<PAGE>
1933 Act Registration No. 2-36394
1940 Act Registration No. 811-1990
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- --------------------------------------------------------------------------------
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. 43
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19
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: (800) 528-2011
ROSS D. FRIEND, 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:
STEPHEN E. ROTH, ESQ.
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on April 30, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (i)
/ / on April 30, 1997 pursuant to paragraph (a) (i)
/ / 75 days after filing pursuant to paragraph (a) (ii)
/ / on April 30, 1997 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, 1996 on February 26, 1997.
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<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
Post-Effective Amendment No. 43
Cross Reference Sheet Required by Rule 495(a)
<TABLE>
<CAPTION>
Registration Item Location in Prospectus ("P") or Statement
of Additional Information ("SAI")
Part A INFORMATION REQUIRED IN PROSPECTUS
<S> <C>
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)
<PAGE>
Item 18. General Information and History . . . . . . . . . . . . . . . General Information
Item 19. Investment Objectives and Policies. . . . . . . . . . . . . . Investment Policies and Restrictions of the Fund (P);
Investment Objectives
Item 20. Management. . . . . . . . . . . . . . . . . . . . . . . . . . Management (SAI)
Item 21. Investment Advisory and Other Services. . . . . . . . . . . . Summary (P); Deductions and Charges under the Contracts
(P); Management (P); Management (SAI); Investment
Advisory and Other Services
Item 22. Brokerage Allocation. . . . . . . . . . . . . . . . . . . . . Portfolio Turnover and Brokerage
Item 23. Purchase and Pricing of Securities Being Offered. . . . . . . Summary (P); Introduction (P); Deductions and Charges
under the Contracts-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)
</TABLE>
<PAGE>
EXPLANATORY STATEMENT
The Prospectus Supplement set forth on the next page will be attached to
the Prospectus when it is used to offer contracts to participants in the Texas
Optional Retirement Program, as codified in Chapter 830 of Title 8 of the
Government Code of the State of Texas, and is authorized by an order of the
Commission pursuant to Section 6(c) of the Investment Company Act, dated
February 3, 1977 (Investment Company Act Release No. 9629).
<PAGE>
SUPPLEMENT DATED APRIL 30, 1997 TO PROSPECTUS
OF FRANKLIN LIFE VARIABLE ANNUITY FUND A
DATED APRIL 30, 1997
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, Illlinois 62713
Telephone (800) 528-2011
THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED 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", BELOW FOR MORE
INFORMATION). THE BASIC PURPOSE OF THE VARIABLE CONTRACTS IS TO PROVIDE ANNUITY
PAYMENTS WHICH WILL VARY WITH THE INVESTMENT PERFORMANCE OF FRANKLIN LIFE
VARIABLE ANNUITY FUND A (THE "FUND"). THE FUND NO LONGER OFFERS NEW CONTRACTS.
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, 1997, WHICH HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED
FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING
THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE
REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED
IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE.
THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON
PAGE 35 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, 1997.
<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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Description of the Separate Account. . . . . . . . . . . . . . . . . . . 10
Deductions and Charges Under the Contracts . . . . . . . . . . . . . . . 11
A. Sales and Administration Deductions . . . . . . . . . . . . . . 11
B. Premium Taxes . . . . . . . . . . . . . . . . . . . . . . . . . 11
C. Mortality and Expense Risk Charge . . . . . . . . . . . . . . . 11
D. Investment Management Service Charge. . . . . . . . . . . . . . 12
E. Transfers to and from Other Contracts . . . . . . . . . . . . . 12
F. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 13
The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
A. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
B. Deferred Variable Annuity Accumulation Period . . . . . . . . . 15
C. Annuity Period. . . . . . . . . . . . . . . . . . . . . . . . . 22
Investment Policies and Restrictions of the Fund . . . . . . . . . . . . 25
Federal Income Tax Status. . . . . . . . . . . . . . . . . . . . . . . . 27
Introduction. . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
The Franklin. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The Contracts: Qualified Plans. . . . . . . . . . . . . . . . . . . 28
A. Qualified Pension, Profit-Sharing and Annuity Plans . . . . 28
B. H. R. 10 Plans (Self-Employed Individuals). . . . . . . . . 29
C. Section 403(b) Annuities. . . . . . . . . . . . . . . . . . 29
D. Individual Retirement Annuities . . . . . . . . . . . . . . 30
Income Tax Withholding. . . . . . . . . . . . . . . . . . . . . . . 31
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . . . 33
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . 34
Other Variable Annuity Contracts; Effect of Non-Qualification. . . . . . 34
Table of Contents of Statement of Additional Information . . . . . . . . 35
- --------------------------------------------------------------------------------
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 after the
first.
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.
3
<PAGE>
INDIVIDUAL RETIREMENT ANNUITY-An annuity contract described in Section 408(b)
of the Code. Individual Retirement Annuities may also qualify as Simplified
Employee Pensions.
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 OF DEDUCTIONS AND CHARGES
<TABLE>
<CAPTION>
Contract Owner Transaction Expenses
<S> <C>
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
If you surrender your contract at the end of the applicable
time period: 1 year 3 years 5 years 10 years
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets:
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," below. For a more detailed
description of such fees and expenses, see "Deductions and Charges under the
Contracts," below. The example assumes that a single Stipulated Payment of
$1,000 is made at the beginning of the periods shown. (It should be noted that
The Franklin will not actually issue a Single Stipulated Payment Contract unless
the single payment is at least $2,500.) This assumption applies even with
respect to Periodic Stipulated Payment Contracts, which would normally require
additional payments. The example also assumes a constant investment return of 5%
and the expenses might be different if the return of the Fund averaged 5% over
the periods shown but fluctuated during such periods. The amounts shown in the
example represent the aggregate amounts that would be paid over the life of a
Contract if the Contract were surrendered at the end of the applicable time
periods.
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," 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," and "The Contracts," below. At any time within 10 days after
receipt of a Contract, the Contract Owner may return the Contract and receive a
refund of any premium paid on the Contract. See "Right to Revocation of
Contract," below.
THE FUND AND ITS INVESTMENT OBJECTIVES
The Fund is an open-end diversified management investment company. The
primary investment objective of the Fund is long-term 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," below.
INVESTMENT ADVISER; PRINCIPAL UNDERWRITER
The Franklin Life Insurance Company ("The Franklin"), an Illinois legal
reserve stock life insurance company, acts as investment adviser to the Fund.
