<PAGE>
1933 Act Registration No.2-36394
1940 Act Registration No. 811-1990
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
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. 42
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 18
FRANKLIN LIFE
VARIABLE ANNUITY FUND A
(Exact Name of Registrant)
The Franklin Life Insurance Company
(Name of Insurance Company)
#1 Franklin Square, Springfield, Illinois 62713
(Address of Insurance Company's Principal Executive Offices) (Zip Code)
Insurance Company's Telephone Number, including Area Code: (217) 528-2011
STEPHEN P. HORVAT, JR., ESQ.
Senior Vice President,
Secretary and General Counsel
THE FRANKLIN LIFE INSURANCE COMPANY
#1 Franklin Square
Springfield, Illinois 62713
(Name and Address of Agent for Service)
Copy to:
PETER K. INGERMAN, ESQ.
CHADBOURNE & PARKE LLP
30 Rockefeller Plaza
New York, New York 10112
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/x/ on April 30, 1996 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (i)
/ / on April 30, 1996 pursuant to paragraph (a) (i)
/ / 75 days after filing pursuant to paragraph (a) (ii)
/ / on April 30, 1996 pursuant to paragraph (a) (ii) of
Rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new
effective date for a previously filed post-effective
amendment.
Pursuant to Rule 24f-2 of the Investment Company Act of 1940, the Registrant has
registered an indefinite number of units of interest in Franklin Life Variable
Annuity Fund A under variable annuity contracts. The Registrant filed a Rule
24f-2 Notice for the year ended December 31, 1995 on February 28, 1996.
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
Post-Effective Amendment No. 42
Cross Reference Sheet Required by Rule 495(a)
Registration Item Location in Prospectus ("P") or Statement
of Additional Information ("SAI")
Part A INFORMATION REQUIRED IN PROSPECTUS
Item 1. Cover Page . . . . . . . . Cover Page (P)
Item 2. Definitions. . . . . . . . Special Terms
Item 3. Synopsis or Highlights . . Table of Deductions and Charges; Summary
Item 4. Condensed Financial Information Per-Unit Income and Changes in
Accumulation Unit Value
Item 5. General Description of
Registrant and Insurance
Company. . . . . . . . . . Cover Page (P); Summary; Introduction;
Description of the Separate Account;
Investment Policies and Restrictions of
the Fund
Item 6. Management . . . . . . . . Management (P)
Item 7. Deductions and Expenses. . Summary; Deductions and Charges under
the Contracts
Item 8. General Description of
Variable Annuity Contracts Summary; Introduction; Deductions and
Charges under the Contracts-Transfers to
and from Other Contracts; The Contracts;
Voting Rights; Fundamental Changes
Item 9. Annuity Period . . . . . . Summary; Introduction; The
Contracts-Deferred Variable Annuity
Accumulation Period-Annuity Period
Item 10. Death Benefit . . . . . . The Contracts-Deferred Variable Annuity
Accumulation Period
Item 11. Purchases and Contract Value Summary; Deductions and Charges Under
The Contracts; The
Contracts-General-Deferred Variable
Annuity Accumulation Period;
Distribution of the Contracts
Item 12. Redemptions . . . . . . . Summary; The Contracts-General-Deferred
Variable Annuity Accumulation Period
Item 13. Taxes . . . . . . . . . . Cover Page (P); Summary; Introduction;
Deductions and Charges Under the
Contracts-Premium Taxes; The Contracts;
Federal Income Tax Status; Other
Variable Annuity Contracts; Effect of
Non-Qualification; Limitations on
Settlement Options (SAI)
Item 14. Legal Proceedings . . . . Not Applicable
Item 15. Table of Contents of the
Statement of Additional
Information . . . . . . . Table of Contents of the Statement
of Additional Information
Part B INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
Item 16. Cover Page. . . . . . . . Cover Page (SAI)
Item 17. Table of Contents . . . . Table of Contents (SAI)
Item 18. General Information and
History . . . . . . . . . General Information
Item 19. Investment Objectives and
Policies. . . . . . . . . Investment Policies and Restrictions of
the Fund (P); Investment Objectives
Item 20. Management. . . . . . . . Management (SAI)
Item 21. Investment Advisory and Other
Services. . . . . . . . . Summary (P); Deductions and Charges
under the Contracts (P); Management (P);
Management (SAI); Investment Advisory
and Other Services
<PAGE>
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-Sales and 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
Data. . . . . . . . . . . Not Applicable
Item 26. Annuity Payments. . . . . The Contracts-Annuity Period (P)
Item 27. Financial Statements. . . Per Unit Income and Changes in
Accumulation Unit Values (P); Financial
Statements; Experts (SAI)
<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
February 3, 1977 (Investment Company Act Release No. 9629).
<PAGE>
SUPPLEMENT DATED APRIL 30, 1996 TO PROSPECTUS
OF FRANKLIN LIFE VARIABLE ANNUITY FUND A
DATED APRIL 30, 1996
The contracts offered by this Prospectus to participants in the Texas Optional
Retirement Program, as codified in Chapter 830 of Title 8 of the Government Code
of the State of Texas, contain restrictions on redemption in addition to those
set forth in the Prospectus under the heading captioned "Deferred Variable
Annuity Accumulation Period-5. Redemption.'' In accordance with such Chapter,
redemption of contracts required by a participant in the Texas Optional
Retirement Program will not be permitted prior to such participant's termination
of employment in the Texas public institutions of higher education, retirement,
death or attainment of age 70-1/2.
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(USED IN CONNECTION WITH QUALIFIED
TRUSTS OR PLANS OR AS INDIVIDUAL
RETIREMENT ANNUITIES) ISSUED BY
#1 Franklin Square
Springfield, Illinois 62713
Telephone (217) 528-2011
THIS PROSPECTUS OFFERS INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE IN
CONNECTION WITH CERTAIN QUALIFIED PLANS AND TRUSTS ACCORDED SPECIAL TAX
TREATMENT OR AS INDIVIDUAL RETIREMENT ANNUITIES UNDER THE INTERNAL REVENUE CODE
(SEE "FEDERAL INCOME TAX STATUS" ON PAGES 26 TO 30 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 VARIABLE ANNUITY FUND
A (THE "FUND").
THE PRIMARY INVESTMENT OBJECTIVE OF THE FUND IS LONG-TERM APPRECIATION OF
CAPITAL THROUGH INVESTMENT APPRECIATION AND THE RETENTION AND REINVESTMENT OF
INCOME. THERE IS NO ASSURANCE THAT THIS OBJECTIVE WILL BE ATTAINED. GENERALLY,
THE FUND'S INVESTMENTS WILL CONSIST OF EQUITY SECURITIES, MAINLY COMMON STOCKS.
- - --------------------------------------------------------------------------------
THIS PROSPECTUS SETS FORTH INFORMATION ABOUT THE FUND THAT A PROSPECTIVE
INVESTOR OUGHT TO KNOW BEFORE INVESTING AND SHOULD BE KEPT FOR FUTURE REFERENCE.
ADDITIONAL INFORMATION ABOUT THE FUND AND THE FRANKLIN IS CONTAINED IN A
STATEMENT OF ADDITIONAL INFORMATION, DATED APRIL 30, 1996, WHICH HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED
FROM THE EQUITY ADMINISTRATION DEPARTMENT OF THE FRANKLIN BY WRITING TO THE
ADDRESS OR CALLING THE TELEPHONE NUMBER SET FORTH ABOVE OR BY RETURNING THE
REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED
IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE.
THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON
PAGE 33 OF THIS PROSPECTUS.
- - --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- - --------------------------------------------------------------------------------
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1996.
<PAGE>
TABLE OF CONTENTS
Page
Special Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Deductions and Charges. . . . . . . . . . . . . . . . . . . 5
Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Per-Unit Income and Changes in Accumulation Unit Value . . . . . . . 8
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Description of the Separate Account. . . . . . . . . . . . . . . . . 11
Deductions and Charges Under the Contracts . . . . . . . . . . . . . 13
A. Sales and Administration Deductions. . . . . . . . . . . . . 13
B. Premium Taxes. . . . . . . . . . . . . . . . . . . . . . . . 13
C. Mortality and Expense Risk Charge. . . . . . . . . . . . . . 13
D. Investment Management Service Charge . . . . . . . . . . . . 14
E. Transfers to and from Other Contracts. . . . . . . . . . . . 14
F. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . 15
The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
A. General. . . . . . . . . . . . . . . . . . . . . . . . . . . 16
B. Deferred Variable Annuity Accumulation Period. . . . . . . . 18
C. Annuity Period . . . . . . . . . . . . . . . . . . . . . . . 24
Investment Policies and Restrictions of the Fund . . . . . . . . . . 26
Federal Income Tax Status. . . . . . . . . . . . . . . . . . . . . . 29
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 29
The Franklin . . . . . . . . . . . . . . . . . . . . . . . . . . 29
The Contracts: Qualified Plans . . . . . . . . . . . . . . . . . 29
A. Qualified Pension, Profit-Sharing and Annuity Plans. . . . 30
B. H. R. 10 Plans (Self-Employed Individuals) . . . . . . . . 30
C. Section 403(b) Annuities . . . . . . . . . . . . . . . . . 31
D. Individual Retirement Annuities. . . . . . . . . . . . . . 31
Income Tax Withholding . . . . . . . . . . . . . . . . . . . . . 32
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . 34
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . 35
Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . 35
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . 35
Other Variable Annuity Contracts; Effect of Non-Qualification. . . . 35
Table of Contents of Statement of Additional Information . . . . . . 36
- - --------------------------------------------------------------------------------
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 VARIABLE ANNUITY FUND A 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.
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
Variable Annuity Fund A 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.
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.
3
<PAGE>
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 9, below.
ROLLOVER CONTRIBUTION--A transfer pursuant to Sections 402(c)(1), 402(c)(9),
403(a)(4), 403(b)(8) or 408(d)(3) of the Code.
SETTLEMENT OPTION OR OPTIONS--Alternative terms under which payment of the
amounts due in settlement of the Contracts may be received.
SIMPLIFIED EMPLOYEE PENSION--An Individual Retirement Annuity which meets the
additional requirements of Section 408(k) of the Code.
SINGLE STIPULATED PAYMENT CONTRACT--An annuity contract which provides that the
total payment to purchase the contract will be made in a single sum rather than
in periodic instalments. Included are single payment immediate contracts and
single payment deferred contracts.
STIPULATED PAYMENTS--The payment or payments provided to be made to The Franklin
under a Contract.
THE FRANKLIN--The Franklin Life Insurance Company, an Illinois legal reserve
stock life insurance company.
VALUATION DATE--Each date as of which the Accumulation Unit value is determined.
This value is determined on each day (other than a day during which no Contract
or portion thereof is tendered for redemption and no order to purchase or
transfer a Contract is received by the Fund) in which there is a sufficient
degree of trading in the securities in which the Fund invests that the value of
an Accumulation Unit might be materially affected by changes in the value of the
Fund's investments, as of the close of trading on that day.
VALUATION PERIOD--The period commencing on a Valuation Date and ending on the
next Valuation Date.
VARIABLE ANNUITANT--Any natural person with respect to whom a Contract has been
issued and a Variable Annuity has been, will be or (but for death) would have
been effected thereunder. In certain circumstances, a Variable Annuitant may
elect to receive Annuity Payments on a fixed-basis or a combination of a fixed
and variable basis.
VARIABLE ANNUITY--An annuity contract which provides for a series of periodic
annuity payments, the amounts of which may increase or decrease as a result of
the investment experience of a separate account.
4
<PAGE>
<TABLE>
<CAPTION>
TABLE OF DEDUCTIONS AND CHARGES
<S> <C>
Contract Owner Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of purchase payments)
Single Stipulated Payment Contract 5.00%
Periodic Stipulated Payment Contract 6.00%
Administration Fee (as a percentage of purchase payments)
Single Stipulated Payment Contract 4.00% ($100 maximum)
Periodic Stipulated Payment Contract 3.00%
Annual Expenses
(as a percentage of average net assets)
Management Fees 0.44%
Mortality and Expense Risk Fees
Mortality Fees 0.90%
Expense Risk Fees 0.10%
-----
Total Annual Expenses 1.44%
Example
</TABLE>
If you surrender your contract at the end of the applicable
time period:
<TABLE>
<CAPTION>
1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets:
Single Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247
Periodic Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247
</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," p. 11, below. For a more detailed
description of such fees and expenses, see "Deductions and Charges under the
Contracts," pp. 10-13, 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.
5
<PAGE>
SUMMARY
THE CONTRACTS
The individual variable annuity contracts (the "Contracts") being offered by
this Prospectus are for use in connection with certain qualified plans and
trusts accorded special tax treatment under the Code or as Individual Retirement
Annuities. See "Federal Income Tax Status," pp. 26-30, below. The basic
purpose of the Contracts is to provide Annuity Payments which will vary with the
investment performance of Franklin Life Variable Annuity Fund A (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," pp. 9-10, and The "Contracts," pp. 13-23, below.
At any time within 10 days after receipt of a Contract, the Contract Owner may
return the Contract and receive a refund of any premium paid on the Contract.
See "Right to Revocation of Contract," p. 15, 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 appreciation of capital
through investment appreciation and retention and reinvestment of income.
Generally, the Fund's investments will consist of equity securities, mainly
common stocks. The value of investments held in the Fund is subject to the risk
of changing economic conditions as well as the risk inherent in management's
ability to anticipate such changes. See "Investment Policies" and Restrictions
of the Fund, pp. 24-26, below.
INVESTMENT ADVISER; PRINCIPAL UNDERWRITER
The Franklin Life Insurance Company ("The Franklin"), an Illinois legal
reserve stock life insurance company, acts as investment adviser to the Fund.
The Franklin is engaged in the writing of ordinary life policies, annuities and
income protection policies. Franklin Financial Services Corporation, a
wholly-owned subsidiary of The Franklin, is the principal underwriter for the
Fund. The Franklin is an indirect wholly-owned subsidiary of American General
Corporation. See "Investment Management Service Charge," p. 12, and
"Distribution of the Contracts," p. 32, 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.
In the case of Periodic Stipulated Payment Contracts, a deduction equal to 6% of
each periodic payment is made for sales expenses and a deduction equal to 3% of
each such payment is made for administrative expenses. The combined deductions
amount to 9.89% of the net amount invested assuming no premium taxes are
applicable (6.59% for sales expenses and 3.30% for administrative expenses). In
the case of a Single Stipulated Payment Contract, a deduction equal to 5% of the
total single payment is made for sales expenses and a deduction equal to 4%
(with a maximum of $100) of such payment is made for administrative expenses
(for a combined total of 9%). In the case of the minimum Single Stipulated
Payment Contract sold, the combined deductions amount to 9.89% of the net amount
invested assuming no premium taxes are applicable (5.49% for sales expenses and
4.40% for administrative expenses). Any applicable state or local taxes on the
Stipulated Payments (currently, up to 5%) also are deducted from the single or
periodic Stipulated Payments. The amount remaining after deductions is
allocated to the Fund. See "Sales and Administration Deductions," p. 11,
"Transfers to Other Contracts," pp. 12-13, and Premium Taxes," p. 11, below.
6
<PAGE>
The Contracts include The Franklin's undertaking that deductions for sales
and administrative expenses will not be increased regardless of the actual
expenses incurred, and that the Annuity Payments will be paid for the lifetime
of the Variable Annuitant (and, in the case of a joint and last survivor
annuity, for the joint lives of the persons specified) commencing on the
selected initial Annuity Payment Date based on the mortality assumptions
contained in the Contract, regardless of the actual mortality experience among
the Variable Annuitants. In exchange for these undertakings, a charge of 1.002%
of net asset value on an annual basis is made daily against the Fund (consisting
of 0.900% for The Franklin's assurances of annuity rates or mortality factors
and 0.102% for The Franklin's assurances of expense factors). A charge of
0.438% of net asset value on an annual basis is also made daily against the Fund
for investment management services by The Franklin. The charges for annuity
rate assurances, expense assurances and investment management services thus
aggregate 1.440% of net asset value on an annual basis. See "Mortality and
Expense Risk Charge," pp. 11-12, and "Investment Management Service Charge,"
p. 12, below.
MINIMUM PERMITTED INVESTMENT
Subject to limited exceptions, the minimum single Stipulated Payment is
$2,500. The minimum Periodic Stipulated Payment Contract sold is one under
which the annual payments are $120 and each monthly Stipulated Payment is $10.
See "Purchase Limits," p. 14, below.
NEW CONTRACTS NO LONGER BEING ISSUED
THE FUND NO LONGER ISSUES NEW CONTRACTS.
REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the Contract's initial Annuity
Payment Date, may, subject to any limitations on early settlement contained in
an applicable Qualified Plan and subject to limitations on early withdrawals
imposed in connection with Section 403(b) annuity purchase plans (see "Federal
Income Tax Status," pp. 26-30, 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 federal income tax withholding, if applicable. For information as to
Accumulation Units, see "Value of the Accumulation Unit," pp. 15-16, 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," pp. 16-17, "Transfers to and from Other
Contracts," pp. 12-13, "Settlement Options," pp. 18-21, and "Federal Income Tax
Status," pp. 26-30, below.
TERMINATION BY THE FRANKLIN
The Franklin reserves the right to terminate Contracts if Stipulated Payments
are less than $120 in each of three consecutive Contract Years (excluding the
first Contract Year) and if the Cash Value is less than $500 at the end of such
three-year period. Different termination provisions apply in the case of
Individual Retirement Annuities. See "Termination by The Franklin," p. 14,
below.
7
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
The financial information in this table for the year ended December 31, 1995 has
been audited by Ernst & Young LLP, independent auditors. The financial
information in this table for each of the seven years in the period ended
December 31, 1994 was audited by Coopers & Lybrand L.L.P., independent
accountants. The financial information in this table for each of the two years
in the period ended December 31, 1987 was audited by Ernst & Young LLP,
independent auditors. This table should be read in conjunction with the
financial statements and notes thereto included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
1995 1994 1993 1992 1991 1990 1989 1988 1987 1986
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income $ 1.948 $ 1.408 $ 1.231 $ 1.064 $ 1.194 $ 1.326 $ 1.343 $ 1.235 $ 1.100 $ .734
Expenses .875 .773 .773 .723 .654 .569 .528 .454 .458 .389
---------------------------------------------------------------------------------------------------
Net Investment income 1.073 .635 .458 .341 .540 .757 .815 .781 .642 .345
Net realized and
unrealized gain
(loss) on securities 14.139 (.240) .112 .770 14.238 (3.287) 7.021 .043 3.144 2.525
---------------------------------------------------------------------------------------------------
Net change in
accumulation unit
value 15.212 .395 .570 1.111 14.778 (2.530) 7.836 .824 3.786 2.870
Accumulation unit
value:
Beginning of year 53.988 53.593 53.023 51.912 37.134 39.664 31.828 31.004 27.218 24.348
---------------------------------------------------------------------------------------------------
End of year $ 69.200 $ 53.988 $ 53.593 $ 53.023 $ 51.912 $ 37.134 $ 39.664 $ 31.828 $ 31.004 $ 27.218
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
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 1.76% 1.18% .85% .68% 1.19% 1.91% 2.22% 2.47% 2.02% 1.28%
Portfolio turnover rate 14.66% 88.99% 68.62% 59.84% 28.47% 24.01% 64.55% 104.96% 75.96% 45.01%
Number of
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
8
<PAGE>
accumulation
units outstanding
at end of year 150,474 172,507 198,763 217,948 229,368 256,831 277,735 305,265 312,966 284,005
</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 VARIABLE ANNUITY FUND A
INDIVIDUAL VARIABLE ANNUITY CONTRACTS ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
The Contracts offered by this Prospectus are designed primarily to assist in
retirement planning for individuals. The Contracts provide Annuity Payments for
life commencing on a selected Annuity Payment Date; other Settlement Options are
available. The amount of the Annuity Payments will vary with the investment
performance of the assets of the Fund, a separate account which has been
established by The Franklin under Illinois insurance law. For the primary
investment objective of the Fund, see "Investment Policies and Restrictions of
the Fund," pp. 24-26, 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 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.
The Franklin is a legal reserve stock life insurance company organized under
the laws of the State of Illinois in 1884. The Franklin issues individual life
insurance, annuity and accident and health insurance policies, group annuities
and group life and health insurance and offers a variety of whole life, life,
retirement income and level and decreasing term insurance plans. Its Home Office
is located at #1 Franklin Square, Springfield, Illinois 62713.
On January 31, 1995, American General Corporation ("American General")
through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"),
acquired American Franklin Company ("AFC"), the holding company of The Franklin,
from American Brands, Inc. The address of AFC is #1 Franklin Square,
Springfield, Illinois 62713. The address of AGC Life is American General
Center, Nashville, Tennessee 37250-0001. The address of American General is
2929 Allen Parkway, Houston, Texas 77019-2155.
American General is the parent company of one of the nation's largest
diversified financial services organizations. American General's operating
subsidiaries are leading providers of retirement annuities, consumer loans, and
life insurance. The company was incorporated as a general business corporation
in Texas
10
<PAGE>
in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
Subject to the terms of any plan pursuant to which a Contract is issued,
the Contract Owner may elect to have a portion of the Stipulated Payment or
Payments applied by The Franklin for the purchase of a Fixed-Dollar Annuity.
Fixed-Dollar Annuity contracts do not, however, participate in the Fund and
the contracts are transferred to the general account of The Franklin. In
cases where both a Fixed-Dollar and a Variable Annuity are provided under the
same contract, either annuity may be terminated and the Cash Value
attributable thereto obtained or other Settlement Option elected by the
Contract Owner, at any time prior to commencement of Annuity Payments by The
Franklin; under these circumstances, the other annuity may be continued in
effect, provided that the annual stipulated payment allocated to the other
annuity satisfies The Franklin's usual underwriting practices. These
practices presently require that each periodic Stipulated Payment which
purchases the Variable Annuity be at least $10. See generally "Redemption,"
pp. 16-17, "Settlement Options," pp. 18-21, and "Federal Income Tax
Status--Individual Retirement Annuities," p. 30, below.
Unless otherwise indicated in this Prospectus, the discussion of the Contracts
herein refers to Variable Annuity Contracts, or to the Variable Annuity portion
in cases where both a variable and a Fixed-Dollar Annuity are provided in the
same contract, and not to any Fixed-Dollar Annuity. Provisions relating to a
Fixed-Dollar Annuity and a Variable Annuity are separate, and neither is
dependent upon the other in its operation.
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 Contract
rights herein described may be subject to the terms and conditions of any
Qualified Plan under which such 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.
DESCRIPTION OF THE SEPARATE ACCOUNT
The Fund was established as a separate account on November 5, 1969 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," p. 30, below. The Fund meets the definition of a "Separate
Account" under the federal securities laws.
Under the provisions of the Illinois Insurance Code, the income, gains or
losses of the Fund are credited to or charged against the amounts allocated to
the Fund in accordance with the terms of the Contracts, without regard to the
other income, gains or losses of The Franklin. The assets of the Fund are not
chargeable with liabilities arising out of The Franklin's other business
activities, including liabilities of any other separate account which may be
established. These assets are held with relation to the Contracts described in
this Prospectus and such other Variable Annuity contracts as may be issued by
The Franklin and designated by it as participating in the Fund. All obligations
arising under the Contracts, including the promise to make Annuity Payments,
are general corporate obligations of The Franklin. Accordingly, all of The
Franklin's assets (except those allocated to other separate accounts which have
been or may be established) are available to meet its obligations and expenses
under the Contracts participating in the Fund.
The Franklin is taxed as a "life insurance company" under the Code. The Fund
is subject to tax as part of The Franklin for federal income tax purposes.
However, the operations of the Fund are considered separately from the other
operations of The Franklin in computing The Franklin's tax liability and the
Fund is not affected by federal income taxes paid by The Franklin with respect
to its other operations. The operations of the Fund are
11
<PAGE>
treated separately from the other operations of The Franklin for accounting and
financial statement purposes. Under existing law, no federal income tax is
payable by The Franklin on investment income and realized capital gains of the
Fund. See "Federal Income Tax Status," pp. 26-30, below.
12
<PAGE>
DEDUCTIONS AND CHARGES UNDER THE CONTRACTS
A. SALES AND ADMINISTRATION DEDUCTIONS
Deductions will be made as follows for sales expenses with respect to the
Contracts and for administrative expenses with respect to Contracts and the
Fund:
(1) Under Single Stipulated Payment Contracts, a deduction of 4%
(with a maximum of $100) is made from the single payment for administrative
expenses. In addition a sales expense deduction of 5% of the total payment
is made from the payment. In the case of the minimum Single Stipulated
Payment Contract sold, the combined deductions for administrative expenses
and sales expenses amount to 9.89% of the net amount invested (5.49% for
sales expenses and 4.40% for administrative expenses) assuming no premium
taxes are applicable.
(2) Under Periodic Payment Contracts, a deduction of 6% is made from
each payment for sales expenses and 3% for administrative expenses. The
combined deductions for sales and administrative expenses amount to 9.89%
of the net amount invested (6.59% for sales expenses and 3.30% for
administrative expenses) assuming no premium taxes are applicable.
Deductions for sales expenses are made pursuant to a Sales Agreement with
Franklin Financial Services Corporation ("Franklin Financial"), a wholly-owned
subsidiary of The Franklin and the principal underwriter of the Fund. See
"Distribution of the Contracts," p. 32, below, and in the Statement of
Additional Information. The above deductions for administrative expenses, and
charges for mortality and expense risk assurances discussed under "Mortality and
Expense Risk Charge," pp. 11-12, below, are made pursuant to an Administration
Agreement dated June 30, 1971 between the Fund and The Franklin. The
Administration Agreement is described under "Investment Advisory and Other
Services" in the Statement of Additional Information.
The total deductions made in respect of sales expenses of Franklin Financial
in 1993, 1994 and 1995 were $36,552, $28,833 and $20,566, respectively, and all
such amounts were retained on behalf of Franklin Financial.
The administration deductions are designed to cover the actual expenses of
administering the Contracts and the Fund, and The Franklin does not expect to
realize a profit by virtue of these deductions. The aggregate dollar amounts of
the administration deductions for the fiscal years ended December 31, 1993, 1994
and 1995 were $17,802, $14,164 and $10,279, 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% as of February 7,
1996 are charged by various jurisdictions in which The Franklin is transacting
business and in which it may, after appropriate qualification, offer Contracts.
C. MORTALITY AND EXPENSE RISK CHARGE
While Annuity Payments will reflect the investment performance of the Fund,
they will not be affected by adverse mortality experience or by any excess in
the actual expenses of the Contracts and the Fund over the maximum
administration deductions provided for in the Contracts. The Franklin assumes
the risk that Annuity Payments will continue for a longer period than
anticipated because the Variable Annuitant lives longer than expected (or the
Variable Annuitants as a class do so) and also assumes the risk that the
administration deductions may be insufficient to cover the actual expenses of
the administration of the Contracts and of the Fund (except those expenses
listed under "Investment Management Service Charge," p. 12, 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 regardless of the actual
13
<PAGE>
mortality and expense experience. The mortality risk charge is imposed
regardless of whether or not the payment option selected involves a life
contingency.
For assuming these risks, The Franklin imposes a daily charge against the
value of the Accumulation Unit and the Annuity Unit. (For further information as
to the Accumulation Unit and the Annuity Unit, see "Deferred Variable Annuity
Accumulation Period" and "Annuity Period," pp. 15-21 and pp. 21-23,
respectively, below.) These charges are at the current combined annual rate of
1.002% (.002745% on a daily basis), of which .900% is for annuity rate and
mortality assurances and .102% is for expense assurances.
During 1993, 1994 and 1995, The Franklin earned and was paid $112,746, $98,321
and $97,809, respectively, by reason of these charges. Such charges during 1995
were equal to 1.002% 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 Fund at the annual rate of 0.438% of the
Fund's assets, computed by imposing a daily charge of 0.0012% against the value
of the Accumulation Unit and of the Annuity Unit, in determining those values.
The investment management services are rendered and the charge is made
pursuant to an Investment Management Agreement executed and dated January 31,
1995, pursuant to approval by the Contract Owners at their annual meeting held
on April 17, 1995, and to be annually renewed by a vote of the Board of Managers
of the Fund commencing in 1997. The Investment Management Agreement is
described under "Investment Advisory and Other Services" in the Statement of
Additional Information.
During 1993, 1994 and 1995, The Franklin earned and was paid $49,288, $42,982
and $42,758, respectively, under the Investment Management Agreement then in
effect.
E. 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 Money Market Variable Annuity Fund C and Franklin Life
Variable Annuity Fund B, other separate accounts of The Franklin funding
Variable Annuity contracts, no longer issue new contracts. In addition, in all
instances of permitted transfers set forth above, any administration deductions
otherwise imposed by the Fund will be waived with respect to such transferred
funds. However, any new periodic Stipulated Payments made on a Contract offered
by this Prospectus will be subject to the normal sales and administration
deductions applicable to periodic Stipulated Payments under such Contract.
14
<PAGE>
It is not clear whether gain or loss will be recognized for federal income tax
purposes upon the redemption of a Contract, another annuity contract or a 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 Contract or another contract
issued by The Franklin for purposes of purchasing a different contract issued by
The Franklin is advised to consult a qualified tax advisor prior to the time of
redemption.
F. MISCELLANEOUS
The Fund's total expenses for 1995 were $140,567, or 1.440% of average net
assets during 1995.
15
<PAGE>
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 (subject to the following two paragraphs) set forth in the Contract.
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," pp. 21-23, 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.
2. INCREASE OR DECREASE BY CONTRACT OWNER IN AMOUNT OR NUMBER OF PERIODIC
STIPULATED PAYMENTS
The Contract Owner may increase the periodic Stipulated Payments under a
Periodic Stipulated Payment Contract (except in the case of an Individual
Retirement Annuity, which cannot be increased above the amounts described under
"Purchase Limits," immediately below) up to an amount on an annual basis equal
to twice the amount of the first Stipulated Payment on an annual basis.
Similarly, subject to the limitations described under "Purchase Limits,"
immediately, below, the amount of a Periodic Stipulated Payment may be decreased
by the Contract Owner on any date a Stipulated Payment is due.
The Contract Owner may continue making Stipulated Payments after the agreed
number of Stipulated Payments has been made, but The Franklin will not accept
Stipulated Payments after age 75. Submission of a Stipulated Payment in an
amount different from that of the previous payment, subject to the aforesaid
limits, will constitute notice of the election of the Contract Owner to make
such change.
16
<PAGE>
3. ASSIGNMENT OR PLEDGE
A 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 Contracts may,
depending on such factors as the amount pledged or assigned, be treated as a
taxable distribution. See "Individual Retirement Annuities," pp. 28-29, below,
for special rules applicable thereto. Moreover, in certain instances, pledges
or assignments of a Qualified Contract may result in the imposition of certain
tax penalties. See generally "The Contracts: Qualified Plans," pp. 27-29,
below.
Persons contemplating the assignment or pledge of a 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 $10 per month ($120 per year).
No single Stipulated Payment may be less than $2,500, except that in the case
of a deferred Single Stipulated Payment Contract to be used as an Individual
Retirement Annuity funded with a Rollover Contribution, the total Stipulated
Payment applicable to the Variable Annuity, prior to administration and sales
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 Contract issued
for use as an Individual Retirement Annuity, annual premium payments may not, in
general, exceed $2,000. However, if the Individual Retirement Annuity is a
Simplified Employee Pension, annual premium payments may not exceed $24,500.
Single Stipulated Payment Contracts are not available as Individual Retirement
Annuities except for those funded with Rollover Contributions and except for
those to be used as Simplified Employee Pensions.
5. TERMINATION BY THE FRANKLIN
The Franklin reserves the right to terminate any Contract, other than a
Contract issued for use as an Individual Retirement Annuity, if total Stipulated
Payments paid are less than $120 in each of three consecutive Contract Years
(excluding the first Contract Year) and if the Cash Value is less than $500 at
the end of such three-year period. The Franklin must give 31 days' notice by
mail to the Contract Owner of such termination. The Franklin will not exercise
any right to terminate such Contract if the value of the Contract declines to
less than $500 as a result of a decline in the market value of the securities
held by the Fund.
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 federal income tax withholding, if
applicable. For certain tax consequences upon such payment, see "Federal Income
Tax Status," pp. 26-30, 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 and a written request for its
revocation 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.
17
<PAGE>
7. NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
B. DEFERRED VARIABLE ANNUITY ACCUMULATION PERIOD
1. CREDITING ACCUMULATION UNITS; DEDUCTIONS FOR SALES AND ADMINISTRATIVE
EXPENSES
During the accumulation period--the period before the initial Annuity Payment
Date--deductions from Stipulated Payments for sales and administrative expenses
are made as specified under "Deductions and Charges Under the Contracts," pp.
11-13, above. In addition, any applicable premium taxes, also as specified
above under that caption, are deducted from the Stipulated Payments. The
balance of each Stipulated Payment is credited to the Contract Owner in the form
of Accumulation Units.
The number of a Contract Owner's Accumulation Units is determined by dividing
the net amount of Stipulated Payments credited to his or her Contract by the
value of an Accumulation Unit on the day on which the Stipulated Payment is
received, except that, in the case of the original application for a Variable
Annuity Contract, the value of an Accumulation Unit within two business days
after receipt of the application will be used if the application and all
information necessary to process the application are complete upon receipt. If
the application and such information are not complete upon receipt, The
Franklin, within five days after the receipt of an original application and
initial payment at the Home Office of The Franklin, will attempt to complete
the application and will either accept the application or reject the
application and return the initial payment.
The number of Accumulation Units so determined will not be changed by any
subsequent change in the value of an Accumulation Unit, but the dollar value of
an Accumulation Unit may vary from day to day depending upon the investment
experience of the Fund.
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, 1971.
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.
18
<PAGE>
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. See "Deductions and Charges
Under the Contracts," pp. 11-13, 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
In determining the value of the assets of the Fund, each security traded on a
national securities exchange is valued at the last reported sale price on the
Valuation Date. If there has been no sale on such day, then the value of such
security is taken to be the current bid price at the time as of which the value
is being ascertained. Any security not traded on a securities exchange but
traded in the over-the-counter market is valued at the current bid price on the
Valuation Date. Any securities or other assets for which market quotations are
not readily available 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, 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. Early
withdrawal of certain amounts attributable to Contracts issued pursuant to an
annuity purchase plan meeting the requirements of Code Section 403(b) may be
prohibited. See "Federal Income Tax Status," pp. 26-30, 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.
Where the Contract Owner has both a Variable Annuity and a Fixed-Dollar
Annuity, a request for partial redemption, if no other indication is obtained
from the Contract Owner, will be treated as a pro rata request for partial
redemption of the Variable Annuity and the Fixed-Dollar Annuity.
