indicated, all subsidiaries are wholly owned.
Inactive subsidiaries are denoted by an asterisk (*).
<TABLE>
<CAPTION>
NAME JURISDICTION OF
- ---- ---------------
INCORPORATION INSURER
------------- -------
<S> <C> <C>
AGC Life Insurance Company(5) Missouri Yes
American General Life and Accident Insurance Company(6) Tennessee Yes
American General Exchange, Inc. Tennessee No
Independent Fire Insurance Company Florida Yes
American General Property Insurance Company of Florida Florida Yes
Old Faithful General Agency, Inc. Texas No
Independent Life Insurance Company Georgia Yes
</TABLE>
C-3
<PAGE>
<TABLE>
<CAPTION>
NAME JURISDICTION OF
- ---- ---------------
INCORPORATION INSURER
------------- -------
<S> <C> <C>
American General Life Insurance Company(7) Texas Yes
American General Annuity Service Corporation Texas No
American General Life Insurance Company of New York New York Yes
The Winchester Agency Ltd. New York No
The Variable Annuity Life Insurance Company Texas Yes
The Variable Annuity Marketing Company Texas No
VALIC Investment Services Company Texas No
VALIC Retirement Services Company Texas No
VALIC Trust Company Texas No
Astro Acquisition Corp. Delaware No
The Franklin Life Insurance Company Illinois Yes
The American Franklin Life Insurance Company Illinois Yes
Franklin Financial Services Corporation Delaware No
HBC Development Corporation Virginia No
Allen Property Company Delaware No
Florida Westchase Corporation Delaware No
Hunter's Creek Communications Corporation Florida No
Westchase Development Corporation Delaware No
American General Capital Services, Inc. Delaware No
American General Corporation* Delaware No
American General Delaware Management Corporation(1) Delaware No
American General Finance, Inc. Indiana No
AGF Investment Corp. Indiana No
American General Auto Finance, Inc. Delaware No
American General Finance Corporation(8) Indiana No
American General Finance Group, Inc. Delaware No
American General Financial Services, Inc.(9) Delaware No
The National Life and Accident Insurance Company Texas Yes
</TABLE>
C-4
<PAGE>
<TABLE>
<CAPTION>
NAME JURISDICTION OF
- ---- ---------------
INCORPORATION INSURER
------------- -------
<S> <C> <C>
Merit Life Insurance Co. Indiana Yes
Yosemite Insurance Company California Yes
American General Finance, Inc. Alabama No
American General Financial Center Utah No
American General Financial Center, Inc.* Indiana No
American General Financial Center, Incorporated* Indiana No
American General Financial Center Thrift Company* California No
Thrift, Incorporated* Indiana No
American General Independent Producer Division Co. Delaware No
American General Investment Advisory Services, Inc.* Texas No
American General Investment Holding Corporation(10) Delaware No
American General Investment Management Corporation(10) Delaware No
American General Realty Advisors, Inc. Delaware No
American General Realty Investment Corporation Texas No
American General Mortgage Company Delaware No
GDI Holding, Inc.*(11) California No
Ontario Vineyard Corporation Delaware No
Pebble Creek Country Club Corporation Florida No
Pebble Creek Service Corporation Florida No
SR/HP/CM Corporation Texas No
American General Property Insurance Company Tennessee Yes
Bayou Property Company Delaware No
AGLL Corporation(12) Delaware No
American General Land Holding Company Delaware No
AG Land Associates, LLC(12) California No
Hunter's Creek Realty, Inc.* Florida No
Summit Realty Company, Inc. So. Carolina No
Florida GL Corporation Delaware No
</TABLE>
C-5
<PAGE>
<TABLE>
<CAPTION>
NAME JURISDICTION OF
- ---- ---------------
INCORPORATION INSURER
------------- -------
<S> <C> <C>
GPC Property Company Delaware No
Cinco Ranch East Development, Inc. Delaware No
Cinco Ranch West Development, Inc. Delaware No
Hickory Downs Development, Inc. Delaware No
Lake Houston Development, Inc. Delaware No
South Padre Development, Inc. Delaware No
Green Hills Corporation Delaware No
Knickerbocker Corporation Texas No
American Athletic Club, Inc. Texas No
Pavilions Corporation Delaware No
USLIFE Corporation New York No
All American Life Insurance Company Illinois Yes
1149 Investment Corp. Delaware No