The Franklin is engaged in the writing of ordinary life policies, annuities and
income protection policies. Franklin Financial Services Corporation, a wholly-
owned subsidiary of The Franklin, is the principal underwriter for the Fund. The
Franklin is an indirect wholly-owned subsidiary of American General
Corporation. See "Investment Management Service Charge," and "Distribution of
the Contracts," below.
DEDUCTIONS AND CHARGES
The deductions and charges applicable to a Contract are illustrated in the
Table of Deductions and Charges that appears immediately before this Summary. 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," "Transfers to Other
Contracts," and "Premium Taxes," 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," and "Investment Management Service Charge," below.
MINIMUM PERMITTED INVESTMENT
Subject to limited exceptions, the minimum single Stipulated Payment is
$2,500. The minimum Periodic Stipulated Payment Contract sold is one under which
the annual payments are currently $120 and each monthly Stipulated Payment is
currently $10. See "Purchase Limits," below.
NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the Contract's initial Annuity
Payment Date, may, subject to any limitations on early settlement contained in
an applicable Qualified Plan and subject to limitations on early withdrawals
imposed in connection with Section 403(b) annuity purchase plans (see "Federal
Income Tax Status," below), redeem all or part of the Contract and receive the
Cash Value (equal to the number of Accumulation Units credited to the part of
the Contract redeemed times the value of an Accumulation Unit at the end of the
Valuation Period in which the request for redemption is received) less federal
income tax withholding, if applicable. For information as to Accumulation Units,
see "Value of the Accumulation Unit," below. Subject to certain limitations, the
Contract Owner may elect to have all or a portion of the amount due upon a total
redemption of a Contract applied under certain Settlement Options or applied
toward the purchase of other annuity or insurance products offered by The
Franklin. Federal tax penalties may apply to certain redemptions. See
"Redemption," "Transfers to and from Other Contracts," "Settlement Options," and
"Federal Income Tax Status," below.
TERMINATION BY THE FRANKLIN
The Franklin currently 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," 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 years ended December 31, 1996
and December 31, 1995 has been audited by Ernst & Young LLP, independent
auditors. The financial information in this table for each of the three years
in the period ended December 31, 1994 was audited by Coopers & Lybrand L.L.P.,
independent accountants. This table should be read in conjunction with the
financial statements and notes thereto included in the Statement of Additional
Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income $ 1.685 $ 1.948 $ 1.408 $ 1.231 $ 1.064 $ 1.194 $ 1.326 $ 1.343 $ .235 $ 1.100
Expenses 1.090 .875 .773 .773 .723 .654 .569 .528 .454 .458
------------------------------------------------------------------------------------------------------------
Net Investment
income .595 1.073 .635 .458 .341 .540 .757 .815 .781 .642
Net realized and
unrealized gain
(loss) on
securities 11.690 14.139 (.240) .112 .770 14.238 (3.287) 7.021 .043 3.144
------------------------------------------------------------------------------------------------------------
Net change in
accumulation
unit value 12.285 15.212 .395 .570 1.111 14.778 (2.530) 7.836 .824 3.786
Accumulation unit
value:
Beginning of
year 69.200 53.988 53.593 53.023 51.912 37.134 39.664 31.828 31.004 27.218
------------------------------------------------------------------------------------------------------------
End of year $81.485 $69.200 $53.988 $53.593 $53.023 $51.912 $37.134 $39.664 $31.828 $31.004
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
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 .79% 1.76% 1.18% .85% .68% 1.19% 1.91% 2.22% 2.47% 2.02%
Portfolio turnover
rate 4.77% 14.66% 88.99% 68.62% 59.84% 28.47% 24.01% 64.55% 104.96% 75.96%
Number of
accumulation
units outstanding
at end of year 139,945 150,474 172,507 198,763 217,948 229,368 256,831 277,735 305,265 312,966
------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------
</TABLE>
--------------------------------------
FINANCIAL STATEMENTS
8
<PAGE>
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," 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 insurance and offers a variety of whole life, life, retirement
income and level and decreasing term insurance plans. Its Home Office is located
at #1 Franklin Square, Springfield, Illinois 62713.
American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding
shares of common stock of The Franklin. The address of AGC Life is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. The company was incorporated as a general business corporation in
Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
10
<PAGE>
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," "Settlement Options," and "Federal Income
Tax Status-Individual Retirement Annuities," 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," below. The Fund meets the definition of a "Separate Account" under
the federal securities laws.
Under the provisions of the Illinois Insurance Code: (i) the income, gains
or losses of the Fund are credited to or charged against the amounts allocated
to the Fund in accordance with the terms of the Contracts, without regard to the
other income, gains or losses of The Franklin; and (ii) the assets of the Fund
are not chargeable with liabilities arising out of The Franklin's other
business activities, including liabilities of any other separate account which
may be established. These assets are held with relation to the Contracts
described in this Prospectus and such other Variable Annuity contracts as may
be issued by The Franklin and designated by it as participating in the Fund.
All obligations arising under the Contracts, including the promise to make
Annuity Payments, are general corporate obligations of The Franklin.
Accordingly, all of The Franklin's assets (except those allocated to other
separate accounts which have been or may be established) are available to meet
its obligations and expenses under the Contracts participating in the Fund.
The Franklin is taxed as a "life insurance company" under the Code. The
Fund is subject to tax as part of The Franklin for federal income tax purposes.
However, the operations of the Fund are considered
11
<PAGE>
separately from the other operations of The Franklin in computing The Franklin's
tax liability and the Fund is not affected by federal income taxes paid by The
Franklin with respect to its other operations. The operations of the Fund are
treated separately from the other operations of The Franklin for accounting and
financial statement purposes. Under existing law, no federal income tax is
payable by The Franklin on investment income and realized capital gains of the
Fund. See "Federal Income Tax Status," below.
DEDUCTIONS AND CHARGES UNDER THE CONTRACTS
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," 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," 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 1994, 1995 and 1996 were $28,833, $20,566 and $14,575,
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. The aggregate dollar amounts of the
administration deductions for the fiscal years ended December 31, 1994, 1995 and
1996 were $14,164, $10,279 and $7,285, 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 6, 1997 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
12
<PAGE>
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,"
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 mortality and expense experience. The mortality risk charge is imposed
regardless of whether or not the payment option selected involves a life
contingency.