In lieu of a single payment of the amount due upon redemption of a Contract,
the Contract Owner may elect, at any time prior to the initial Annuity Payment
Date and during the lifetime of the Variable Annuitant, to have all or any
portion of the amount due applied under any available Settlement Option. See
"Settlement Options," pp. 18-21, below. However, no Settlement Option may be
elected upon redemption without surrender of the entire Contract.
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The payment of the Cash Value of a redeemed Contract either in a single
payment or under an available Settlement Option may be subject to federal income
tax withholding and federal tax penalties. See "Federal Income Tax Status," pp.
26-30, below.
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. For payment of death proceeds in the event
no Beneficiary is surviving at the death of the Variable Annuitant, see "Change
of Beneficiary or Mode of Payment of Proceeds; Death of Beneficiaries," p. 18,
below. The Code imposes certain requirements concerning payment of death
benefits payable before the initial Annuity Payment Date in the case of
Qualified Contracts issued in connection with qualified pension and profit-
sharing plans under Section 401(a) of the Code. Under those Contracts, death
benefits will be paid as specified in the governing plan documents. The terms of
such documents should be consulted to determine the death benefits and any
limitations the plan may impose.
Subject to the foregoing, the Contract Owner may, at any time prior to the
initial Annuity Payment Date, elect that all or any portion of such death
proceeds be paid to the Beneficiary under any one of the available Settlement
Options. See "Settlement Options," pp. 18-21, 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," pp. 29-30, 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," pp. 18-21, below.
7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS
Upon a failure to make a Stipulated Payment under a Periodic Stipulated
Payment Contract, subject to The Franklin's power of termination described under
"Termination by The Franklin," p. 14, above, and subject to the right of The
Franklin to pay the value of the Contract Owner's account in a single sum at the
initial Annuity Payment Date if the value on such date is less than $2,000, the
Contract Owner may elect, prior to the death of the Variable Annuitant and prior
to the initial Annuity Payment Date, either of the following options:
(a) to exercise any of the available Settlement Options described under
"Settlement Options," pp. 18-21, below, or redeem the Contract as described
under "Redemption," pp. 16-17, 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.
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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.
9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF
BENEFICIARIES
While the Contract is in force the Contract Owner may (by filing a written
request at the Home Office of The Franklin) change the Beneficiary or Settlement
Option, or, if agreed to by The Franklin, change to a mode of payment different
from one of the Settlement Options, subject to applicable limitations under the
Code and any governing Qualified Plan.
If any Beneficiary predeceases the Variable Annuitant, the interest of such
Beneficiary will pass to the surviving Beneficiaries, if any, unless otherwise
provided by endorsement. If no Beneficiary survives the Variable Annuitant and
no other provision has been made, then, upon the death of the Variable
Annuitant, the proceeds will be paid in a single sum to the Contract Owner or,
if the Variable Annuitant was the Contract Owner, to the executors or
administrators of the Contract Owner's estate.
10. SETTLEMENT OPTIONS
At any time prior to the initial Annuity Payment Date and during the lifetime
of the Variable Annuitant, the Contract Owner may elect to have all or a portion
of the amount due in settlement of the Contract applied under any of the
available Settlement Options described below. If the Contract Owner fails to
elect a Settlement Option, payment automatically will be made in the form of a
life annuity. See "First Option," p. 19, below, and "Deferred Variable Annuity
Contracts," p. 21, 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," pp. 16-17, above,
and "Payment of Accumulated Value at Time of Death," p. 17, above.
Available Settlement Options may be selected on a fixed or variable basis or a
combination thereof, except that Settlement Options may be selected only on a
fixed basis under a Contract issued for use as an Individual Retirement Annuity.
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
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<PAGE>
the case of a deferred Single Stipulated Payment Contract funded with a Rollover
Contribution not in excess of $2,000. See "Purchase Limits," p. 14, above.
Further, if at any time payments under a Settlement Option become less than $25
per payment, The Franklin has the right to change the frequency of payment to
such intervals as will result in payments of at least $25.
In the case of Immediate Variable Annuity Contracts, the only Settlement
Options offered are the life annuity, the life annuity with 120, 180 or 240
monthly payments certain, or the joint and last survivor life annuity. See
"First Option," "Second Option" and "Fourth Option," pp. 19-20, below, and
"Immediate Variable Annuity Contracts," p. 21, below.
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
Contracts issued in connection therewith. 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 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 are advised to 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 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 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 or Sixth 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.
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.
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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.
For example, if $10,000 were applied on the first Annuity Payment Date to the
purchase of an annuity under this Option, the Annuity Unit value at the initial
Annuity Payment Date were $2.00, the number of Annuity Units represented by each
Annuity Payment were 30.55, 10 Annuity Payments were paid prior to the date of
the Variable Annuitant's death and the value of an Annuity Unit on the Valuation
Date following the Variable Annuitant's death were $2.05, the amount paid to the
Beneficiary would be $9,623.73, computed as follows:
<TABLE>
<S> <C>
($10.000 - (30.55 x 10)) X 2.05 = (5,000 - 305.5) X $2.05 = 4,694.5 X $2.05 = $9,623.73
-------
$2.00
</TABLE>
FOURTH OPTION--JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable
monthly during the joint lifetime of the Variable Annuitant and a secondary
variable annuitant, and thereafter during the remaining lifetime of the
survivor, ceasing with the last Annuity Payment due prior to the death of the
survivor. Since there is no minimum number of guaranteed payments under this
Option, it would be possible under this Option to receive only one Annuity
Payment if both the Variable Annuitant and the secondary variable annuitant died
before the second Annuity Payment Date, or to receive only two Annuity Payments
if both the Variable Annuitant and the secondary variable annuitant died after
the second Annuity Payment Date but before the third Annuity Payment Date, and
so forth.
FIFTH OPTION--PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly to
the Variable Annuitant for a number of years which may be from one to 30 (as
selected by the Contract Owner in electing this Option). At the death of the
Variable Annuitant, payments will be continued to the Beneficiary for the
remaining period. The cash value under this Settlement Option is the then
present value of the current dollar amount of any unpaid Annuity Payments
certain. A Contract under which Annuity Payments are being made under this
Settlement Option may be redeemed in whole or in part at any time by the
Contract Owner for the aforesaid cash value of the part of the Contract
redeemed. See "Redemption," pp. 16-17, 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.
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11. TRANSFER OF FIXED-DOLLAR ANNUITY VALUES TO ACQUIRE VARIABLE ANNUITY
ACCUMULATION UNITS
Where a Deferred Variable Annuity and a Fixed-Dollar Annuity have been issued
on the same Contract, on any Contract Anniversary during the accumulation period
of the Contract, the Contract Owner may have the cash value of his Fixed-Dollar
Annuity transferred in whole or in part to his Variable Annuity to purchase
Variable Annuity Accumulation Units at net asset value, without any sales or
administrative deductions. However, any such partial transfer of cash value must
be at least $500. (A similar privilege, but available four times in one contract
year, permits transfer of Variable Annuity Accumulation Unit values to establish
values under a Fixed-Dollar Annuity issued on the same Contract.)
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 Contracts issued in connection with qualified pension and profit-sharing
plans (including H.R. 10 Plans) under Section 401(a) of the Code and annuity
plans (including H.R. 10 Plans) under Section 403(a) of the Code provide for
Annuity Payments to commence at the date and under the Settlement Option
specified in the plan. The Contract Owner may defer the initial Annuity Payment
Date and continue the Contract to a date not later than the Contract Anniversary
on which the attained age of the Variable Annuitant is 75 unless the provisions
of the Code or any governing Qualified Plan require Annuity Payments to commence
at an earlier date. See "Limitations on Settlement Options" in the Statement of
Additional Information. The Franklin will require satisfactory proof of age of
the Variable Annuitant prior to the initial Annuity Payment Date.
(b) IMMEDIATE VARIABLE ANNUITY CONTRACTS
The Franklin offers three forms of Immediate Variable Annuity Contracts: the
life annuity, the life annuity with 120, 180 or 240 monthly payments certain and
the joint and last survivor life annuity. For a description of these forms of
annuity, see the First, Second and Fourth Options under "Settlement Options,"
pp. 18-21, 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, 1971 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)," this page and page 23,
below, and "Assumed Net Investment Rate," p. 23, below.
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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.
3. DETERMINATION OF AMOUNT OF FIRST MONTHLY ANNUITY PAYMENT (DEFERRED
VARIABLE ANNUITY CONTRACTS ONLY)
When Annuity Payments commence under a Deferred Variable Annuity Contract, the
value of the Contract Owner's account is determined as the product of the value
of an Accumulation Unit on the first Annuity Payment Date and the number of
Accumulation Units credited to the Contract Owner's account as of such Annuity
Payment Date.
The Contract utilizes tables indicating the dollar amount of the first monthly
Annuity Payment under each Settlement Option for each $1,000 of Cash Value of
the Contract. The first monthly Annuity Payment varies according to the
Settlement Option selected (see "Settlement Options," pp. 18-21, 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," p. 13, above. (The Contracts provide for age adjustment based on the
year of birth of the Variable Annuitant and any joint Variable Annuitant; a
person's actual age when Annuity Payments commence may not be the same as the
"adjusted age" used in determining the amount of the first Annuity Payment.)
For Contracts utilizing sex-distinct annuity tables, the tables are determined
from the Progressive Annuity Table assuming births in the year 1900 and a net
investment rate of 3-1/2% a year. The total first monthly Annuity Payment is
determined by multiplying the number of thousands of dollars of Cash Value of
the Contract Owner's Contract by the amount of the first monthly Annuity Payment
per $1,000 of value from the tables in the Contract.
The amount of the first monthly Annuity Payment, determined as above, is
divided as of the initial Annuity Payment Date by the value of an Annuity Unit
to determine the number of Annuity Units represented by the first Annuity
Payment. Annuity Units are valued as of a Valuation Date not less than 10 days
prior to the initial Annuity Payment Date, pursuant to the procedure discussed
under "The Annuity Unit," immediately, 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)," p. 23, 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 Annuity
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.
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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 sales and administrative expenses and premium taxes) by the
applicable annuity factor from the annuity 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," pp. 21-22, 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," p. 13, 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 following are the fundamental investment policies of the Fund:
(1) The primary objective of the Fund in making investments is long-term
appreciation of capital. Occasional investments for the purpose of seeking
short-term capital appreciation may also be made.
(2) Realization of current investment return is a secondary objective,
subordinate to the primary objective.
(3) Any investment income and realized capital gains (net of any capital
gains tax) will be retained and reinvested.
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<PAGE>
(4) The Fund's policy is to be substantially fully invested. Generally, the
Fund's investments will consist of equity securities, mainly common stocks. The
purchase of common stock may be made both in rising and declining markets. When
it is determined, however, that investments of other types may be advantageous
in reaching the Fund's objectives, on the basis of combined considerations of
risk, income and appreciation, investments may be made in bonds, debentures,
notes or other evidences of indebtedness, issued publicly or placed privately,
of a type customarily purchased for investment by institutional investors,
including United States Government securities, in corporate preferred stock or
in certificates of deposit, or funds may be retained in cash. Such debt
securities may, or may not, be convertible into stock or be accompanied by stock
purchase options or warrants.
(5) Temporary investments may be made in United States Government securities,
certificates of deposit, short-term corporate debt securities (subject to
fundamental restriction (4), below) and other similar securities, pending
investment in the above-mentioned securities.
While The Franklin is obligated to make Annuity Payments in accordance with
selected Settlement Options, the amount of the Annuity Payments is not
guaranteed but is a variable amount. Since, historically, the value of a
diversified portfolio of common stocks held for an extended period of time has
tended to rise during periods of inflation and growth in the economy, the
Annuity Payment under a Variable Annuity should tend to conform more closely to
changes in the cost of living and the level of the economy than payments under a
Fixed-Dollar Annuity would do. However, there is no assurance that this
objective can be attained. There have been times when the cost of living has
increased while securities prices have decreased and times when the cost of
living and the level of the economy have gone up or down with no direct
correlation to the value of securities in general or to any particular type or
class of securities. The value of investments held in the Fund will fluctuate
daily and is subject to the risk of changing economic conditions as well as the
risks inherent in the ability of management to anticipate changes in those
conditions. The value of investments in common stock has historically fluctuated
more greatly than the value of investments in securities such as bonds,
debentures, notes, other evidences of indebtedness, preferred stock and
certificates of deposit, and hence investments in common stocks offer greater
opportunities for appreciation and greater risk of depreciation. There is no
assurance that the Cash Value of the Contract during the years prior to the
Variable Annuitant's retirement or the aggregate amount received during the
years following the initial Annuity Payment Date will equal or exceed the
Stipulated Payments on the Contract.
The investment policies of the Fund include a provision that investments may
be made in securities other than common stocks if they are advantageous in
reaching the Fund's objectives, on the basis of combined considerations of risk,
income and appreciation. No assurance can be given, however, that investment in
such other securities will accomplish such objectives. Investments may be made
in bonds, debentures, notes or other evidences of indebtedness, issued publicly
or placed privately, of a type customarily purchased for investment by
institutional investors, including United States Government securities, and may
also be made in corporate preferred stock or in certificates of deposit, or
funds may be retained in cash. Such debt securities may, or may not, be
convertible into stock or be accompanied by stock purchase options or warrants.
Funds may also be temporarily invested in United States Government securities,
certificates of deposit, short-term corporate debt securities (subject to
certain restrictions) and other similar securities, pending long-term
investment. Although debt securities and preferred stocks of the type in which
the Fund would invest are generally considered to present less risk than common
stocks, the value of such securities is subject to market fluctuations as a
result of money market rates, the demand for such securities and factors
relating to the individual issuers of such securities. In the event the Fund
invests in such securities, such factors may limit the ability of the Fund to
convert such securities to cash and reinvest in other types of securities.
Historically, the Fund has not invested significant amounts in debt securities
or preferred stocks except for short-term investments in debt securities pending
ultimate long-term application of funds for investment purposes.
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 will be invested in any one industry or group of related industries.
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(2) The Fund will not issue senior securities, except that the Fund may
borrow money as set forth in paragraph (3) immediately below.
(3) The Fund will not borrow money except for temporary or emergency purposes
from banks, 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.
(4) 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.
(5) 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 readily
marketable interests in real estate investment trusts or similar securities,
which may be deemed to represent indirect interests in real estate.
(6) The Fund will not engage in the making of loans to other persons, except
that the Fund may acquire privately placed corporate debt securities of a type
customarily purchased by institutional investors. Such securities, if required
to be registered under the Securities Act of 1933 prior to public distribution,
will be included in the 10% limitation specified in fundamental restriction (4),
above. The foregoing does not restrict the purchase by the Fund of a portion of
an issue of publicly distributed bonds, debentures or other securities, whether
or not the purchase is made upon the original issuance of such securities.
(7) The Fund will not engage in the purchase or sale of commodities or
commodity contracts.
(8) 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.
(9) 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, 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 fundamental investment policies 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
policies 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:
(10) 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
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under the Illinois Insurance Code is thereby exempted from the other investment
restrictions specified under this caption.
(11) The Fund will not invest in companies for the purpose of exercising
control or management.
(12) The Fund will not invest in the securities of other investment
companies.
(13) The Fund will not purchase securities on margin, except for such short-
term credits as are necessary for the clearance of transactions.
(14) The Fund will not make short sales of securities.
(15) The Fund will not invest in corporate debt (other than commercial paper)
or preferred stock that is rated lower than one of the three top grades by
Moody's Investors Services, Inc. or Standard & Poor's Corporation and the Fund
will not invest in commercial paper rated lower than one of the two top grades
by such rating agencies.
FEDERAL INCOME TAX STATUS
INTRODUCTION
The Contracts are designed for use by individuals in connection with Qualified
Plans under the Code. The federal income tax treatment of the Contracts and
payments received thereunder depends on various factors, including, among other
factors, the tax status of The Franklin, the type of retirement plan or program
in connection with which the Contracts are used and the form in which payments
are received. The discussion of federal income taxes contained in this
Prospectus, which focuses on rules applicable to Contracts purchased under this
Prospectus, is general in nature and is based on existing federal income tax
law, which is subject to change. The tax discussion is not intended as tax
advice. The applicable federal income tax law is complex and contains many
special rules and exceptions in addition to the general rules summarized herein.
For these reasons, various questions about the applicable rules exist.
Accordingly, each person contemplating the purchase of a Contract is advised to
consult with a qualified tax advisor concerning federal income taxes and any
other federal, state or local taxes that may be applicable.
THE FRANKLIN
The Franklin is taxed as a "life insurance company" under the Code. Since the
operations of the Fund are part of the overall operations of The Franklin, the
Fund is subject to tax as part of The Franklin for federal income tax purposes.
Thus, the Fund is not taxed separately as a "regulated investment company" under
the Code.
Under the Code a life insurance company like The Franklin is generally taxed
at regular corporate rates, under a single-phase system, on its specially-
computed life insurance company taxable income. Some special rules continue to
apply, however, in the case of segregated asset accounts like the Fund.
Investment income and realized capital gains on the assets of the Fund are
reinvested by The Franklin for the benefit of the Fund and are taken into
account in determining the value of Accumulation Units and Annuity Units. As a
result, such income and gains are applied to increase reserves applicable to the
Fund. Under the Code, no federal income tax is payable by The Franklin on such
investment income or on realized capital gains of the Fund on assets held in the
Fund.
THE CONTRACTS: QUALIFIED PLANS
The manner in which payments received under a Contract are taxed for federal
income tax purposes depends on the form of payment. If payments are received in
the form of an annuity, then, in general, under Section 72 of the Code, such
payment is taxable to the recipient as ordinary income to the extent that such
payment exceeds the portion, if any, of the cost basis of the Contract that is
allocable to that payment. A
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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.
Under a provision of federal income tax law effective for Contracts entered
into after October 21, 1988, distributions from a Contract are generally not
subject to aggregation with distributions from other annuity contracts issued by
The Franklin (or its affiliates) for the purpose of determining the taxability
of distributions not in the form of an annuity.
The Qualified Contracts are designed for use in connection with several types
of Qualifed Plans, as described generally below.
A. QUALIFIED PENSION, PROFIT-SHARING AND ANNUITY PLANS
Under pension and profit-sharing plans that qualify under Section 401(a) of
the Code and annuity purchase plans that qualify under Section 403(a) of the
Code (collectively "Corporate Qualified Plans"), amounts contributed by an
employer to the Corporate Qualified Plan on behalf of an employee and any gains
thereon are not, in general, taxable to the employee until distribution.
Generally, the cost basis of an employee under a Corporate Qualified Plan will
equal the amount of non-deductible contributions, if any, that the employee made
to the Corporate Qualified Plan.
The Code imposes an additional tax of 10% on the taxable portion of any early
withdrawal from a Corporate Qualified Plan made by a Variable Annuitant before
age 59-1/2, death, or disability. The additional income tax on early withdrawals
will not apply however to certain distributions including (a) distributions
beginning after separation from service that are part of a series of
substantially equal periodic payments made at least annually for the life of the
Variable Annuitant or the joint lives of the Variable Annuitant and his or her
Beneficiary, and (b) distributions made to Variable Annuitants after attaining
age 55 and after separating from service. Further, additional penalties may
apply to distributions made on behalf of a "5-percent owner" (as defined by
Section 416(i)(1)(B) of the Code).
If a lump sum payment of the proceeds of a Contract qualifies as a "lump sum
distribution" under the Code, special tax rules (including limited capital gain
and income averaging treatment in some circumstances) may apply.
B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS)
Self-employed persons (including members of partnerships) are permitted to
establish and participate in Corporate Qualified Plans under Sections 401(a) and
403(a) of the Code. Corporate Qualified Plans in which self-employed persons
participate are commonly referred to as "H.R. 10 Plans."
The tax treatment of annuity payments and lump sum payments received in
connection with an H.R. 10 Plan is, in general, subject to the same rules
described in "Qualified Pension, Profit-Sharing and Annuity Plans," immediately
above. Some special rules apply, however, in the case of self-employed persons
which, for example, affect certain "lump sum distribution" and "rollover" rules.
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C. SECTION 403(B) ANNUITIES
Section 403(b) of the Code permits public schools and other tax-exempt
organizations described in Section 501(c) (3) of the Code to purchase annuity
contracts for their employees subject to special tax rules.
If the requirements of Section 403(b) are satisfied, amounts contributed by
the employer to purchase an annuity contract for an employee, and any gains
thereon, are not, subject to certain limitations, taxable to the employee until
distributed to the employee. Generally, the cost basis of an employee under a
Section 403(b) annuity contract will equal the amount of any non-deductible
contributions the employee made toward the contract plus any employer
contributions that were taxable to the employee because they exceeded excludable
amounts.
Federal tax law imposes limitations on distributions from Section 403(b)
annuity contracts. Withdrawals of amounts attributable to contributions made
pursuant to a salary reduction agreement in connection with a Section 403(b)
annuity contract will be permitted only (1) when an employee attains age 59-1/2,
separates from service, dies or becomes totally and permanently disabled or (2)
in the case of hardship. A withdrawal made in the case of hardship may not
include income attributable to the contributions. However, these limitations
generally do not apply to distributions which are attributable to assets held as
of December 31, 1988. In general, therefore, contributions made prior to January
1, 1989, and earnings on such contributions through December 31, 1988, are not
subject to these limitations. In addition, these limitations do not apply to
contributions made other than by a salary reduction agreement. A number of
questions exist concerning the application of these rules. Anyone considering a
withdrawal from a Contract issued in connection with a Section 403(b) annuity
plan should consult a qualified tax advisor.
The 10% penalty tax on early withdrawals described under "Qualified Pension,
Profit-Sharing and Annuity Plans," p. 27, 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, if any, made to
the Individual Retirement Annuity. Under special rules, all individual
retirement plans will be treated as one plan for purposes of these rules.
Section 408(b) sets forth various requirements that an annuity contract must
satisfy before it will be treated as an Individual Retirement Annuity. Although
final regulations that interpret some of these requirements have been adopted,
other regulations have been proposed that interpret the additional requirement
that, under a Section 408(b) Individual Retirement Annuity, the premiums may not
be fixed. These proposed regulations, which contain certain ambiguities, may, of
course, be changed before they are issued in final form. ACCORDINGLY, WHILE THE
FRANKLIN BELIEVES THAT THE CONTRACTS OFFERED BY THIS PROSPECTUS MEET THE
REQUIREMENTS OF SECTION 408(b), THE FINAL REGULATIONS AND THE CURRENTLY PROPOSED
REGULATIONS THEREUNDER, THERE CAN BE NO ASSURANCE THAT THE CONTRACTS QUALIFY AS
INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408(b) PENDING THE ISSUANCE OF
COMPLETE FINAL REGULATIONS UNDER THAT CODE SECTION.
Individuals who are not "active participants" in an employer-related
retirement plan described in Section 219(g) of the Code will, in general, be
allowed to contribute to an Individual Retirement Annuity and to deduct a
maximum of $2,000 annually (or 100% of the individual's compensation if less).
In addition, this deduction will be allowed for individuals who are active
participants in Qualified Plans with annual adjusted gross income that is not
above $25,000 ($40,000 for married individuals filing a joint return). This
deduction will be phased out for individuals who are active participants in
Qualified Plans with annual adjusted gross income between $25,000 and $35,000
($40,000 and $50,000 for married individuals filing a joint return), and will
not be allowed for such
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active participants with annual adjusted gross income above $35,000 ($50,000 for
married individuals filing a joint return). The active participant status of
both spouses is taken into account in determining the deductible limit. In
addition, an individual will not be considered married for a year in which the
individual and the individual's spouse (1) file separate returns and (2) did not
live together at any time during the year. Individuals who may not make
deductible contributions to an Individual Retirement Annuity may, instead, make
non-deductible contributions (up to the applicable maximum described above) on
which earnings will accumulate on a tax-deferred basis. If the Individual
Retirement Annuity includes non-deductible contributions, distributions will be
divided on a pro rata basis between taxable and non-taxable amounts. Special
rules apply if, for example, an individual contributes to an Individual
Retirement Annuity for his or her own benefit and to another Individual
Retirement Annuity for the benefit of his or her spouse.
The 10% penalty tax on early withdrawals described under "Qualified Pension,
Profit-Sharing and Annuity Plans," p. 27, above, also applies to Individual
Retirement Annuities, except that the circumstances in which the penalty tax
will not apply are different in certain respects. Further, for any year in which
a Contract Owner borrows any money under or by use of the Individual Retirement
Annuity, the Contract ceases to qualify under Section 408(b), and an amount
equal to the fair market value of the Contract as of the first day of such year
is includible in the Contract Owner's gross income for such year.
2. SECTION 408(k) SIMPLIFIED EMPLOYEE PENSIONS
An Individual Retirement Annuity described in Section 408(b) of the Code that
also meets the special requirements of Section 408(k) qualifies as a Simplified
Employee Pension. Under a Simplified Employee Pension, employers may contribute
to the Individual Retirement Annuities of their employees. An employee may
exclude the employer's contribution on his or her behalf to a Simplified
Employee Pension from gross income subject to certain limitations. Elective
deferrals under a Simplified Employee Pension are to be treated like elective
deferrals under a cash or deferred arrangement under Section 401(k) of the Code
and are subject to a $7,000 limitation, adjusted for inflation. In general, the
employee may also contribute and deduct an additional amount not in excess of
the lesser of (a) $2,000 or (b) 100% of compensation if the employee meets the
qualifications for an Individual Retirement Annuity.
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.
INCOME TAX WITHHOLDING
Withholding of federal income tax is generally required from distributions
from Qualified Plans or Contracts issued in connection therewith, to the extent
the distributions are taxable and are not otherwise subject to withholding as
wages ("Distributions"). See "The Contracts: Qualified Plans," pp. 27-29, 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
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Code or an Individual Retirement Annuity described in Section 408(b) of the
Code. Mandatory federal income tax withholding is required even if the Variable
Annuitant receives an eligible rollover distribution and rolls it over within 60
days to an eligible retirement plan. Federal income tax is not required to be
withheld from any eligible rollover distribution which is rolled over directly
from a qualified trust described in Section 401(a) of the Code, a qualified
annuity plan described in Section 403(a) of the Code or a qualified annuity
contract described in Section 403(b) of the Code to an eligible retirement plan.
Except with respect to certain payments delivered outside the United States or
any possession of the United States, federal income tax is not required to be
withheld from any Distribution which does not constitute an eligible rollover
distribution, if the Variable Annuitant or Beneficiary properly elects in
accordance with the prescribed procedures not to have withholding apply. In the
absence of a proper election not to have withholding apply, the amount to be
withheld from a Distribution which is not an eligible rollover distribution
depends upon the type of payment being made. Generally, in the case of a
periodic payment which is not an eligible rollover distribution, the amount to
be withheld from such payment is the amount that would be withheld therefrom
under specified wage withholding tables if the payment were a payment of wages
for the appropriate payroll period. In the case of a nonperiodic payment which
is not an eligible rollover distribution, the amount to be withheld is generally
equal to 10% of the amount of the Distribution.
The applicable federal law pertaining to income tax withholding from
Distributions is complex and contains many special rules and exceptions in
addition to the general rules summarized above. Special rules apply, for
example, if the Distribution is made to the surviving spouse of a Variable
Annuitant or if the Distribution is an eligible rollover distribution from a
qualified annuity contract under Section 403(b) of the Code. Any Variable
Annuitant or Beneficiary considering a Distribution should consult a qualified
tax advisor.
MANAGEMENT
The Fund is managed by a Board of Managers elected annually by the Contract
Owners. The Board of Managers currently has four members. The members of the
Board of Managers also serve as the Board of Managers of Franklin Life Variable
Annuity Fund B, a separate account of The Franklin having investment objectives
similar to the Fund but the assets of which are not held with respect to
Variable Annuity Contracts accorded special tax treatment, and of Franklin Life
Money Market Variable Annuity Fund C, a separate account of The Franklin having
investments in money market securities.
The affairs of the Fund are conducted in accordance with Rules and Regulations
adopted by the Board of Managers. Under the Rules and Regulations, the Board of
Managers is authorized to take various actions on behalf of the Fund, including
the entry into contracts for the purpose of services with respect to the Fund
under circumstances where the approval of such contracts is not required to be
submitted to the Contract Owners. Subject to the authority of the Board of
Managers, officers and employees of The Franklin are responsible for overall
management of the Fund's business affairs.
VOTING RIGHTS
All Contract Owners will have the right to vote upon:
(1) The approval of any investment management agreement and any amendment
thereto.
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(2) Ratification of an independent auditor for the Fund.
(3) Any change in the fundamental investment policies 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 Contract. An employee covered by a 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 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.
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 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
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Franklin Financial Services Corporation serves as "principal underwriter" (as
that term is defined in the Investment Company Act of 1940) for the Contracts
pursuant to a Sales Agreement with the Fund. The Sales Agreement is described
under "Distribution of The Contracts" in the Statement of Additional
Information. Franklin Financial, located at #1 Franklin Square, Springfield,
Illinois 62713, is organized under the laws of the State of Delaware and is a
wholly-owned subsidiary of The Franklin.
STATE REGULATION
As a life insurance company organized and operated under Illinois law, The
Franklin is subject to statutory provisions governing such companies and to
regulation by the Illinois Director of Insurance. An annual statement is filed
with the Director on or before March 1 of each year covering the operations of
The Franklin for the preceding year and its financial condition on December 31
of such year. The Franklin's books and accounts are subject to review and
examination by the Illinois Insurance Department at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") periodically. The NAIC has divided the country
into six geographic zones. A representative of each such zone may participate in
the examination.
In addition, The Franklin is subject to the insurance laws and regulations of
the jurisdictions other than Illinois in which it is licensed to operate.
Generally, the insurance departments of such jurisdictions apply the laws of
Illinois in determining permissible investments for The Franklin.
For certain provisions of Illinois law applicable to the Fund's investments,
see "Investment Policies and Restrictions of the Fund," pp. 24-26, 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.
FUNDAMENTAL CHANGES
The Franklin has no present intention of effecting any of the following
fundamental modifications in the operations or status of the Fund. However, upon
compliance with applicable law, including obtaining any necessary affirmative
vote of Contract Owners in each case: (a) the Fund may be operated in a form
other than as a "management company" under the Investment Company Act of 1940
(including operation as a "unit investment trust"); (b) the Fund may be
deregistered under the Investment Company Act of 1940 in the event such
registration is no longer required; or (c) the provisions of the Contracts may
be modified to assure qualification under the pertinent provisions of the Code
or to comply with other applicable federal or state laws. In the event of any
such fundamental change, The Franklin may make appropriate amendments to the
Contracts to give effect to such change or take such other action as may be
necessary in this respect.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Contracts offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Fund, The Franklin and the Contracts offered hereby.
Statements contained in this Prospectus as to the content of Contracts and other
legal instruments are summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
OTHER VARIABLE ANNUITY CONTRACTS; EFFECT OF NON-QUALIFICATION
35
<PAGE>
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. All such other contracts, however, will be
designed for use in connection with certain Qualified Plans or as Individual
Retirement Annuities.
The Franklin will not knowingly permit moneys which are not "tax-benefited" to
be allocated to the Fund. The Franklin will transfer any portion of a Contract
allocated to the Fund to the general account of The Franklin, less a deduction
for federal income taxes payable on the portion so transferred, if, at any time,
the plan or arrangement with respect to which the Contract was sold fails to
meet the requirements of the Code. The Franklin will promptly notify the
Contract Owner of such transfer. The Contract Owner may elect to (1) leave the
funds so transferred in the general account, (2) redeem his Contract, or (3)
apply the funds so transferred to the purchase of a variable annuity contract
offered by Franklin Life Variable Annuity Fund B. See "Redemption," pp. 16-17,
and "Transfers to and from Other Contracts," pp. 12-13, above.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
- - --------------------------------------------------------------------
General Information . . . . . . . . . . . . . 2
Investment Objectives. . . . . . . . . . . . . 2
Limitations on Settlement Options. . . . . . . 2
Management . . . . . . . . . . . . . . . . . . 4
Investment Advisory and Other Services . . . . 5
Distribution of The Contracts. . . . . . . . . 7
Portfolio Turnover and Brokerage . . . . . . . 8
Safekeeper of Securities . . . . . . . . . . . 8
Legal Opinions . . . . . . . . . . . . . . . . 9
Experts. . . . . . . . . . . . . . . . . . . . 9
Index to Financial Statements. . . . . . . . . F-1
36
<PAGE>
PROSPECTUS
FRANKLIN LIFE
VARIABLE ANNUITY FUND A
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
FOR USE WITH CERTAIN QUALIFIED
PLANS AND TRUSTS ACCORDED SPECIAL
TAX TREATMENT AND AS INDIVIDUAL
RETIREMENT ANNUITIES
ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
- - --------------------------------------------------------------------------------
Complete and return this form to:
Supply Department
The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
(217) 528-2011
Please send me the Statement of Additional Information dated April 30, 1996 for
Franklin Life Variable Annuity Fund A.
- - --------------------------------------------------------------------------------
(Name)
- - --------------------------------------------------------------------------------
(Street)
- - --------------------------------------------------------------------------------
(City) (State) (Zip Code)
- - --------------------------------------------------------------------------------
37
<PAGE>
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
FOR USE WITH CERTAIN QUALIFIED PLANS
AND TRUSTS ACCORDED SPECIAL TAX
TREATMENT AND AS INDIVIDUAL
RETIREMENT ANNUITIES
FRANKLIN LIFE VARIABLE ANNUITY
FUND A
ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
TELEPHONE (217) 528-2011
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus dated April 30, 1996 relating to the
offering of individual variable annuities for use in connection with certain
qualified plans and trusts accorded special tax treatment or as individual
retirement annuities. A copy of the Prospectus may be obtained by writing to the
Equity Administration Department of The Franklin Life Insurance Company at the
address set forth above or by calling (217) 528-2011.
-----------------------------------
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
-----------------------------------
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1996.
<PAGE>
TABLE OF CONTENTS
PAGE
General Information . . . . . . . . . . . . . . . . . 2
Investment Objectives. . . . . . . . . . . . . . . . . 2
Limitations on Settlement Options. . . . . . . . . . . 2
Management . . . . . . . . . . . . . . . . . . . . . . 5
Investment Advisory and Other Services . . . . . . . . 6
Distribution of The Contracts. . . . . . . . . . . . . 9
Portfolio Turnover and Brokerage . . . . . . . . . . . 10
Safekeeper of Securities . . . . . . . . . . . . . . . 10
Legal Opinions . . . . . . . . . . . . . . . . . . . . 11
Experts. . . . . . . . . . . . . . . . . . . . . . . . 11
Index to Financial Statements. . . . . . . . . . . . . F-1
1
<PAGE>
GENERAL INFORMATION
The individual variable annuity contracts offered by the Prospectus dated
April 30, 1996 (the "Prospectus") are designed primarily to provide annuity
payments which will vary with the investment performance of Franklin Life
Variable Annuity Fund A (the "Fund"), a separate account which has been
established by The Franklin Life Insurance Company ("The Franklin") under
Illinois insurance law. Reference is made to the Prospectus, which should be
read in conjunction with this Statement of Additional Information. Capitalized
terms not otherwise defined in this Statement of Additional Information shall
have the meanings designated in the Prospectus.