American General Life Insurance Company of Pennsylvania Pennsylvania Yes
New D Corporation* Iowa No
The Old Line Life Insurance Company of America Wisconsin Yes
The United States Life Insurance Company in the City of New York New York Yes
USLIFE Advisers, Inc. New York No
USLIFE Agency Services, Inc. Illinois No
USLIFE Credit Life Insurance Company Illinois Yes
USLIFE Credit Life Insurance Company of Arizona Arizona Yes
USLIFE Indemnity Company Nebraska Yes
USLIFE Financial Corporation of Delaware* Delaware No
Midwest Holding Corporation Delaware No
I.C. Cal* Nebraska No
Midwest Property Management Co. Nebraska No
USLIFE Financial Institution Marketing Group, Inc. California No
USLIFE Insurance Services Corporation Texas No
</TABLE>
C-6
<PAGE>
<TABLE>
<CAPTION>
NAME JURISDICTION OF
- ---- ---------------
INCORPORATION INSURER
------------- -------
<S> <C> <C>
USLIFE Realty Corporation Texas No
405 Leasehold Operating Corporation New York No
405 Properties Corporation* New York No
USLIFE Real Estate Services Corporation Texas No
USLIFE Realty Corporation of Florida Florida No
USLIFE Systems Corporation Delaware No
</TABLE>
American General Finance Foundation, Inc. is not included on this list. It is a
non-profit corporation.
NOTES
(1) The following limited liability companies were formed in the State of
Delaware on March 28, 1995. The limited liability interests of each are
jointly owned by AGC and AGDMC and the business and affairs of each are
managed by AGDMC:
American General Capital, L.L.C.
American General Delaware, L.L.C.
(2) On November 26, 1996, American General Institutional Capital A ("AG Cap
Trust A"), a Delaware business trust, was created. On March 10, 1997,
American General Institutional Capital B ("AG Cap Trust B"), also a
Delaware business trust, was created. Both AG Cap Trust A's and AG Cap
Trust B's business and affairs are conducted through their trustees:
Bankers Trust Company and Bankers Trust (Delaware). Capital securities
of each are held by non-affiliated third party investors and common
securities of AG Cap Trust A and AG Cap Trust B are held by AGC.
(3) On November 14, 1997, American General Capital I, American General
Capital II, American General Capital III, and American General Capital IV
(collectively, the "Trusts"), all Delaware business trusts, were created.
Each of the Trusts' business and affairs are conducted through its
trustees: Bankers Trust (Delaware) and James L. Gleaves (not in his
individual capacity but solely as Trustee).
(4) On July 10, 1997, the following insurance subsidiaries of AGC became the
direct owners of the parenthetically indicated percentages of membership
units of SBIL B, L.L.C. ("SBIL B"), a U.S. limited liability company:
VALIC (22.6%), FL (8.1%), AGLA (4.8%) and AGL (4.8%).
Through its aggregate 40.3% interest in SBIL B, VALIC, FL, AGLA and AGL
indirectly own approximately 28% of the securities of SBI, an English
company, and 14% of the securities of ESBL, an English company, SBP, an
English company, and SBFL, a Cayman Islands company. These interests are
held for investment purposes only.
(5) On December 23, 1994, AGCL purchased approximately 40% of the shares of
common stock of Western National Corporation ("WNC"), Western National
Life Insurance Company's ("WNL") indirect intermediate parent.
Therefore, WNL became approximately 40% indirectly controlled by AGC. On
September 30, 1996, AGC purchased 7,254,464 shares of WNC's Series A
Participating Convertible Preferred Stock (the "Convertible Preferred
Stock"). On November 30, 1996, AGC contributed the Convertible Preferred
Stock to AGCL. On May 14, 1997, WNC's shareholders approved the
conversion of 7,254,464 shares of WNC's Series A Participating
Convertible Preferred Stock held by AGCL into an equal number of WNC
common stock. Thus, at present, the percentage of WNC common stock owned
directly by AGCL (and indirectly by AGC) is 46.2%. WNC, a Delaware
corporation, owns the following companies:
C-7
<PAGE>
WNL Holding Corporation
Western National Life Insurance Company (TX)
Independent Advantage Financial & Insurance Services, Inc.
WNL Investment Advisory Services, Inc.
Conseco Annuity Guarantee Corp.