For assuming these risks, The Franklin imposes a daily charge against the
value of the Accumulation Unit and the Annuity Unit. (For further information
as to the Accumulation Unit and the Annuity Unit, see "Deferred Variable Annuity
Accumulation Period" and "Annuity Period," below.) These charges are at the
current combined annual rate of 1.002% (.002745% on a daily basis), of which
.900% is for annuity rate and mortality assurances and .102% is for expense
assurances.
During 1994, 1995 and 1996, The Franklin earned and was paid $98,321,
$97,809 and $108,769, respectively, by reason of these charges. Such charges
during 1996 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 renewal to January 31, 1998 by the Board of Managers of
the Fund at its meeting on January 20, 1997. The Investment Management
Agreement is described under "Investment Advisory and Other Services" in the
Statement of Additional Information.
During 1994, 1995 and 1996, The Franklin earned and was paid $42,982,
$42,758 and $47,550, 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.
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 (or any other contract) is advised to consult a qualified tax
advisor prior to the time of redemption.
F. MISCELLANEOUS
13
<PAGE>
The Fund's total expenses for 1996 were $156,319, or 1.440% of average net
assets during 1996.
THE CONTRACTS
A. GENERAL
Certain significant provisions of the Contracts and administrative
practices of The Franklin with respect thereto are discussed in the following
paragraphs.
Contract Owner inquiries may be directed to the Equity Administration
Department of The Franklin at the address or telephone number set forth on the
cover of this Prospectus.
1. ANNUITY PAYMENTS
Variable Annuity Payments are determined on the basis of (i) an annuity
rate table specified in the Contract, and (ii) the investment performance of
the Fund. In the case of Deferred Variable Annuity Contracts, the annuity rate
table is set forth in the Contract (but see below). In the case of Immediate
Variable Annuities, the table is that used by The Franklin on the date of issue
of the Contract. The amount of the Annuity Payments will not be affected by
mortality experience adverse to The Franklin or by an increase in The
Franklin's expenses related to the Fund or the Contracts in excess of the
expense deductions provided for in the Contracts. The Variable Annuitant under
an annuity with a life contingency or one providing for a number of Annuity
Payments certain will receive the value of a fixed number of Annuity Units each
month, determined as of the initial Annuity Payment Date on the basis of the
applicable annuity rate table and the then value of his or her account. The
value of Annuity Units, and thus the amounts of the monthly Annuity Payments,
will, however, reflect investment gains and losses and investment income
occurring after the initial Annuity Payment Date, and thus the amount of the
Annuity Payments will vary with the investment experience of the Fund. See
"Annuity Period," below.
Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS, have
held that the use of gender-based mortality tables to determine benefits under
an employer-related retirement or benefit plan may violate Title VII of the
Civil Rights Act of 1964 ("Title VII"). These cases indicate that plans
sponsored by employers subject to Title VII generally may not provide different
benefits for similarly-situated men and women.
The Contracts described in this Prospectus incorporate annuity rate tables
which reflect the age and sex of the Variable Annuitant and the Settlement
Option selected. Such sex-distinct tables continue to be appropriate for use,
for example, under Contracts which are not purchased in connection with an
"employer-related" plan subject to NORRIS (such as individual retirement
annuities not sponsored by an employer). However, in order to enable subject
employers to comply with NORRIS, The Franklin will provide "unisex" annuity
rate tables for use under Contracts purchased in connection with
"employer-related" plans. Persons contemplating purchase of a Contract, as well
as current Contract Owners, should consult a legal advisor regarding the
applicability and implications of NORRIS in connection with their purchase and
ownership of a Contract.
2. INCREASE OR DECREASE BY CONTRACT OWNER IN AMOUNT OR NUMBER OF PERIODIC
STIPULATED PAYMENTS
Stipulated Payments can be paid on an annual, semi-annual or quarterly
schedule or, with The Franklin's consent, monthly. The first Stipulated Payment
is due as of the date of issue and each subsequent Stipulated Payment is due on
the first day following the interval covered by the next preceding Stipulated
Payment and on the same date each month as the date of issue. The Contract
Owner may increase the amount of a Stipulated Payment on an annualized basis
under a Periodic Stipulated Payment Contract (except in the case of an
Individual Retirement Annuity, which cannot be increased above the amounts
described under "Purchase Limits," immediately below) up to an amount on an
annualized basis equal to twice the amount of the first
14
<PAGE>
Stipulated Payment on an annualized basis. Similarly, subject to the
limitations described under "Purchase Limits," immediately, below, the amount of
a Periodic Stipulated Payment may be decreased by the Contract Owner on any
date a Stipulated Payment is due. Unless otherwise agreed to by The Franklin,
the mode of Stipulated Payment may be changed only on a Contract Anniversary.
The Contract Owner may continue making Stipulated Payments after the agreed
number of Stipulated Payments has been made, but The Franklin will not accept
Stipulated Payments after age 75. Submission of a Stipulated Payment in an
amount different from that of the previous payment, subject to the aforesaid
limits, will constitute notice of the election of the Contract Owner to make
such change.
3. ASSIGNMENT OR PLEDGE
A 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," below, for special
rules applicable thereto. Moreover, in certain instances, pledges or
assignments of a Qualified Contract may result in the imposition of certain tax
penalties. See generally "The Contracts: Qualified Plans," below.
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
Currently, no periodic Stipulated Payment may be less than $10 per month
($120 per year). Under the terms of the Contract, The Franklin may increase the
minimum periodic Stipulated Payment to $20 per month ($240 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 currently 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. Under the terms of the
Contract, The Franklin may terminate such Contract if total Stipulated Payments
paid are less than $240 in each of such three consecutive Contract Years 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
15
<PAGE>
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," 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.
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," above. In addition, any applicable premium taxes, also as specified
above under that caption, are deducted from the Stipulated Payments. The
balance of each Stipulated Payment is credited to the Contract Owner in the form
of Accumulation Units.
The number of a Contract Owner's Accumulation Units is determined by
dividing the net amount of Stipulated Payments credited to his or her Contract
by the value of an Accumulation Unit at the end of the Valuation Period during
which the Stipulated Payment is received, except that, in the case of the
original application for a Variable Annuity Contract, the value of an
Accumulation Unit within two business days after receipt of the application
will be used if the application and all information necessary to process the
application are complete upon receipt. If the application and such information
are not complete upon receipt, The Franklin, within five days after the
receipt of an original application and initial payment at the Home Office of
The Franklin, will attempt to complete the application and will either accept
the application or reject the application and return the initial payment.
The number of Accumulation Units so determined will not be changed by any
subsequent change in the dollar value of an Accumulation Unit, but the dollar
value of an Accumulation Unit may vary from day to day depending upon the
investment experience of the Fund.