On January 31, 1995, American General Corporation ("American General")
through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"),
acquired American Franklin Company ("AFC"), the holding company of The Franklin,
from American Brands, Inc. The address of AFC is #1 Franklin Square,
Springfield, Illinois 62713. The address of AGC Life is American General
Center, Nashville, Tennessee 37250-0001. The address of American General is
2929 Allen Parkway, Houston, Texas 77019-2155.
American General is the parent company of one of the nation's largest
diversified financial services organizations. American General's operating
subsidiaries are leading providers of retirement annuities, consumer loans, and
life insurance. The company was incorporated as a general business corporation
in Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
American General has advised the Fund that there was no person who was known
to it to be the beneficial owner of 10% or more of the voting power of American
General as of February 15, 1996.
INVESTMENT OBJECTIVES
The investment objectives of the Fund are described under "Investment Policies
and Restrictions of the Fund" in the Prospectus.
LIMITATIONS ON SETTLEMENT OPTIONS
A. LIMITATIONS ON CHOICE OF SETTLEMENT OPTION
Described below are certain limitations on Settlement Options based on The
Franklin's current understanding of the distribution rules generally applicable
to 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.
2
<PAGE>
FIRST OPTION-LIFE ANNUITY. Under 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 Annuitant would have attained age 70-1/2). If the
surviving spouse of the Variable Annuitant is the Beneficiary
3
<PAGE>
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.
SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN.
Under 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.
THIRD OPTION-UNIT REFUND LIFE ANNUITY. This Option is not available under
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.
FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. Under 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 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 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.
SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Option is not
available under Contracts issued for use as Individual Retirement Annuities or
in connection with Section 403(b) annuity purchase plans.
B. LIMITATIONS ON COMMENCEMENT OF ANNUITY PAYMENTS
4
<PAGE>
The Contract Owner may defer the initial Annuity Payment Date and continue the
Contract to a date not later than age 75 unless the provisions of the Code or
any governing Qualified Plan require Annuity Payments to commence at an earlier
date. For example, under Qualified Contracts, the Contract Owner may not defer
the initial Annuity Payment Date beyond April 1 of the calendar year following
the calendar year in which the Variable Annuitant attains age 70-1/2. The
Franklin will require satisfactory proof of age of the Variable Annuitant prior
to the initial Annuity Payment Date.
MANAGEMENT
The following persons hold the positions designated with respect to the Board
of Managers. The table also shows any positions held with The Franklin and
Franklin Financial Services Corporation, a wholly-owned subsidiary of The
Franklin which serves as distributor for the Contracts. (See "Distribution of
the Contracts," p. 6, below.)
NAME AND ADDRESS PRINCIPAL OCCUPATIONS DURING PAST POSITIONS HELD WITH THE
5 YEARS FUND
ROBERT G. SPENCER* Officer of The Franklin; Chairman and Member,
#1 Franklin Square currently, Vice President Board of Managers
Springfield, Illinois of The Franklin; prior to
62713 1996, also Treasurer of The
Franklin and Treasurer and
Assistant Secretary of
Franklin Financial Services
Corporation.
STEPHEN P. HORVAT, JR.*+ Officer of The Franklin; Secretary, Board of
#1 Franklin Square currently, Senior Vice Managers
Springfield, Illinois President, Secretary and
62713 General Counsel and a
director of The Franklin.
Mr. Horvat also serves as
Vice President, Secretary
and a director of Franklin
Financial Services
Corporation.
DR. ROBERT C. SPENCER Visiting Professor of Member, Board of
2303 South 3rd Avenue Government, Montana State Managers
Bozeman, Montana 59715 University, since 1992;
Professor of Government and
Public Affairs, Sangamon
State University, prior
thereto.
JAMES W. VOTH Chairman, Resource Member, Board of
50738 Meadow Green International Corp., South Managers
Court, 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 Member, Board of
607 East Adams Street Executive Officer, CIPSCO Managers
Springfield, Illinois Incorporated, since October,
62739 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;
5
<PAGE>
Director, First of America Bank,
Kalamazoo, Michigan; Director,
First of America Bank - Illinois,
N.A. (a subsidiary of First of
America Bank).
--------------------
*DENOTES INDIVIDUALS WHO ARE "INTERESTED PERSONS" (AS DEFINED IN THE INVESTMENT
COMPANY ACT OF 1940) OF THE FUND, THE FRANKLIN OR FRANKLIN FINANCIAL SERVICES
CORPORATION BY REASON OF THE CURRENT POSITIONS HELD BY THEM AS SET FORTH IN THE
ABOVE TABLE AND, WITH RESPECT TO MR. HORVAT, BY VIRTUE OF HIS POSITION AS A
DIRECTOR OF AMERICAN FRANKLIN COMPANY AS DESCRIBED IN THE FOLLOWING FOOTNOTE.
+MR. HORVAT SERVES AS AN ASSISTANT SECRETARY AND DIRECTOR OF AMERICAN FRANKLIN
COMPANY, WHICH OWNS ALL THE CAPITAL STOCK OF THE FRANKLIN AND WHICH IS A WHOLLY-
OWNED SUBSIDIARY OF AMERICAN GENERAL CORPORATION. SEE "GENERAL INFORMATION," P.
2, ABOVE.
The following table sets forth a summary of compensation paid for services to
the Fund and certain other entities that are deemed to be part of the same "Fund
Complex" in accordance with the rules of the Securities and Exchange Commission
to all members of the Board of Managers during the year ended December 31, 1995.
Pursuant to the terms of its agreement to assume certain of the Fund's
administrative expenses, The Franklin pays all compensation received by the
members of the Board of Managers and the officers of the Fund. Members of the
Board of Managers or officers of the Fund who are also officers, directors or
employees of The Franklin do not receive any remuneration for their services as
members of the Board of Managers or officers of the Fund. Other members of the
Board of Managers received a fee of $1,400 ($1,050 where the member did not
serve for the entire year) for the year and, thus, the aggregate direct
remuneration of all such members of the Board of Managers was $3,850 during
1995. It is currently anticipated that the annual aggregate remuneration of
such members of the Board of Managers to be paid during 1996 will not exceed
$4,200.
<TABLE>
<CAPTION>
NAME OF PERSON, AGGREGATE PENSION OR ESTIMATED ANNUAL TOTAL
POSITION COMPENSATION RETIREMENT BENEFITS UPON COMPENSATION
FROM FUND BENEFITS ACCRUED RETIREMENT FROM FUND AND
AS PART OF FUND FUND COMPLEX
EXPENSES PAID TO DIRECTORS
<S> <C> <C> <C> <C>
All members of the
Board of Managers $3,850(1) -0- -0- $11,550(1)(2)
as a group (4
persons)
</TABLE>
- - ----------------
(1) Paid by The Franklin pursuant to an agreement to assume certain Fund
administrative expenses.
(2) Includes amounts paid to members of the Board of Managers who are not
officers, directors or employees of The Franklin for service on the Boards
of Managers of Franklin Life Variable Annuity Fund B and Franklin Life
Money Market Variable Annuity Fund C.
Neither any member of the Board of Managers nor the Secretary of the Fund
was, as of April 15, 1996, the owner of any contract participating in the
investment experience of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
The Franklin acts as investment manager of the Fund pursuant to an Investment
Management Agreement executed and dated January 31, 1995, which was approved by
Contract Owners at their annual meeting held on April 17, 1995. The method of
determining the advisory charge is described in the Prospectus under "Investment
Management Service Charge."
6
<PAGE>
7
<PAGE>
The Investment Management Agreement:
(1) May not be terminated by The Franklin without the prior approval of a
new investment management agreement by a "majority" (as that term is defined
in the Investment Company Act of 1940) of the votes available to the Contract
Owners, and may be terminated without the payment of any penalty on 60 days'
written notice by a vote of the Board of Managers of the Fund or by a vote of a
majority of the votes available to the Contract Owners.
(2) Shall continue in effect from the date of its execution until the second
anniversary of such execution date and thereafter shall continue in effect from
year to year but only if such continuance is specifically approved at least
annually by the Board of Managers or by a vote of a majority of the votes
available to Contract Owners, provided that in either case the continuation is
also approved by the vote of a majority of the Board of Managers who are not
"interested persons" (as that term is defined in the Investment Company Act of
1940) of the Fund or of The Franklin, cast in person at a meeting called for the
purpose of voting on such approval.
(3) Shall not be amended without prior approval by a majority of the votes
available to the Contract Owners.
(4) Shall terminate automatically on "assignment" (as that term is defined
in the Investment Company Act of 1940).
A "majority" of the votes available to the Contract Owners is defined in the
Investment Company Act of 1940 as meaning the lesser of (i) Contract Owners
holding 67% or more of the voting power of the Contract Owners present at a
meeting if Contract Owners holding more than 50% of the total voting power of
all Contract Owners in the Fund are present or represented by proxy, or (ii)
Contract Owners holding more than 50% of the total voting power of all Contract
Owners in the Fund. For the voting rights of Contract Owners, see "Voting
Rights," in the Prospectus.
Under the Investment Management Agreement, The Franklin, subject to the
control of the Board of Managers of the Fund, is authorized and has the duty to
manage the investment of the assets of the Fund, subject to the Fund's
investment policies and the restrictions on investment activities set forth in
the Prospectus, and to order the purchase and sale of securities on behalf of
the Fund. In carrying out its obligations to manage the investment of the assets
of the Fund, The Franklin is committed by the Agreement, so long as it remains
in force, to pay all investment expenses of the Fund other than the following,
which the Fund will bear: (i) taxes, if any, based on the income of, capital
gains of assets in, or existence of, the Fund; (ii) taxes, if any, in connection
with the acquisition, disposition or transfer of assets of the Fund; (iii)
commissions or other capital items payable in connection with the purchase or
sale of the Fund's investments; and (iv) interest on account of any borrowings
by the Fund.
Messrs. Robert G. Spencer and Stephen P. Horvat, Jr. are "affiliated
persons," as defined in the Investment Company Act of 1940, of both The
Franklin and the Fund by reason of the positions held by them with The Franklin
and the Fund as set forth in the table under "Management," pp. 4-5, above.
The Administration Agreement discussed under "Deductions and Charges Under the
Contracts-Sales and 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.
8
<PAGE>
DISTRIBUTION OF THE CONTRACTS
Franklin Financial Services Corporation ("Franklin Financial"), #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State of
Delaware and is a wholly-owned subsidiary of The Franklin. Franklin Financial
serves as "principal underwriter" (as that term is defined in the Investment
Company Act of 1940) for the Contracts, pursuant to a Sales Agreement with the
Fund. The present Sales Agreement was approved by the Board of Managers of the
Fund, and came into effect, on January 31, 1995. It was renewed by the Board of
Managers on January 15, 1996. Franklin Financial's employment will continue
thereunder if specifically approved at least annually by the Board of Managers
of the Fund, or by a majority of votes available to Contract Owners, provided
that in either case the continuance of the Sales Agreement is also approved by a
majority of the members of the Board of Managers of the Fund who are not
"interested persons" (as that term is defined in the Investment Company Act of
1940) of the Fund or Franklin Financial. The employment of Franklin Financial as
principal underwriter automatically terminates upon "assignment" (as that term
is defined in the Investment Company Act of 1940) of the Sales Agreement and is
terminable by either party on not more than 60 days' and not less than 30 days'
notice.
The Fund no longer issues new Contracts. To the extent that Stipulated
Payments continue to be made on Contracts, the Fund may nevertheless be deemed
to be offering interests in Contracts on a continuous basis. Contracts are sold
primarily by persons who are insurance agents or brokers for The Franklin
authorized by applicable law to sell life and other forms of personal insurance
and who are similarly authorized to sell Variable Annuities. Pursuant to an
Agreement, dated June 30, 1971 and amended on May 15, 1975, between The Franklin
and Franklin Financial, Franklin Financial has agreed to employ and supervise
agents chosen by The Franklin to sell the Contracts and to use its best efforts
to qualify such persons as registered representatives of Franklin Financial,
which is a broker-dealer registered with the Securities and Exchange Commission
under the Securities Exchange Act of 1934 and a member of the National
Association of Securities Dealers, Inc. Franklin Financial also may enter into
agreements with The Franklin and each such agent with respect to the supervision
of such agent. The Contracts also may be sold by persons who are registered
representatives of other registered broker-dealers who are members of the
National Association of Securities Dealers, Inc., and with whom Franklin
Financial may enter into a selling agreement. If Contracts are sold by other
dealers, the maximum allowance which will be made to them by Franklin Financial
will be 5% in the case of Periodic Stipulated Payment Contracts and 4% in the
case of Single Stipulated Payment Contracts.
Franklin Financial incurs certain sales expenses, such as sales literature
preparation and related costs, in connection with the sale of the Contracts
pursuant to a Sales Agreement with the Fund. Sales deductions from Stipulated
Payments are paid to Franklin Financial as a means to recover sales expenses.
Sales deductions are not necessarily related to Franklin Financial's actual
sales expenses in any particular year. To the extent sales expenses are not
covered by sales deductions, 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 to bear the cost of
preparation of prospectuses and other disclosure materials. Commissions and
other remuneration and the cost of disclosure materials will be paid by The
Franklin from its General Account.
Registration as a broker-dealer does not mean that the Securities and Exchange
Commission has in any way passed upon the financial standing, fitness or conduct
of any broker or dealer, upon the merits of any securities offering or upon any
other matter relating to the business of any broker or dealer. Salesmen and
employees selling Contracts, where required, are also licensed as securities
salesmen under state law.
Stephen P. Horvat, Jr. is an "affiliated person" (as that term is defined in
the Investment Company Act of 1940) of both Franklin Financial and the Fund by
reason of the positions held by him with Franklin Financial and the Fund as set
forth in the table under "Management," pp. 4-5, above.
9
<PAGE>
PORTFOLIO TURNOVER AND BROKERAGE
A. PORTFOLIO TURNOVER
The Fund will purchase securities, in general, for long-term appreciation of
capital and income and does not place emphasis on obtaining short-term trading
profits. See "Investment Policies and Restrictions of the Fund" in the
Prospectus. Accordingly, the Fund expects to have an annual rate of portfolio
turnover which is at, or below, the industry average. (The "portfolio turnover"
rate means (a) the lesser of the dollar amount of the purchases or of the sales
of portfolio securities (other than short-term securities, that is, those with a
maturity of one year or less at the time of purchase) by the Fund for the period
in question, divided by (b) the monthly average of the value of the Fund's
portfolio securities (excluding short-term securities).) However, the rate of
portfolio turnover is not a limiting factor when changes in the portfolio are
deemed appropriate, and in any given year conditions could result in a higher
rate, which would not in and of itself indicate a variation from stated
investment objectives. The degree of portfolio activity affects the brokerage
costs of the Fund. See "Brokerage," this page, below.
For 1994, the portfolio turnover rate was 88.99%; for 1995 the rate was
14.66%.
B. BROKERAGE
Decisions to buy and 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. 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 in negotiating commissions. During 1993, 1994 and 1995, a
total of $18,515, $20,612 and $4,260, respectively, in brokerage commissions was
paid; none of such brokerage business of the Fund was allocated to Franklin
Financial Services Corporation or to brokers who furnished statistical data and
research to The Franklin. No officer or director of The Franklin or Franklin
Financial Services Corporation (the principal underwriter for the Contracts),
and no member of the Board of Managers, is affiliated with any brokerage firm
(except with Franklin Financial Services Corporation, as described under
"Investment Management Service Charge," in the Prospectus, and "Distribution of
the Contracts," p. 7, 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
Services Corporation).
SAFEKEEPER OF SECURITIES
Securities of the Fund are held by State Street Bank and Trust Company ("State
Street"), which is located in Boston, Massachusetts, under a Custodian Agreement
dated April 17,
10
<PAGE>
1995 to which The Franklin and State Street are parties. The Franklin has
requested that the Illinois Insurance Department approve an arrangement under
which State Street would hold the securities of the Fund as sub-custodian under
an agreement that would be entered into by The Franklin, State Street Bank and
Trust Company of Connecticut, as custodian, and State Street, as sub-custodian.
Representatives of the Securities and Exchange Commission, the Illinois
Insurance Department and the NAIC zonal examination committee have access to
such securities in the performance of their official duties.
LEGAL OPINIONS
Legal matters concerning federal securities laws applicable to the issue and
sale of the variable annuity contracts offered hereby have been passed upon by
Messrs. Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, New York 10112.
All matters of Illinois law, including The Franklin's right and power to issue
such contracts, have been passed upon by Stephen P. Horvat, Jr., Esq., Senior
Vice President, General Counsel, Secretary and a director of The Franklin, a
director and Secretary of Franklin Financial, and Secretary to the Board of
Managers of the Fund.
EXPERTS
The statement of assets and liabilities, including the portfolio of
investments, as of December 31, 1995 and the related statements of operations
and changes in contract owners' equity and the table of per-unit income and
changes in accumulation unit value for the year then ended of the Fund,
appearing herein, have been audited by Ernst & Young LLP, independent auditors,
as set forth in their report thereon appearing elsewhere herein. The
consolidated balance sheet as of December 31, 1995 of The Franklin, and the
related consolidated statements of income, shareholder's equity and cash flows
for the eleven months ended December 31, 1995 and the one month ended January
31, 1995, appearing herein, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein. The
statement of changes in contract owners' equity for the year ended December 31,
1994 and the table of per-unit income and changes in accumulation unit value for
each of the four years in the period then ended of the Fund, appearing herein,
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report thereon appearing elsewhere herein. The consolidated
balance sheet of The Franklin as of December 31, 1994 and the consolidated
statements of income, shareholder's equity and cash flows of The Franklin for
each of the two years in the period then ended, appearing herein, have been
audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in
their report thereon appearing elsewhere herein. Such financial statements and
tables of per-unit income and changes in accumulation unit value referred to
above are included in reliance upon such reports given upon the authority of
such firms as experts in accounting and auditing.
11
<PAGE>
12
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Franklin Life Variable Annuity Fund A:
Reports of Independent Auditors and Accountants F-2 - F-3
Financial Statements:
Statement of Assets and Liabilities, December 31, 1995 F-4
Statement of Operations for the year ended
December 31, 1995 F-4
Statements of Changes in Contract Owners' Equity for the
years ended December 31, 1995 and 1994 F-4
Portfolio of Investments, December 31, 1995 F-5
Notes to Financial Statements F-6
Supplementary Information - Per-Unit Income and Changes in
Accumulation Unit Value for the five years ended December 31, 1995 F-7
The Franklin Life Insurance Company and Subsidiaries:*
Reports of Independent Auditors and Accountants F-8 - F-9
Financial Statements:
Consolidated Balance Sheet, December 31, 1995 and 1994 F-10 - F-11
Consolidated Statement of Income for the eleven months ended December
31, 1995, one month ended January 31, 1995 and years ended
December 31, 1994 and 1993 F-12
Consolidated Statement of Shareholder's Equity for the eleven months ended
December 31, 1995, one month ended January 31, 1995 and
years ended December 31, 1994 and 1993 F-13
Consolidated Statement of Cash Flows for the eleven months ended
December 31, 1995, one month ended January 31, 1995 and
years ended December 31, 1994 and 1993 F-14
Notes to Consolidated Financial Statements F-15 - F-44
<PAGE>
*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 Variable Annuity Fund A
We have audited the accompanying statement of assets and liabilities of
Franklin Life Variable Annuity Fund A, including the portfolio of investments,
as of December 31, 1995, and the related statements of operations, changes in
contract owners' equity, and the table of per-unit income and changes in
accumulation unit value for the year then ended. These financial statements and
the table of per-unit income and changes in accumulation unit value are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the table of per-unit income and
changes in accumulation unit value based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the table of
per-unit income and changes in accumulation unit value are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of investments held by the custodian as of December 31,
1995. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 1995 financial statements and the 1995 table of per-unit
income and changes in accumulation unit value referred to above present fairly,
in all material respects, the financial position of Franklin Life Variable
Annuity Fund A as of December 31, 1995, and the results of its operations,
changes in its contract owners' equity, and per-unit income and changes in
accumulation unit value for the year then ended in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
February 2, 1996
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund A
Springfield, Illinois
We have audited the accompanying statement of changes in contract owners' equity
of Franklin Life Variable Annuity Fund A for the year ended December 31, 1994
and the table of per-unit income and changes in accumulation unit value for
each of the four years in the period then ended. This financial statement and
the table of per-unit income and changes in accumulation unit value are
the responsibility of the Fund's management. Our responsibility is to express
an opinion on this financial statement and the table of per-unit income and
changes in accumulation unit value based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statement 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 statement. Our
procedures included confirmation of investments and cash held by the custodian
as of December 31, 1994. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statement and the table of per-unit income and
changes in accumulation unit value referred to above present fairly, in all
material respects, the changes in contract owners' equity of Franklin Life
Variable Annuity Fund A for the year ended December 31, 1994 and per-unit
income and changes in accumulation unit value for each of the four years in the
period then ended, in conformity with generally accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 1, 1995
F-3
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Assets
Investments-at fair value (cost-$8,118,227):
Common stocks $ 8,634,319
Short-term note 1,661,216
-----------
10,295,535
Cash on deposit 114,797
Dividends and interest receivable 31,435
-----------
Total Assets 10,441,767
Liability - Due to The Franklin Life Insurance Company 12,854
-----------
Contract Owners' Equity
Annuity reserves $ 16,105
Value of 150,474 Accumulation Units outstanding,
equivalent to $69.199949 per unit 10,412,808 $ 10,428,913
------------ ------------
------------
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
Investment Income
Dividends $ 167,553
Interest 145,370
-----------
Total Income $ 312,923
Expenses
Mortality and expense charges $ 97,809
Investment management services 42,758
-----------
Total Expenses 140,567
-----------
Net Investment Income 172,356
Realized and Unrealized Gain (Loss) on Investments
Net realized gain from investment transactions
Proceeds from sales $ 1,044,876
Cost of investments sold (identified
cost method) 1,028,020
-----------
Net Realized Gain 16,856
Net unrealized appreciation (depreciation) of investments
Beginning of year $ ( 77,823)
End of year 2,177,308
-----------
Net Unrealized Appreciation 2,255,131
-----------
Net Gain On Investments 2,271,987
-----------
Net Increase In Contract Owners'
Equity Resulting From Operations $ 2,444,343
-----------
-----------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
-------------------------------
<S> <C> <C>
Net investment income $ 172,356 $ 116,171
Net realized gain from investment transactions 16,856 708,267
Net unrealized appreciation (depreciation) of investments 2,255,131 (749,740)
-------------------------------
Net Increase In Contract Owners' Equity Resulting From Operations 2,444,343 74,698
Net contract purchase payments 354,276 521,549
Reimbursement for contract guarantees 407 3,436
Annuity payments (3,262) (3,002)
Withdrawals (1,694,308) (1,936,673)
-------------------------------
Net Increase (Decrease) in Contract Owners' Equity 1,101,456 (1,339,992)
Contract Owners' Equity at Beginning of Year 9,327,457 10,667,449
-------------------------------
Contract Owners' Equity At End of Year $10,428,913 $ 9,327,457
-------------------------------
-------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
- - ------ --------
<C> <S> <C>
COMMON STOCKS (82.8%)
BANKING (2.3%)
3,675 Student Loan Marketing Association $242,550
BEVERAGES (3.2%)
3,200 Anheuser-Busch Companies, Inc. 214,000
2,200 PepsiCo, Incorporated 122,925
-----------
336,925
BUSINESS SERVICES (1.2%)
5,600 Equifax Inc. 119,700
CHEMICALS (1.8%)
2,700 Dow Chemical 189,675
COMPUTER SERVICES (3.2%)
8,100 Ceridian Corporation* 334,125
COSMETICS & HOUSEHOLD PRODUCTS (3.5%)
3,200 Dial Corp. 94,800
5,200 Gillette Company 271,050
-----------
365,850
DRUGS & HEALTH CARE (16.9%)
6,100 Eckerd Corporation* 272,213
4,000 Eli Lilly and Company 225,000
4,300 Merck & Company, Inc. 282,187
2,100 Pfizer, Incorporated 132,300
6,450 St. Jude Medical, Inc. 277,350
3,300 Schering-Plough Corporation 180,675
3,000 Stryker Corporation 157,500
8,000 Walgreen Company 239,000
-----------
1,766,225
ELECTRONICS & INSTRUMENTATIONS (2.3%)
2,900 Hewlett-Packard Company 242,875
FOOD PROCESSING (2.1%)
5,300 ConAgra, Inc. 218,625
FOOD - RETAIL (1.8%)
5,700 Albertson's, Inc. 187,387
HOUSEHOLD PRODUCTS (.9%)
3,700 Newell Co. 95,738
MACHINERY - INDUSTRIAL & CONSTRUCTION (1.9%)
1,500 Fluor Corporation 99,000
3000 Trinity Industry 94,500
-----------
193,500
MINING & MINERALS (.8%)
2,000 Cleveland-Cliffs Inc. 82,000
OFFICE EQUIPMENT & SERVICES (9.0%)
2,000 Compaq Computers Corporation* 96,000
5,350 Digital Equipment Corporation* 343,069
2,400 International Business Machines Corporation 219,300
5,900 Policy Management Systems Corporation* 280,987
-----------
939,356
OIL SERVICES & DRILLING (1.5%)
3,100 Halliburton Company 156,938
OILS & OIL RELATED PRODUCTS (9.2%)
2,700 Amoco Corporation 193,050
1,300 Atlantic Richfield Company 143,975
2,500 British Petroleum Company, p.l.c. 255,312
3,700 Diamond Shamrock, Inc. 95,738
2,600 Kerr-McGee Corporation 165,100
3,700 Unocal Corporation 107,763
-----------
960,938
PHOTOGRAPHY (2.6%)
4,100 Eastman Kodak Company 274,700
RESTAURANTS/LODGING (1.3%)
3,400 Marriott International, Inc. 130,050
RETAIL-SPECIALTY (2.4%)
3,600 NIKE, Inc. 250,650
TECHNOLOGY (6.7%)
5,000 AMP, Incorporated 191,250
2,200 Diebold, Incorporated 121,825
2,400 Intel Corporation 136,200
3,100 Marshall, Incorporated* 99,587
3,600 Millipore Corporation 148,050
-----------
696,912
UTILITIES-ELECTRIC (6.1%)
6,500 American Electric Power Company, Inc. 263,250
6,900 Baltimore Gas and Electric Company 196,650
4,200 Texas Utilities Company 172,200
-----------
632,100
UTILITIES - TELEPHONE (2.1%)
5,000 BellSouth Corporation 217,500
-----------
TOTAL COMMON STOCKS
(COST-$6,457,011) 8,634,319
<CAPTION>
PRINCIPAL
AMOUNT
- - ---------
<C> <S> <C>
SHORT-TERM NOTE (15.9%)
$1,675,000 United States Treasury Bill
due 1/4/96 (cost-$1,661,216) 1,661,216
-----------
TOTAL INVESTMENTS (98.7%)
(COST -$8,118,227) 10,295,535
CASH AND RECEIVABLES, LESS
LIABILITY (1.3%) 133,378
-----------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $10,428,913
-----------
-----------
</TABLE>
*NON-INCOME PRODUCING INVESTMENT IN 1995.
SEE NOTES TO FINANCIAL STATEMENTS
- - --------------------------------------------------------------------------------
F-5
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Variable Annuity Fund A (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: Investments in common stocks listed on national stock
exchanges are valued at closing sales prices. Unlisted common stocks are valued
at the most recent bid prices, as supplied by broker-dealers. Short-term notes
are valued at cost, which approximates fair value.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions
are accounted for on the trade date. Dividend income is recorded on the
ex-dividend date and 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.
ANNUITY RESERVES: Reserves on contracts, all involving life contingencies, are
calculated using the Progressive Annuity Table with an assumed investment rate
of 3-1/2%.
NOTE B-INVESTMENTS
Exclusive of short-term investments, the cost of investments purchased and the
proceeds from investments sold during 1995 aggregated $1,578,489 and $1,044,876,
respectively.
NOTE C-EXPENSES
Amounts are paid to The Franklin for investment management services at the rate
of .0012% of the current value of the Fund per day (.438% on an annual basis)
and for mortality and expense risk assurances at the rate of .002745% of the
current value of the Fund per day (1.002% on an annual basis).
NOTE D-SALES AND ADMINISTRATIVE CHARGES
During the year ended December 31, 1995, sales and administrative charges
aggregating $30,845 were deducted from the proceeds of the sales of accumulation
units and retained by Franklin Financial Services Corporation and The Franklin.
Franklin Financial Services Corporation is a wholly-owned subsidiary of The
Franklin and principal underwriter for the Fund.
NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
----------------------------------------------
UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ------
<S> <C> <C> <C> <C>
Balance at
beginning of
year 172,507 $9,313,322 198,763 $10,652,285
Purchases 5,872 354,276 9,726 521,549
Net investment
income* - 171,988 - 113,239
Net realized gain
from investment
transactions* - 16,819 - 690,391
Net unrealized
appreciation
(depreciation) of
investments* - 2,250,305 - (730,818)
Withdrawals (27,905) (1,694,308) (35,982) (1,936,673)
Reimbursement for
contract
guarantees* - 406 - 3,349
----------------------------------------------
Balance at end of
year 150,474 $10,412,808 172,507 $9,313,322
----------------------------------------------
----------------------------------------------
</TABLE>
*Excludes portion allocated to annuity reserves on a pro rata basis.
NOTE F-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 ranklin Financial Services Corporation are disclosed in this
report.
NOTE G-NET UNREALIZED APPRECIATION/DEPRECIATION OF INVESTMENTS
Net unrealized appreciation/depreciation of investments at December 31, 1995
and 1994 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-----------------------------
<S> <C> <C>
Gross unrealized $2,225,359 $351,869
appreciation
Gross unrealized 48,051 429,692
depreciation
-----------------------------
Net unrealized
appreciation
(depreciation) $2,177,308 $(77,823)
of investments
-----------------------------
-----------------------------
</TABLE>
F-6
<PAGE>
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994 1993 1992 1991
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $1.948 $1.408 $1.231 $1.064 $1.194
Expenses .875 .773 .773 .723 .654
------------------------------------------------------------------------
Net investment income 1.073 .635 .458 .341 .540
Net realized and unrealized gain (loss) on
investments 14.139 (.240) .112 .770 14.238
-----------------------------------------------------------------------
Net increase in accumulation unit value 15.212 .395 .570 1.111 14.778
Accumulation unit value:
Beginning of year 53.988 53.593 53.023 51.912 37.134
------------------------------------------------------------------------
End of year $69.200 $53.988 $53.593 $53.023 $51.912
------------------------------------------------------------------------
------------------------------------------------------------------------
Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment income to average net assets 1.76% 1.18% .85% .68% 1.19%
Portfolio turnover rate 14.66% 88.99% 68.62% 59.84% 28.47%
Number of accumulation units outstanding at end of
year 150,474 172,507 198,763 217,948 229,368
- - -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
---------------
Board of Directors
and Shareholder of
The Franklin Life Insurance Company
We have audited the consolidated balance sheet of The Franklin Life Insurance
Company (a wholly-owned subsidiary of American Franklin Company, which is an
indirect wholly-owned subsidiary of American General Corporation) and
subsidiaries (the Company) as of December 31, 1995, and the related
consolidated statements of income, shareholder's equity and cash flows for
the eleven months ended December 31, 1995 and the one month ended January 31,
1995. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Franklin
Life Insurance Company and subsidiaries at December 31, 1995 and the
consolidated results of their operations and their cash flows for the eleven
months ended December 31, 1995 and the one month ended January 31, 1995, in
conformity with generally accepted accounting principles.
As discussed in the notes to the consolidated financial statements, in
January 1995, the Company changed its method of accounting for mortgage loans.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
February 12, 1996
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholder of
The Franklin Life Insurance Company
We have audited the consolidated balance sheet of The Franklin Life Insurance
Company (a wholly-owned subsidiary of American Franklin Company which,
through January 31, 1995 was a wholly owned subsidiary of American Brands,
Inc.) and Subsidiaries as of December 31, 1994, and the related consolidated
statements of income, shareholder's equity and cash flows for each of the two
years in the period then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As discussed in Note 1 to the Consolidated Financial Statements, on January
31, 1995, American Brands, Inc. completed the sale of American Franklin
Company and Subsidiaries (including The Franklin Life Insurance Company) to
American General Corporation. These financial statements have been prepared
on a basis consistent with prior years and have not been adjusted to reflect
the effects of this sale.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Franklin
Life Insurance Company and Subsidiaries as of December 31, 1994, and the
consolidated results of their operations and their cash flows for each of the
two years in the period then ended, in conformity with generally accepted
accounting principles.