WNL Brokerage Services, Inc.
WNL Insurance Services, Inc.
However, AGCL (1) holds the direct interest in WNC (and the indirect
interests in WNC's subsidiaries) for investment purposes; (2) does not
direct the operations of WNC or WNL; (3) has no representatives on the
Board of Directors of WNC; and (4) is restricted, pursuant to a
Shareholder's Agreement between WNC and AGCL, in its right to vote its
shares against the slate of directors proposed by WNC's Board of
Directors. Accordingly, although WNC and its subsidiaries technically
are members of the American General insurance holding company system
under insurance holding company laws, AGCL does not direct the operations
of WNC or its subsidiaries.
(6) AGLA owns approximately 11% of Whirlpool Financial Corp. ("Whirlpool")
on a fully diluted basis. The total investment of AGLA in Whirlpool
represents approximately 3% of the voting power of the capital stock of
Whirlpool, but approximately 11% of the Whirlpool stock which has voting
rights. The interests in Whirlpool (which is a corporations that is not
associated with AGC) are held for investment purposes only.
(7) AGL owns 100% of the common stock of American General Securities
Incorporated ("AGSI"), a full-service NASD broker-dealer. AGSI, in turn,
owns 100% of the stock of the following insurance agencies:
American General Insurance Agency, Inc. (Missouri)
American General Insurance Agency of Hawaii, Inc. (Hawaii)
American General Insurance Agency of Massachusetts, Inc.
(Massachusetts)
In addition, the following agencies are indirectly related to AGSI, but
not owned or controlled by AGSI:
American General Insurance Agency of Ohio, Inc. (Ohio)
American General Insurance Agency of Texas, Inc. (Texas)
American General Insurance Agency of Oklahoma, Inc. (Oklahoma)
Insurance Masters Agency, Inc. (Texas)
AGSI and the foregoing agencies are not affiliates or subsidiaries of AGL
under applicable holding company laws, but they are part of the AGC group
of companies under other laws.
(8) American General Finance Corporation is the parent of an additional 48
wholly owned subsidiaries incorporated in 30 states and Puerto Rico for
the purpose of conducting its consumer finance operations, including
those noted in footnote 7 below.
(9) 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.
(10) American General Investment Management, L.P. is jointly owned by AGIHC
and AGIMC. AGIHC holds a 99% limited partnership interest, and AGIMC owns
a 1% general partnership interest.
(11) AGRI owns only a 75% interest in GDI Holding, Inc.
(12) AG Land Associates, LLC is jointly owned by AGLH and AGLL. AGLH holds a
98.75% managing interest and AGLL owns a 1.25% managing interest.
Item 31. Number of Holders of Securities.
C-8
<PAGE>
<TABLE>
<CAPTION>
As of February 20, 1998, 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
- --------------------------------------------------------------------------------
<S> <C>
Accumulation Units Under 289
Variable Annuity Contracts
</TABLE>
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 Director - Marketing Training, The Franklin
Elizabeth E. Arthur Director, Associate General Counsel and
Assistant Secretary, The Franklin
B. Shelby Baetz Secretary, The Franklin, since November,
1997; General Counsel, American
General Independent Producer Division,
Houston, Texas, since January, 1998;
Associate General Counsel, American
General Corporation, Houston, Texas,
prior to January, 1998.
Earl W. Baucom Treasurer, The Franklin, since June 30,
1997; Senior Vice President and Chief
Financial Officer, The Franklin, since
June 10, 1996; Director, The Franklin,
since August 21, 1996.
Robert M. Beuerlein Senior Vice President-Actuarial and
Director, The Franklin
Mark R. Butler Director - Special Projects, Marketing, The
Franklin
Philip D. Calderwood Director - Actuary, The Franklin
Eldon R. Canary Vice President - Actuarial, The Franklin
Brady W. Creel Senior Vice President, Chief Marketing
Officer and Director, The Franklin,
since September 3, 1996; Regional
Manager, The Franklin, prior to
September, 1996.
</TABLE>
C-9
<PAGE>
<TABLE>
<CAPTION>
(1) (2)
Name Business or Employment
------------------------------ --------------------------------------
<S> <C>
James S. D'Agostino, Jr. Vice Chairman and Director, The Franklin,
since May 27, 1997; President, American
General Corporation, Houston, Texas,
since April 24, 1997; Chief Executive
Officer, American General Life and
Accident Insurance Company, Nashville,
Tennessee, from July 1, 1995 to March 5,
1997.