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.
16
<PAGE>
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.
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," 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
17
<PAGE>
prohibited. See "Federal Income Tax Status," below. The Cash Value of a Contract
or part thereof redeemed prior to the initial Annuity Payment Date is the number
of Accumulation Units credited to the Contract (or that part so redeemed) times
the value of an Accumulation Unit at the end of the Valuation Period in which
the request for redemption is received. Except in limited circumstances
discussed below, the payment of the Cash Value will be made within seven days
after the date a properly completed and documented request for redemption is
received by The Franklin at its Home Office. The right of redemption may be
suspended or the date of payment postponed during any periods when the New York
Stock Exchange is closed (other than customary weekend and holiday closings);
when trading in the markets the Fund normally utilizes is restricted, or an
emergency exists as determined by the Securities and Exchange Commission so that
disposal of the Fund's investments or determination of its net asset value is
not reasonably practicable; or for such other periods as the Securities and
Exchange Commission by order may permit to protect Contract Owners.
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," below. However, no Settlement Option may be elected upon
redemption without surrender of the entire Contract.
The payment of the Cash Value of a redeemed Contract either in a single or
under an available Settlement Option may be subject to federal income tax
withholding and federal tax penalties. See "Federal Income Tax Status," 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," 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 required by the Code and as specified in the governing plan documents.
The terms of such documents should be consulted to determine the death benefits
and any limitations the plan may impose. You should consult your legal counsel
and tax advisor regarding these requirements.
Subject to the foregoing, the Contract Owner may, at any time prior to the
initial Annuity Payment Date, elect that all or any portion of such death
proceeds be paid to the Beneficiary under any one of the available Settlement
Options. See "Settlement Options," below. If the Contract Owner has not made
such an election, the Beneficiary may do so after the death of the Variable
Annuitant. The Contract Owner or the Beneficiary, whichever selects the method
of settlement, may designate contingent Beneficiaries to receive any other
amounts due should the first Beneficiary die before completion of the specified
payments. If neither the Contract Owner nor the Beneficiary elects payment of
death proceeds under an available Settlement Option, payment will be made to the
Beneficiary in a single sum.
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<PAGE>
Death proceeds may be applied to provide variable payments, fixed-dollar
payments or a combination of both.
The payment of death proceeds may be subject to federal income tax
withholding. See "Income Tax Withholding," below.
In the event of the death of the Variable Annuitant after the initial
Annuity Payment Date, payments under a Contract will be made as described in
"Settlement Options," below.
7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS
Upon a failure to make a Stipulated Payment under a Periodic Stipulated
Payment Contract, subject to The Franklin's power of termination described under
"Termination by The Franklin," above, and subject to the right of The Franklin
to pay the value of the Contract Owner's account in a single sum at the initial
Annuity Payment Date if the value on such date is less than $2,000, the Contract
Owner may elect, prior to the death of the Variable Annuitant and prior to the
initial Annuity Payment Date, either of the following options:
(a) to exercise any of the available Settlement Options described
under "Settlement Options," below, or redeem the Contract as described
under "Redemption," above; or
(b) to have the Contract continued from the date of failure to make
a Stipulated Payment as a paid-up annuity to commence on the initial
Annuity Payment Date stated in the Contract.
If no option is elected by the Contract Owner within 31 days after failure to
make a Stipulated Payment, the Contract will automatically be continued under
the paid-up annuity option.
8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS)
A Contract Owner, by making one Stipulated Payment, may reinstate a
Periodic Stipulated Payment Contract as to which there has been a failure to
make a Stipulated Payment, if the Contract at the time of the payment is being
continued as a paid-up annuity. However, such reinstatement does not
automatically reinstate the benefits provided by any riders to the Contract
providing life insurance or disability benefits.
9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF
BENEFICIARIES
While the Contract is in force the Contract Owner may (by filing a written
request at the Home Office of The Franklin) change the Beneficiary or Settlement
Option, or, if agreed to by The Franklin, change to a mode of payment different
from one of the Settlement Options, subject to applicable limitations under the
Code and any governing Qualified Plan.
If any Beneficiary predeceases the Variable Annuitant, the interest of such
Beneficiary will pass to the surviving Beneficiaries, if any, unless otherwise
provided by endorsement. If no Beneficiary survives the Variable Annuitant and
no other provision has been made, then, upon the death of the Variable
Annuitant, the proceeds will be paid in a single sum to the Contract Owner or,
if the Variable Annuitant was the Contract Owner, to the executors or
administrators of the Contract Owner's estate.
10. SETTLEMENT OPTIONS
At any time prior to the initial Annuity Payment Date and during the
lifetime of the Variable Annuitant, the Contract Owner may elect to have all or
a portion of the amount due in settlement of the Contract applied under any of
the available Settlement Options described below. If the Contract Owner fails to
elect a Settlement Option, payment automatically will be made in the form of a
life annuity. See "First Option," below, and "Deferred Variable Annuity
Contracts," below.
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<PAGE>
Annuity Payments under a Settlement Option are made to the Variable
Annuitant during his or her lifetime, or for such shorter period that may apply
under the particular Settlement Option. Upon the death of the original Variable
Annuitant after the initial Annuity Payment Date, any remaining Annuity Payments
that are due under the Settlement Option elected will be continued to the
Beneficiary or, if elected by the Contract Owner (or, if so designated by the
Contract Owner, by the Beneficiary), the Cash Value of the Contract, as
described under such Settlement Option below, will be paid to the Beneficiary in
one lump sum. Upon the death of any Beneficiary to whom payments are being made
under a Settlement Option, a single payment equal to the then remaining Cash
Value of the Contract, if any, will be paid to the executors or administrators
of the Beneficiary, unless other provision has been specified and accepted by
The Franklin. For a discussion of payments if no Beneficiary is surviving at the
death of the Variable Annuitant, see "Change of Beneficiary or Mode of Payment
of Proceeds; Death of Beneficiaries," immediately above.
Payment to a Contract Owner upon redemption of a Contract, and payment of
death proceeds to a Beneficiary upon the death of the Variable Annuitant prior
to the initial Annuity Payment Date, may also be made under an available
Settlement Option in certain circumstances. See "Redemption," above, and
"Payment of Accumulated Value at Time of Death," above.