As discussed in the Notes to Consolidated Financial Statements in 1993, the
Company changed its methods of accounting for post retirement benefits other
than pensions, certain investments in debt and equity securities, and
reinsurance contracts.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
203 North LaSalle Street
Chicago, Illinois
February 1, 1995
F-9
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions, except share data)
<TABLE>
<CAPTION>
Predecessor
Basis
------------
December 31
-----------------------
ASSETS 1995 1994
-----------------------
<S> <C> <C>
Investments
Fixed maturity securities
Fair value (amortized cost: $5,109.5; $180.0) $ 5681.8 $ 164.4
Amortized cost (fair value: $4,612.5) - 4896.8
Mortgage loans on real estate 595.3 636.2
Equity securities (cost: $2.4; $177.7) 3.7 176.5
Policy loans 322.8 334.2
Other long-term investments 51.0 60.6
-----------------------
Total investments 6654.6 6268.7
-----------------------
Cash and cash equivalents 13.8 149.8
Accrued investment income 103.4 106.8
Note receivable from parent 116.0 -
Preferred stock of affiliates (amortized cost: $8.5) 8.5 -
Receivable from brokers 34.4 -
Receivables from agents, less allowance (1995 - $0.4) 18.3 17.9
Amounts recoverable from reinsurers 19.0 23.2
Deferred policy acquisition costs 47.5 510.6
Cost of insurance purchased 353.0 174.7
Property and equipment, at cost, less accumulated
depreciation ($3.4; $36.1) 20.1 20.2
Acquisition - related goodwill - 79.8
Other assets 30.7 18.8
Assets held in separate accounts 118.3 104.3
-----------------------
Total assets $ 7537.6 $ 7474.8
-----------------------
-----------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions, except share data)
<TABLE>
<CAPTION>
Predecessor
Basis
------------
December 31
-----------------------
LIABILITIES 1995 1994
-----------------------
<S> <C> <C>
Insurance liabilities
Life, annuity and accident and health reserves $ 2791.4 $ 2733.3
Policy and contract claims 41.2 39.1
Investment-type contract deposits
and dividend accumulations 2993.0 2897.3
Participating policyholders' interests 199.2 190.7
Other 48.4 55.8
Income taxes
Current (12.0) 6.0
Deferred 49.8 (22.0)
Intercompany payables 0.6 -
Accrued expenses and other liabilities 145.5 110.7
Liabilities related to separate accounts 118.3 104.3
-----------------------
Total liabilities 6375.4 6115.2
-----------------------
SHAREHOLDER'S EQUITY
Common stock ($2 par value;
30,000,000 shares authorized,
21,002,000 shares issued and outstanding) 42.0 42.0
Paid-in capital 884.3 803.0
Net unrealized gains (losses) on securities 187.5 (8.1)
Retained earnings 48.4 522.7
-----------------------
Total shareholder's equity 1162.2 1359.6
-----------------------
Total liabilities and shareholder's equity $ 7537.6 $ 7474.8
-----------------------
-----------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
----------------------------------------
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------------
1995 1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $ 449.6 $ 34.5 $ 502.7 $ 462.2
Net investment income 468.8 41.3 478.7 465.4
Investment gains (losses) 7.2 (7.6) (14.4) 92.6
Other 55.9 4.1 68.5 50.8
----------------------------------------------------------
Total revenues 981.5 72.3 1035.5 1071.0
----------------------------------------------------------
Benefits and expenses
Benefits paid or provided
Death claims and other policy
benefits 236.3 21.5 233.0 259.5
Investment-type contracts 168.3 14.0 170.5 169.1
Dividends to policyholders 85.6 7.5 87.0 92.3
Change in policy reserves 148.5 11.0 218.1 122.2
Increase in participating policy-
holders' interests 11.0 1.0 12.0 12.2
----------------------------------------------------------
649.7 55.0 720.6 655.3
Operating costs and expenses 125.3 10.2 119.8 120.3
Amortization of deferred policy
acquisition costs 8.3 5.8 71.3 68.0
Amortization of cost of insurance
purchased 29.0 0.8 9.0 7.9
Amortization of acquisition-related
goodwill - 0.2 3.3 3.3
----------------------------------------------------------
Total benefits and expenses 812.3 72.0 924.0 854.8
----------------------------------------------------------
Income before income tax expense
and cumulative effect of accounting
changes 169.2 0.3 111.5 216.2
----------------------------------------------------------
Income tax expense (benefit)
Current 39.7 4.9 75.6 97.8
Deferred 21.1 (4.7) (31.9) (18.7)
----------------------------------------------------------
Total income tax expense 60.8 0.2 43.7 79.1
----------------------------------------------------------
Income before cumulative effect of
accounting changes 108.4 0.1 67.8 137.1
Cumulative effect of accounting changes - - - 17.9
----------------------------------------------------------
Net income $ 108.4 $ 0.1 $ 67.8 $ 119.2
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
----------------------------------------
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------------
1995 1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 42.0 $ 42.0 $ 42.0 $ 42.0
----------------------------------------------------------
Paid-in capital
Balance at beginning of period 884.3 803.0 803.0 803.0
Adjustment for the acquisition - 81.3 - -
----------------------------------------------------------
Balance at end of period 884.3 884.3 803.0 803.0
----------------------------------------------------------
Net unrealized gains (losses)
on available-for-sale securities
Balance at beginning of period - (8.1) 5.3 10.5
Change during the period 187.5 1.4 (13.4) (5.2)
Adjustment for the acquisition - 6.7 - -
----------------------------------------------------------
Balance at end of period 187.5 - (8.1) 5.3
----------------------------------------------------------
Retained earnings
Balance at beginning of period - 522.7 492.7 418.7
Net income 108.4 0.1 67.8 119.2
Dividends paid to parent (60.0) (250.0) (37.8) (45.2)
Adjustment for the acquisition - (272.8) - -
----------------------------------------------------------
Balance at end of period 48.4 - 522.7 492.7
----------------------------------------------------------
Total shareholder's equity
at end of period $ 1162.2 $ 926.3 $ 1359.6 $ 1343.0
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
----------------------------------------
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------------
1995 1995 1994 1993
----------------------------------------------------------
<S> <C> <C> <C> <C>
Operating activities
Net income before cumulative effect
of accounting changes $ 108.4 $ 0.1 $ 67.8 $ 137.1
Reconciling adjustments to net cash
provided by operating activities
Insurance liabilities 155.4 19.9 232.8 141.1
Deferred policy acquisition costs (59.4) (2.7) (40.1) (32.6)
Investment (gains) losses (11.4) (0.9) 14.4 (92.6)
Investment write-downs and reserves 4.2 8.5 - -
Cost of insurance purchased and intangibles 29.0 1.0 12.3 11.2
Interest credited, net of charges on investment
contract deposits 153.7 12.0 153.0 155.1
Purchase of trading securities - (1.5) (183.3) -
Proceeds from sale of trading securities - 85.5 247.0 -
Other, net 8.5 (7.1) (37.3) (20.0)
----------------------------------------------------------
Net cash provided by operating activities 388.4 114.8 466.6 299.3
----------------------------------------------------------
Investing activities
Investments purchases
Held-to-maturity - (0.8) (621.8) -
Available-for-sale (1055.8) - (57.3) -
Other investments (95.7) (27.2) (224.3) (2079.6)
Affiliated (124.5) - - -
Investment calls, maturities and sales
Held-to-maturity - 24.9 470.0 -
Available-for-sale 832.0 0.2 8.1 -
Other investments 127.1 6.3 72.6 1708.2
Additions to property and equipment (3.5) (0.5) (5.0) (6.5)
----------------------------------------------------------
Net cash provided by (used for) investing activities (320.4) 2.9 (357.7) (377.9)
----------------------------------------------------------
Financing activities
Policyholder account deposits 357.8 29.2 336.6 386.0
Policyholder account withdrawals (366.2) (32.6) (337.0) (268.5)
Proceeds from intercompany borrowings 105.2 - - -
Repayments of intercompany borrowings (105.1) - - -
Dividend payments (60.0) (250.0) (37.8) (45.2)
----------------------------------------------------------
Net cash provided by (used for) financing activities (68.3) (253.4) (38.2) 72.3
----------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (0.3) (135.7) 70.7 (6.3)
Cash and cash equivalents at
beginning of period 14.1 149.8 79.1 85.4
----------------------------------------------------------
Cash and cash equivalents at end of period $ 13.8 $ 14.1 $ 149.8 $ 79.1
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
1.1 NATURE OF OPERATIONS
The Franklin Life Insurance Company (Franklin) and its subsidiaries,
headquartered in Springfield, Illinois, provide life insurance and
annuity products to middle income customers throughout the United
States. Franklin serves this customer base through 3,500 agents.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) and include the
accounts of Franklin, a wholly-owned subsidiary of American Franklin
Company (AFC), and its significant subsidiaries, The American Franklin
Life Insurance Company (AMFLIC) and The Franklin United Life Insurance
Company (FULIC). All material intercompany transactions have been
eliminated in consolidation. To conform with the 1995 presentation,
certain items in the prior years' financial statements and notes have
been reclassified.
On December 31, 1995, Franklin completed the sale of FULIC to American
General Life Insurance Company of New York (AGNY), an affiliated entity.
Franklin received $8.5 million of preferred stock of American General Life
Insurance Company, the parent of AGNY, as consideration with no gain or
loss recognized on the transaction.
The preparation of financial statements requires management to make
estimates and assumptions that affect (1) the reported amounts of assets
and liabilities, (2) disclosures of contingent assets and liabilities, and
(3) the reported amounts of revenues and expenses during the reporting
periods. Ultimate results could differ from those estimates.
1.3 ACQUISITION
On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of
American General Corporation (AGC), acquired AFC for a purchase price of
$1.17 billion.
F-15
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.3 ACQUISITION (CONTINUED)
The purchase price consisted of $920 million paid in cash at closing and a
$250 million extraordinary cash dividend paid by AFC to Franklin's former
parent prior to closing. In addition, $6.3 million of acquisition costs
were capitalized as part of the acquisition. These transactions received
the required regulatory approvals from the Illinois and New York Insurance
Departments.
The acquisition was accounted for using the purchase method of accounting
in accordance with the provisions of Accounting Principles Board Opinion
16, "Business Combinations", and other existing accounting literature
pertaining to purchase accounting. Under purchase accounting, the total
purchase cost was allocated to the assets and liabilities acquired based on
a determination of their fair value. Franklin's consolidated balance sheet
at December 31, 1995, and the consolidated statements of income,
shareholder's equity and cash flows for the eleven months then ended, are
reported under the purchase method of accounting and, accordingly, are not
consistent with the basis of presentation of the previous periods'
financial statements (Predecessor Basis).
The fair values of Franklin's consolidated assets and liabilities at
January 31, 1995 were as follows (in millions):
Fixed maturity securities $ 4862.3
Other investments 1126.0
Other assets 300.7
Cost of insurance purchased 656.6
Federal income taxes 76.5
Insurance liabilities (5891.5)
Other liabilities (204.3)
-----------
Net assets $ 926.3
-----------
-----------
F-16
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.4 ACCOUNTING CHANGES
CURRENT YEAR. Effective January 1, 1995, Franklin adopted Statement of
Financial Accounting Standards (SFAS 114), "Accounting by Creditors for
Impairment of a Loan." SFAS 114 requires that certain impaired loans be
reported at the present value of expected future cash flows discounted
using the loan's initial effective interest rate, the loan's observable
market price, or the fair value of underlying collateral. The initial
effect of adopting this statement was recorded as part of realized
investment losses and resulted in a one-time reduction of net income of
$5.5 million ($8.5 million pretax) for the one month ended January 31, 1995.
Effective January 31, 1995, Franklin adopted SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". The adoption of this statement did not have a material impact on
Franklin's consolidated financial statements.
Effective January 31, 1995, Franklin adopted SFAS 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises
for Certain Long-Duration Participating Contracts". SFAS 120 requires that
benefit reserves for participating life insurance contracts be computed on
a net level premium basis using nonforfeiture interest and mortality rates.
The interest assumption used to compute estimated gross profits was 8.5% at
December 31, 1995. The initial effect of adopting this statement was
recorded as part of purchase accounting.
PRIOR YEARS. Effective January 1, 1993, Franklin adopted SFAS 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
which requires accrual of a liability for postretirement benefits other
than pensions, and SFAS 112, "Employers' Accounting for Postemployment
Benefits," which requires accrual of a liability for benefits provided to
employees after employment but before retirement.
Franklin elected to recognize the one-time transition obligation charge
resulting from the adoption of SFAS 106 on the immediate recognition basis.
The transition obligation at January 1, 1993 was $31.5 million. The
cumulative change in accounting principle for the adoption of SFAS 106 and
SFAS 112, net of $11.0 million of deferred income taxes, was a $20.5
million increase to net income in 1993.
F-17
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.4 ACCOUNTING CHANGES (CONTINUED)
Effective December 31, 1993, Franklin adopted SFAS 115, "Accounting for
Certain Investments in Debt and Equity Securities." This standard requires
that fixed maturity and equity securities be classified into one of three
categories: (1) held-to-maturity, (2) available-for-sale, or (3) trading.
Securities classified as held-to-maturity are carried at amortized cost
while those classified as available-for-sale or trading are carried at fair
value. The unrealized gain (loss) on those securities classified as
available-for-sale is recorded as an adjustment to shareholder's equity,
while the unrealized gain (loss) on those securities classified as trading
is recorded as an adjustment to income. At December 31, 1994 and 1993,
Franklin classified all equity securities as trading and a portion of its
fixed maturity securities as available-for-sale, with the remainder
classified as held-to-maturity. The cumulative change in accounting
principle, net of $1.5 million of deferred income taxes, was a $2.6 million
increase to net income in 1993.
Effective January 1, 1993, Franklin adopted SFAS 113 "Accounting and
Reporting for Reinsurance of Short-Duration and Long-Duration Contracts".
The adoption of this statement did not have a material impact on Franklin's
consolidated financial statements.
1.5 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES. Concurrent with the sale of
Franklin, and in conjunction with purchase accounting, effective January
31, 1995, Franklin has classified all fixed maturity securities and all
equity securities as available-for-sale and recorded them at fair value.
After adjusting related balance sheet accounts as if the unrealized gains
(losses) had been realized, the net fair value adjustment is recorded in
net unrealized gains (losses) on securities within shareholder's equity.
If the fair value of a security classified as available-for-sale declines
below its cost and this decline is considered to be other than temporary,
the security is reduced to its fair value, and the reduction is recorded as
a realized loss.
MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of an
allowance for losses. The allowance for losses covers all non-performing
loans, consisting of loans delinquent 60 days or more. The allowance also
covers loans for which there is a concern based on management's assessment
of risk factors, such as potential non-payment or non-monetary default.
The allowance is based on a loan-specific review and a formula that
reflects past results and current trends.
Impaired loans, those for which Franklin determines that it is probable
that all amounts due under the contractual terms will not be collected, are
reported at the lower of amortized cost or fair value of the underlying
collateral less estimated costs to sell.
F-18
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.5 INVESTMENTS (CONTINUED)
POLICY LOANS. Policy loans are reported at unpaid principal balance and
are adjusted periodically for any differences between face value and unpaid
principal balance, and for possible uncollectible amounts.
INVESTMENT INCOME. Interest on fixed maturity securities and performing
mortgage loans is recorded as income when earned and is adjusted for any
amortization of premium or discount. Interest on restructured mortgage
loans is recorded as income when earned based on the new contractual rate.
Interest on delinquent mortgage loans is recorded as income on a cash
basis. Dividends are recorded as income on ex-dividend dates.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are
recognized using the specific identification method and include declines in
the fair value of investments below cost that are considered other than
temporary and the net unrealized holding gain or loss on trading
securities.
1.6 CASH AND CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or less
are included in cash and cash equivalents. The carrying amount
approximates fair value.
1.7 DEFERRED POLICY ACQUISITION COSTS (DPAC)
The costs of writing an insurance policy, including agents' commissions and
underwriting and marketing expenses, are deferred and included in the DPAC
asset.
DPAC associated with interest-sensitive life insurance, participating life
insurance and investment contracts is charged to expense in relation to the
estimated gross profits of those contracts. DPAC associated with all
other insurance contracts is charged to expense over the premium-paying
period or as the premiums are earned over the life of the contract.
Gross profits include realized investment gains (losses). In addition,
DPAC is adjusted for the impact on estimated future gross profits as if net
unrealized gains (losses) on securities had been realized at the balance
sheet date. The impact of this adjustment is included in net unrealized
gains (losses) on securities within shareholder's equity.
F-19
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.7 DEFERRED POLICY ACQUISITION COSTS (DPAC) (CONTINUED)
Franklin reviews the carrying amount of DPAC on at least an annual basis.
In determining whether the carrying amount is appropriate, Franklin
considers estimated future gross profits or future premiums, as applicable
for the type of contract. In all cases, Franklin considers expected
mortality, interest earned and credited rates, persistency, and expenses.
1.8 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to insurance contracts in force at the acquisition date
is referred to as CIP. CIP is charged to expense using the same
assumptions as DPAC. Interest is accreted on the unamortized balance of
CIP at rates of 7% to 8.5%. CIP is also adjusted for the impact of net
unrealized gains (losses) on securities in the same manner as DPAC.
Franklin reviews the carrying amount of CIP on at least an annual basis
using the same methods used to evaluate DPAC.
1.9 ACQUISITION-RELATED GOODWILL
Prior to January 31, 1995, acquisition-related goodwill was charged to
expense in equal amounts over 40 years. At December 31, 1994, accumulated
amortization was $53.0 million. Acquisition-related goodwill was
attributable to a previous acquisition of AFC and was eliminated in
purchase accounting.
1.10 SEPARATE ACCOUNTS
Separate accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the holder of the
contract rather than Franklin. Consequently, the insurer's liability for
these accounts equals the value of the account assets. Investment income,
realized investment gains (losses), and policyholder account deposits and
withdrawals related to separate accounts are excluded from the consolidated
statements of income and cash flows. Assets held in separate accounts are
carried at fair value.
1.11 INSURANCE LIABILITIES
Substantially all of Franklin's insurance liabilities relate to
long-duration contracts, which generally require performance over a period
of more than one year. The contract provisions normally cannot be changed
or canceled by Franklin during the contract period.
F-20
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.11 INSURANCE LIABILITIES (CONTINUED)
For interest-sensitive life insurance and investment contracts, reserves
equal the sum of the policy account balance and deferred revenue charges.
Reserves for other non-participating long-duration contracts are based on
estimates of the cost of future policy benefits to be paid as a result of
present and future claims due to death, disability, surrender of a policy,
or payment of an endowment. Reserves are determined using the net level
premium method. Interest assumptions used to compute reserves ranged from
2.0% to 8.5% at December 31, 1995.
1.12 PREMIUM RECOGNITION
Most receipts for annuities and interest-sensitive life insurance contracts
are classified as deposits instead of revenues. Revenues for these
contracts consist of the mortality, expense, and surrender charges assessed
against the account balance. Policy charges that are designed to
compensate Franklin for future services are deferred and recognized in
income over the period earned, using the same assumptions used to amortize
DPAC.
For limited-payment contracts, net premiums are recorded as revenue, and
the difference between the gross premium received and the net premium is
deferred and recognized in income in a constant relationship to insurance
in force. For all other long-duration contracts, premiums are recognized
when due.
1.13 INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in effect
when the temporary differences reverse. The effect of a tax rate change is
recognized in income in the period of enactment. State income taxes are
included in income tax expense.
A change in deferred taxes related to fluctuations in fair value of
available-for-sale securities is included in net unrealized gains (losses)
on securities in shareholder's equity.
F-21
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.14 PARTICIPATING LIFE INSURANCE
Participating life insurance contracts contain dividend payment provisions
that entitle the policyholders to participate in the earnings of the
contracts. Participating life insurance accounted for 48% and 49% of life
insurance in force at December 31, 1995 and 1994, respectively, and 58%,
69%, 61%, and 65% of premiums and other considerations for the eleven
months ended December 31, 1995, the one month ended January 31, 1995, and
the years ended December 31, 1994 and 1993, respectively.
The portion of earnings allocated to participating policyholders which
cannot be expected to inure to Franklin's shareholder is excluded from net
income and shareholder's equity.
The amount of dividends to be paid on participating life insurance
contracts is determined annually, based on estimates of amounts incurred
for the contracts in effect during the period.
2. Investments
2.1 INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------------
IN MILLIONS 1995 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 394.3 $ 33.9 $ 400.8 $ 394.4
Mortgage loans on real estate 54.3 4.6 54.9 47.7
Policy loans 18.6 1.7 18.3 17.8
Other investments 9.1 1.2 12.2 11.9
----------------------------------------------------------
Gross investment income 476.3 41.4 486.2 471.8
Investment expense 7.5 0.1 7.5 6.4
----------------------------------------------------------
Net investment income $ 468.8 $ 41.3 $ 478.7 $ 465.4
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
The carrying value of investments that produced no investment income during
1995 totaled $30.3 million, or less than 0.5% of total invested assets.
The ultimate disposition of these assets is not expected to have a material
effect on Franklin's consolidated results of operations and financial
position.
F-22
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.2 REALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for fixed maturity and equity
securities, net of participating policyholders' interest, and DPAC and CIP
amortization were as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------------
IN MILLIONS 1995 1995 1994 1993
- - --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 13.8 $ - $ 17.4 $ 79.1
Gross losses (1.9) - (0.9) (8.9)
----------------------------------------------------------
Total fixed maturity securities 11.9 - 16.5 70.2
----------------------------------------------------------
Equity securities
Gross gains 1.9 4.1 23.2 59.1
Gross losses (0.5) (5.4) (49.4) (32.5)
----------------------------------------------------------
Total equity securities 1.4 (1.3) (26.2) 26.6
----------------------------------------------------------
Other - (6.3) (4.7) (4.2)
Adjustment to DPAC and CIP (6.1) - - -
----------------------------------------------------------
Realized investment gains
(losses) $ 7.2 $ (7.6) $ (14.4) $ 92.6
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
Voluntary sales of investments resulted in:
<TABLE>
<CAPTION>
Realized
--------------------------
In millions Proceeds Gains Losses
- - ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ELEVEN MONTHS ENDED AVAILABLE-FOR-SALE $ 268.7 $ 8.5 $ (0.4)
DECEMBER 31, 1995
- - ------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------
ONE MONTH ENDED HELD-TO-MATURITY $ - $ - $ -
JANUARY 31, 1995 AVAILABLE-FOR-SALE $ - $ - $ -
TRADING $ 84.7 $ 4.1 $ (5.4)
- - ------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------
Year Ended December 31, 1994 Available-for-sale $ - $ - -
Trading $ 236.7 $ 23.2 $ (49.4)
- - ------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------
Year Ended December 31, 1993 Fixed maturity
and equity securities $ 34.1 $ 1.0 $ (0.2)
- - ------------------------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------------------------
</TABLE>
F-23
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES
VALUATION. Amortized cost and fair value of available-for-sale and
held-to-maturity securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In millions COST GAINS LOSSES VALUE
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Fixed maturity securities
Corporate bonds
Investment grade $ 2872.1 $ 304.2 $ (3.5) $ 3172.8
Below investment grade 188.1 11.9 (0.7) 199.3
Public utilities 1241.5 156.6 - 1398.1
Mortgage-backed 500.4 61.5 - 561.9
Foreign governments 101.5 17.7 - 119.2
U.S. Government 191.8 23.7 - 215.5
States/political subdivisions 13.6 0.9 - 14.5
Redeemable
preferred stocks 0.5 - - 0.5
----------------------------------------------------------
Total fixed maturity securities 5109.5 576.5 (4.2) 5681.8
----------------------------------------------------------
EQUITY SECURITIES 2.4 1.3 - 3.7
----------------------------------------------------------
Total available-for-sale securities $ 5111.9 $ 577.8 $ (4.2) $ 5685.5
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
F-24
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
IN MILLIONS COST GAINS LOSSES VALUE
- - ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
HELD-TO-MATURITY SECURITIES
Fixed maturity securities
Corporate securities
Investment grade $ 2511.1 $ 41.8 $ (137.4) $ 2415.5
Below investment grade 189.0 0.6 (5.0) 184.6
Public utilities 1549.5 16.8 (128.9) 1437.4
Mortgage-backed 464.0 3.8 (68.4) 399.4
Foreign governments 113.7 1.8 (6.8) 108.7
U.S. Government 49.0 0.7 (2.8) 46.9
States/political subdivisions 18.0 0.2 (1.2) 17.0
Redeemable
preferred stocks 2.5 0.6 (0.1) 3.0
----------------------------------------------------------
Total held-to-maturity 4896.8 66.3 (350.6) 4612.5
----------------------------------------------------------
</TABLE>
F-25
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1994
----------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
IN MILLIONS COST GAINS LOSSES VALUE
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
AVAILABLE-FOR-SALE SECURITIES
Fixed maturity securities
Foreign government 3.4 - (0.6) 2.8
U.S. Government 176.6 1.7 (16.7) 161.6
----------------------------------------------------------
Total available-for-sale
securities 180.0 1.7 (17.3) 164.4
----------------------------------------------------------
Total fixed maturity
securities $ 5,076.8 68.0 $ (367.9) $ 4,776.9
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
F-26
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
MATURITIES. The contractual maturities of fixed maturity securities, at
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------
AMORTIZED FAIR
In millions COST VALUE
- - ----------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 66.0 $ 66.8
Due after one year through five years 871.8 928.6
Due after five years through ten years 1932.1 2134.7
Due after ten years 1739.2 1989.8
Mortgage-backed securities 500.4 561.9
---------------------------
Totals $ 5109.5 $ 5681.8
---------------------------
---------------------------
</TABLE>
Actual maturities may differ from contractual maturities since borrowers may
have the right to call or prepay obligations. Corporate requirements and
investment strategies may result in the sale of investments before maturity.
F-27
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.4 NET UNREALIZED GAINS (LOSSES) ON SECURITIES
Net unrealized gains (losses) on available-for-sale securities included in
shareholder's equity at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1995 1994
-----------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 577.8 $ 1.7
Gross unrealized losses (4.2) (17.3)
DPAC fair value adjustment (11.7) -
CIP fair value adjustment (270.0) -
Participating policyholders'
interest (3.4) 1.8
Deferred federal income taxes (101.0) 5.7
Net unrealized gains (losses) -------------------------------
on securities $ 187.5 $ (8.1)
-------------------------------
-------------------------------
</TABLE>
The change in net unrealized holding gain or loss on trading securities
which was included in earnings during the one month ended January 31, 1995
and for the year ended December 31, 1994 and recorded as part of the
cumulative effect of a change in accounting principle for 1993 was as
follows:
<TABLE>
<CAPTION>
ONE MONTH Years
ENDED Ended
JANUARY 31 December 31
--------------------------------------
In millions 1995 1994 1993
------------------------------------------------------------------
<S> <C> <C> <C>
Change in unrealized
holding gain or loss
on trading securities $ 2.2 $ (5.3) $ 4.1
Deferred income taxes (0.8) 1.9 (1.5)
------------------------------------
Change in net unrealized
holding gain or loss on
trading securities $ 1.4 $ (3.4) $ 2.6
------------------------------------
------------------------------------
</TABLE>
F-28
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE
DIVERSIFICATION. Diversification of the geographic location and type of
property collateralizing mortgage loans reduces the concentration of credit
risk. For new loans, Franklin requires loan-to-value ratios of 79% or
less, based on management's credit assessment of the borrower. At December
31, the mortgage loan portfolio was distributed as follows:
<TABLE>
<CAPTION>
In millions 1995 1994
-----------------------------------------------------------------
<S> <C> <C>
Geographic distribution
East North Central $ 135.3 $ 148.5
East South Central 39.1 37.3
Mid Atlantic 17.9 19.0
Mountain 42.9 45.2
New England 20.6 22.4
Pacific 102.0 103.0
South Atlantic 153.8 162.7
West North Central 40.2 47.4
West South Central 56.2 50.7
Allowance for losses (12.7) -
--------------------------------
Total $ 595.3 $ 636.2
--------------------------------
--------------------------------
Property type
Retail $ 296.3 $ 295.5
Office 159.7 177.9
Industrial 99.9 109.9
Residential and other 52.1 52.9
Allowance for losses (12.7) -
--------------------------------
Total $ 595.3 $ 636.2
--------------------------------
--------------------------------
</TABLE>
F-29
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
IMPAIRED LOANS. The carrying value of impaired mortgage loans on real
estate and related interest income were as follows:
<TABLE>
<CAPTION>
AS OF AND FOR THE
ELEVEN MONTHS
ENDED
DECEMBER 31
------------------
In millions 1995
-------------------------------------------------------
<S> <C>
Impaired loans
With allowance (a) $ 5.3
Without allowance 17.8
------------------
Total impaired loans $ 23.1
------------------
------------------
Average investment $ 27.4
Interest income earned 1.3
</TABLE>
(a) Represents gross amounts before allowance for mortgage loan losses of
$1.6 million. Franklin had no impaired loans at December 31, 1994 and
1993.
ALLOWANCE. The allowance for mortgage loan losses was as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH
ENDED ENDED
DECEMBER 31 JANUARY 31
--------------------------------
In millions 1995 1995
-----------------------------------------------------------------
<S> <C> <C>
Balance at beginning of period $ 8.5 $ -
Net additions(a) 4.2 8.5
---------------------------------
Balance at end of period $ 12.7 $ 8.5
---------------------------------
---------------------------------
</TABLE>
(a) Charged to realized investment gains (losses).
F-30
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.6 INVESTMENTS ON DEPOSIT
As of December 31, 1995 and 1994, bonds and other investments carried
at $25.0 million and $24.8 million, respectively, were on deposit with
regulatory authorities to comply with state insurance laws.
2.7 INVESTMENT RESTRICTIONS
Franklin is restricted by the insurance laws of its domiciliary state as to
the amount which it can invest in any entity. At December 31, 1995 and
1994, Franklin's largest investment in any one entity other than U.S.
Government obligations and related party amounts was $66.1 million and
$40.7 million, respectively.
3. Fair Value of Financial Instruments
Carrying amounts and fair values for certain of Franklin's financial
instruments at December 31 are presented below. Care should be exercised
in drawing conclusions based on fair value, since (1) the fair values
presented do not include the value associated with all of the Company's
assets and liabilities, and (2) the reporting of investments at fair value
without a corresponding revaluation of related policyholder liabilities can
be misinterpreted.
<TABLE>
<CAPTION>
December 31
------------------------------------------------
1995 1994
------------------------------------------------
CARRYING FAIR Carrying Fair
In millions AMOUNT VALUE Amount Value
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Available-for-sale
fixed maturity
securities $ 5681.8 $ 5681.8 $ 164.4 $ 164.4
Held-to-maturity
fixed maturity
securities - - 4896.8 4612.5
Mortgage loans on
real estate 595.3 628.6 636.2 624.3
Equity securities 3.7 3.7 176.5 176.5
Liabilities
Insurance investment
contracts (1985.0) (1901.3) (1908.0) (1823.5)
</TABLE>
F-31
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Fair Value of Financial Instruments (continued)
The methods and assumptions used to estimate fair value were as follows:
FIXED MATURITY AND EQUITY SECURITIES. Fair values of fixed maturity and
equity securities were based on quoted market prices, where available. For
investments not actively traded, fair values were estimated using values
obtained from independent pricing services or in the case of some private
placements, by discounting expected future cash flows using current market
rates applicable to the yield, credit quality, and the average life of the
investments.
MORTGAGE LOANS ON REAL ESTATE. Fair value of mortgage loans was estimated
primarily using discounted cash flows, based on contractual maturities and
discount rates that were based on U.S. Treasury rates for similar maturity
ranges, adjusted for risk, based on property type.
POLICY LOANS. Policy loans have no stated maturity dates and are an
integral part of the related insurance contract. Accordingly, it is not
practicable to estimate a fair value. The weighted average interest rate
on policy loans was 6% in 1995 and 1994.
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts, which do not subject Franklin to significant risks arising from
policyholder mortality or morbidity, was estimated using cash flows
discounted at market interest rates. Care should be exercised in drawing
conclusions from the estimated fair value, since the estimates are based on
assumptions regarding future economic activity.
F-32
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Deferred Policy Acquisition Costs (DPAC)
Analysis of the changes in the DPAC asset is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
-------------------------------------------------
In millions 1995 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ - $ 510.6 $ 470.5 $ 437.9
Capitalization 67.7 8.5 111.4 100.6
Amortization (8.3) (5.8) (71.3) (68.0)
Effect of unrealized gains
on securities (11.7) - - -
Effect of realized investment
gains (0.2) - - -
Adjustment for the
acquisition (a) - (513.3) - -
-------------------------------------------------
End of period balance $ 47.5 $ - $ 510.6 $ 470.5
-------------------------------------------------
-------------------------------------------------
</TABLE>
(a) Represents the necessary elimination of the historical DPAC asset
required by purchase accounting
.
F-33
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP)
An analysis of the changes in the CIP asset is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
----------------------------------------------------
In millions 1995 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period
balance $ 656.6 $ 174.7 $ 169.9 $ 175.6
Interest accretion 49.0 2.0 24.9 25.5
Additions 41.3 - 13.8 2.2
Amortization (118.0) (2.8) (33.9) (33.4)
Effect of unrealized
gains on securities (270.0) - - -
Effect of realized
investment gains (5.9) - - -
Incremental adjustment
for the acquisition (a) - 482.7 - -
----------------------------------------------------
End of period balance $ 353.0 $ 656.6 $ 174.7 $ 169.9
----------------------------------------------------
----------------------------------------------------
</TABLE>
(a) Represents the incremental amount necessary to recognize the new CIP asset
attributable to the January 31, 1995 acquisition.
Accumulated CIP amortization at December 31, 1995 and 1994 was $29.0 million
and $140.0 million, respectively.
CIP amortization, net of accretion and additions, expected to be recorded in
each of the next five years is $33.4 million, $32.1 million, $29.6 million,
$25.6 million and $23.7 million.
F-34
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. Separate Accounts
Franklin administers four separate accounts. Three of these issue variable
annuity contracts and the fourth has issued a group deposit administration
contract for the Franklin employees' pension plan. AMFLIC administers two
separate accounts in connection with the issue of its Variable Universal
Life product.
7. Income Taxes
Franklin and its life insurance company subsidiaries are subject to the
life insurance company provisions of the federal tax law. Prior to
February 1, 1995, Franklin and its subsidiaries filed a consolidated
federal income tax return with their former parent company. The method of
allocation of tax expense was based upon separate return calculations with
current credit for net losses and tax credits. Consolidated Alternative
Minimum Tax, if any, was allocated separately. Intercompany tax balances
were to be settled no later than thirty (30) days after the date of filing
the consolidated return.
After January 31, 1995 Franklin will file a life/life consolidated return
which includes Franklin, FULIC (prior to the date of sale) and AMFLIC.
Franklin Financial Services Corporation, a broker-dealer and wholly-owned
subsidiary of Franklin, will file a separate return. The tax allocation
agreement is in the process of being drafted, executed and approved by the
Board of Directors.
7.1 DEFERRED TAXES
Components of deferred tax liabilities and assets at December 31, were as
follows:
<TABLE>
<CAPTION>
In millions 1995 1994
-----------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of investments $ 151.9 $ 5.6
DPAC and CIP 99.5 204.1
Other 27.0 11.1
----------------------------
Total deferred tax liabilities 278.4 220.8
----------------------------
Deferred tax assets, applicable to:
Policy reserves (115.6) (141.2)
Participating policyholders' interests (69.9) (67.0)
Postretirement benefits (4.0) (12.9)
Basis differential of investments (14.4) (1.3)
Other (24.7) (20.4)
----------------------------
Total deferred tax assets (228.6) (242.8)
----------------------------
Net deferred tax liabilities (assets) $ 49.8 $ (22.0)
----------------------------
----------------------------
</TABLE>
FLIC expects adequate future taxable income to realize the net deferred tax
assets. Accordingly, no valuation allowance is considered necessary.