Steve A. Dmytrack Vice President, The Franklin, since
August 24, 1995
Paul C. Ely Director - Group Insurance, The Franklin
Barbara Fossum Senior Vice President, The Franklin
since March 20, 1998; Vice President,
The Franklin, from June, 1995 to
March 20, 1998.
Ross D. Friend Senior Vice President and General
Counsel, The Franklin,, since
September 3, 1996; Assistant Secretary,
The Franklin, since November 13, 1997;
Secretary, The Franklin, from
September 3, 1996 to November 13, 1997;
Attorney-in-Charge, Prudential Life
Insurance Company, Jacksonville,
Florida, from July, 1995 to
September, 1996.
Jerry P. Jourdan Director of Information Services, The
Franklin, since January 31, 1996;
Assistant Vice President, The Franklin,
prior thereto
Darrell J. Malano Vice President, The Franklin
Margaret L. Manola Director - Marketing, The Franklin
Rodney O. Martin, Jr. Director and Senior Chairman, The Franklin;
President and Chief Executive
Officer, American General Life Insurance
Company, Houston, Texas, since
August, 1996; President, American
General Life Insurance Company
of New York, Syracuse, New York,
from November, 1995 to August, 1996.
Thomas K. McCracken Director - Marketing, The Franklin
Mark R. McGuire Vice President, The Franklin, since
January 6, 1997; Consultant/Manager,
American General Life Insurance Company,
Houston, Texas, prior to January, 1997.
Sylvia A. Miller Vice President, The Franklin
Cheryl E. Morton 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.
James M. Quigley Vice President, The Franklin, since
August 24, 1995.
</TABLE>
C-10
<PAGE>
<TABLE>
<CAPTION>
(1) (2)
Name Business or Employment
------------------------------ --------------------------------------
<S> <C>
Gary D. Reddick............... Director, The Franklin since February 22,
1995; Vice Chairman, The Franklin, since
July 1, 1997; Executive Vice President,
The Franklin, from February 22, 1995 to
July 1, 1997.
Dale W. Sachtleben............ Vice President, The Franklin
Richard W. Scott.............. Vice President and Chief Investment
Officer, The Franklin, since
April, 1998; Executive Vice
President and Chief Investment Officer,
American General Corporation, Houston,
Texas, since February, 1998; Vice
Chairman and Chief Investment Officer,
Western National Corporation, Houston,
Texas, from February, 1997 to February,
1998; Vice Chairman, Chief Investment
Officer and General Counsel, Western
National Corporation, from July, 1996
to February, 1997; Executive Vice
President, General Counsel and Chief
Investment Officer, Western National
Corporation, from May, 1995 to July,
1996.
William A. Simpson............ Chairman, Chief Executive Officer and
President, The Franklin, since
September 5, 1997; President and Chief
Executive Officer, The Old Line Life
Insurance Company of America, Milwaukee,
Wisconsin, from May 1, 1990 to
September 8, 1997; President-Life
Insurance Division, USLIFE
Corporation, New York, New York, from
February, 1996 to May, 1996; President
and Chief Executive Officer, USLIFE
Corporation from January, 1995 to
February, 1996.
Robert G. Spencer............. Vice President, The Franklin; prior to
1996, also Treasurer, The Franklin
T. Clayton Spires............. Director, Corporate Tax, The Franklin,
since February 3, 1997; Assistant Vice
President and Tax Manager, First Colony
Life, Lynchburg, Virginia, prior to
February, 1997.
J. Alan Vala.................. Director - Agency Secretary, The Franklin
David G. Vanselow............. Director - Communications, The Franklin
Cynthia P. Wieties............ Director of Communications, The Franklin,
since March 19, 1997; Assistant Vice
President, The Franklin, prior to March,
1997.
</TABLE>
Item 34. Principal Underwriters.
(a) Franklin Life Variable Annuity Fund A, Franklin Life Variable Annuity Fund
B, 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, and Separate Account VA-1 of The American Franklin Life
Insurance Company, which offers interest in variable annuity contracts (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. Unless otherwise
indicated below, the principal business address of each individual is c/o The
Franklin Life Insurance Company, #1 Franklin Square, Springfield, Illinois
62713.