Available Settlement Options may be selected on a fixed or variable basis
or a combination thereof, except 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 the case of a deferred
Single Stipulated Payment Contract funded with a Rollover Contribution not in
excess of $2,000. See "Purchase Limits," above. Further, if at any time payments
under a Settlement Option become less than $25 per payment, The Franklin has the
right to change the frequency of payment to such intervals as will result in
payments of at least $25.
In the case of Immediate Variable Annuity Contracts, the only Settlement
Options offered are the life annuity, the life annuity with 120, 180 or 240
monthly payments certain, or the joint and last survivor life annuity. See
"First Option," "Second Option" and "Fourth Option," below, and "Immediate
Variable Annuity Contracts," below.
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
20
<PAGE>
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.
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>
<CAPTION>
<S><C>
($10.000 - (30.55 x 10)) X 2.05 = (5,000 - 305.5) X $2.05 = 4,694.5 X $2.05 = $9,623.73
-------
$2.00
</TABLE>
21
<PAGE>
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," above.
It should be noted that, while this Option does not involve a life
contingency, charges for annuity rate assurances, which include a factor for
mortality risks, are included in the computation of Annuity Payments due under
this Option. Further, although not contractually required to do so, The Franklin
currently follows a practice, which may be discontinued at any time, of
permitting persons receiving Annuity Payments under this Option to elect to
convert such payments to a Variable Annuity involving a life contingency under
the First, Second, Third or Fourth Options above if, and to the extent, such
other Options are otherwise available to such person.
SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. The amount due will
be paid to the Variable Annuitant in equal annual, semiannual, quarterly or
monthly Annuity Payments of a designated dollar amount (not less than $75 a year
per $1,000 of the original amount due) until the remaining balance (adjusted
each Valuation Period by the Net Investment Factor for the period) is less than
the amount of one Annuity Payment, at which time such balance will be paid and
will be the final Annuity Payment under this Option. Upon the death of the
Variable Annuitant, payments will be continued to the Beneficiary until such
remaining balance is paid. The cash value under this Settlement Option is the
amount of proceeds then remaining with The Franklin. A Contract under which
Annuity Payments are being made under this Settlement Option may be redeemed at
any time by the Contract Owner for the aforesaid cash value.
Annuity Payments made under the Sixth Option may, under certain
circumstances, be converted into a Variable Annuity involving a life
contingency. See the last paragraph under the Fifth Option, above, which applies
in its entirety to the Sixth Option as well.
SEVENTH OPTION-INVESTMENT INCOME. The amount due may be left on deposit with
The Franklin in its general account and a sum will be paid annually,
semiannually, quarterly or monthly, as selected by the Contract Owner in
electing this Option, which shall be equal to the net investment rate of 3%
stipulated as payable upon fixed-dollar amounts for the period multiplied by the
amount remaining on deposit. Upon the death of the Variable Annuitant, the
aforesaid payments will be continued to the Beneficiary. The sums left on
deposit with The Franklin may be withdrawn at any time.
Periodic payments received under this Option may be treated like interest
for federal income tax purposes. Interest payments are fully taxable and are
not subject to the general rules applicable to the taxation of annuities
described in "Federal Income Tax Status," below. Persons contemplating election
of this Seventh Option are advised to consult a qualified tax advisor concerning
the availability and tax effect of this election.
11. TRANSFER OF FIXED-DOLLAR ANNUITY VALUES TO ACQUIRE VARIABLE ANNUITY
ACCUMULATION UNITS
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<PAGE>
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,"
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)," below, and "Assumed Net
Investment Rate," below.
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<PAGE>
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," above) and the "adjusted
age" of the Variable Annuitant. The first monthly Annuity Payment may also vary
according to the sex of the Variable Annuitant. See "Annuity Payments," above.
(The Contracts provide for age adjustment based on the year of birth of the
Variable Annuitant and any joint Variable Annuitant; a person's actual age when
Annuity Payments commence may not be the same as the "adjusted age" used in
determining the amount of the first Annuity Payment.)
For Contracts utilizing sex-distinct annuity tables, the tables for the
First, Second, Third and Fourth Options are determined from the Progressive
Annuity Table assuming births in the year 1900 and a net investment rate of
3-1/2% a year. The tables for the Fifth Option are based on a net investment
rate of 3% for the General Account and 3-1/2% for the Separate Account. The
total first monthly Annuity Payment is determined by multiplying the number of
thousands of dollars of Cash Value of the Contract Owner's Contract by the
amount of the first monthly Annuity Payment per $1,000 of value from the tables
in the Contract.
The amount of the first monthly Annuity Payment, determined as above, is
divided as of the initial Annuity Payment Date by the value of an Annuity Unit
to determine the number of Annuity Units represented by the first Annuity
Payment. Annuity Units are valued as of a Valuation Date not less than 10 days
prior to the initial Annuity Payment Date, pursuant to the procedure discussed
under "The Annuity Unit," 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)," 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.
24
<PAGE>
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.
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," above. Thus, the number of Annuity Units (and hence the
amount of the Annuity Payments) will be affected by the net asset value of the
Fund approximately 10 days prior to the Effective Date of the Contract, even
though changes in those net asset values have occurred during that 10-day
period.
As of the date of this Prospectus, The Franklin was using, in connection
with the determination of the number of Annuity Units per month purchased under
Immediate Variable Annuity Contracts, the 1955 American Annuity Table with
assumed 4-1/2% interest, the purchase rates in such table being increased by
0.5% (which percentage is decreased 0.2% for each year of age at the Effective
Date in excess of 70 years for male Variable Annuitants and in excess of 75
years for female Variable Annuitants). However, in lieu of such table, The
Franklin will provide "unisex" annuity rate tables for use under Contracts
purchased in connection with employer-related plans subject to the decision of
the Supreme Court in ARIZONA GOVERNING COMMITTEE v. NORRIS. See "Annuity
Payments," above.
The Annuity Change Factors used by The Franklin for Immediate Variable
Annuity Contracts assume a net investment rate of 3-1/2%.
6. ASSUMED NET INVESTMENT RATE
The objective of a Variable Annuity Contract is to provide level Annuity
Payments during periods when the economy, price levels and investment returns
are relatively stable and to reflect as increased Annuity Payments only the
excess investment results flowing from inflation, increases in productivity or
other factors increasing investment returns. The achievement of this objective
will depend in part upon the validity of the assumption in the annuity factor
that a 3-1/2% net investment rate would be realized in the periods of relative
stability assumed. A higher rate assumption would mean a higher initial Annuity
Payment but a more slowly rising series of subsequent Annuity Payments in the
event of a rising actual investment rate (or a more rapidly falling series of
subsequent Annuity Payments in the event of a lower actual investment rate). A
lower assumption would have the opposite effect. If the actual net investment
rate is at the annual rate of 3-1/2%, the Annuity Payments under Contracts whose
Annuity Payments are measured by Annuity Units will be level.