F-35
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.1 DEFERRED TAXES (CONTINUED)
A portion of life insurance income earned prior to 1984 is not taxable
unless it exceeds certain statutory limitations or is distributed as
dividends. Such income, accumulated in policyholders' surplus accounts,
totaled $200 million at December 31, 1995. At current corporate rates, the
maximum amount of tax on such income is approximately $70 million.
Deferred income taxes on these accumulations are not required because no
distributions are expected.
7.2 TAX EXPENSE
A reconciliation between the federal income tax rate and the effective
income tax rate follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
--------------------------------------------
1995 1995 1994 1993
--------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0 % 35.0 % 35.0 % 35.0 %
State taxes, net 0.9 36.3 1.1 1.0
Tax-exempt investment income (0.6) (39.3) 0.7 (0.7)
Amortization of goodwill - 34.3 1.0 0.5
Other 0.6 0.4 1.4 0.8
--------------------------------------------
Effective tax rate 35.9 % 66.7 % 39.2 % 36.6 %
--------------------------------------------
--------------------------------------------
</TABLE>
7.3 TAXES PAID
Federal income taxes paid for the eleven months ending December 31, 1995,
and for the years ended December 31, 1994 and 1993 were $53 million, $65
million, and $84 million, respectively. State income taxes paid for the
eleven months ended December 31, 1995, were $1 million, and $3 million for
each of the years ended December 31, 1994 and 1993, respectively.
There were no federal or state income taxes paid during January 1995.
F-36
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.4 TAX RETURN EXAMINATIONS
The Internal Revenue Service (IRS) has completed examinations of Franklin's
returns through 1989. All resolved issues have been settled within the
amounts previously provided in the consolidated financial statements.
Adequate provision has been made for unresolved issues.
8. Benefit Plans
8.1 PENSION PLANS
Franklin and its subsidiaries have a defined benefit pension plan covering
substantially all employees. On January 1, 1996, this plan was merged with
the plan sponsored by American General Corporation. At that time, the
benefits to employees were frozen and no future accrual or accretion of
interest will occur. The plan provides for the payment of retirement
benefits; normally commencing at age 65, and also for the payment of
certain disability benefits. After meeting certain qualifications, an
employee acquires a vested right to future benefits. Pension benefits are
based on the participant's average monthly compensation and length of
credited service. Annual contributions made to the plan are sufficient to
satisfy legal funding requirements.
Fixed maturity securities constitute the majority of the plan's assets at
December 31, 1995.
The pension plan has purchased annuity contracts from Franklin to provide
benefits for its retirees. For the eleven months ended December 31, 1995,
the one month ended January 31, 1995 and for the years ended December 31,
1994 and 1993, these contracts provided approximately $3.9, $0.3, $4.0, and
$4.0 million annually for retiree benefits, respectively.
During the fourth quarter of 1995, Franklin sponsored a program of special
incentives to those employees age 55 and over who elected early retirement.
The program concluded December 31, 1995. A withdrawal of $26.5 million was
made from the plan in 1995 to provide full retirement benefits for these
employees who elected by December 31, 1995 to retire under the program.
F-37
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
Net pension cost included the following components:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
--------------------------------------------
In millions 1995 1995 1994 1993
- - ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned) $ 0.9 $ 0.2 $ 2.8 $ 2.7
Interest cost 3.7 0.4 4.2 4.4
Actual return on plan assets (11.5) (0.4) 2.5 (5.9)
Net amortization and deferral 6.3 - (6.7) 2.8
--------------------------------------------
Pension expense (income) $ (0.6) $ 0.2 $ 2.8 $ 4.0
--------------------------------------------
--------------------------------------------
</TABLE>
F-38
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
The funded status of the plan and the prepaid pension expense included in
other assets at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1995 1994
-------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation,
primarily vested $ 27.6 $ 35.9
Effect of increase in
compensation levels - 16.1
---------------------------------
Projected benefit obligation 27.6 52.0
Plan assets at fair value 31.3 49.6
---------------------------------
Plan assets at fair value in
excess of (less than) projected
benefit obligation 3.7 (2.4)
Unrecognized net loss 7.4 4.7
---------------------------------
Prepaid pension expense $ 11.1 $ 2.3
---------------------------------
---------------------------------
Weighted-average discount rate
on benefit obligation 7.25 % 8.75 %
Rate of increase in compensation
levels 4.00 5.00
Expected long-term rate of
return on plan assets 10.00 9.50
</TABLE>
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
Franklin has life, medical, supplemental major medical and dental plans for
certain retired employees and agents. Most plans are contributory with
retiree contributions adjusted annually to limit employer contributions to
predetermined amounts. Franklin has reserved the right to change or
eliminate these benefits at any time.
F-39
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
The life plans are fully insured. The plan's funded status and the accrued
postretirement benefit cost included in other liabilities at December 31
were as follows:
<TABLE>
<CAPTION>
In millions 1995 1994
--------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligation
Retirees $ 8.9 $ 18.1
Active plan participants
Fully eligible 1.1 5.7
Other 2.5 15.5
---------------------
Accumulated postretirement
benefit obligation (APBO) 12.5 39.3
Plan assets at fair value - -
---------------------
APBO in excess of plan assets
at fair value 12.5 39.3
Unrecognized net gain (1.4) -
---------------------
Accrued benefit cost $ 11.1 $ 39.3
---------------------
---------------------
Weighted-average discount
rate on benefit obligation 7.25 % 7.25 %
</TABLE>
Effective January 31, 1995, as part of purchase accounting, the
postretirement benefit obligation was revalued using AGC assumptions and
anticipated plan revisions. As a result of this revaluation, the
accumulated postretirement benefit obligation was reduced by $28.8 million.
Postretirement benefit expense is as follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
-------------------------------------------------
In millions 1995 1995 1994 1993
---------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost
(benefits earned) $ 0.1 $ - $ 1.1 $ 0.8
Interest cost 0.9 (0.2) 2.8 2.6
-------------------------------------------------
Postretirement
benefit expense
(income) $ 1.0 $ (0.2) $ 3.9 $ 3.4
-------------------------------------------------
-------------------------------------------------
</TABLE>
F-40
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
For measurement purposes, a 12% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1996; the rate was
assumed to decrease gradually to 6% by the year 2007 and remain at that
level. A 1% increase in the assumed rate results in a $0.2 million
increase in the accumulated postretirement benefit obligation and no
increase in postretirement benefit expense.
9. Statutory Accounting
State insurance laws prescribe accounting practices for calculating
statutory net income and equity. In addition, state regulators may allow
permitted statutory accounting practices that differ from prescribed
practices.
During 1995 Franklin, with the approval of the Illinois Insurance
Department, reclassified $203 million of its statutory surplus from
contributed to unassigned surplus.
At December 31, 1995 and 1994 Franklin had statutory shareholder's equity
of $386.0 million and $606.7 million, respectively. Statutory net income
was $100.2 million, $28.7 million, and $87.2 million for 1995, 1994 and
1993, respectively.
As determined on a statutory basis, the statutory shareholder's equity and
net income of subsidiaries, in millions of dollars, were reported as
follows:
<TABLE>
<CAPTION>
STATUTORY
----------------------------------------
1995 1994 1993
----------------------------------------
<S> <C> <C> <C>
Shareholder's Equity $ 9.9 $ 17.5 $ 20.1
----------------------------------------
----------------------------------------
Net Income $ (4.7) $ (4.8) $ (3.6)
----------------------------------------
----------------------------------------
</TABLE>
Generally, Franklin is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends,
loans, or advances without the approval of the Illinois Insurance
Department. During 1995, Franklin received approval to loan $116.0 million
to AGCL. Franklin also received approval to pay an extraordinary dividend
of $250 million to its former parent as part of the 1995 acquisition.
During December 1995, Franklin received approval to pay an extraordinary
dividend of $60 million to AGCL. Under these restrictions, loans or
advances in excess of $96.5 million and dividends in any twelve-month
period aggregating in excess of $100.2 million will require the approval of
the Illinois Insurance Department.
F-41
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. Consolidated Statement of Cash Flows
In addition to the cash activities shown in the consolidated statement of
cash flows, the following transactions, in millions of dollars, occurred:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
1995 1995 1994 1993
---------------------------------------------
<S> <C> <C> <C> <C>
Interest added to annuity
and other financial products $ 168.3 $ 14.0 $ 170.5 $ 169.0
---------------------------------------------
---------------------------------------------
Fair value of assets acquired
under certain assumed
reinsurance treaties $ 14.7 $ - $ 18.3 $ 204.3
Unearned revenue - - - 9.3
---------------------------------------------
Insurance liabilities assumed $ 14.7 $ - $ 18.3 $ 195.0
---------------------------------------------
---------------------------------------------
</TABLE>
11. Reinsurance
Franklin is routinely involved in reinsurance transactions. Ceded
insurance becomes a liability of the reinsurer that assumes the risk. If
the reinsurer could not meet its obligations, Franklin would reassume the
liability. The likelihood of a material reinsurance liability being
reassumed by Franklin is considered to be remote. Franklin and its
insurance subsidiaries diversify their risk of exposure to reinsurance loss
by using a number of life reinsurers that have strong claims-paying ability
ratings. The maximum retention on one life for individual life insurance
is $1.0 million.
Amounts paid or deemed to have been paid in connection with ceded
reinsurance contracts are recorded as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is recognized over the life
of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
F-42
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance (continued)
Reinsurance premiums included in premiums and other considerations were as
follows:
<TABLE>
<CAPTION>
ELEVEN MONTHS ONE MONTH Years
ENDED ENDED Ended
DECEMBER 31 JANUARY 31 December 31
--------------------------------------------------
In millions 1995 1995 1994 1993
- - -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct premiums
and other considerations
other considerations $ 500.1 $ 36.8 $ 507.1 $ 466.9
Reinsurance assumed 44.2 (0.8) 114.7 97.1
Reinsurance ceded (94.7) (1.5) (119.1) (101.8)
--------------------------------------------------
Premiums and
other considerations
considerations $ 449.6 $ 34.5 $ 502.7 $ 462.2
--------------------------------------------------
--------------------------------------------------
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $63.3 million, $1.4
million, $69.6 million and $65.9 million for the eleven months ended December
31, 1995, the one month ended January 31, 1995 and the years ended December 31,
1994 and 1993, respectively. The amount of reinsurance recoverable (payable) on
paid and unpaid losses was $0.4 million and $(1.0) million at December 31, 1995
and 1994, respectively.
12. Related Party Transactions
During 1995, the following transactions occurred with related parties:
+ Franklin purchased a 6.75% promissory note from AGCL for $116.0
million to mature in 2005.
+ Franklin borrowed $105.2 million and repaid $105.1 million through its
participation in the AGC short-term borrowing program. The remaining
balance was paid in January 1996. Interest was paid on the
outstanding balances based on the Federal Reserve Board's monthly
average H.15 rate for 30-day commercial paper.
+ Franklin received $8.5 million of 8% non-voting preferred stock of
American General Life Insurance Company as consideration for the sale
of FULIC.
Additionally, Franklin has entered into indefinite contracts for the
performance of all investment management services as well as cost
allocation agreements with its ultimate parent. Total expenses under these
agreements were $2.3 million in the eleven months ended December 31, 1995.
F-43
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. Legal Proceedings
Franklin and certain of its subsidiaries are defendants in various lawsuits
and proceedings arising in the normal course of business. Although no
assurances can be given and no determination can be made at this time as to
the outcome of any particular lawsuit or proceeding, Franklin and its
subsidiaries believe that there are meritorious defenses for all of these
claims and are defending them vigorously. The Company also believes that
the total amounts that would ultimately be paid, if any, arising from these
claims would have no material effect on the Company's consolidated results
of operations and financial position.
14. State Guaranty Associations
State guaranty fund expense included in operating costs and expenses was
$0.2 million, $0.6 million, $2.3 million and $2.1 million for the eleven
months ended December 31, 1995, one month ended January 31, 1995, and the
years ended December 31, 1994 and 1993, respectively. Amounts assessed
Franklin by state life and health insurance guaranty funds resulting from
paid industry insolvencies were $0.1 million, $0.6 million, $2.3 million
and $2.1 million for the eleven months ended December 31, 1995, one month
ended January 31, 1995, and the two years ended December 31, 1994 and 1993.
These assessments are expected to be partially recovered against the
payment of future premium taxes.
The accrued liability for anticipated assessments was $8.5 million at
December 31, 1995. Franklin has recorded a receivable of $11.2 million for
expected recoveries against the payment of future premium taxes. In prior
periods, no accrual was recorded for anticipated assessments.
The 1995 liability was estimated by Franklin using the latest information
available from the National Organization of Life and Health Insurance
Guaranty Associations. Although the amount accrued represents Franklin's
best estimate of its liability, this estimate may change in the future.
Additionally, changes in state laws could decrease the amount recoverable
against future premium taxes.
F-44
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN LIFE VARIABLE ANNUITY FUND A
INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE WITH CERTAIN QUALIFIED PLANS AND
TRUSTS ACCORDED SPECIAL TAX TREATMENT AND AS INDIVIDUAL RETIREMENT ANNUITIES
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 Variable Annuity Fund A:
Per-Unit Income and Changes in Accumulation Unit Value for
the ten years ended December 31, 1995
Included in the Statement of Additional Information:
Franklin Life Variable Annuity Fund A:
Reports of Independent Auditors and Accountants
Financial Statements:
Statement of Assets and Liabilities, December 31, 1995
Statement of Operations for the year ended December 31, 1995
Statements of Changes in Contract Owners' Equity for the two years
ended December 31, 1995
Portfolio of Investments, December 31, 1995
Notes to Financial Statements
Supplementary Information - Per-Unit Income and Changes in
Accumulation Unit Value for the five
years ended December 31, 1995
The Franklin Life Insurance Company and Subsidiaries:
Reports of Independent Auditors and Accountants
Financial Statements:
Consolidated Balance Sheet, December 31, 1995 and 1994
Consolidated Statement of Income for the eleven months ended December
31, 1995, one month ended January 31, 1995, and years ended
December 31, 1994 and 1993
Consolidated Statement of Shareholder's Equity for the eleven months
ended December 31, 1995, one
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<PAGE>
month ended January 31, 1995, and years ended December 31, 1994 and
1993
Consolidated Statement of Cash Flows for the eleven months ended
December 31, 1995, one month ended January 31, 1995, and years
ended December 31, 1994 and 1993
Notes to Consolidated Financial Statements
Schedules to the financial statements have been omitted because they are
not required under the related instructions or are not applicable, or the
information has been shown elsewhere.
(b) Exhibits:
1 - Resolution of The Franklin Life Insurance Company's Board of
Directors creating Franklin Life Variable Annuity Fund A is
incorporated herein by reference to Exhibit 1 to Registrant's
Registration Statement on Form N-8B-1, filed February 25, 1970 (File
No. 811-1990).
2 - Rules and Regulations of Registrant as amended to date are
incorporated herein by reference to Exhibit 1.2 to Amendment No. 3 to
Registrant's Registration Statement on Form S-5, filed July 1, 1971
(File No. 2-36394).
3 - Custodian Agreement dated April 17, 1995 between The Franklin Life
Insurance Company and State Street Bank and Trust Company.
4 - Investment Management Agreement between Registrant and The Franklin
Life Insurance Company dated January 31, 1995 is incorporated herein
by reference to Exhibit 4 to Registrant's Post-Effective Amendment
No. 41 on Form N-3, filed March 2, 1995.
5(a)- Sales Agreement among The Franklin Life Insurance Company, Registrant
and Franklin Financial Services Corporation dated January 31, 1995 is
incorporated herein by reference to Exhibit No. 5(a) to Registrant's
Post-Effective Amendment No. 41 on Form N-3, filed March 2, 1995.
5(b)- Form of Agreement among The Franklin Life Insurance Company, Franklin
Financial Services Corporation and agents is incorporated herein by
reference to Exhibit 1.6(b) to Amendment No. 2 to Registrant's
Registration Statement on Form S-5, filed April 1, 1971 (File No. 2-
36394).
6(a)- Specimen copy of Form 1170, deferred periodic payment variable
annuity contract, is incorporated herein by reference to Exhibit
1.4(a)(i) to Amendment No. 3 to Registrant's Registration Statement
on Form S-5, filed July 1, 1971 (File No. 2-36394).
(b)- Specimen copy of Form 1171, single payment deferred variable annuity
contract, is incorporated herein by reference to Exhibit 1.4(a)(ii)
to Amendment No. 3 to Registrant's Registration Statement on Form S-
5, filed July 1, 1971 (File No. 2-36394).
(c)- Specimen copy of Form 1172, single payment immediate life variable
annuity contract, is incorporated herein by reference to Exhibit
1.4(a)(iii) to Amendment No. 3 to Registrant's Registration Statement
on Form S-5, filed July 1, 1971 (File No. 2-36394).
(d)- Specimen copy of Form 1173, single payment immediate life variable
annuity contract with guaranteed period, is incorporated herein by
reference to Exhibit 1.4(a)(iv) to Amendment No. 3 to Registrant's
Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-
36394).
(e)- Specimen copy of Form 1174, single payment immediate joint and last
survivor life variable annuity contract, is incorporated herein by
reference to Exhibit 1.4(a)(v) to Amendment No. 3 to Registrant's
Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-
36394).
(f)- Specimen copy of endorsement to Forms 1170, 1171, 1172, 1173 and 1174
when such contracts are issued to variable annuitants in the State of
Texas is incorporated herein by reference to Exhibit 6 (f) to Post-
Effective Amendment No. 36 to Registrant's Registration Statement on
Form N-3, filed March 1, 1990 (File No. 2-36394).
7 - The applications for the various forms of variable annuity contracts
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. 36 to Registrant's Registration Statement on Form N-3,
filed March 1, 1990 (File No. 2-36394).
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<PAGE>
(b)- By-Laws of The Franklin Life Insurance Company.
9 - Not applicable.
10 - Not applicable.
11(a)- Administration Agreement between Registrant and The Franklin Life
Insurance Company dated June 30, 1971 is incorporated herein by
reference to Exhibit 9(a) to Amendment No. 1 to Registrant's
Registration Statement on Form N-8B-1, filed July 15, 1971 (File No.
811-1990).
(b)- Agreement between The Franklin Life Insurance Company and Franklin
Financial Services Corporation dated June 30, 1971 is incorporated
herein by reference to Exhibit 9(b) to Amendment No. 1 to
Registrant's Registration Statement on Form N-8B-1, filed July 15,
1971 (File No. 811-1990).
(c)- Amendment to Agreement between The Franklin Life Insurance Company
and Franklin Financial Services Corporation, dated May 15, 1975, is
incorporated herein by reference to Exhibit 1.9(b)(i) to Post-
Effective Amendment No. 9 to Registrant's Registration Statement on
Form S-5, filed November 6, 1975 (File No. 2-36394).
12 - Opinion and consent dated October 24, 1988 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 13(e) to Post-Effective Amendment No. 33 to Registration
Statement on Form N-3, filed October 27, 1988 (File No. 2-36394).
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<PAGE>
13(a)- List of Consents Pursuant to Rule 483(c).
(b) Consent of Ernst & Young LLP, Independent Auditors.
(c)- Consent of Coopers & Lybrand L.L.P., Independent Accountants.
(d)- Consent of Messrs. Chadbourne & Parke LLP.
(e)- Consent of Stephen P. Horvat, Jr.
14(a)- Not applicable.
(b)- Not applicable.
15 - Not applicable.
16 - Not applicable.
17 - Power of Attorney.
27 - Financial Data Schedule meeting the requirements of Rule 483.
Item 29. Directors and Officers of Insurance Company
Information concerning the name, principal business address and positions
and offices with The Franklin of each officer and director of The Franklin is
hereby incorporated herein by reference to Item 33. Information concerning the
positions and offices with the Fund of Messrs. Robert G. Spencer and Horvat, the
only directors or officers of The Franklin who hold positions or offices with
the Fund, is hereby incorporated herein by reference to the table under
"Management" in the Statement of Additional Information.
Item 30. Persons Controlled by or under Common Control with the Insurance
Company or Registrant.
There is no person controlled by or under common control with Registrant.
The Franklin is an indirect wholly-owned subsidiary of American General
Corporation ("AGC"). A list of the subsidiaries of AGC is set forth below.
The following chart sets forth the identities of, and the
interrelationships among, AGC and all affiliated persons within the holding
company system.
The following is a list of American General Corporation's subsidiaries as
of February 29, 1996(1). Subsidiaries of subsidiaries are indicated by
indentations and unless otherwise indicated, all subsidiaries are wholly-owned.
Inactive subsidiaries are denoted by an asterisk(*).
Jurisdiction of
Name Incorporation Insurer
- - ---- ------------- -------
AGC Life Insurance Company (2) MO Yes
American Franklin Company DE No
The Franklin Life Insurance Company IL Yes
The American Franklin Life Insurance Company IL Yes
Franklin Financial Services Corporation DE No
American General Life and Accident Insurance Company TN Yes
American General Exchange, Inc. TN No
American General Life Insurance Company TX Yes
American General Annuity Service Corporation TX No
American General Life Insurance Company of New York NY Yes
The Winchester Agency Ltd. NY No
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<PAGE>
American General Securities Incorporated (3) TX No
American General Insurance Agency, Inc. MO No
American General Insurance Agency of Hawaii, Inc. HI No
American General Insurance Agency of Massachusetts, Inc. MA No
The Variable Annuity Life Insurance Company TX Yes
The Variable Annuity Marketing Company TX No
Independent Investment Advisory Services, Inc. FL No
The Independent Life and Accident Insurance Company FL Yes
Independent Fire Insurance Company FL Yes
Herald Underwriters, Inc. FL No
Independent Fire Insurance Company of Florida FL Yes
Independent Service Company FL No
Old Faithful General Agency, Inc. TX No
Thomas Jefferson Insurance Company FL Yes
Independent Property & Casualty Insurance Company FL Yes
Independent Real Estate Management Corporation FL No
Allen Property Company DE No
Florida Westchase Corporation DE No
Greatwood Development, Inc. DE No
Greatwood Golf Club, Inc. TX No
Highland Creek Golf Club, Inc. NC No
Hunter's Creek Communications Corporation FL No
Pebble Creek Corporation DE No
Pebble Creek Development Corporation FL No
Westchase Development Corporation DE No
Westchase Golf Corporation FL No
American General Capital Services, Inc. DE No
American General Delaware Management Corporation ("AGDMC")(1) DE No
American General Finance, Inc. IN No
AGF Investment Corp. IN No
American General Auto Finance, Inc. DE No
American General Finance Corporation (4) IN No
American General Finance Group, Inc. DE No
American General Financial Services, Inc. (5) DE No
The National Life and Accident Insurance Company TX Yes
Merit Life Insurance Company IN Yes
Yosemite Insurance Company CA Yes
American General Finance, Inc. AL No
American General Financial Center UT No
American General Financial Center, Inc.* IN No
American General Financial Center, Incorporated* IN No
C-5
<PAGE>
American General Financial Center Thrift Company* CA No
Thrift, Incorporated* IN No
American General Investment Corporation DE No
American General Mortgage Company DE No
American General Realty Investment Corporation TX No
American Athletic Club, Inc. TX No
Hope Valley Farms Recreation Association, Inc. NC No
INFL Corporation DE No
Ontario Vineyard Corporation DE No
Pebble Creek Country Club Corporation FL No
Pebble Creek Service Corporation FL No
SR/HP/CM Corporation TX No
American General Mortgage and Land Development, Inc. DE No
American General Land Development, Inc. DE No
American General Realty Advisors, Inc. DE No
American General Property Insurance Company TN Yes
Bayou Property Company DE No
AGLL Corporation ("AGLL")(6) DE No
American General Land Holding Company ("AGLH") DE No
AG Land Associates, LLC(6) CA No
Hunter's Creek Realty, Inc.* FL No
Summit Realty Company, Inc. SC No
Financial Life Assurance Company of Canada Canada Yes
Florida GL Corporation DE No
GPC Property Company DE No
Cinco Ranch Development Corporation TX No
Cinco Ranch East Development, Inc. DE No
Cinco Ranch West Development, Inc. DE No
The Colonies Development, Inc. DE No
Fieldstone Farms Development, Inc. DE No
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<PAGE>
Hickory Downs Development, Inc. DE No
Lake Houston Development, Inc. DE No
South Padre Development, Inc. DE No
Green Hills Corporation DE No
Knickerbocker Corporation TX No
Lincoln American Corporation DE No
Pavilions Corporation DE No
American General Finance Foundation, Inc. is not included on this list. It is a
non-profit corporation.
(1) The following limited liability companies were formed in the State of
Delaware on March 28, 1995. The limited liability interests of each are
jointly owned by AGC and AGDMC and the business and affairs of each are
managed by AGDMC:
American General Capital, L.L.C.
American General Delaware, L.L.C.
(2) The following companies became approximately 40% owned by AGC Life
Insurance Company ("AGCL") on December 23, 1994:
Western National Corporation ("WNC") (DE)
WNL Holding Corporation
Western National Life Insurance Company (TX)
Western Save (401K Plan)
Independent Advantage Financial & Insurance Services, Inc.
WNL Investment Advisory Services, Inc.
Conseco Annuity Guarantee Corp.
WNL Brokerage Services, Inc.
WNL Insurance Services, Inc.
Accordingly, these companies became AGCL affiliates under insurance holding
company laws. However, the WNC stock is held for investment purposes by
AGCL and there are no plans for AGCL to direct the operations of any of
these companies.
(3) The following companies are controlled indirectly by American General
Securities Incorporated:
American General Insurance Agency of Ohio, Inc.
American General Insurance Agency of Texas, Inc.
American General Insurance Agency of Oklahoma, Inc.
(4) American General Finance Corporation is the parent of an additional 41
wholly owned subsidiaries incorporated in 26 states for the pupose of
conducting its consumer finance operations.
(5) American General Financial Services, Inc. is the parent of an
additional 7 wholly-owned subsidiaries incorporated in 4 states and
Puerto Rico for the purpose of conducting its consumer finance operations.
(6) AG Land Associates, LLC is jointly owned by AGLH and AGLL. AGLH holds a
98.75% managing interest and AGLL owns a 1.25% managing interest.
Item 31. Number of Holders of Securities.
As of February 15, 1996, the number of record holders of the sole class of
securities of Registrant was as indicated below:
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<PAGE>
(1) (2)
Title of Class Number of Record Holders
-------------- ------------------------
Accumulation Units Under 5,690
Variable Annuity Contracts
Item 32. Indemnification.
The information called for by this item has not changed from that provided
in Registrant's Post-Effective Amendment No. 22 on Form N-1 (File No. 2-36394)
filed with the Commission on April 6, 1982.
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 B and Franklin Life
Money Market Variable Annuity Fund C. 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:
(1) (2)
Name Business or Employment
----------------------- --------------------------------------------------
Vickie J. Alton . . . . . . . Vice President, The Franklin
Elizabeth E. Arthur . . . . . Vice President, Associate General Counsel
and Assistant Secretary, The Franklin
Robert M. Beuerlein . . . . . Senior Vice President-Actuarial and
Director, The Franklin
Barbara S. Butler . . . . . . Vice President, The Franklin
Mark R. Butler. . . . . . . . Vice President - Management Development
Director, The Franklin
Thomas J. Byerly . . . . . . Executive Vice President, Chief Marketing
Officer and Director, The Franklin;
prior to February 22, 1995, also Chief
Operating Officer, The Franklin
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<PAGE>
(1) (2)
Name Business or Employment
----------------------- --------------------------------------------------
Philip D. Calderwood. . . . . Vice President and Actuary, The Franklin
Eldon R. Canary . . . . . . . Division Vice President - Actuarial, The
Franklin
Robert M. Devlin. . . . . . . Director and Senior Chairman, The Franklin
since February 22, 1995; President and
a Director, American General
Corporation, 2929 Allen Parkway,
Houston, Texas 77019; Vice Chairman,
American General Corporation, prior to
October 26, 1995
Steve A. Dmytrack . . . . . . Vice President, The Franklin, since August
24, 1995; Assistant Vice President, The
Franklin, prior thereto
Paul C. Ely . . . . . . . . . Vice President, The Franklin
Stephen H. Field. . . . . . . Vice President, The Franklin, since
December 22, 1995; President and Chief
Executive Officer, American General
Mortgage and Land Development, Inc.,
2929 Allen Parkway, Houston, Texas
77019
Barbara Fossum. . . . . . . . Vice President, The Franklin, since June,
1995; Vice President, American General
Life Insurance Company, prior thereto
Robert J. Gibbons . . . . . . Chief Executive Officer, The Franklin,
since November 30, 1995; Director and
President, The Franklin since February
22, 1995; President and Chief Executive
Officer, American General Life
Insurance Company of New York prior to
February 22, 1995; Senior Vice
President and Chief Marketing Officer,
American General Life Insurance Company
of New York, prior to June, 1994
Harold S. Hook. . . . . . . . Director and Senior Chairman, The Franklin
since February 22, 1995; Chairman,
Chief Executive Officer and a director,
American General Corporation, 2929
Allen Parkway, Houston, Texas 77019
Stephen P. Horvat, Jr. . . . Senior Vice President, Secretary, General
Counsel and Director, The Franklin
Howard C. Humphrey. . . . . . Chairman of the Board, The Franklin; prior
to November 30, 1995, also Chief
Executive Officer, The Franklin; prior
to
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<PAGE>
February 22, 1995, also President, The
Franklin; prior to January 31, 1995
Vice President - Life Insurance of
American Brands, Inc., 1700 East Putnam
Avenue, P.O. Box 811, Old Greenwich,
CT 06870-0811; Director, BANC One Corp.
(IL.) (bank holding company), E. Old
State Capital Plaza, Springfield, IL.
62701
Jerry P. Jourdan. . . . . . . Director of Information Services -
Technical Support, The Franklin, since
January 31, 1996; Assistant Vice
President, The Franklin, prior thereto
Darrell J. Malano . . . . . . Division Vice President, The Franklin
Margaret L. Manola. . . . . . Vice President, The Franklin
(1) (2)
Name Business or Employment
Thomas K. McCracken . . . . . Vice President, The Franklin
Sylvia A. Miller. . . . . . . Vice President, The Franklin; Assistant
Vice President, The Franklin, prior to
July, 1994
Cheryl E. Morton. . . . . . . Division Vice President - Actuarial, The
Franklin
Jon P. Newton . . . . . . . . Director and Vice Chairman, The Franklin,
since January 31, 1996; Vice Chairman
and General Counsel, American General
Corporation, 2929 Allen Parkway,
Houston, Texas 77019 since
C-10
<PAGE>
October 26, 1995; Senior Vice President
and General Counsel, American General
Corporation, prior thereto
Randall E. O'Brien. . . . . . Division Vice President, The Franklin
James R. Philpott . . . . . . Vice President, The Franklin
Jeffrey D. Pirmann. . . . . . Vice President, Controller and Treasurer,
The Franklin
John M. Pruitt. . . . . . . . Vice President and Director of Sales
Services, The Franklin
James M. Quigley. . . . . . . Division Vice President, The Franklin,
since August 24, 1995; Vice President,
The Franklin, prior thereto
Gary D. Reddick . . . . . . . Director and Executive Vice President, The
Franklin since February 22, 1995;
Senior Vice President, American General
Corporation, Houston, Texas prior to
February, 1995; Senior Vice President,
American General Life Insurance
Company, prior to October 28, 1994
Dale W. Sachtleben. . . . . . Division Vice President, The Franklin
John E. Sartore . . . . . . . Vice President, The Franklin
Robert G. Spencer . . . . . . Vice President, The Franklin; prior to
1996, also Treasurer, The Franklin
Peter V. Tuters . . . . . . . Director, Vice President and Chief
Investment Officer, The Franklin since
February 22, 1995; Senior Vice
President since 1992 and Chief
Investment Officer since December,
1993, American General Corporation,
2929 Allen Parkway, Houston, Texas
77019
J. Alan Vala. . . . . . . . . Vice President and Agency Secretary, The
Franklin
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<PAGE>
David G. Vanselow . . . . . . Division Vice President, The Franklin
Raymond P. Weber. . . . . . . Vice President and Associate General
Counsel, The Franklin
C-12
<PAGE>
Item 34. Principal Underwriters.
(a) Franklin Life Variable Annuity Fund B, Franklin Life Money Market
Variable Annuity Fund C and Separate Account VUL and Separate Account VUL-2 of
The American Franklin Life Insurance Company, which offer interests in flexible
premium variable life insurance policies (The American Franklin Life Insurance
Company is a wholly-owned subsidiary of The Franklin), are the only investment
companies (other than Registrant) for which Franklin Financial Services
Corporation, the principal underwriter of Registrant, also acts as principal
underwriter, depositor, sponsor or investment adviser.
(b) Information required with respect to each director or officer of the
principal underwriter of Registrant is set forth below. The principal business
address of each individual is c/o The Franklin Life Insurance Company, #1
Franklin Square, Springfield, Illinois 62713.
(1) (2) (3)
Name Positions and Offices Positions and Offices
with Underwriter with Registrant
- - --------------------------------------------------------------------------------
Robert M. Beuerlein Director None
Thomas J. Byerly Director and Senior Vice President None
Robert J. Gibbons Chairman of the Board, President and None
Chief Executive Officer
Stephen P. Horvat, Jr. Director, Vice President Secretary to the
and Secretary Board of Managers
Randall E. O'Brien Vice President - Marketing None
Deanna Osmonson Vice President-Administration None
and Assistant Secretary
Gary D. Osmonson Senior Vice President - Sales and None
Compliance Officer
Jeffrey D. Pirmann Vice President, Treasurer and None
Chief Financial Officer
Gary D. Reddick Director and Executive None
Vice President
J. Alan Vala Vice President and Assistant Secretary None
(c) Information regarding commissions and other compensation received by each
principal underwriter, directly or indirectly, from Registrant during 1995,
Registrant's last fiscal year, is set forth below:
(1) (2) (3) (4) (5)
Name of Net Underwriting Compensation
Principal Discounts and on Redemption Brokerage Other
Underwriters Commissions or Annuitization Commissions Compensation
- - --------------------------------------------------------------------------------
Franklin Financial
Services Corporation $20,566 -0- -0- -0-
Item 35. Location of Accounts and Records.
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<PAGE>
The information called for by this item has not changed from that provided
in Registrant's Post-Effective Amendment No. 17 on Form N-1 (File No. 2-36394)
filed with the Commission on November 1, 1979.
Item 36. Management Services.
Registrant has no management-related service contract not discussed in Part
A or Part B hereof.
Item 37. Undertakings.
(b) The Registrant hereby undertakes to file a post-effective amendment to
this Registration Statement as frequently as is necessary to ensure that the
audited financial statements in the Registration Statement are never more than
16 months old for so long as payments under the Contracts may be accepted.