C-11
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3)
Name Positions and Offices with Positions and Offices with
Underwriter Registrant
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Elizabeth E. Arthur Assistant Secretary Secretary to the Board of Managers
Bruce R. Baker Assistant Vice President and None
665 North Newbridge Road Marketing Officer
Levitttown, NY 11756
Earl W. Baucom Treasurer and Director None
Robert M. Beuerlein Senior Vice President None
Tony Carter Vice President None
2900 Greenbrier Drive
Springfield, IL 62704
Peter Dawson Assistant Vice President and None
665 North Newbridge Road Marketing Officer
Levittown, NY 11756
Ross D. Friend Director, Vice President None
and Secretary
James L. Gleaves Assistant Treasurer None
2929 Allen Parkway
Houston, TX 77019
Karen Kunz Chief Financial Officer and None
Director of Compliance
and Administration
Deanna Osmonson Vice President None
and Assistant Secretary
Gary D. Osmonson President and Director None
Gary D. Reddick Vice Chairman and None
Director
William A. Simpson Chairman of the Board None
Dan E. Trudan Vice President and Assistant None
Secretary
</TABLE>
(c) Information regarding commissions and other compensation received by each
principal underwriter, directly or indirectly, from Registrant during 1997,
Registrant's last fiscal year, is set forth below:
C-12
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Net Underwriting Compensation
Principal Discounts and on Redemption Brokerage Other
Underwriters Commissions or Annuitization Commissions Compensation
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Franklin Financial
Services Corporation -0- -0- -0- -0-
</TABLE>
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 and Representations.
(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.
(f) The Franklin Life Insurance Company hereby represents that the fees and
charges deducted under the Contracts, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by The Franklin Life Insurance Company.
C-13
<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 28th day of April, 1998.
FRANKLIN LIFE MONEY MARKET
VARIABLE ANNUITY FUND C
By: /s/ Elizabeth E. Arthur
--------------------------------
(Elizabeth E. Arthur, 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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Clifford L. Greenwalt* Member, Board April 28, 1998
- ----------------------------------- of Managers
(Clifford L. Greenwalt)
/s/ Robert C. Spencer* Member, Board April 28, 1998
- ----------------------------------- of Managers
(Robert C. Spencer)
/s/ Robert G. Spencer* Chairman, Board April 28, 1998
- ----------------------------------- of Managers
(Robert G. Spencer)
/s/ James W. Voth* Member, Board April 28, 1998
- ----------------------------------- of Managers
(James W. Voth)
/s/ Elizabeth E. Arthur Secretary, Board April 28, 1998
- ----------------------------------- of Managers
(Elizabeth E. Arthur)
/s/ Elizabeth E. Arthur
- -----------------------------------
* By Elizabeth E. Arthur, Attorney-in-Fact
</TABLE>
C-14
<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 28th day of April, 1998.
THE FRANKLIN LIFE INSURANCE COMPANY
By /s/ William A. Simpson
---------------------------------
(William A. Simpson, Chairman, Chief
Executive Officer and President)
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Earl W. Baucom* Senior Vice President, Chief April 28, 1998
- ----------------------------------- Financial Officer and Treasurer
(Earl W. Baucom) (principal financial officer and
principal accounting officer)
and Director
/s/ Robert M. Beuerlein* Senior Vice President- April 28, 1998
- ----------------------------------- Actuarial and Director
(Robert M. Beuerlein)
/s/ Brady W. Creel* Senior Vice President, April 28, 1998
- ----------------------------------- Chief Marketing Officer and Director
(Brady W. Creel)
- ----------------------------------- Director __________, 1998
(James S. D'Agostino, Jr.)
Director __________, 1998
- -----------------------------------
(Rodney O. Martin, Jr.)
Director __________, 1998
- -----------------------------------
(Jon P. Newton)
/s/ Gary D. Reddick* Vice Chairman and Director April 28, 1998
- -----------------------------------
(Gary D. Reddick)
/s/ William A. Simpson Chief Executive Officer, April 28, 1998
- ----------------------------------- President and Director
(William A. Simpson) (principal executive officer)
/s/ Elizabeth E. Arthur
- -----------------------------------
* By Elizabeth E. Arthur, Attorney-in-Fact
</TABLE>
C-15
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT INDEX
EXHIBIT Page
<C> <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 is incorporated herein by reference
to Exhibit 3 to Post-Effective Amendment No. 21 to
Registrant's Registration Statement on Form N-3, filed
April 30, 1996 (File No. 2-74459).