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<PAGE>
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.
(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
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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.
(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.
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(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 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.
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THE FRANKLIN
The Franklin is taxed as a "life insurance company" under the Code. Since
the operations of the Fund are part of the overall operations of The Franklin,
the Fund is subject to tax as part of The Franklin for federal income tax
purposes. Thus, the Fund is not taxed separately as a "regulated investment
company" under the Code.
Under the Code a life insurance company like The Franklin is generally
taxed at regular corporate rates, under a single-phase system, on its
specially-computed life insurance company taxable income. Some special rules
continue to apply, however, in the case of segregated asset accounts like the
Fund.
Investment income and realized capital gains on the assets of the Fund are
reinvested by The Franklin for the benefit of the Fund and are taken into
account in determining the value of Accumulation Units and Annuity Units. As a
result, such income and gains are applied to increase reserves applicable to the
Fund. Under the Code, no federal income tax is payable by The Franklin on such
investment income or on realized capital gains of the Fund on assets held in the
Fund.
THE CONTRACTS: QUALIFIED PLANS
The manner in which payments received under a Contract are taxed for
federal income tax purposes depends on the form of payment. If payments are
received in the form of an annuity, then, in general, under Section 72 of the
Code, such payment is taxable to the recipient as ordinary income to the extent
that such payment exceeds the portion, if any, of the cost basis of the Contract
that is allocable to that payment. A payment received on account of partial
redemption of an annuity contract generally is taxable in whole or part. The
taxation of a partial redemption is governed by complex rules and a qualified
tax advisor should be consulted prior to a proposed partial redemption. If the
Variable Annuitant's life span exceeds his or her life expectancy, the Variable
Annuitant's cost basis will eventually be recovered, and any payments made after
that point will be fully taxable. If, however, the Annuity Payments cease after
the initial Annuity Payment Date by reason of the death of the Variable
Annuitant, the amount of any unrecovered cost basis in the Qualified Contract
will generally be allowed as a deduction to the Variable Annuitant for his or
her last taxable year.
Generally, payment of the proceeds of a Qualified Contract in a lump sum
instead of in the form of an annuity, either at or before maturity, also is
taxable as ordinary income to the extent the lump sum exceeds the cost basis of
the Qualified Contract. Taxation may be deferred, however, to the extent, if
any, that "rollover" treatment is available and elected for a particular
distribution.
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. These retirement plans may permit the purchase
of the Contracts to accumulate retirement savings under the plans. Adverse tax
consequences
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to the plan, to the participant, or both may result if this Contract is assigned
or transferred to any individual as a means to provide benefit payments.
The Code imposes an additional tax of 10% on the taxable portion of any
early withdrawal from a Corporate Qualified Plan made by a Variable Annuitant
before age 59-1/2, death, or disability. The additional income tax on early
withdrawals will not apply however to certain distributions including (a)
distributions beginning after separation from service that are part of a series
of substantially equal periodic payments made at least annually for the life of
the Variable Annuitant or the joint lives of the Variable Annuitant and his or
her Beneficiary, and (b) distributions made to Variable Annuitants after
attaining age 55 and after separating from service. Further, additional
penalties may apply to distributions made on behalf of a "5-percent owner" (as
defined by Section 416(i)(1)(B) of the Code).
If a lump sum payment of the proceeds of a Contract qualifies as a "lump
sum distribution" under the Code, special tax rules (including limited capital
gain and income averaging treatment in some circumstances) may apply.
B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS)
Self-employed persons (including members of partnerships) are permitted to
establish and participate in Corporate Qualified Plans under Sections 401(a) and
403(a) of the Code. Corporate Qualified Plans in which self-employed persons
participate are commonly referred to as "H.R. 10 Plans."
The tax treatment of annuity payments and lump sum payments received in
connection with an H.R. 10 Plan is, in general, subject to the same rules
described in "Qualified Pension, Profit-Sharing and Annuity Plans," immediately
above. Some special rules apply, however, in the case of self-employed persons
which, for example, affect certain "lump sum distribution" and "rollover" rules.
C. SECTION 403(b) ANNUITIES
Section 403(b) of the Code permits public schools and other tax-exempt
organizations described in Section 501(c) (3) of the Code to purchase annuity
contracts for their employees subject to special tax rules.
If the requirements of Section 403(b) are satisfied, amounts contributed by
the employer to purchase an annuity contract for an employee, and any gains
thereon, are not, subject to certain limitations, taxable to the employee until
distributed to the employee. However, these payments may be subject to FICA
(Social Security) taxes. Generally, the cost basis of an employee under a
Section 403(b) annuity contract will equal the amount of any non-deductible
contributions the employee made toward the contract plus any employer
contributions that were taxable to the employee because they exceeded excludable
amounts.
Federal tax law imposes limitations on distributions from Section 403(b)
annuity contracts. Withdrawals of amounts attributable to contributions made
pursuant to a salary reduction agreement in connection with a Section 403(b)
annuity contract will be permitted only (1) when an employee attains age 59-1/2,
separates from service, dies or becomes totally and permanently disabled or (2)
in the case of hardship. A withdrawal made in the case of hardship may not
include income attributable to the contributions. However, these limitations
generally do not apply to distributions which are attributable to assets held as
of December 31, 1988. In general, therefore, contributions made prior to January
1, 1989, and earnings on such contributions through December 31, 1988, are not
subject to these limitations. In addition, these limitations do not apply to
contributions made other than by a salary reduction agreement. A number of
questions exist concerning the application of these rules. Anyone considering a
withdrawal from a Contract issued in connection with a Section 403(b) annuity
plan should consult a qualified tax advisor.
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The 10% penalty tax on early withdrawals described under "Qualified
Pension, Profit-Sharing and Annuity Plans," 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 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.
Individual Retirement Annuities are subject to limitations on the time when
distributions must commence. In addition, the 10% penalty tax on early
withdrawals described under "Qualified Pension, Profit-Sharing and Annuity
Plans," above, also applies to Individual Retirement Annuities, except that the
circumstances in which the penalty tax will not apply are different in certain
respects. Further, for any year in which a Contract Owner borrows any money
under or by use of the Individual Retirement Annuity, the Contract ceases to
qualify under Section 408(b), and an amount equal to the fair market value of
the Contract as of the first day of such year will be includible in the Contract
Owner's gross income for such year.