(c) The Registrant hereby undertakes to include either (1) as part of any
application to purchase a Contract offered by the Prospectus, a space that the
applicant can check to request a Statement of Additional Information, or (2) a
post card or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
(d) The Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form N-3 promptly upon written or oral request.
(e) The Registrant is relying upon the "no-action" letter of the Securities
and Exchange Commission dated November 28, 1988 in response to the American
Council of Life Insurance with respect to restrictions on withdrawal of amounts
from Contracts issued in connection with annuity purchase plans meeting the
requirements of Internal Revenue Code Section 403(b), which amounts are
attributable to contributions made on or after January 1, 1989 pursuant to a
salary reduction agreement or to income earned on or after January 1, 1989 with
respect to contributions made pursuant to a salary reduction agreement. The
Registrant represents that it has complied with the requirement of numbered
paragraphs (1) through (4) of such "no-action" letter.
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<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 Variable Annuity
Fund A certifies that it meets the requirements of 1933 Act Rule 485(b) for
effectiveness of this Registration Statement and has duly caused this Post-
Effective Amendment to the Registration Statement under the 1933 Act and this
Amendment to the Registration Statement under the 1940 Act to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Springfield, and State of Illinois, on the 18th day of April, 1996.
FRANKLIN LIFE VARIABLE ANNUITY FUND A
By: /s/ S.P. Horvat, Jr.
-------------------------------------
(S. P. Horvat, Jr., Secretary, Board of
Managers)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
/s/Clifford L. Greenwalt* Member, Board April 18, 1996
- - -------------------------
(Clifford L. Greenwalt) of Managers
/s/ R. C. Spencer* Member, Board April 18, 1996
- - -------------------------
(R.C. Spencer) of Managers
/s/ R. G. Spencer* Chairman, Board April 18, 1996
- - -------------------------
(R.G. Spencer) of Managers
/s/ J. W. Voth* Member, Board April 18, 1996
- - -------------------------
(J.W. Voth) of Managers
/s/ S. P. Horvat, Jr. Secretary, Board April 18, 1996
- - -------------------------
(S.P. Horvat, Jr.) of Managers
/s/ Stephen P. Horvat, Jr.
- - -------------------------
* By Stephen P. Horvat, Jr., Attorney-in-Fact
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 ("1933 Act") and
the Investment Company Act of 1940 ("1940 Act"), The Franklin Life Insurance
Company certifies that it meets the requirements of 1933 Act Rule 485(b) for
effectiveness of this Registration Statement and has duly caused this Post-
Effective Amendment to the Registration Statement under the 1933 Act and this
Amendment to the Registration Statement under the 1940 Act to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Springfield, and State of Illinois, on the 18th day of April, 1996.
THE FRANKLIN LIFE INSURANCE COMPANY
By /s/ S. P. Horvat, Jr.
------------------------------------
(S.P. Horvat, Jr., Senior Vice
President, General Counsel and
Secretary)
Pursuant to the requirements of the Securities Act of 1933, this Post-
Effective Amendment to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
Signature Title Date
/s/ R. M. Beuerlein* Senior Vice President- April 18, 1996
- - -------------------------
(R. M. Beuerlein) Actuarial and Director
/s/ T. J. Byerly* Executive Vice President April 18, 1996
- - -------------------------
(T.J. Byerly) and Director
(R.M. Devlin) Senior Chairman and Director , 1996
------
/s/ R. J. Gibbons* President , Chief Exective April 18, 1996
- - -------------------------
(R.J. Gibbons) Officer and Director
(principal executive officer)
(H.S. Hook) Senior Chairman and Director , 1996
------
/s/ S. P. Horvat, Jr. Senior Vice President April 18, 1996
- - -------------------------
(S.P. Horvat, Jr.) General Counsel, Secretary and Director
/s/ H. C. Humphrey* Chairman of the Board April 18, 1996
- - -------------------------
(H.C. Humphrey)
(J.P. Newton) Director and Vice Chairman , 1996
-------
/s/ J. D. Pirmann* Vice President, Controller April 18, 1996
- - -------------------------
(J.D.Pirmann) and Treasurer
(principal financial officer and
principal accounting officer)
/s/ G. D. Reddick* Executive Vice President and April 18, 1996
- - -------------------------
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<PAGE>
(G.D. Reddick) Director
Vice President, Chief Investment , 1996
------
(P.V.Tuters) Officer and Director
/s/ Stephen P. Horvat, Jr.
- - -------------------------
* By Stephen P. Horvat, Jr., Attorney-in-Fact
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<PAGE>
EXHIBIT INDEX
Exhibit Page
- - -------
1 - Resolution of The Franklin Life Insurance Company's Board of
Directors creating Franklin Life Variable Annuity Fund A is
incorporated herein by reference to Exhibit 1 to Registrant's
Registration Statement on Form N-8B-1, filed February 25, 1970
(File No. 811-1990).
2 - Rules and Regulations of Registrant as amended to date are
incorporated herein by reference to Exhibit 1.2 to Amendment
No. 3 to Registrant's Registration Statement on Form S-5, filed
July 1, 1971 (File No. 2-36394).
3 - Custodian Agreement dated April 17, 1995 between The Franklin
Life Insurance Company and State Street Bank and Trust Company.
4 - Investment Management Agreement between Registrant and The
Franklin Life Insurance Company dated January 31, 1995 is
incorporated herein by reference to Exhibit 4 of Registrant's
Post-Effective Amendment No. 41 on Form N-3, filed March 2,
1995.
5 (a) - Sales Agreement among The Franklin Life Insurance Company,
Registrant and Franklin Financial Services Corporation dated
January 31, 1995 is incorporated herein by reference to Exhibit
5(a) of Registrant's Post-Effective Amendment No. 41 on Form N-
3, filed March 2, 1995.
(b) - Form of Agreement among The Franklin Life Insurance Company,
Franklin Financial Services Corporation and agents is
incorporated herein by reference to Exhibit 1.6(b) to Amendment
No. 2 to Registrant's Registration Statement on Form S-5, filed
April 1, 1971 (File No. 2-36394).
6 (a) - Specimen copy of Form 1170, deferred periodic payment variable
annuity contract, is incorporated herein by reference to
Exhibit 1.4(a)(i) to Amendment No. 3 to Registrant's
Registration Statement on Form S-5, filed July 1, 1971 (File
No. 2-36394).
(b) - Specimen copy of Form 1171, single payment deferred variable
annuity contract, is incorporated herein by reference to
Exhibit 1.4(a)(ii) to Amendment No. 3 to Registrant's
Registration Statement on Form S-5, filed July 1, 1971 (File
No. 2-36394).
(c) - Specimen copy of Form 1172, single payment immediate life
variable annuity contract, is incorporated herein by reference
to Exhibit 1.4(a)(iii) to Amendment No. 3 to Registrant's
Registration Statement on Form S-5, filed July 1, 1971 (File
No. 2-36394).
(d) - Specimen copy of Form 1173, single payment immediate life
variable annuity contract with guaranteed period, is
incorporated herein by reference to Exhibit 1.4(a)(iv) to
Amendment No. 3 to Registrant's Registration Statement on Form
S-5, filed July 1, 1971 (File No. 2-36394).
(e) - Specimen copy of Form 1174, single payment immediate joint and
last survivor life variable annuity contract, is incorporated
herein by reference to Exhibit 1.4(a)(v) to Amendment No. 3 to
Registrant's Registration Statement on Form S-5, filed July 1,
1971 (File No. 2-36394).
(f) - Specimen copy of endorsement to Forms 1170, 1171, 1172, 1173
and 1174 when such contracts are issued to variable annuitants
in the State of Texas is incorporated herein by
<PAGE>
reference to Exhibit 6 (f) to Post-Effective Amendment No. 36
to Registrant's Registration Statement on Form N-3, filed March
1, 1990 (File No. 2-36394).
7 - The applications for the various forms of variable annuity
contracts 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. 36 to Registrant's Registration
Statement on Form N-3, filed March 1, 1990 (File No. 2-36394).
(b) - By-Laws of The Franklin Life Insurance Company.
9 - Not applicable.
10 - Not applicable.
11 (a) - Administration Agreement between Registrant and The Franklin
Life Insurance Company dated June 30, 1971 is incorporated
herein by reference to Exhibit 9(a) to Amendment No. 1 to
Registrant's Registration Statement on Form N-8B-1, filed July
15, 1971 (File No. 811-1990).
(b) - Agreement between The Franklin Life Insurance
Company and Franklin Financial Services
Corporation dated June 30, 1971 is incorporated
herein by reference to Exhibit 9(b) to Amendment
No. 1 to Registrant's Registration Statement on
Form N-8B-1, filed July 15, 1971 (File No. 811-
1990).
(c) - Amendment to Agreement between The Franklin Life
Insurance Company and Franklin Financial Services
Corporation, dated May 15, 1975, is incorporated
herein by reference to Exhibit 1.9(b)(i) to Post-
Effective Amendment No. 9 to Registrant's
Registration Statement on Form S-5, filed November
6, 1975 (File No. 2-36394).
12 - Opinion and consent dated October 24, 1988 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 13(e) to Post-
Effective Amendment No. 33 to Registration
Statement on Form N-3, filed October 27, 1988
(File No. 2-36394).
13 (a) - List of Consents Pursuant to Rule 483(c).
(b) Consent of Ernst & Young LLP, Independent
Auditors.
(c) - Consent of Coopers & Lybrand L.L.P., Independent
Accountants.
(d) - Consent of Messrs. Chadbourne & Parke LLP.
(e) - Consent of Stephen P. Horvat, Jr.
14 (a) - Not applicable.
(b) - Not applicable.
15 - Not applicable.
<PAGE>
16 - Not applicable.
17 - Power of Attorney.
27 - Financial Data Schedule meeting the requirements
of Rule 483.
<PAGE>
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
CUSTODIAN AGREEMENT
between
THE FRANKLIN LIFE INSURANCE COMPANY
and
STATE STREET BANK AND TRUST COMPANY
dated
as of
April 17, 1995
- - --------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
1. CUSTODIAN............................................................... 2
1.1 Appointment of Custodian........................................... 2
1.2 Form of Securities Delivered to State Street....................... 3
1.3 Powers and Duties of Custodian..................................... 3
1.3-1 Safekeeping.............................................. 3
1.3-1.1 Insurance Boards, Commissions or Departments............. 4
1.3-2 Use of a System for the Central Handling of Securities... 6
1.3-3 Registered Name, Nominee................................. 9
1.3-4 Purchases................................................ 9
1.3-5 Liability for Payment in Advance of Receipt of the
Securities Purchased..................................... 10
1.3-6 Exchanges................................................ 11
1.3-7 Sales and Delivery of Securities......................... 12
1.3-8 Communications Relating to Securities.................... 14
1.3-9 Proxies, Notices, Etc.................................... 15
1.3-10 Incurrence of Expenses................................... 15
2. ADDITIONAL POWERS AND DUTIES OF CUSTODIAN............................... 15
2.1 Bank Account....................................................... 15
2.2 Collections........................................................ 16
2.3 Stock Dividends, Rights, Etc....................................... 18
2.4 Other Proper Purposes.............................................. 18
2.5 Recordkeeping and Reports.......................................... 18
2.6 Transaction Information............................................ 20
2.7 Segregated Accounts................................................ 21
3. INSTRUCTIONS............................................................ 21
3.1 Proper Instructions................................................ 21
4. ADDITIONAL AGREEMENTS................................................... 22
4.1 Indemnification.................................................... 22
4.2 Appointment of Agents.............................................. 25
4.3 Appointment of Sub-Custodians...................................... 25
4.4 Fee Schedule....................................................... 26
4.5 Effective Period, Termination and Amendment, and Interpretive and
Additional Provisions.............................................. 26
4.6 Compliance With Law................................................ 27
4.7 Successor Custodian................................................ 28
4.8 Disclosure of Information.......................................... 29
4.9 Assignment......................................................... 29
5. MASSACHUSETTS LAW TO APPLY.............................................. 30
6. NOTICE.................................................................. 30
7. EXECUTED ORIGINALS...................................................... 30
Exhibit A- Custodian Affidavit (on deposit with State Street)
Exhibit B- Custodian Affidavit (on deposit with DTC)
Exhibit C- Custodian Affidavit (book-entry account)
Exhibit D- Daily Activity and Investory Reports
Exhibit E- State Street Bank Insurance Program
Exhibit F- Delegation of Authority (non-variable annuity fund matters)
Exhibit G- Delegation of Authority (variable annuity fund matters)
<PAGE>
CUSTODIAN AGREEMENT
THIS AGREEMENT made as of the 17th day of April, 1995, between THE FRANKLIN
LIFE INSURANCE COMPANY, an Illinois corporation, having its principal address at
No. 1 Franklin Square, Springfield, Illinois 62713 (hereinafter called "the
Corporation"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking
corporation regulated by state banking laws, having corporate trust powers and
being duly authorized to act as a custodian with its principal place of business
at 225 Franklin Street, Boston, Massachusetts 02110 (hereinafter called "State
Street") shall serve to set forth certain custodial arrangements between State
Street and the Corporation with respect to (i) the establishment of a custody
account (the "Custody Account") in the name of the Corporation with State Street
as custodian, which Custody Account is established for the deposit by the
Corporation of any or all of its Securities and/or Moneys, as such terms are
hereinafter defined, and (ii) the participation by the Corporation, through
State Street, in the book-entry programs or systems of any "Securities System,"
as defined in Section 1.3-2, with respect to the Securities held hereunder which
are eligible for deposit with any such "Securities System."
The term "Securities," as used herein, shall mean and include all
investments held for the Corporation, including but not limited to the
following: futures, options, repurchase agreements, common stocks, preferred or
preference stocks, notes, bonds, debentures, or other evidences of indebtedness
of private, corporate or public issuers and any certificates, receipts, warrants
or other instruments representing rights to receive, purchase, or subscribe for
the same, or evidencing or representing any other rights or interest therein, or
in any property or assets, owned by the Corporation (whether ownership by the
Corporation thereof is evidenced, or to be evidenced, by (i) a physical
certificate registered as provided in
<PAGE>
Section 1.3-3, or (ii) a credit, to the account of State Street, entered on the
books of account and records of any Securities System, as defined in
Section 1.3-2).
The terms "held" and "hold," when applied to Securities referred to herein,
shall mean Securities of the Corporation deposited by the Corporation with or in
the custody of State Street, any agent of State Street appointed pursuant to
Section 4.2 hereof, any sub-custodian appointed pursuant to Section 4.3 hereof,
or any duly authorized third person, including but not limited to Securities
held in any "Securities System," as defined in Section 1.3-2, to which State
Street may give custody of such Securities.
WITNESSETH THAT:
WHEREAS, State Street is a member of the Federal Reserve System; and
WHEREAS, the Corporation has the power and authority to enter into and
perform under this Agreement; and
WHEREAS, this form of Agreement and its terms and conditions do not require
the prior approval of any regulatory body or authority having jurisdiction over
the Corporation;
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, the parties hereto, intending to be legally bound, hereby
agree as follows:
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<PAGE>
1. CUSTODIAN
1.1 APPOINTMENT OF CUSTODIAN. The Corporation hereby appoints and employs
State Street as its custodian for the purposes of this Agreement and State
Street hereby accepts such appointment. As said custodian, State Street agrees
to hold the Securities as the Corporation may from time to time deliver to it,
subject to the terms and conditions herein set forth, as custodian for the
Corporation, in the Custody Account. Notwithstanding anything to the contrary
herein, pursuant to Illinois insurance laws and regulations, the Custody Account
shall be the undivided responsibility of State Street. State Street further
agrees to hold, subject to the terms and conditions herein set forth, as said
custodian for the Corporation all moneys of the Corporation delivered to State
Street ("Moneys") in the Bank Account, as such term is defined in Section 2.1.
Securities and Moneys shall be held by State Street subject to the
instructions of the Corporation and shall be withdrawable at any time upon the
demand of the Corporation, except that Securities designated in writing to be
used to meet deposit requirements set forth in applicable insurance laws shall
be under control of the appropriate insurance regulatory authority as specified
in such writing and shall not be withdrawn by the Corporation without the
approval of the appropriate insurance regulatory authority.
1.2 FORM OF SECURITIES DELIVERED TO STATE STREET. Unless otherwise
directed by Proper Instructions, all Securities accepted by State Street on
behalf of the Corporation under the terms of this Agreement shall be in "street
delivery" or other good delivery form. The Corporation shall from time to time
furnish State Street appropriate
- 3 -
<PAGE>
instruments to enable State Street to register in the name of the nominee of
State Street any Securities (other than bearer Securities) held by State Street
hereunder which may be registered in the name of the Corporation.
1.3 POWERS AND DUTIES OF CUSTODIAN. As Custodian, State Street shall have
and perform the following powers and duties:
1.3-1 SAFEKEEPING. To hold in the Custody Account for the
account of the Corporation and segregate both physically and on its official
records from its own securities and from those of any and all of its other
customers all non-cash property, including all Securities held hereunder and
owned by the Corporation, other than Securities which are maintained pursuant to
Section 1.3-2 hereof in a "Securities System" as defined in such section. State
Street shall receive delivery of certificates for safekeeping and maintain
records of all receipts, deliveries and locations of such Securities, together
with a current inventory thereof and shall conduct periodic physical inspection
of certificates representing Securities held by it under this Agreement in such
manner as State Street shall determine from time to time to be advisable in
order to verify the accuracy of such inventory. State Street will promptly
report to the Corporation the results of such inspections, indicating any
shortages or discrepancies uncovered thereby, and take appropriate action to
remedy any such shortages or discrepancies.
1.3-1.1 INSURANCE BOARDS, COMMISSIONS OR DEPARTMENTS. The
parties acknowledge that the Corporation is subject to the laws, rules and
regulations of various state insurance
- 4 -
<PAGE>
codes, boards, commissions, or departments and that as a result, certain
activities of the Corporation may, among other things, require the approval of
or review by the various state insurance boards, commissions, or departments.
Except for Securities which are maintained pursuant to Section 1.3-2 in a
Securities System, State Street shall not commingle certificates representing
Securities owned by the Corporation, but shall keep said certificates separate
and physically apart from all other securities held under custodial or trust
agreements by State Street and State Street shall not merge certificates
representing Securities owned by the Corporation into or with one or more
certificates of a larger denomination representing certificates of the same
class of the same issuer constituting assets owned by the Corporation and other
companies.
State Street shall on request by the Corporation or the
representative of the appropriate regulatory body, certify in writing that the
Securities are held by State Street as a fiduciary for the Corporation for which
State Street serves as a custodian. Such certification shall include the name
of the issuer of each Security, the class of Security, the "Cusip" number of
each Security, the number of shares or units or face amount in which the
Corporation has vested ownership, and specific uses or purposes for which such
shares, units or face amount of any part thereof have been segregated as
required by any statute, law or rule
- 5 -
<PAGE>
promulgated by any state insurance board, commission or department. In
addition, State Street shall also furnish any additional information requested
pursuant to this paragraph. The Corporation consents to any disclosure required
pursuant to this section.
State Street shall provide, upon Proper Instructions, as
defined in Section 3.1 hereof, or upon request by the representative of the
appropriate regulatory body, the appropriate affidavits, substantially in the
forms attached hereto as Exhibits A, B and C with respect to Securities of the
Custody Account.
The representative of the appropriate regulatory body shall
have the right to make direct inquiry to State Street concerning Securities or
Moneys held hereunder, including, but not limited to, detailed inventories of
Securities or Moneys and to examine and audit all Securities or Moneys held
hereunder, but only upon furnishing State Street with advance written
notification to such effect signed by an appropriate officer of the Corporation.
The Corporation consents to any and all disclosures given by State Street to the
representative of the appropriate regulatory body pursuant to this section.
- 6 -
<PAGE>
In the event the representative of the appropriate
regulatory body determines that this Agreement does not comply
with the rules and regulations of the board, commission or
department of insurance or that the customs or practices of the
parties hereto do not comply with the rules and regulations of
the board, commission or department of insurance, then this
Agreement shall immediately be modified in a manner acceptable to
the appropriate regulatory body and State Street and the
Corporation will cooperate with the appropriate regulatory body
in complying with the rules and regulations of the board,
commission or department of insurance.
1.3-2 USE OF A SYSTEM FOR THE CENTRAL HANDLING OF SECURITIES.
To deposit and/or maintain the Securities pursuant to this Agreement
(i) in the "book-entry" program of The Depository Trust Company or of
any clearing corporation; or (ii) in any "book-entry" system
authorized by the United States Department of the Treasury and certain
federal agencies including the Federal Reserve Book-Entry System
(collectively, the "Securities System"), and subject to the following
provisions:
(1) State Street may keep the Securities in a Securities
System, provided that the Securities are represented in an
account ("Account") of State Street in the Securities System
which shall not include any assets of State Street other than
assets held as a fiduciary, custodian or otherwise for customers;
- 7 -
<PAGE>
(2) The official records of State Street with respect to
the Securities which are maintained in a Securities System shall
identify (i) the Securities as belonging to the Corporation and
(ii) the name of any clearing agency maintaining the Securities;
(3) Such Securities System may be used to hold, receive,
exchange, release, deliver and otherwise deal with eligible
Securities and to remit to State Street all income and other
payments thereon and to take all steps necessary and proper in
connection with the collection thereof;
(4) Payment for eligible Securities purchased and sold may
be through the clearing medium employed by the Securities System
for transactions of participants acting through them;
(5) State Street shall pay for the Securities purchased for
the Account of the Corporation upon (i) receipt of an electronic
advice from the Securities System that such Securities have been
transferred to the Account, and (ii) the making of an entry on
the official records of State Street to reflect such payment and
transfer for the Account of the Corporation. State Street shall
transfer the Securities sold for the Account of the Corporation
upon (i) receipt of an electronic advice from the Securities
System that payment for such Securities has been transferred to
the Account, and (ii) the making of an entry on the official
records of State Street to reflect such transfer and payment for
the Account of the Corporation. Copies of all such advices from
the Securities System regarding transfers of the Securities for
- 8 -
<PAGE>
the Account of the Corporation shall identify the Corporation, be
maintained for the Corporation by State Street and the
information contained in such advices shall be promptly provided
to the Corporation at its request. State Street shall
(a) furnish the Corporation with a report of all transfers to or
from the Account of the Corporation; (b) furnish to the
Corporation, electronically, copies of daily transaction sheets
reflecting each day's transactions in the Securities System for
the Account of the Corporation; and (c) furnish the Corporation
any other information required pursuant to Section 2.6 hereof;
(6) State Street shall provide the Corporation with any
material report, including but not limited to all reports
received from a clearing corporation or the Federal Reserve
book-entry system on their respective systems of internal
accounting control and any reports prepared by outside auditors
on State Street's or its agents' internal accounting control of
custodied Securities; and
(7) Anything to the contrary in this Agreement
notwithstanding, the use of a Securities System will not affect
any of State Street's responsibilities under this Agreement and
State Street shall be liable to the Corporation for any loss or
damage to the Corporation resulting from use of the Securities
System by reason of any negligence, misfeasance or misconduct of
State Street or any Agent appointed pursuant to Section 4.2
hereof or any Sub-Custodian appointed pursuant to Section 4.3
hereof, or of any of its or
- 9 -
<PAGE>
their employees or from failure of State Street or any such Agent
or Sub-Custodian to enforce effectively such rights as it or the
Corporation may have against the Securities System or any
participant of the Securities System; at the election of the
Corporation, it shall be entitled to be subrogated to the rights
of State Street with respect to any claim against the Securities
System or any participant of the Securities System or any other
person which State Street may have as a consequence of any such
loss or damage if and to the extent that the Corporation has not
been made whole for any such loss or damage.
1.3-3 REGISTERED NAME, NOMINEE. To register Securities of the
Custody Account held by State Street (other than bearer securities) in
the name of a nominee of State Street or in the name of any Agent or
any nominee of such Agent appointed pursuant to Section 4.2 hereof or
in the name of any Sub-Custodian or any nominee of any such Sub-
Custodian appointed pursuant to Section 4.3 hereof; provided that any
nominee shall be used exclusively for the Securities of the
Corporation; and provided further that all Securities relating to
private placements shall be kept in full company name.
1.3-4 PURCHASES. Upon receipt of Proper Instructions, which may
be continuing instructions when deemed appropriate by the parties to
this Agreement, and insofar as Moneys are available for the purpose,
to accept and pay for specified Securities for the account of the
Custody Account and otherwise pay out Moneys as directed by Proper
Instructions; provided, however, that except
- 10 -
<PAGE>
upon receipt of Proper Instructions to the contrary, State Street
shall pay out Moneys upon the purchase of such Securities only:
(a) against delivery of such Securities to State Street (or any bank,
banking firm, responsible commercial agent or trust company doing
business in the United States and/or any foreign country and appointed
by State Street pursuant to Section 4.2 hereof as State Street's Agent
for this purpose or appointed as Sub-Custodian pursuant to Section 4.3
hereof), registered as provided in Section 1.2 hereof or in the proper
form for transfer; (b) in the case of a purchase effected through a
Securities System, in accordance with the conditions set forth in
Section 1.3-2; or (c) in the case of repurchase agreements, against
delivery of such Securities as provided in (a) or (b) above. All
Securities accepted by State Street shall be accompanied by payment
of, or a "due bill" for, any dividends, interests or other
distributions of the issuer, due the purchaser.
1.3-5 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF THE
SECURITIES PURCHASED. In any and every case where payment for
purchase of Securities for the account of the Custody Account is made
by State Street in advance of receipt of the Securities purchased
(i.e., in advance of the time specified in Section 1.3-4), in the
absence of Proper Instructions to so pay in advance, State Street
shall be absolutely liable to the Corporation for such Securities to
the same extent as if the Securities had been received by State
Street, except that in the case of repurchase agreements entered into
by the Corporation with a bank which is a member of the Federal
Reserve System, State Street may
- 11 -
<PAGE>
transfer funds to the account of such bank prior to the receipt of
(i) written evidence that the Securities subject to such repurchase
agreement have been transferred by book-entry into a segregated
non-proprietary account of State Street with the Federal Reserve Bank
of Boston or (ii) the safe-keeping receipt, provided that in the event
of clause (i) or (ii) hereof, such Securities have in fact been so
transferred by book-entry.
1.3-6 EXCHANGES. Upon receipt of Proper Instructions, to
exchange Securities or interim receipts or temporary Securities held
by it or by any Agent appointed by it pursuant to Section 4.2 hereof
or by any Sub-Custodian appointed pursuant to Section 4.3 hereof or
held in any Securities System for the account of the Custody Account
for other Securities alone or for other Securities and Moneys, and to
expend Moneys insofar as Moneys are available, in connection with any
merger, consolidation, reorganization, recapitalization, split-up of
shares, changes of par value, conversion or in connection with the
exercise of warrants, subscription or purchase rights, or otherwise;
to deposit any such Securities and Moneys in accordance with the terms
of any reorganization or protective plan or otherwise, and to deliver
Securities to the designated depository or other receiving agent in
response to tender offers or similar offers to purchase received in
writing. Except as instructed by Proper Instructions received in
timely enough fashion for State Street to act thereon prior to any
expiration date (which shall be presumed to be three (3) business days
prior to such date unless State Street has advised the Corporation of
a different period) and giving full details of the
- 12 -
<PAGE>
time and method of submitting Securities in response to any tender or
similar offer, exercising any subscription or purchase right or making
any exchange pursuant to this Section and subject to State Street
having fulfilled its obligations under Section 1.3-8 hereof, State
Street shall be under no obligation regarding any tender or similar
offer, subscription or purchase right or exchange except to exercise
its best efforts. When such Securities are in the possession of an
Agent appointed by State Street pursuant to Section 4.2 hereof, the
Proper Instructions referred to in the preceding sentence must be
received by State Street in timely enough fashion (which shall be
presumed to be four (4) business days unless State Street has advised
the Corporation of a different period) for State Street to notify the
Agent in sufficient time to permit such Agent to act prior to any
expiration date. When the Securities are in the possession of a
Sub-Custodian appointed pursuant to Section 4.3 hereof, the Proper
Instructions must be received by the Sub-Custodian in a timely enough
fashion, as advised to the Corporation by State Street or the
Sub-Custodian, to permit the Sub-Custodian to act prior to any
expiration date.
1.3-7 SALES AND DELIVERY OF SECURITIES. Only upon receipt of
Proper Instructions, which may be continuing instructions when deemed
appropriate by the parties, to release and deliver Securities owned by
the Corporation held by State Street or in an Account of State Street,
and only in the following cases:
(1) Upon sale of such Securities for the account of the
Corporation and receipt of payment therefor;
- 13 -
<PAGE>
(2) Upon the receipt of payment in connection with any
repurchase agreement related to such Securities entered into by
the Corporation;
(3) In the case of a sale effected through a Securities
System, in accordance with the provisions of Section 1.3-2
hereof;
(4) To the depository agent in connection with tender or
other similar offers for such Securities;
(5) To the issuer thereof or its agent when such Securities
are called, redeemed, retired or otherwise become payable;
provided that in any such case, cash or other consideration is to
be delivered to State Street;
(6) To the issuer thereof, or its agent, for transfer into
the name of a nominee, in accordance with the conditions
specified in Section 1.3-3; or for exchange for a different
number of bonds, certificates or other evidence representing the
same aggregate face amount or number of units; or for exchange of
interim receipts or temporary Securities for definitive
Securities; provided that, in any such case, the new Securities
are to be delivered to State Street;
(7) Upon the sale of such securities for the account of
the Corporation, to the broker or its clearing agent, against a
receipt, for examination in accordance with "street delivery"
custom; provided that in any such case, State Street shall have
no responsibility or liability for any loss arising from the
delivery of such securities prior to
- 14 -
<PAGE>
receiving payment for such securities except as may arise from
State Street's own negligence or willful misconduct;
(8) For exchange or conversion pursuant to Section 1.3-6
hereof; provided that, in any such case, the new Securities and
Moneys, if any, are to be delivered to State Street;
(9) In the case of warrants, rights or similar Securities,
the surrender thereof upon the exercise of such warrants, rights
or similar Securities or the surrender of interim receipts or
temporary Securities for definitive Securities; provided that, in
any such case, the new Securities and Moneys, if any, are to be
delivered to State Street;
(10) For delivery in connection with any loans of
Securities made by the Corporation, but only against receipt of
adequate collateral as specified from time to time by the
Corporation, which may be in the form of cash or obligations
issued by the United States government, its agencies or
instrumentalities, except that in connection with any loans for
which collateral is to be credited to State Street's account in
the book-entry system authorized by the U.S. Department of the
Treasury, State Street will not be held liable or responsible for
the delivery of Securities owned by the Corporation prior to the
receipt of such collateral; or
- 15 -
<PAGE>
(11) For any other proper purpose, but only upon receipt of
Proper Instructions from an Authorized Person, as defined in
Section 3.1, to be specified in the Delegation of Authority from
time to time in effect, the form of which is attached hereto as
Exhibit F.
In delivering any Securities pursuant to this Section 1.3-7, State
Street shall credit the Moneys or other property received therefor to
the Bank Account of the Corporation except to the extent that State
Street may be instructed otherwise by Proper Instructions.
1.3-8 COMMUNICATIONS RELATING TO SECURITIES. To transmit
promptly to the Corporation all written information (including,
without limitation, pendency of calls and maturities of Securities and
expirations of rights in connection therewith) received by State
Street from issuers of the Securities being held for the Corporation.
With respect to tender or exchange offers, State Street shall transmit
promptly to the Corporation all written information received by State
Street from issuers of the Securities held hereunder whose tender or
exchange is sought and from the party (or his agents) making the
tender or exchange offer.
1.3-9 PROXIES, NOTICES, ETC. Upon receipt of Proper
Instructions, which may be continuing instructions when deemed
appropriate by the parties, to cause to be promptly executed by the
registered holder of such Securities, if such Securities are
registered otherwise than in the name of the Corporation or a nominee
of the Corporation, all proxies, without indication of the manner in
which such proxies are to be voted, and to promptly deliver to the
Corporation such proxies, all proxy soliciting
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<PAGE>
materials and all notices relating to such Securities. Neither State
Street nor any Agent or Sub-Custodian, nor any nominee thereof shall
vote upon any of the Securities.
1.3-10 INCURRENCE OF EXPENSES. Except as directed by the
Corporation, at no time may State Street make payments to itself or
others out of Securities, Moneys or other funds of the Corporation for
expenses relating to its duties under this Agreement. Expenses
include the expenses and fees incurred in the custody account, bank
account, cash dividend account, sweep account, and any other accounts.
2. ADDITIONAL POWERS AND DUTIES OF CUSTODIAN. As custodian, State Street
shall have and perform the following additional powers and duties:
2.1 BANK ACCOUNT. To retain all Moneys, subject to receipt of Proper
Instructions to the contrary, in the banking department of State Street in
a separate demand deposit account or accounts in the name of the
Corporation (the "Bank Account"), subject only to draft or order by State
Street acting pursuant to the terms of this Agreement. If and when
authorized by Proper Instructions, State Street may open and maintain an
additional demand deposit account or accounts in such other bank or trust
companies as may be designated by such instructions, such account or
accounts, however, to be in the name of the Corporation and subject only to
State Street's draft or order in accordance with the terms of this
Agreement. If as a result of this Agreement, State Street incurs any cost
for daylight overdrafts, the Corporation will compensate State Street in a
manner reasonable and customary in the banking industry. If and when
authorized by Proper Instructions, State Street may take any appropriate
actions to establish and maintain "sweep" accounts for the Corporation or
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<PAGE>
to effect repurchase agreement transactions initiated by the Corporation.
The Bank may not invade the Bank Account for expenses without express
written authority for each specific instance.
2.2 COLLECTIONS. Unless otherwise instructed by receipt of Proper
Instructions, to collect and receive all income, other payments and
distributions with respect to registered Securities held hereunder to which
the Corporation shall be entitled either by law or pursuant to custom in
the securities business, and to collect all income, other payments and
distributions with respect to bearer Securities if, on the date of payment
by the issuer, such Securities are held by State Street or an Agent or
Sub-Custodian thereof or are maintained pursuant to Section 1.3-2 in a
Securities System on such date of payment and to credit such income into
the Corporation's Bank Account maintained pursuant to Section 2.1 hereof.
Income due the Corporation on securities loaned pursuant to the provisions
of Section 1.3-7 (10) shall be the responsibility of the Corporation.
State Street will have no duty or responsibility in connection therewith,
other than to provide the Corporation with such information or data as may
be necessary to assist the Corporation in arranging for the timely delivery
to State Street of the income to which the Corporation is properly
entitled.