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 (File No. 2-74459).
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 (File No. 2-74459).
(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>
<TABLE>
<CAPTION>
<C> <S>
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) to
Post-Effective Amendment No. 22 to Registrant's
Registration Statement on Form N-3, filed April 30, 1997
(File No. 2-74459).
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.
(d) - Consent of Sutherland, Asbill & Brennan LLP.
14 - Not applicable.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
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 to Post-Effective Amendment No. 23 to
Registrant's Registration Statement on Form N-3, filed
February 26, 1998 (File No. 2-74459).
27 - Financial Data Schedule meeting the requirements of
Rule 483.
</TABLE>
<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 Sutherland, Asbill & Brennan LLP appears as Exhibit 13(d) 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 January 30, 1998, with respect to the statement of assets and
liabilities, including the portfolio of investments, as of December 31, 1997 and
the related statement of operations for the year then ended and the statements
of changes in contract owners' equity for each of the two years in the period
then ended and the table of per-unit income and changes in accumulation unit
value for each of the three years in the period then ended of Franklin Life
Money Market Variable Annuity Fund C, and our report dated February 23, 1998,
with respect to the consolidated financial statements of The Franklin Life
Insurance Company as of December 31, 1997 and 1996 and for each of the two years
in the period ended December 31, 1997, the eleven months ended December 31, 1995
and the one month ended January 31, 1995, in this Post-Effective Amendment No.
24 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 28, 1998
<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 our report
dated February 1, 1995, accompanying the table of per-unit income and changes in
accumulation unit value of Franklin Life Money Market Variable Annuity Fund C
for each of the two years in the period ended December 31, 1994.
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 28, 1998
<PAGE>
Exhibit 13(d)
We consent to the reference to our firm under the heading "Legal
Matters" in the statement of additinal information included in Post-Effective
Amendment No. 24 to the Registration Statement on Form N-3 for Franklin Life
Money Market Variable Annuity Fund C (File No. 2-74459). In giving this
consent, we do not admit that we are in the category of persons whose consent
is required under Section 7 of the Securities Act of 1933.
/s/ Sutherland, Asbill & Brennan LLP
SUTHERLAND, ASBILL & BRENNAN LLP
Washington, D.C.
April 28, 1998
<PAGE>
Exhibit 16
COMPUTATION OF PERFORMANCE DATA
SET FORTH UNDER "YIELD INFORMATION"
IN THE PROSPECTUS (Unaudited)
<TABLE>
<CAPTION>
<S> <C>
Annualized Yield Computation
December 31, 1997 Unit Value (A) 23.73356211
less December 24, 1997 Unit Value (B) 23.71569574
0.01786637
Base Period Return = (A minus B) 0.01786637
Divided by December 24, 1997 Unit Value DIVIDED BY 23.71569574
= 0.00075336
Annualized Yield = (Base Period Return) (0.00075336) x 365/7
x 365/7 = 3.93%
Effective Yield Computation
December 31, 1997 Unit Value (A) 23.73356211
less December 24, 1997 Unit Value (B) 23.71569574
0.01786637
Base Period Return = (A minus B) 0.01786637
Divided by December 24, 1997 Unit Value DIVIDED BY 23.71569574
= 0.00075336
Effective Yield = (1 + Base Period Return) (365/7) - 1 (1 + 0.00075336) (365/7) - 1
4.00%
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE YEAR ENDING 12-31-97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 1,850,834
<INVESTMENTS-AT-VALUE> 1,850,834
<RECEIVABLES> 9,585
<ASSETS-OTHER> 60,830
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,921,249
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 150
<TOTAL-LIABILITIES> 150
<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> 1,921,099
<DIVIDEND-INCOME> 0
<INTEREST-INCOME> 101,478
<OTHER-INCOME> 0
<EXPENSES-NET> 28,308
<NET-INVESTMENT-INCOME> 73,170
<REALIZED-GAINS-CURRENT> 0
<APPREC-INCREASE-CURRENT> 0
<NET-CHANGE-FROM-OPS> 73,170
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 1,238
<NUMBER-OF-SHARES-REDEEMED> 7,651
<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>