2. SECTION 408(k) SIMPLIFIED EMPLOYEE PENSIONS
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An Individual Retirement Annuity described in Section 408(b) of the Code
that also meets the special requirements of Section 408(k) qualifies as a
Simplified Employee Pension. Under a Simplified Employee Pension, employers may
contribute to the Individual Retirement Annuities of their employees subject to
the limitations in Section 408(j). An employee may exclude the employer's
contribution on his or her behalf to a Simplified Employee Pension from gross
income subject to certain limitations. Elective deferrals under a Simplified
Employee Pension are to be treated like elective deferrals under a cash or
deferred arrangement under Section 401(k) of the Code and are subject to a
$7,000 limitation, adjusted for inflation. In general, the employee may also
contribute and deduct an additional amount not in excess of the lesser of (a)
$2,000 or (b) 100% of compensation, subject to the phaseout discussed above, if
the Simplified Employee Pension meets the qualifications for an Individual
Retirement Annuity.
In general, except as stated in this section, the rules discussed in
"Section 408(b) Individual Retirement Annuities," immediately above, apply to a
Simplified Employee Pension.
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," above, regarding
the taxation of Distributions.
Federal income tax is generally required to be withheld from all or any
portion of a Distribution made on or after January 1, 1993 that constitutes an
"eligible rollover distribution." An "eligible rollover distribution" generally
includes any distribution from a qualified trust described in Section 401(a) of
the Code, a qualified annuity plan described in Section 403(a) of the Code or a
qualified annuity contract described in Section 403(b) of the Code except for
(i) a distribution which is one of a series of substantially equal periodic
instalments payable at least annually for the life (or over the life expectancy)
of the Variable Annuitant or for the joint lives (or over the joint life
expectancies) of the Variable Annuitant and his or her Beneficiary, or for a
specified period of 10 years or more or (ii) a minimum distribution required
pursuant to Section 401(a)(9) of the Code and (iii) an amount which is not
includible in gross income (for example, the return of non-deductible
contributions). Any eligible rollover distribution which is not rolled over
directly from a Section 401(a) qualified trust, a Section 403(a) qualified
annuity plan or a Section 403(b) qualified annuity contract to an "eligible
retirement plan" is subject to mandatory federal income tax withholding in an
amount equal to 20% of the eligible rollover distribution. An "eligible
retirement plan" generally includes a qualified trust described in Section
401(a) of the Code, a qualified annuity plan described in Section 403(a) of the
Code, an individual retirement account described in Section 408(a) of the Code
or an Individual Retirement Annuity described in Section 408(b) of the Code.
Mandatory federal income tax withholding is required even if the Variable
Annuitant receives an eligible rollover distribution and rolls it over within 60
days to an eligible retirement plan. Federal income tax is not required to be
withheld from any eligible rollover distribution which is rolled over directly
from a qualified trust described in Section 401(a) of the Code, a qualified
annuity plan described in Section 403(a) of the Code or a qualified annuity
contract described in Section 403(b) of the Code to an eligible retirement plan.
Except with respect to certain payments delivered outside the United States
or any possession of the United States, federal income tax is not required to be
withheld from any Distribution which does not constitute an eligible rollover
distribution, if the Variable Annuitant or Beneficiary properly elects in
accordance with the prescribed procedures not to have withholding apply. In the
absence of a proper election not to have withholding apply, the amount to be
withheld from a Distribution which is not an eligible rollover distribution
depends upon the type of payment being made. Generally, in the case of a
periodic payment which is not an eligible rollover distribution, the amount to
be withheld from such payment is the amount that would be withheld therefrom
under specified wage withholding tables if the payment were a payment of wages
for the appropriate payroll period. In the case of a nonperiodic
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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 initial approval of any investment management agreement and any
amendment thereto.
(2) Ratification of an independent auditor for the Fund.
(3) Any change in the 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
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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
Franklin Financial Services Corporation ("Franklin Financial") serves as
"principal underwriter" (as that term is defined in the Investment Company Act
of 1940) for the Contracts pursuant to a Sales Agreement with the Fund. The
Sales Agreement is described under "Distribution of The Contracts" in the
Statement of Additional Information. Franklin Financial, located at #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State of
Delaware and is a wholly-owned subsidiary of The Franklin.
The Fund no longer offers new Contracts. Commissions are paid to
registered representatives of Franklin Financial with respect to Stipulated
Payments received by The Franklin under the Contracts to a maximum of 5% of such
Stipulated Payments.
STATE REGULATION
As a life insurance company organized and operated under Illinois law, The
Franklin is subject to statutory provisions governing such companies and to
regulation by the Illinois Director of Insurance. An annual statement is filed
with the Director on or before March 1 of each year covering the operations of
The Franklin for the preceding year and its financial condition on December 31
of such year. The Franklin's books and accounts are subject to review and
examination by the Illinois Insurance Department at all times, and a full
examination of its operations is conducted by the National Association of
Insurance Commissioners ("NAIC") periodically. The NAIC has divided the country
into six geographic zones. A representative of each such zone may participate in
the examination.
34
<PAGE>
In addition, The Franklin is subject to the insurance laws and regulations
of the jurisdictions other than Illinois in which it is licensed to operate.
Generally, the insurance departments of such jurisdictions apply the laws of
Illinois in determining permissible investments for The Franklin.
For certain provisions of Illinois law applicable to the Fund's
investments, see "Investment Policies and Restrictions of the Fund," above.
REPORTS TO OWNERS
The Franklin will mail to the Contract Owner, at the last known address of
record at the Home Office of The Franklin, at least annually, a report
containing such information as may be required by any applicable law or
regulation and a statement showing the then Cash Value of his or her Contract.
FUNDAMENTAL CHANGES
Upon compliance with applicable law, including obtaining any necessary
affirmative vote of Contract Owners in each case: (a) the Fund may be operated
in a form other than as a "management company" under the Investment Company Act
of 1940 (including operation as a "unit investment trust"); (b) the Fund may be
deregistered under the Investment Company Act of 1940 in the event such
registration is no longer required; or (c) the provisions of the Contracts may
be modified to assure qualification under the pertinent provisions of the Code
or to comply with other applicable federal or state laws. In the event of any
such fundamental change, The Franklin may make appropriate amendments to the
Contracts to give effect to such change or take such other action as may be
necessary in this respect.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, with respect to the
Contracts offered hereby. This Prospectus does not contain all the information
set forth in the Registration Statement and amendments thereto and exhibits
filed as a part thereof, to all of which reference is hereby made for further
information concerning the Fund, The Franklin and the Contracts offered hereby.