In the event the purchase of a Security in the amount of $10 million
or less fails to settle on the contractual settlement date not as a result
of any act or failure to act on the part of State Street, State Street
shall retain any Moneys made available by the Corporation for such purchase
for five (5) business days thereafter (during which time the Corporation
will forego interest on such amounts) and then immediately return such
Moneys to the Corporation. In the event a purchase exceeding
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<PAGE>
$10 million fails to settle on the contractual settlement date, State
Street shall return on such date any Moneys made available by the
Corporation for such purchase. In either case, if such Moneys are not so
returned to the Corporation, State Street will pay interest in an amount to
be agreed upon from time to time on such Moneys until such time as State
Street has returned such Moneys to the Corporation.
In the event the sale of a Security fails on the contractual
settlement date relating to that Security due to the failure of the
Corporation to deliver such Security, and State Street has credited the
Corporation's Bank Account for such sale, State Street is hereby authorized
to collect interest from the Corporation on such amount so credited in an
amount to be agreed upon from time to time until the actual settlement
date.
State Street shall execute and cause to be executed by any Agent or
Sub-Custodian ownership and other certificates and affidavits for all
federal and state tax purposes in connection with the collection of bond
and note coupons, the receipt of income or other payments with respect to
Securities of the Custody Account held by it, and the transfers of
Securities, and to do all other things necessary or proper in connection
with the collection of such income, and without limiting the generality of
the foregoing, to:
(1) Detach and present for payment on the date of payment all
coupons and other income items requiring presentation as and when they
become due and collect interest when due on Securities held hereunder;
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(2) Present for payment all Securities which may mature or be
called, redeemed, retired or otherwise become payable on the date such
Securities become payable; and
(3) Endorse and deposit for collection only, in the name of the
Corporation, checks, drafts, or other negotiable instruments on the
same day as received.
2.3 STOCK DIVIDENDS, RIGHTS, ETC. To receive and collect all stock
dividends, rights and other items of like nature, and to deal with the
same pursuant to Proper Instructions relative thereto.
2.4 OTHER PROPER PURPOSES. Upon receipt of Proper Instructions, to
make or cause to be made, insofar as Moneys are available, disbursements
for any other purpose (in addition to the purposes specified in Sections
1.3-4, 1.3-5 and 1.3-6 of this Agreement) which the Corporation declares
is a proper purpose pursuant to the Proper Instructions described in
Section 3.1 below.
2.5 RECORDKEEPING AND REPORTS. State Street shall create and
maintain all records relating to its activities and obligations under this
Agreement in such manner as is reasonably satisfactory to the Corporation
and as will meet the obligations of the Custody Account, if any, under
applicable federal and state tax laws, state insurance laws and
regulations and any other law or administrative rules or procedures which
may be applicable to the Corporation. All such records shall remain the
property of the Corporation, and shall be open to the inspection and audit
at reasonable times by duly authorized officers, employees or agents of
the Corporation, independent certified public accountants designated by
the Corporation, and any representatives of an appropriate regulatory body
as hereafter described. State Street shall maintain records sufficient to
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dete mine and verify information relating to Securities and property
held by State Street subject to this Agreement.
During the course of State Street's regular banking hours, any
representative of an appropriate regulatory body (including, without
limitation, representatives of one or more state insurance boards,
commissions or departments or the National Association of Insurance
Commissioners or employees or agents of the Securities and Exchange
Commission) shall be entitled to examine State Street's premises and
securities and records related to the Custody Account, but only upon
furnishing State Street with written instructions to that effect from
the Treasurer, the Controller, any Assistant Treasurer or any
Vice-President in the Treasury Department of the Corporation and a
certificate of incumbency as to such officer executed by an Authorized
Person, Secretary or Assistant Secretary of the Corporation.
State Street and each Agent and each Sub-Custodian shall provide the
Corporation at least annually and, at such other times as the
Corporation may reasonably require, with reports by State Street and
each Agent and each Sub-Custodian and by independent certified public
accountants regarding the accounting system, internal accounting
controls and procedures for safeguarding Securities including the
Securities deposited and/or maintained in a Securities System, relating
to the services provided by State Street and each Agent and each
Sub-Custodian under this Agreement; such reports shall be of sufficient
scope and in sufficient detail as may reasonably be required by the
Corporation and shall provide reasonable assurance that any material
inadequacies would be disclosed by such examination and shall state in
detail any material inadequacies disclosed by such examination, and, if
there are no such
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inadequacies, shall so state. Such examination is to be conducted in
accordance with generally accepted auditing standards.
State Street presently maintains the forms of insurance as set forth
in Exhibit E attached hereto and intends to continue to maintain such
insurance in substantially the same form and amount. State Street
hereby agrees to provide the Corporation with at least thirty (30) days
written notice prior to any reduction or cancellation of such insurance
and will use its best efforts to replace the form and amount reflected
on Exhibit E as the same may be modified from time to time. State
Street will provide the Corporation with a certificate or other evidence
of such insurance within thirty (30) days of the end of each calendar
year.
2.6 TRANSACTION INFORMATION. State Street shall provide to the
Corporation a daily accounting of all activity concerning transactions
described in Sections 1.3-4, 1.3-6, 1.3-7, 2.2, 2.3 and 2.4.
Corresponding debits and credits to the Bank Account will be provided on
all transactions within two (2) business days. Such daily activity
reports shall include, without limitation, all settled transactions and
all transactions pending future settlement of which State Street has
been notified. State Street shall, within seven (7) business days after
the last calendar day of each month, furnish to the Corporation, a
monthly accounting of all activity concerning transactions described in
Sections 1.3-4, 1.3-6, 1.3-7, 2.2, 2.3 and 2.4 hereof, inventory
reports, reflecting the balance of all Securities held by State Street,
as custodian for the Corporation (whether ownership by the Corporation
thereof is evidenced by (i) a physical certificate registered as
provided in Section 1.3-3, or (ii) a credit, to the account of State
Street, entered on the books of account and records of DTC, The Federal
Reserve
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Book-Entry System or any Securities System). The daily activity report
(Blotter) shall reflect receipts, deliveries and any other Security
movement affecting the position of the Custody Account and interest,
dividends and similar distributions with respect to Securities
including total number of shares for each Security acquired or
disposed of and distributions credited to the Bank Account, for the
Custody Account. State Street shall, promptly upon request,
furnish all other such information or documentation the Corporation
may reasonably request.
Daily activity and inventory reports available to the Corporation to
be supplied by State Street pursuant to Section 2.6 of this Agreement
are listed in Exhibit D attached hereto.
2.7 SEGREGATED ACCOUNTS. To maintain the assets of variable
annuity funds, pensions and reinsurance programs each in segregated
accounts.
3. INSTRUCTIONS.
3.1 PROPER INSTRUCTIONS. "Proper Instructions" as used throughout
this Agreement, the method of instruction, the number of signatures
required and a list of persons as shall be authorized from time to time
to act pursuant to this Agreement (an "Authorized Person") and their
specimen signatures are to be specified in the Delegations of Authority
from time to time in effect, the forms of which are attached hereto as
Exhibits F and G. Persons authorzied to act with respect to matters
related solely to variable annuity fund assets are identified on Exhibit
G. Persons authorized to act for all other purposes of this Agreement
are identified on Exhibit G. All Proper Instructions shall be in
writing signed by two (2) Authorized Persons (except as may otherwise be
provided on Exhibit G). Each such writing shall set forth the specific
transaction or type of
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transaction involved. Oral instructions will be considered Proper
Instructions if State Street reasonably believes them to have been given
by two (2) Authorized Persons (except as may otherwise be provided on
Exhibit G). The Corporation shall cause all oral instructions to be
confirmed in writing on the same day. Any oral instructions not
confirmed in writing shall be reported immediately to the Corporation,
Attention: Corporate Audit. Proper Instructions may include
communications effected directly between electro-mechanical or
electronic devices, provided that the Corporation and State Street are
satisfied that such procedures afford adequate safeguards for the
Corporation's assets. In the event of a conflict between instructions
effected directly between electro-mechanical or electronic devices and
written instructions signed in accordance with the appropriate
Delegation of Authority, such written instructions shall control,
provided that actions taken by State Street in reliance upon such
electro-mechanical or electronic devices shall not be voided by
subsequent written instructions. All requests, designations, notices,
agreements, execution of documents and other actions which may be taken
by the Corporation hereunder shall be deemed to have been effected by
the Corporation when such actions have been taken by two (2) Authorized
Persons.
4. ADDITIONAL AGREEMENTS. State Street and the Corporation further agree
as follows:
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4.1 INDEMNIFICATION. So long as and to the extent that it is in
the exercise of reasonable care, State Street shall not be responsible
for the title, validity or genuineness of any property or evidence of
title thereto delivered to it or by it pursuant to this Agreement and
shall be held harmless in acting upon any notice, request, consent,
certificate or other instrument reasonably believed by it to be genuine
and to be signed by the proper party or parties or to have been properly
executed in accordance with Section 3.1 hereof.
Notwithstanding the foregoing, State Street, as custodian, shall
indemnify the Corporation for any losses, damages and expenses as a
result of any actions taken or not taken or things done or not done by
it in carrying out the terms and provisions of this Agreement as set
forth below:
(1) State Street shall be held to the exercise of reasonable
care in carrying out the provisions of this Agreement. State Street
shall indemnify and hold harmless the Corporation for all damages and
expenses reasonably incurred as a result of the negligent action,
negligent failure to act, bad faith or willful misconduct of State
Street or any of its officers, nominees, employees, or any Agent or
Sub-Custodian appointed hereunder, in the performance of any of their
responsibilities hereunder; but State Street shall be indemnified by
and shall be without liability to the Corporation for any other action
taken or omitted by State Street or any of its officers or employees
or any Agent or Sub-Custodian in good faith in the performance of any
of their responsibilities hereunder. It shall be entitled to rely on
and may act upon advise of counsel (who may be counsel for the
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Corporation) on all matters, and shall be without liability for any
action reasonably taken or omitted pursuant to such advice.
(2) Subject to the standard of care and liability specified in
paragraph (1) of this Section 4.1, and without in any way modifying
the responsibility of State Street provided for therein, the losses
referred to in said paragraph (1) shall include losses occasioned by
computer or other mechanical failure, the dishonesty of State Street's
officers or employees, burglary, robbery, holdup, theft, or mysterious
disappearance, and loss by damage or destruction. However, in the
case of computer or mechanical failure liability for such losses shall
be limited to the restoration of all customer records and data and the
correction of all errors resulting from the performance of State
Street; however, in any event, State Street shall implement such
restoration and correction in compliance with all regulatory law and
authority and consistent with any State Street internal policy and
provided further that State Street shall use its reasonable best
efforts to implement such restoration and correction within 48 hours
of the event causing such failure. State Street will not be liable to
the Corporation, and the Corporation will not be liable to State
Street, for consequential damages arising from computer or mechanical
failure. In no case shall computer or mechanical failure excuse State
Street from maintaining records as specified in Section 2.5.
(3) In the event of the loss of Securities held by State Street,
as custodian for the Corporation, for which loss State Street is
liable under paragraphs (1) or (2) of this Section 4.1,
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Securities in replacement thereof, or, at the option of State Street,
funds in an amount equal to the market value of the Securities and
brokerage commissions which would be incurred in replacing such
Securities at the date of discovery of such loss, shall be remitted
promptly to the Corporation, together with funds in an amount equal to
any lost interest payments, dividends, or other distributions, as the
case may be, with respect to such Securities, and, so far as may be
lawful, interest upon such lost interest payments, dividends, or other
distributions, at a rate equal to the rate as announced by State
Street in Massachusetts from time to time as its prime commercial
lending rate.
(4) Without limiting the generality of the foregoing, State
Street shall be under no duty or obligation to inquire into, and shall
not be liable for (i) the validity of the issue of any Securities
purchased by or for the account of, the Corporation, the legality of
the purchase thereof, or the propriety of the amount paid therefor, or
(ii) the legality of the sale by or on behalf of the Corporation of
any Securities, or the propriety of the amount for which such
Securities may be sold.
If in any case a party may be asked to indemnify the other
hereunder, the party seeking indemnification shall fully and promptly
advise the other party of all pertinent facts concerning the situation
in question, and identify and notify the other party promptly
concerning any situation which presents or appears likely to present
the probability of such a claim for indemnification against the other
party. The party against whom indemnification is sought shall have
the option to defend against any claim which may
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be the subject of the request for indemnification, and in the event
that the party against whom indemnification is sought so elects, it
will so notify the other party, and thereupon the party against whom
indemnification is sought shall take over complete defense of the
claim, and the other party shall sustain no further legal or other
expenses in such situation for which it shall seek indemnification.
Neither party shall confess any claim or make any compromise in any
case in which the indemnifying party will be asked to indemnify the
other party except with the other party's consent.
4.2 APPOINTMENT OF AGENTS. State Street, as custodian, may at any
time or times appoint (and may at any time remove) any other bank, trust
company or responsible commercial agent, including, but not limited to
subsidiaries and affiliates of State Street, to act as its agent to
carry out such of the provisions of this Agreement as State Street may
from time to time direct; provided, however, that (i) the appointment of
such agent ("Agent") shall not relieve State Street of any of its
responsibilities under this Agreement and there is an agreement between
State Street and the Agent to this effect, and (ii) the Agent is duly
authorized to act as a custodian or trustee and is organized under the
laws of the United States of America or any state thereof and (a) is a
member of the Federal Reserve System, (b) is a member of or is eligible
to receive deposits which are insured by the Federal Deposit Insurance
Corporation or (c) maintains an account with a Federal Reserve Bank and
is subject to supervision and examination by the Board of Governors of
the Federal Reserve System.
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4.3 APPOINTMENT OF SUB-CUSTODIANS. Upon receipt of Proper
Instructions, State Street, as custodian, may from time to time employ
one or more sub-custodian agents ("Sub-Custodians"), provided that (i)
the appointment of such Sub-Custodian shall not relieve State Street of
any of its responsibilities under this Agreement and there is an
agreement between State Street and the Sub-Custodian to this effect; and
(ii) the Sub-Custodian (a) is a member of the Federal Reserve System,
(b) is a member of or is eligible to receive deposits which are insured
by the Federal Deposit Insurance Corporation or (c) maintains an account
with a Federal Reserve Bank and is subject to supervision and
examination by the Board of Governors of the Federal Reserve System.
4.4 FEE SCHEDULE. State Street shall be entitled to receive fees
provided for in a schedule agreed upon from time to time between the
Corporation and State Street; once agreed upon, the schedule shall
remain effective until a different schedule is agreed upon.
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4.5 EFFECTIVE PERIOD, TERMINATION AND AMENDMENT, AND INTERPRETIVE
AND ADDITIONAL PROVISIONS. This Agreement shall become effective as of
the date of its execution, shall continue in full force and effect until
terminated as hereinafter provided, may be amended at any time by mutual
written agreement of the parties hereto and may be terminated by either
party by an instrument in writing delivered or mailed by registered
mail, postage prepaid, to the other party, such termination to take
effect in accordance with the provisions of this Section 4.5. Either
party may terminate this Agreement for any reason within thirty (30)
days from the date of its execution. After such time, unless otherwise
provided by this Agreement, this Agreement may be terminated (a) by the
Corporation no sooner than ninety (90) days after the date of delivery
or mailing of such notice of termination or (b) by State Street no
sooner than six (6) months after the date of delivery or mailing of such
notice of termination. Notwithstanding the above, neither State Street
nor the Corporation shall amend or terminate this Agreement in
contravention of any applicable Federal or State laws or regulations;
and further provided, that the Corporation may at any time (i)
substitute another bank or trust company for State Street by giving
notice as described above to State Street or (ii) immediately terminate
this Agreement in the event State Street shall have a material adverse
change in its financial condition, assets, liabilities, earnings or
business prospects, or become bankrupt or insolvent or shall invoke the
benefit of, or be subjected to, any laws for the protection,
rehabilitation or liquidation of insolvent debtors, or in the event of
the appointment of a conservator or receiver for State Street by the
Comptroller of the Currency or upon the happening of a like event at the
direction of an appropriate regulatory agency or court of competent
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jurisdiction. In the event of such immediate termination, the
Corporation shall be entitled to the immediate return of all Securities
then held in the Custody Account inclusive of any other accounts
established with State Street pursuant to this Agreement (whether
ownership by the Corporation of such Securities is evidenced by (i) a
physical certificate registered as provided in Section 1.3-3, or (ii) a
credit, to the account of State Street, entered on the books of account
and records of any Securities System).
4.6 COMPLIANCE WITH LAW. It is the intention of the parties hereto
that the terms of this Agreement comply with insurance laws, rules and
regulations and the requirements of insurance regulatory bodies
("Insurance Requirements") as in effect from time to time and applicable
to the Corporation's performance under the Agreement and the rules of
bank regulatory authorities ("Banking Requirements") as in effect from
time to time applicable to State Street's performance under this
Agreement. In the event that any provision hereof is capable of a
number of interpretations, such provision shall be interpreted in such
fashion as to be consistent with the Insurance Requirements and Banking
Requirements as in effect from time to time.
It is also the intention of the parties hereto that the terms of
this Agreement and the performance of the parties hereunder comply with
the Internal Revenue Code of 1986 as amended from time to time and all
rules and regulations promulgated thereunder (the "Code"), including but
not limited to the satisfaction of all conditions set forth in Treasury
Regulation Section 1.165-12(c) and (d), which relate to Securities which
are referred to therein as "registration-required obligations" in bearer
form. State Street agrees to satisfy all applicable conditions contained
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therein, including the making of returns of information to the Internal
Revenue Service, if required, and hereby covenants with the Corporation
that it will deliver all Securities which are "registration-required
obligations" in bearer form (as that term is used in applicable
regulations) in accordance with the requirements set forth in Treasury
Regulation Section 1.165-12(c)(1)(ii) or (iv). State Street and the
Corporation shall agree on a written memorandum setting forth the
material terms for State Street's compliance with the requirements of
the Code referred to in this paragraph. State Street shall rely on such
written memorandum until it is withdrawn or modified in writing by
mutual agreement and shall be under no duty to take independent notice
of any change in the Code and shall be without liability to the
Corporation for loss, claim or expense under this paragraph except for
that which may arise from State Street's failure, through negligence or
bad faith, to follow the terms of the memorandum.
4.7 SUCCESSOR CUSTODIAN. Upon termination hereof the Corporation
shall pay to State Street such compensation as may be due under the fee
schedule in effect between the parties hereto at that time.
If a successor custodian is appointed by the Corporation, State
Street shall, upon termination, deliver to such successor custodian at
the office of State Street, duly endorsed and in form for transfer, all
Securities then held hereunder and all Moneys or other properties of the
Custody Account deposited with or held by it hereunder. If no such
successor custodian is appointed by the Corporation, State Street shall,
upon termination, deliver all properties of the Custody Account to the
Corporation pursuant to Proper Instructions.
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This Agreement shall be binding on and shall inure to the benefit of
the Corporation and State Street and their respective successors. Any
bank or trust company into which State Street or any successor may be
merged, converted or with which it or any successor may be consolidated
or any bank or trust company resulting from any merger, conversion or
consolidation to which State Street or any successor shall be a party or
any bank or trust company succeeding to the business of State Street or
any successor shall be substituted as successor under this Agreement and
any amendments thereof, without the execution of any instrument or any
further act on the part of the Corporation or State Street or any
successor. Any such successor to State Street shall have all powers,
duties and obligations of the preceding custodian under this Agreement
and any amendments thereof and shall succeed to all the exemptions and
privileges of the preceding custodian under this Agreement and any
amendments thereof. All records regarding the Corporation's accounts
will be transferred to the successor custodian, including those records
relating to the Securities System.
4.8 DISCLOSURE OF INFORMATION. Unless required by this Agreement or
applicable law or regulation, State Street is not authorized to disclose
the Corporation's name, address and securities position to any person or
any issuer of securities when requested to do so by them without the
prior written approval of the Corporation.
4.9 ASSIGNMENT. This Agreement may not be assigned by State Street
without the prior written consent of the Corporation.
5. MASSACHUSETTS LAW TO APPLY. THIS INSTRUMENT IS EXECUTED AND DELIVERED
IN THE COMMONWEALTH OF MASSACHUSETTS AND, EXCEPT AS PROVIDED IN SECTION 4.6,
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SHALL BE SUBJECT TO AND BE CONSTRUED ACCORDING TO THE LAWS OF SAID COMMONWEALTH.
6. NOTICE. Notices and other writings delivered or mailed postage prepaid
to The Franklin Life Insurance Company, c/o American General Corporation,
Attention: Jamileh Soufan at 2929 Allen Parkway, Houston, Texas 77019 or to
State Street, Attention: Kenneth A. Bergeron at 225 Franklin Street, Boston,
Massachusetts 02110 or to such address as the Corporation or State Street may
hereafter specify, shall be deemed to have been properly delivered or given
hereunder to the respective address.
7. EXECUTED ORIGINALS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original.
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed in its name and on its behalf by duly authorized persons as of the
day and year first above written.
THE FRANKLIN LIFE INSURANCE
COMPANY
By:
- - -------------------------------------
James L. Gleaves, Authorized Person
By:
- - -------------------------------------
Jamileh Soufan, Authorized Person
STATE STREET BANK AND TRUST COMPANY
ATTEST:
By: By:
---------------------------------
- - ---------------------------------
Title: Title:
-------------------------------
- - ---------------------------------
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<PAGE>
EXHIBIT A
CUSTODIAN AFFIDAVIT
(for securities which have not been redeposited elsewhere)
STATE OF )
) SS:
COUNTY OF )
__________________________, being duly sworn deposes and says that he is
__________ of __________________, a banking corporation organized under and
pursuant to the laws of the _______, with a principal place of business at
_______________________ (the "Bank");
That his duties involve supervision of activities of the Bank as custodian and
maintenance of records relating to such custodian activities;
That the Bank is custodian for certain securities of The Franklin Life
Insurance Company, which has its principal place of business at
________________________ (the "Insurance Company"), pursuant to a Custodian
Agreement dated as of April 17, 1995 between the Bank and the Insurance
Company, as such may be amended from time to time (the "Agreement");
That the schedule attached hereto is a true and complete statement of securities
(other than those caused to be deposited with the Depository Trust Company or
like entity or a Federal Reserve Bank under the Federal Reserve book-entry
procedure) which were in the custody of the Bank for the account of the
Insurance Company as of the close of business on ______________________; that,
unless otherwise indicated on the schedule, the next maturing and all subsequent
coupons were then either attached to coupon bonds or in the process of
collection; and that, unless otherwise shown on the schedule, all such
securities were in bearer form or in registered form in the name of the
Insurance Company or its nominee or a nominee of the Bank, or were in the
process of being registered in such form;
That the Bank as custodian has the responsibility for the safekeeping of such
securities as specifically set forth in the Agreement; and
That to the best of his knowledge and belief, unless otherwise shown on the
schedule, said securities were the property of said Insurance Company and were
free of all liens, claims or encumbrances whatsoever.
Subscribed and sworn to
before me this _______
day of _______ ___, 19___.
(L.S.)
-------------------------
Vice President or other
authorized officer
<PAGE>
EXHIBIT B
CUSTODIAN AFFIDAVIT
(for use with securities on deposit with The Depository Trust Company or like
entity)
STATE OF )
) SS:
COUNTY OF )
________________________, being duly sworn deposes and says that he is
__________ of _____________________, a banking corporation organized under and
pursuant to the laws of the _______, with a principal place of business at ____
__________________ (the "Bank");
That his duties involve supervision of activities of the Bank as custodian and
maintenance of records relating to such custodian activities;
That the Bank is custodian for certain securities of The Franklin Life Insurance
Company, which has its principal place of business at _______________________
(the "Insurance Company"), pursuant to a Custodian Agreement dated as of _____
April 17, 1995 between the Bank and the Insurance Company, as such may be
amended from time to time (the "Agreement");
That the Bank has caused the securities set forth on the schedule attached
hereto to be deposited with _________________________, and such shcedule is a
true and complete statement of the securities of the Insurance Company of which
the Bank was custodian, and which were so deposited, as of the close of business
on _________________________;
That the Bank as custodian has the same responsibility for the safekeeping of
such securities, whether possession of the Bank or deposited, as specifically
set forth in the Agreement; and
That, to the best of his knowledge and belief, unless otherwise shown on the
schedule, said securities were the property of the Insurance Company and were
free of all liens, claims or encumbrances whatsoever.
Subscribed and sworn to
before me this ___________
day of __________, 19__.
(L.S.)
-------------------------
Vice President or other
authorized officer
<PAGE>
EXHIBIT C
CUSTODIAN AFFIDAVIT
(for use where ownership is evidenced by a book-entry account at a Federal
Reserve Bank)
STATE OF )
) SS:
COUNTY OF )
_______________________, being duly sworn deposes and says that he is
___________ of __________________, a banking corporation organized under and
pursuant to the laws of the _______, with a principal place of business at
_____________________ (the "Bank");
That his duties involve the supervision of activities of the Bank as custodian
and maintenance of records relating to such custodian activities;
That the Bank is custodian for certain securities of The Franklin Life Insurance
Company, which has its principal place of business at _______________________
(the "Insurance Company"), pursuant to a Custodian Agreement dated as of
April 17, 1995 between the Bank and the Insurance Company, as the same may be
amended from time to time (the "Agreement");
That it has caused the securities set forth on the attached schedule to be
credited to its book-entry account with a Federal Reserve Bank under the Federal
Reserve book-entry system, and such schedule is a true and complete statement of
the securities of the Insurance Company of which the Bank was custodian, and
which were in a "General" book-entry account maintained in the name of the Bank
on the books and records of a Federal Reserve Bank, at the close of business on
__________________________________;
That the Bank has the same responsibility for safekeeping such securities,
whether in the possession of the Bank or in said "General" book-entry account,
as specifically set forth in the Agreement.
Subscribed and sworn to
before me this __________
day of ____________, 19__.
(L.S.)
-------------------------
Vice President or other
authorized officer
<PAGE>
EXHIBIT D
Daily Activity and Inventory Reports
DAILY
1. Cash Blotter
2. Corporate Action Report
WEEKLY
1. Outstanding Security Loans (and Month-end)
2. Open Trades Report (and Month-end)
3. Corporate Action Report
MONTHLY
1. Open Trades Report
2. Vaulting Report
3. Past Due Report
4. Special Deposit Report
5. Asset Master Reference Data
MASTER TRUST REPORTS: Monthly
1. Computation of NAV
2. Cash Transaction Report
3. Cash Transaction Report Summary
4. Working Trial Balance
5. Account Position Appraisal
6. Purchases Report
7. Sales Report
8. Realized Gain/Loss Report
9. Principal Paydowns
10. Open Transaction Summary
11. Interest Receivable Report
12. Earned Income Detail Report
<PAGE>
EXHIBIT E
STATE STREET BANK INSURANCE PROGRAM
1. COMPREHENSIVE CRIME PROGRAM
LIMITS: $75,000,000
DEDUCTIBLE: 1,500,000
COVERAGES: BANKERS BLANKET BOND
1. Fidelity - Loss by reason of any dishonest or
fraudulent act of any employee, including loss of
property through such acts.
2. On Premises - Loss of property as defined (i.e.,
currency, securities, bullion, etc.) through
burglary, robbery, etc.
3. Transit - Loss of property while in transit except
while in the mail.
4. Forgery or Alteration - Loss by reason of forgery
or alteration of checks, or other similar
instruments.
5. Securities Forgery - Loss through the insured
having in good faith and in the course of business
given value or otherwise acted upon any securities
or other written documents.
2. COMPUTER CRIME COVERAGES
LIMIT: $75,000,000
DEDUCTIBLE: 1,500,000
COVERAGE: This policy covers direct financial loss sustained by
the insured by reason of having transferred, paid or
delivered any funds or property or established any
credit or given any value as the result of certain
defined criminal acts. The policy encompasses the
following insuring agreements:
Agreement 1 Computer Systems
Agreement 2 Electronic Computer Instructions
Agreement 3 Electronic Data and Media
Agreement 4 Electronic Communication
Agreement 5 Assured's Service Bureau Operations
Agreement 6 Electronic Transmission
Agreement 7 Customer Voice Initiated Transfers
3. EXCESS "ALL RISK" SECURITIES COVERAGE
LIMIT: $425,000,000
DEDUCTIBLE: Bankers Professional Liability deductible applies
($10,000,000)
<PAGE>
EXHIBIT E
- 2 -
COVERAGE: All Risk Physical Loss on negotiable and nonnegotiable
securities and all documents of value.
4. LOST INSTRUMENT BOND
LIMIT: $ 1,500,000
DEDUCTIBLE: Bankers Blanket Bond deductible applies
($1,500,000)
COVERAGE: This type of Bond has application where the Bank loses
or misplaces a security whose value is within the
deductible of the Bankers Blanket Bond. In such a
case, the Bank would obtain a Lost Instrument Bond in
order to facilitate the replacing of the missing
security. Under such a Bond the Bank is principal and
agrees to indemnify, among others, the issuer of the
replacement security for any loss that it might incur
by reason of the issuance of a replacement for the lost
security.
5. BANKERS PROFESSIONAL LIABILITY
LIMIT: $ 30,000,000
DEDUCTIBLE: 10,000,000 Corporation
COVERAGE: This policy provides indemnification for all losses
incurred as a result of any claim against the insured
relating to wrongful acts and errors or omissions in
the Bank's performance of professional services.
<PAGE>
EXHIBIT F
(non-variable annuity fund matters)
DELEGATION OF AUTHORITY
You are to follow any and all written instructions given you jointly by any one
(1) Authorized Person designated in GROUP B below AND any one (1) Authorized
Person designated in GROUP C below (two signatures) (a) in respect to the
delivery, transfer, sale, exchange or other disposition of any or all of the
securities or other property, including income and proceeds at any time held by
you for the account of the Corporation, (b) in respect to any securities
transfer for the purpose of a pledge to any state provided that specific written
proper instructions are furnished as to the joint tenancy or control between the
Corporation and the affected state, (c) in respect to the investment of any cash
at any time held by you (whether in the Corporation's checking account or
otherwise), or the purchase or acquisition by exchange or otherwise, on behalf
of the Corporation, of any securities or other property, and (d) in respect to
any other action taken pursuant to the Agreement that you are a party of with
the Corporation (the "Agreement"), hereby granting unto all of the below-named
Authorized Persons full power and authority in the premises, and ratifying and
confirming all that said Authorized Persons shall do, or cause to be done by
virtue hereof.
NOTWITHSTANDING THE FOREGOING, all deliveries of securities by you to a third
party must be either conditioned upon or against receipt of funds therefor
except as provided in the Agreement and unless you have previously received
specific written proper instructions signed jointly by any one (1) Authorized
Person designated in GROUP A below AND any one (1) Authorized Person designated
in GROUP B below AND any one (1) Authorized Person designated in GROUP C below
(three signatures). Under no circumstances should securities be delivered to
any individual at the Corporation or any of its affiliates other than those
persons listed in GROUP C below.
This Delegation of Authority may be revoked only by notice in writing or
substituted Delegation of Authority delivered to you; and in the event of death
or other termination of your authority by operation of law, the Corporation for
the purpose of inducing you to act hereunder hereby agrees that you shall be
saved harmless from any loss suffered, or liability incurred, by reason of any
action taken by you prior to receipt of actual notice of such termination.
All instructions relating to securities movements shall be in writing signed by
the number of Authorized Persons specified herein. Each such writing shall set
forth the specific transaction or type of transaction involved. Oral
instructions will be considered proper instructions if the Custodian reasonably
believes them to have been given by the Authorized Persons. The Corporation
shall cause all oral instructions to be confirmed in writing on the same day.
Any oral instructions not confirmed in writing shall be reported immediately to
the Corporation, Attention: Corporate Audit. Proper instructions may include
communications effected directly between electro-mechanical or electronic
devices, provided that the Corporation and the Custodian are satisfied that such
procedures afford adequate safeguards for the Corporation's assets.
<PAGE>
AUTHORIZED PERSONS
GROUP A GROUP B GROUP C
- - ------- ------- -------
Executive Investment Treasury
- - --------------------- -------------------- ------------------
Nicholas R. Rasmussen Roger E. Hahn C. Jeffery Gay
----------------------
C. Scott Inglis
------------------
James L. Gleaves
- - --------------------- ----------------------
Peter V. Tuters Gordon S. Massie
----------------------- ------------------
Michael L. McEachern Joy A. Kendall
- - --------------------- ----------------------- ------------------
Austin P. Young Julia S. Tucker Jamileh B. Soufan
Acknowledged by: ---------------------------------
Custodian's Name: ---------------------------------
Date: ---------------------------------
<PAGE>
EXHIBIT G
(variable annuity fund matters)
DELEGATION OF AUTHORITY
You are to follow any and all written instructions given you jointly by any
two (2) Authorized Persons designated below (a) in respect to the delivery,
transfer, sale, exchange or other disposition of any or all of the securities
or other property, including income and proceeds at any time held by you for
the account of the Corporation, (b) in respect to any securities transfer for
the purpose of a pledge to any state provided that specific written proper
instructions are furnished as to the joint tenancy or control between the
Corporation and the affected state, (c) in respect to the investment of any
cash at any time held by you (whether in the Corporation's checking account
or otherwise), or the purchase or acquisition by exchange or otherwise, on
behalf of the Corporation, of any securities or other property, and (d) in
respect to any other action taken pursuant to the Agreement that you are a
party of with the Corporation (the "Agreement"), hereby granting unto all of
the below-named Authorized Persons full power and authority in the premises,
and ratifying and confirming all that said Authorized Persons shall do, or
cause to be done by virtue hereof.
NOTWITHSTANDING THE FOREGOING, all deliveries of securities by you to a
third party must be either conditioned upon or against receipt of funds
therefor except as provided in the Agreement and unless you have previously
received specific written proper instructions signed jointly by any three (3)
Authorized Persons designated below. Under no circumstances should securities
be delivered to any individual at the Corporation or any of its affiliates
other than those persons listed below.
This Delegation of Authority may be revoked only by notice in writing or
substituted Delegation of Authority delivered to you; and in the event of
death or other termination of your authority by operation of law, the
Corporation for the purpose of inducing you to act hereunder hereby agrees
that you shall be saved harmless from any loss suffered, or liability
incurred, by reason of any action taken by you prior to receipt of actual
notice of such termination.
All instructions relating to securities movements shall be in writing signed
by the number of Authorized Persons specified herein. Each such writing shall
set forth the specific transaction or type of transaction involved. Oral
instructions will be considered proper instructions if the Custodian
reasonably believes them to have been given by the Authorized Persons. The
Corporation shall cause all oral instructions to be confirmed in writing on
the same day. Any oral instructions not confirmed in writing shall be
reported immediately to the Corporation, Attention: Corporate Audit. Proper
instructions may include communications effected directly between
electro-mechanical or electronic devices, provided that the Corporation and
the Custodian are satisfied that such procedures afford adequate safeguards
for the Corporation's assets.
<PAGE>
AUTHORIZED PERSONS
-----------------------------------------
Robert J. Gibbons
-----------------------------------------
Robert G. Spencer
-----------------------------------------
Stephen P. Horvat, Jr.
-----------------------------------------
Elizabeth E. Arthur
-----------------------------------------
Jeffrey D. Pirmann
Acknowledged by:
-------------------------
Custodian's Name:
------------------------
Date:
------------------------
<PAGE>
MEMORANDUM OF AGREEMENT
This Memorandum of Agreement is made as of the 17th day of April, 1995 by
and between the corporation listed as a signatory hereto (the "Corporation"),
and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking corporation
("State Street").
The Corporation and State Street entered into a Custodian Agreement dated
as of April 17, 1995 (referred to as a "Custodian Agreement") providing for the
establishment of a Custody Account in the name of the Corporation with State
Street as custodian. The Custody Account was established for the deposit by the
Corporation of any and all of its Securities and/or Moneys and the participation
by the Corporation, through State Street, in the book-entry programs or systems
of any Securities System with respect to the Securities, held under the
Custodian Agreement, eligible for deposit with such Securities System.
Capitalized terms used but not defined herein are defined in the Custodian
Agreement.
Section 4.6 of the Custodian Agreement provides in part:
It is also the intention of the parties hereto that the terms of
this Agreement and the performance of the parties hereunder comply
with the Internal Revenue Code of 1986, as amended from time to time,
and all rules and regulations promulgated thereunder (the "Code"),
including but not limited to the satisfaction of all conditions set
forth in Treasury Regulation Section 1.165-12(c) and (d), which relate
to Securities which are referred to therein as "registration-required
obligations" in bearer form. State Street agrees to satisfy all
applicable conditions contained therein, including the making of
returns of information to the Internal Revenue Service, if required,
and hereby covenants with the Corporation that it will deliver all
Securities which are "registration-required obligations" in bearer
form (as that term is used in applicable regulations) in accordance
with the requirements set forth in Treasury Regulation
Section 1.165-12(c)(1)(ii) or (iv). State Street and the Corporation
shall agree on a written memorandum setting forth the material terms
for State Street's compliance with the requirements of the Code
referred to in this paragraph. State Street shall rely on such
written memorandum until it is withdrawn or modified in writing by
mutual agreement and shall be under no duty to take independent notice
of any change in the Code and shall be without liability to the
Corporation for loss, claim or expense under this paragraph except for
that which may arise from State Street's failure, through negligence
or bad faith, to follow the terms of the memorandum.
Page 1 of 6
<PAGE>
This Memorandum of Agreement sets forth the memorandum described in Section 4.6
of the Custodian Agreement.
1. Treasury Regulation Section 1.165-12(a) provides that the term
"registration-required obligation" has the meaning given to that term in section
163(f)(2) of the Code, except that section 163(f)(2)(A)(iv) of the Code shall
not apply. Section 163(f)(2)(A)(i) through (iii) of the Code provides that the
term "registration-required obligation" means any obligation (including any
obligation issued by a governmental entity) other than an obligation which (i)
is issued by a natural person, (ii) is not of a type offered to the public, or
(iii) has a maturity (at issue) of not more than one year.
2. Treasury Regulation Section 1.165-12(b)(1) provides that with respect
to any obligation originally issued after September 21, 1984, the term
"registered form" has the meaning given that term in section 103(j)(3) of the
Code and the regulations thereunder. Therefore, an obligation that would
otherwise be in registered form is not considered to be in registered form if it
can be transferred at that time or at any time until its maturity by any means
not described in Treasury Regulation Section 5f.103-1(c). An obligation that,
as of a particular time, is not considered to be in registered form because
it can be transferred by any means not described in Treasury Regulation
Section 5f.103-1(c) is considered to be in registered form at all times during
the period beginning with a later time and ending with the maturity of the
obligation in which the obligation can be transferred only by a means described
in Treasury Regulation Section 5f.103-1(c). Treasury Regulation
Section 5f.103-1(c) provides that an obligation is in registered form if (i) the
obligation is registered both as to principal and any stated interest with the
issuer (or its agent) and transfer of the obligation may be effected only by
surrender of the old instrument and either the reissuance by the issuer of the
old instrument to the new holder or the issuance by the issuer of a new
instrument to the new holder, (ii) the right to the principal of, and stated
interest on, the obligation may be transferred only through a book-entry system
maintained by the issuer (or its agent) as described in Treasury Regulation
Section 5f.103-1(c)(2), or (iii) the obligation is registered as to both
principal and any stated interest with the issuer (or its agent) and may be
transferred through both of the methods described in (i) and (ii) above.
Treasury Regulation Section 5f.103-1(c)(2) provides that an obligation shall be
considered transferable through a book-entry system if the ownership of an
interest in the obligation is required to be reflected in a book-entry, whether
or not physical securities are issued; a book-entry is a record of ownership
that identifies the owner of an interest in the obligation.
3. Treasury Regulation Section 1.165-12(b)(2) provides that with respect
to any obligation originally issued after December 31, 1982 and on or before
September 21, 1984 (or an obligation originally issued after September 21, 1984
pursuant to the exercise of a warrant or the conversion of a convertible
obligation, which warrant or obligation (including conversion privilege) was
issued after December 31, 1982 and on or before September 21, 1984), that
obligation will be considered in registered form if it satisfies either the
provisions of Treasury Regulation Section 5f.103-1 (set forth in part in
paragraph 2 above) or the proposed regulations provided in Treasury Regulation
Section 1.163-5(c) published in the Federal Register on September 2, 1983 (48 FR
39953).
Page 2 of 6
<PAGE>
4. Treasury Regulation Section 1.165-12(c) sets forth the conditions under
which the holder of a registration-required obligation will not be subject to
certain tax sanctions notwithstanding the fact that the obligation is not in
registered form. Treasury Regulation Section 1.165-12(c)(3) provides that the
holder of a registration-required obligation that is not in registered form will
not be subject to such tax sanctions if the holder purchases and holds the
registration-required obligation in bearer form through a financial institution
with which the holder maintains a customer, custodial or nominee relationship
and such institution agrees to satisfy, and does in fact satisfy, the following
conditions:
(i) The financial institution makes a return of information to
the Internal Revenue Service with respect to any interest payments
received. The financial institution must report original issue
discount includable in the holder's gross income for the taxable year
on any obligation so held, but only if the obligation appears in an
Internal Revenue Service publication of obligations issued at an
original issue discount and only in an amount determined in accordance
with information contained in that publication. An information return
for any interest payment shall be made on a Form 1099 for the calendar
year. It shall indicate the aggregate amount of the payment received,
the name, address and taxpayer identification number of the holder,
and such other information as is required by the form.
(ii) The financial institution makes a return of information on
Form 1099B with respect to any disposition by the holder of such
obligation. The return shall show the name, address, and taxpayer
identification number of the holder of the obligation, the Committee
on Uniform Security Information Procedures (CUSIP), gross proceeds,
sale date, and such other information as may be required by the form.
(iii) In the case of a bearer obligation offered for resale
or resold in the United States, the financial institution may resell
the obligation only to another financial institution for its own
account or for the account of an exempt organization.
(iv) The financial institution covenants with the holder that the
financial institution will deliver the obligation in bearer form in
accordance with the requirements set forth in Treasury Regulation
Section 1.165-12(c)(1)(ii) and (iv).
(v) The financial institution delivers the obligation in bearer
form in accordance with Treasury Regulation Section 1.165-12(c)(1)(ii)
and (iv) as if the financial institution delivering the obligation
were the holder referred to in such regulation.
5. Treasury Regulation Section 1.165-12(c)(1)(ii) provides that the holder
must offer to sell, sell and deliver the obligation in bearer form only outside
of the United States except that a holder that is a registered broker-dealer
(registered under Federal or State law or exempted from registration by the
provisions of such law because it is a bank) that holds the obligation for sale
to customers in the ordinary course of its trade or business may offer to sell
and sell the obligation in bearer form inside the United States to a financial
institution for its own account or for the account of another financial
institution or exempt organization as defined in section 501(c)(3) of the Code
if the transaction consists of the purchase of a block of obligations the total
denominations of which are at least $1,000,000.
Page 3 of 6
<PAGE>
6. Treasury Regulation Section 1.165-12(c)(1)(iv) provides that the holder
may deliver an obligation in bearer form that is offered or sold inside the
United States only if the holder delivers it to a financial institution that
states that it is a financial institution as defined in Treasury Regulation
Section 1.165-12(c)(1)(v) that is purchasing for its own account or for the
account of another financial institution or exempt organization, that will
comply with the requirements of section 165(j)(3)(A), (B), or (C) of the Code
and the regulations thereunder and the holder has no actual knowledge that the
statement is false. The statement must contain the name and address of the
person entitled to delivery and must be signed by such person under penalties of
perjury. A form of such statement is attached hereto as Exhibit A. The holder
may deliver an obligation in bearer form that is offered and sold outside the
United States to a financial institution if it delivers to such person a
confirmation stating that any United States taxpayer who holds this obligation
in bearer form and who is not exempt under section 165(j)(3)(A), (B), or (C) of
the Code and the regulations thereunder will, for purposes of the United States
income tax, be denied a deduction for any loss incurred with respect to the
obligation and will be denied capital gain treatment with respect to the
obligation. The holder may deliver a registration-required obligation in bearer
form that is offered and sold outside the United States to a person other than a
financial institution only if the holder has documentary evidence as described
in Treasury Regulation Section 35a.9999-4T, A-5(iii) that the person is not a
United States person. For this purpose, "deliver" includes the transfer of an
obligation evidenced by a book-entry including a book-entry notation by a
clearing organization evidencing transfer of the obligation from one member of
the organization to another member, but does not include a transfer of an
obligation to the issuer or its agent for cancellation or extinguishment. If a
holder that is a member of a clearing organization (as defined in Treasury
Regulation Section 1.163-5(c)(2)(i)(B)(4)) delivers an obligation to another
member of the same or another clearing organization by transfer of the
obligation between the clearing organization accounts of such members, the
selling member shall receive the statement from the purchasing member (in the
case of obligations offered or sold inside the United States) or send the
confirmation to the purchasing member (in the case of obligations offered or
sold outside the United States).
7. Treasury Regulation Section 1.165-12(c)(1)(v) defines the term
"financial institution" to mean a person which itself is, or more than 50% of
the total combined voting power of all classes of whose stock entitled to vote
is owned by a person which is, (A) engaged in the conduct of a banking,
financing, or similar business within the meaning of section 954(c)(3)(B) of the
Code as in effect before the Tax Reform Act of 1986, and the regulations
thereunder; (B) engaged in business as a broker or dealer in securities; (C) an
insurance company; (D) a person that provides pensions or other similar benefits
to retired employees; (E) primarily engaged in the business of rendering
investment advice; (F) a regulated investment company or other mutual fund; or
(G) a finance corporation a substantial part of the business of which consists
of making loans (including the acquisition of obligations under a lease which is
entered into primarily as a financing transaction), acquiring accounts
receivable, notes or installment obligations arising out of the sale of tangible
personal property or the performance of services, or servicing debt obligations.
8. Treasury Regulation Section 1.163-5(c)(2)(i)(B)(4) defines a clearing
organization as an entity which is in the business of holding obligations for
member organizations and transferring obligations among such members by credit
or debit to the account of a member without the necessity of physical delivery
of the obligation.
Page 4 of 6
<PAGE>
9. With respect to any registration-required obligation (as defined in
paragraph 1 above) which is not in registered form (as defined in paragraph 2 or
3 above), which is held by State Street as custodian under the Custodian
Agreement, State Street shall:
(i) make the return of information described in paragraph 4(i)
above;
(ii) make the return of information described in paragraph 4(ii)
above; and
(iii) in connection with the offer for resale, resale, or
delivery of the obligation, comply with the requirements set forth in
paragraph 4(iii), (iv) and (v) and paragraph 5 or 6 above.
This Memorandum of Agreement may be executed in any number of counterparts,
each of which shall be deemed an original and all of which together shall be
deemed one and the same document.
Page 5 of 6
<PAGE>
IN WITNESS WHEREOF, the Corporation and State Street have executed this
Memorandum of Agreement.
THE AMERICAN FRANKLIN LIFE INSURANCE
COMPANY
By:
----------------------------------------
James L. Gleaves, Authorized Person
By:
----------------------------------------
Jamileh Soufan, Authorized Person
STATE STREET BANK AND TRUST COMPANY
ATTEST:
By: By:
---------------------- --------------------------------------
Title:
--------------------------------------
Page 6 of 6
<PAGE>
Exhibit A
, 19
--------------------- --
State Street Bank and Trust Company
225 Franklin Street
Boston, Massachusetts 02110
Attention:
--------------------
Re: Purchase of $ face amount of obligations issued by
----------
------------------------------------------------------------
Gentlemen:
In connection with our purchase of the above-referenced obligations, the
undersigned hereby certifies under penalties of perjury that:
(i) the undersigned is a financial institution as defined in
section 1.165-12(c)(1)(v) of the United States Treasury
regulations,
(ii) the undersigned is purchasing the obligations for its own
account or for the account of another financial institution or
exempt organization (within the meaning of section
1.165-12(c)(1)(iv) of the regulations), and
(iii) the undersigned will comply with the requirements of section
165(j)(3)(A), (B), or (C) of the United States Internal Revenue
Code of 1986, as amended, and the regulations thereunder.
Very truly yours,
----------------------------------------
(Name of Financial Institution)
----------------------------------------
(Address)
----------------------------------------
(City, State and Zip Code)
By:
-----------------------------------
(Signature of Responsible
Officer)
-----------------------------------
(Title)
<PAGE>
EXHIBIT 8(b)
B Y L A W S
O F
THE FRANKLIN LIFE INSURANCE COMPANY
SPRINGFIELD, ILLINOIS
(AMENDED FEBRUARY 22, 1995)
A R T I C L E I
MEETING OF STOCKHOLDERS
SECTION 1. The regular annual meeting of the stockholders of the Company
shall be held at the Home Office of the Company, in the City of Springfield,
Illinois, on the second Tuesday in January of each year at the hour of nine-
thirty a.m.
SECTION 2. Special meetings of the stockholders may be called at any time
by the President and Secretary or by the holders of not less than a majority of
the then outstanding stock by mailing to each stockholder a written notice
(stating the time, place and object of the meeting) at least five (5) days prior
to the date fixed therefor.
SECTION 3. At any meeting of stockholders the holders of the majority of
the capital stock issued and outstanding present in person or represented by
proxy, shall constitute a quorum for all purposes. If the holders of the amount
of stock necessary to constitute a quorum shall fail to attend in person or by
proxy at the time and place fixed by these Bylaws for an annual meeting, or
fixed by notice as provided for a special meeting, a majority in interest
(although less than a quorum) of the stockholders present in person or by proxy
may adjourn, from time to time, without notice other than by announcement at the
meeting. At any such adjourned meeting at which a quorum shall be present any
business may be transacted which might have been transacted at the meeting as
originally fixed or modified.
<PAGE>
A R T I C L E I I
DIRECTORS
SECTION 1. The Board of Directors of the Company shall consist of fifteen
(15) members. They shall be elected by the stockholders at their regular annual
meeting for the term of one year each or until their successors are elected.
SECTION 2. Vacancies in the Board of Directors may be filled by the
stockholders at any regular meeting of stockholders, or at any special meeting
called for that purpose.
SECTION 3. A regular meeting of the board of Directors shall be held on
the second Tuesday in the months of January, April, July and October at 9:30
a.m. Notice of each meeting shall be given to each member of the Board by the
President or Secretary at least three days prior to the meeting date. A
majority of all of the Directors shall constitute a quorum for the transaction
of business but when a quorum is not present, one or more Directors present may
adjourn and continue to adjourn such meeting from time to time, but not to a
time beyond the date of the next regular meeting.
SECTION 4. Special meetings of the Board of Directors may be called by the
Chairman or President and Secretary, or by a majority of the Directors, by
mailing to each Director a written notice (stating the time, place, and object
of the meeting) at least three days prior to the date fixed therefor. A
majority of all Directors shall constitute a quorum.
SECTION 5. The Board of Directors, at its first meeting following the
regular annual meeting of stockholders in each year, shall elect one of its
members as Chairman of the Board to serve for one year or until his successor is
elected and shall elect one of its members as Vice Chairman of the Board to
serve for one year or until his successor is elected. The Chairman shall
preside at all meetings of the stockholders and of the Board of Directors and
shall perform such other duties as may be required of him by the Board or by the
Executive Committee. In case of a vacancy in the office of Chairman, the same
may be filled for the unexpired term by the Board of Directors at any regular
meeting or at any special meeting called for that purpose. In the event of the
absence or inability of the Chairman, his duties shall be performed by the Vice
Chairman, and the Vice Chairman
2
<PAGE>
shall perform such other duties as may be required of him by the Board or by the
Executive committee. In the event of the absence or inability of the Chairman
and the Vice Chairman, the duties of the Chairman shall be performed by the
President.
SECTION 6. The Board of Directors shall have the power to elect or
appoint, and to remove at pleasure, all officers, committees and members of
committees, and shall fix the salaries of all officers and committee members and
prescribe their duties.
A R T I C L E I I I
STANDING COMMITTEES
SECTION 1. The Board of Directors shall, at its first meeting following
the regular annual meeting of the stockholders in each year, appoint the
following standing committees: an Executive Committee of not less than three
members or more than eight members; an Operations Committee of not less than
five members or more than twelve members; an Investment Committee of not less
than four members or more than nine members; a Claims Committee of not less than
three members or more than ten members, a Marketing Committee of not less than
five members or more than twelve members; an Auditing Committee of not less than
three members or more than seven members; an Underwriting Committee of not less
than three members or more than ten members; a Benefits Committee of not less
than three members or more than five members; and Consumer Affairs Committee of
not less than four members and not more than twelve members. All members shall
serve for a term of one year or until their successors may be appointed.
Vacancies may be filled by the Board of Directors at any regular meeting, or at
any special meeting called for that purpose. Said Committees shall make written
reports of their transactions to the Board, and their acts shall be subject to
review by the Board of Directors. A majority of the members of any committee
shall be a quorum for the transactions of business, except that it will not be
necessary for the Underwriting Committee to have a quorum to pass on the
insurability of any applicant for insurance.
SECTION 2. The Executive Committee shall have the custody of all books,
papers, and records of the Company, and shall have general control and direction
of all the affairs and business of the Company not delegated
3
<PAGE>
in these Bylaws to other persons, officers, or committees or reserved to the
Board of Directors.
SECTION 3. The Operations Committee shall have general supervision of the
administrative activities of the Company.
SECTION 4. The Investment Committee shall have authority to make all
investments of the Company (except loans to policyholders when provided for by
their policies) and all such investments shall be made in the name of the
Company. Said Committee shall have control of all real estate belonging to the
Company, and when in their judgment it is expedient to do so, may authorize any
proper officer or employee to sell and/or transfer any of the Company's
properties, securities, or investments and to manage any of the Company's
properties. No investments shall be made or any assets sold unless the
investment or sale is authorized or ratified by all members of said committee
present at the meeting when such investment or sale is considered.
SECTION 5. The Claims Committee shall supervise the administration of all
claims arising from the death or disability of policyholders of the Company and
formulate such rules and regulations covering the administration of claims as it
deems necessary.
SECTION 6. The Marketing Committee shall have general supervision of the
agency activities of the Company.
SECTION 7. The Auditing Committee shall audit the receipts and
disbursements of the Company each month, and shall perform such other duties as
may be required of it by the Board of Directors.
SECTION 8. The Underwriting Committee shall (a) supervise the underwriting
of applications for new insurance and reinstatement of lapsed policies and
promulgate such rules and regulations regarding the eligibility for insurance of
such applicants as it deems necessary, and (b) perform such other duties as may
be required of them by the Board of Directors.
SECTION 9. The Benefits Committee shall administer any Retirement and
Welfare Plan of the Company.
SECTION 10. The Consumer Affairs Committee shall have general supervision
of the Company's relations with the insuring public.
4
<PAGE>
A R T I C L E I V
EXECUTIVE OFFICERS
SECTION 1. The Executive Officers of the Company shall consist of a Chief
Executive Officer, a President, one or more Vice Presidents, a Secretary, one or
more Assistant Secretaries, Treasurer, and one or more Assistant Treasurers,
who shall be elected by the Board of Directors at their first meeting after the
annual meeting of the stockholders, and they shall, subject to these Bylaws,
serve for a term of one year each or until their successors are duly elected.
In case of a vacancy in any of the offices named in this Section, the same may
be filled for the unexpired term by the Board of Directors at any regular
meeting, or at a special meeting called for that purpose.
SECTION 2. The Chief Executive Officer shall perform such duties as
usually pertain to his office or as may be required of him by the Board of
Directors or by the Executive Committee.
SECTION 3. The President shall perform such duties as usually pertain to
his office or as may be required of him by the Board of Directors or by the
Executive Committee.
SECTION 4. The Vice Presidents, in the order designated by the President,
shall perform the duties of the President in case of his absence or inability to
act. In event the President shall fail to make such designations, the order
shall be designated by the Board of Directors, and in event of the absence or
inability of the President and the Vice Presidents, the Board of Directors may
select one of its members as President Pro Tem. The Vice Presidents shall
perform such other duties as may be required of them by the Board of Directors
or by the Executive Committee.
SECTION 5. The Secretary shall keep a record of the meetings of the
stockholders and of the Board of Directors, and shall perform such duties as
usually pertain to his office, or as may be required of him by the Board of
Directors or by the Executive Committee.
SECTION 6. The Assistant Secretaries, in the order designated by the
Secretary, shall perform the duties of the Secretary in case of his
5
<PAGE>
absence or inability to act. In event the Secretary shall fail to make such
designation, the order shall be designated by the Board of Directors, and in the
event of the absence or inability of the Secretary and the Assistant
Secretaries, the Board of Directors may select one of its members as Secretary
Pro Tem. The Assistant Secretaries shall perform such other duties as may be
required of them by the Board of Directors or by the Executive Committee
SECTION 7. The Treasurer shall perform such duties as may be required of
him by the Board of Directors, or by the Executive Committee.
SECTION 8. The Assistant Treasurers, in the order designated by the
Treasurer, shall perform the duties of the Treasurer in case of his absence or
inability to act. In event the Treasurer shall fail to make such designation,
the order shall be designated by the Board of Directors and in the event of the
absence or inability of the Treasurer and the Assistant Treasurers the Board of
Directors may select one of its members as Treasurer Pro Tem. The Assistant
Treasurers shall perform such other duties as may be required of them by the
Board of Directors or by the Executive Committee.
A R T I C L E V
TRANSFERRING REAL ESTATE, SECURITIES, ETC.
SECTION 1. The President, or a Vice President, or an Assistant Vice
President, or the General Counsel, or the Treasurer, or the Assistant Treasurer
and the Secretary or an Assistant Secretary, are authorized for and on behalf of
the Company.
(a) To execute, acknowledge, and deliver deeds to real estate when such
real estate has been sold.
(b) To assign, transfer, and cancel evidence of indebtedness and notes
secured by mortgage upon real estate when such notes have been paid or sold.
(c) To execute releases of mortgages upon real estate when the notes such
mortgages were given to secure have been paid, and to execute partial releases,
easements, and subordinations.
6
<PAGE>
(d) To transfer bonds, stocks, and/or other securities held as collateral
security for loans when such loans have been paid or sold.
(e) To transfer bonds, stocks, and/or other assets or securities when such
bonds, stocks, and/or other assets or securities have been sold or called for
payments.
(f) To execute such other instruments from time to time as may be
necessary or expedient to carry on the business of the Company.
SECTION 2. For the purpose of deposit under the provisions of Section 1 of
"An Act to Provide for the Deposit of Reserve and the Registration of Policies
and Annuity Bonds by Life Insurance Companies of this State" (approved April 18,
1899, in force July 1, 1899, as amended), the President, or a Vice President, or
an Assistant Vice President, or the General Counsel and the Secretary, or an
Assistant Secretary, are hereby authorized to execute, acknowledge, and deliver
from time to time and for and on behalf of and in the name of this Company, a
deed or deeds conveying to the Director of Insurance of the State of Illinois,
his successor, or successors, in office, in trust for the purpose and objects
specified in said Act, such parcels of real estate as said officers may deem
advisable.
SECTION 3. The President, a Vice President, an Assistant Vice President,
the General Counsel, or the Secretary is authorized to negotiate and enter into
any leasing agreement for any real estate owned by the Company and to execute
the same for and on behalf of the Company, and to do and perform any and all
other acts that may be necessary to effectively accomplish the purposes
mentioned.
A R T I C L E V I
ACTUARIES, MEDICAL DIRECTORS, ETC.
SECTION 1. The Board of Directors may appoint one or more Actuaries, one
or more Associate Actuaries, and one or more Assistant Actuaries, one or more
Medical Directors, one or more Associate Medical Directors and one or more
Assistant Medical Directors, and such other officers and department heads as it
may deem necessary and expedient, who shall perform such duties as may be
required of them by the Board of Directors or by the Executive Committee.
7
<PAGE>
A R T I C L E V I I
INDEMNIFICATION FOR OFFICERS AND DIRECTORS
SECTION 1. The Company shall indemnify and hold harmless each person who
shall serve at any time hereafter as a director or officer of the Company or who
is serving at the request of the Company as a director or officer of any other
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise from and against any and all claims and liabilities to which such
person shall become subject by reason of his having heretofore or hereafter been
a director or officer of the Company, or such other organization with respect to
which such director or officer serves at the request of the Company, or by
reason of any action alleged to have been heretofore or hereafter taken or
omitted by him as such director or officer, and shall reimburse each such person
for all legal and other expenses reasonably incurred by him in connection with
any such claim or liability; provided, however, that no such person shall be
indemnified against, or be reimbursed for, any expense incurred in connection
with any claim or liability arising out of his own willful misconduct.
A R T I C L E V I I I
SALARIES
SECTION 1. All salaries, compensations, or emolument to be paid to any
officer or director of the Company, and all salaries, compensations or emolument
amounting in any year to more than forty thousand dollar ($40,000.00) to any
person, firm, or corporation, shall be first authorized by a vote of the Board
of Directors, which vote shall be by roll call at a regular meeting of said
Board, and which vote shall be duly recorded in the records of the Company.
A R T I C L E I X
SEAL
SECTION 1. The Corporate Seal of the Company shall be that now in use,
consisting of two concentric circles between which shall be the
8
<PAGE>
words "The Franklin Life Insurance Company, Springfield, Ill." and in the
center shall be inserted the words "Corporate Seal" and such seal is impressed
on the margin hereof.
A R T I C L E X
AMENDMENTS
Section 1. These Bylaws may be amended, repealed, or altered in whole or
in part by the Board of Directors at any regular meeting, or at any special
meeting called for that purpose.
* * * * * * * * * *
9
<PAGE>
Exhibit 13(a)
LIST OF CONSENTS PURSUANT TO RULE 483(c)
Consent of Ernst & Young LLP, independent auditors, appears as Exhibit 13(b)
hereto.
Consent of Coopers & Lybrand L.L.P., independent accountants, appears as Exhibit
13(c) hereto.
Consent of Messrs. Chadbourne & Parke LLP appears as Exhibit 13(d) hereto.
Consent of Stephen P. Horvat, Jr., Esq., Senior Vice President and General
Counsel of The Franklin Life Insurance Company, appears as Exhibit 13(e) hereto.
<PAGE>
Exhibit 13(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Per-Unit Income
and Changes in Accumulation Unit Value" and "Experts" and to the use of our
report dated February 2, 1996, with respect to the financial statements and
table of per-unit income and changes in accumulation unit value of Franklin Life
Variable Annuity Fund A for the year ended December 31, 1995, and our report
dated February 12, 1996, with respect to the consolidated financial statements
of The Franklin Life Insurance Company and subsidiaries as of December 31, 1995
and for the eleven months ended December 31, 1995 and one month ended January
31, 1995, in this Post-Effective Amendment to the Registration Statement on Form
N-3 (No. 2-36394) under the Securities Act of 1933 and Registration Statement
(No. 811-1990) under the Investment Company Act of 1940 and related Prospectus
and Statement of Additional Information of Franklin Life Variable Annuity
Fund A.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
April 29, 1996
<PAGE>
Exhibit 13(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form N-3
(File No. 2-36394) and related Prospectus and Statement of Additional
Information of Franklin Life Variable Annuity Fund A of:
(1) Our report dated February 1, 1995, accompanying the statement of
changes in contract owners' equity of Franklin Life Variable Annuity
Fund A for the year ended December 31, 1994 and the table of per-unit
income and changes in accumulation unit value for each of the four
years in the period then ended; and
(2) Our report dated February 1, 1995, accompanying the consolidated
financial statements of The Franklin Life Insurance Company and
Subsidiaries as of December 31, 1994 and for the years ended December
31, 1994 and 1993.
We also consent to the references to our firm under the captions "Per Unit
Income and Changes in Accumulation Unit Value'' and "Experts''.
/s/ Coopers & Lybrand L.L.P.
----------------------------
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 29, 1996
<PAGE>
Exhibit 13(d)
CONSENT OF COUNSEL
We consent to the reference to our firm under the caption "Legal Opinions''
in the Statement of Additional Information constituting a part of this Post-
Effective Amendment No. 42 to the Registration Statement under the Securities
Act of 1933 and Amendment No. 18 to the Registration Statement under the
Investment Company Act of 1940.
/s/ Chadbourne & Parke LLP
--------------------------
CHADBOURNE & PARKE LLP
New York, New York
April 18, 1996
<PAGE>
Exhibit 13(e)
CONSENT OF COUNSEL
I hereby consent to the use of my name under the caption "Legal Opinions''
in the Statement of Additional Information constituting a part of this Post-
Effective Amendment No. 42 to the Registration Statement under the Securities
Act of 1933 and Amendment No. 18 to the Registration Statement under the
Investment Company Act of 1940 and to the incorporation herein by reference of
my opinion dated October 24, 1988 filed as part of Post-Effective Amendment No.
33 to the Registration Statement under the Securities Act of 1933
(File No. 2-36394) on Form N-3, filed October 27, 1988.
/s/ Stephen P. Horvat, Jr.
--------------------------
STEPHEN P. HORVAT, JR.
Senior Vice President and General Counsel
The Franklin Life Insurance Company
Springfield, Illinois
April 18, 1996
<PAGE>
Conformed Copy
Exhibit 17
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated opposite their
respective names below, hereby constitute and appoint STEPHEN P. HORVAT, JR.,
RAYMOND P. WEBER, EDWARD P. SMITH and PETER K. INGERMAN, and each of them,
singularly, attorneys-in-fact of the undersigned with full power to each of them
to sign for and in the name of the undersigned in the capacities indicated below
(a) Post-Effective Amendment No. 42 to the Registration Statement under the
Securities Act of 1933, as amended (the "1933 Act"), and Amendment No. 18 to the
Registration Statement under the Investment Company Act of 1940, as amended (the
"1940 Act"), on Form N-3 (1933 Act File No. 2-36394 and 1940 Act File No. 811-
1990) of Franklin Life Variable Annuity Fund A of The Franklin Life Insurance
Company ("The Franklin")and (b) any and all amendments (including further Post-
Effective Amendments and Amendments) thereto, and to give any certification
which may be required in connection therewith pursuant to Rule 485 under the
1933 Act.
Signature Title Date
--------- ----- ----
/s/ R.M. Beuerlein Senior Vice President- 1/16, 1996
- - ------------------------ Actuarial and Director of The
R.M. Beuerlein Franklin
/s/ T.J. Byerly Executive Vice President and 1/16, 1996
- - ------------------------ Chief Marketing Officer and
T.J. Byerly Director of The Franklin
Senior Chairman and ,1996
- - ------------------------ Director of The Franklin
R.M. Devlin
/s/ Robert J. Gibbons President, Chief Executive 1/16, 1996
- - ------------------------ Officer (principal executive
R.J. Gibbons officer) and Director
of The Franklin
/s/ C.L. Greenwalt Member, Board of Managers of 1/15, 1996
- - ------------------------ the Fund
C.L. Greenwalt
Senior Chairman and ,1996
- - ------------------------ Director of The Franklin
H.S. Hook
/s/ S.P. Horvat, Jr. Senior Vice President, 1/16, 1996
- - ------------------------ General Counsel, Secretary
S.P. Horvat, Jr. and Director of The Franklin;
Secretary, Board of Managers
of the Fund
/s/ H.C. Humphrey Chairman of the Board 1/22, 1996
- - ------------------------ of The Franklin
H.C. Humphrey
<PAGE>
Signature Title Date
--------- ----- ----
/s/ J.D. Pirmann Vice President and Treasurer 1/16, 1996
- - ------------------------ (principal financial
J.D. Pirmann officer and principal
accounting officer) of The
Franklin
/s/ Gary D. Reddick Executive Vice President- 1/16, 1996
- - ------------------------ Administration and Director
G.D. Reddick of The Franklin
/s/ R.C. Spencer Member, Board of Managers 1/15, 1996
- - ------------------------ of the Fund
R.C. Spencer
/s/ Robert G. Spencer Member, Board of Managers 1/29 1996
- - ------------------------ of the Fund
R.G. Spencer
Vice President, Chief ,1996
- - ------------------------ Investment Officer and
P.V. Tuters of the Fund
/s/ James W. Voth Member, Board of Managers of 1/15 ,1996
- - ------------------------ the Fund
J.W. Voth
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE YEAR ENDING 12-31-95 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<INVESTMENTS-AT-COST> 8,118,227
<INVESTMENTS-AT-VALUE> 10,295,535
<RECEIVABLES> 31,435
<ASSETS-OTHER> 114,797
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 10,441,767
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 12,854
<TOTAL-LIABILITIES> 12,854
<SENIOR-EQUITY> 0
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<NET-ASSETS> 10,428,913
<DIVIDEND-INCOME> 167,553
<INTEREST-INCOME> 145,370
<OTHER-INCOME> 0
<EXPENSES-NET> 140,567
<NET-INVESTMENT-INCOME> 172,356
<REALIZED-GAINS-CURRENT> 16,856
<APPREC-INCREASE-CURRENT> 2,255,131
<NET-CHANGE-FROM-OPS> 2,444,343
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
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<NUMBER-OF-SHARES-SOLD> 5,872
<NUMBER-OF-SHARES-REDEEMED> 27,905
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