Statements contained in this Prospectus as to the content of Contracts and other
legal instruments are summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
OTHER VARIABLE ANNUITY CONTRACTS; EFFECT OF NON-QUALIFICATION
The Franklin may offer, under other prospectuses, other variable annuity
contracts having interests in the Fund and containing different terms and
conditions from those offered hereby. 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," and
"Transfers to and from Other Contracts," above.
35
<PAGE>
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. . . . . . . . 6
Distribution of The Contracts . . . . . . . . . . . . 7
Portfolio Turnover and Brokerage. . . . . . . . . . . 8
Safekeeper of Securities. . . . . . . . . . . . . . . 9
Legal Matters . . . . . . . . . . . . . . . . . . . . 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:
The Franklin Life Insurance Company
#1 Franklin Square
Springfield, Illinois 62713
Attention: Box 1018
(800) 528-2011, extension 2591
Please send me the Statement of Additional Information dated April 30, 1997 for
Franklin Life Variable Annuity Fund A.
- --------------------------------------------------------------------------------
(Name)
- --------------------------------------------------------------------------------
(Street)
- --------------------------------------------------------------------------------
(City) (State) (Zip Code)
<PAGE>
INDIVIDUAL VARIABLE ANNUITY
CONTRACTSFOR USE WITH CERTAIN
QUALIFIED PLANS AND TRUSTS ACCORDED
SPECIAL TAX
TREATMENT AND AS
INDIVIDUALRETIREMENT ANNUITIES
FRANKLIN LIFE VARIABLE ANNUITY
FUND A
ISSUED BY
THE FRANKLIN LIFE INSURANCE COMPANY
#1 FRANKLIN SQUARE
SPRINGFIELD, ILLINOIS 62713
TELEPHONE (800) 528-2011
STATEMENT OF ADDITIONAL INFORMATION
This Statement of Additional Information is not a prospectus and should be
read in conjunction with the Prospectus dated April 30, 1997 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
Franklin Life Insurance Company at the address set forth above (Attention: Box
1018) or by calling (800) 528-2011, extension 2591.
___________________________________
THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ AND RETAINED FOR FUTURE
REFERENCE.
___________________________________
THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1997.
<PAGE>
TABLE OF CONTENTS
PAGE
General Information . . . . . . . . . . . . . . . . . . . . . . . . . 2
Investment Objectives . . . . . . . . . . . . . . . . . . . . . . . . 2
Limitations on Settlement Options . . . . . . . . . . . . . . . . . . 2
Management. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Investment Advisory and Other Services. . . . . . . . . . . . . . . . 6
Distribution of The Contracts . . . . . . . . . . . . . . . . . . . . 7
Portfolio Turnover and Brokerage. . . . . . . . . . . . . . . . . . . 8
Safekeeper of Securities. . . . . . . . . . . . . . . . . . . . . . . 9
Legal Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
Experts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
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.
American General Corporation ("American General") through its wholly-owned
subsidiary, AGC Life Insurance Company ("AGC Life"), owns all of the outstanding
shares of common stock of The Franklin. The address of AGC Life is American
General Center, Nashville, Tennessee 37250-0001. The address of American
General is 2929 Allen Parkway, Houston, Texas 77019-2155.
American General is one of the largest diversified financial services
organizations in the United States. American General's operating subsidiaries
are leading providers of retirement services, consumer loans, and life
insurance. The company was incorporated as a general business corporation in
Texas in 1980 and is the successor to American General Insurance Company, an
insurance company incorporated in Texas in 1926.
American General has advised the Fund that there was no person who was known
to it to be the beneficial owner of 10% or more of the voting power of American
General as of January 29, 1997.
INVESTMENT OBJECTIVES
The investment objectives and policies of the Fund are described under
"Investment Policies and Restrictions of the Fund" in the Prospectus.
LIMITATIONS ON SETTLEMENT OPTIONS
A. LIMITATIONS ON CHOICE OF SETTLEMENT OPTION
Described below are certain limitations on Settlement Options based on The
Franklin's current understanding of the distribution rules generally applicable
to Contracts purchased for use as Individual Retirement Annuities or issued in
connection with Section 403(b) annuity purchase plans. Various questions exist,
however, about the application of the distribution rules to distributions from
the Contracts and their effect on Settlement Option availability thereunder.
The Internal Revenue Service has proposed regulations relating to required
distributions from qualified plans, individual retirement plans, and annuity
contracts under Section 403(b) of the Code. These proposed regulations may limit
the availability of the Settlement Options in Contracts purchased for use as
Individual Retirement Annuities or issued in connection with Section 403(b)
annuity purchase plans. The proposed regulations are generally effective for
calendar years after 1984; persons contemplating the purchase of a Contract
should consult a qualified tax advisor concerning the effect of the proposed
regulations on the Settlement Option or Options he or she is contemplating.
FIRST OPTION-LIFE ANNUITY. Under 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
2
<PAGE>
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.
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.
SEVENTH OPTION-INVESTMENT OPTION. This Option is not available under
Qualified Contracts issued in connection with any Qualified Plan.
3
<PAGE>
B. LIMITATIONS ON COMMENCEMENT OF ANNUITY PAYMENTS
The Contract Owner may defer the initial Annuity Payment Date and continue the
Contract to a date not later than age 75 unless the provisions of the Code or
any governing Qualified Plan require Annuity Payments to commence at an earlier
date. For example, under Qualified Contracts, other than those issued for use as
Individual Retirement Annuities, the Contract Owner may not defer the initial
Annuity Payment Date beyond April 1 of the calendar year following the later of
the calendar year in which the Variable Annuitant (i) attains age 70-1/2, or
(ii) retires, and must be made in a specified form or manner. In addition, if
the plan participant is a "5 percent owner" (as defined in the Code), or if the
Contract is issued for use as an Individual Retirement Annuity, distributions
generally must begin no later than the date described in (i). The Franklin will
require satisfactory proof of age of the Variable Annuitant prior to the initial
Annuity Payment Date.
MANAGEMENT
The following persons hold the positions designated with respect to the Board
of Managers. The table also shows any positions held with The Franklin and
Franklin Financial Services Corporation, a wholly-owned subsidiary of The
Franklin which serves as distributor for the Contracts. (See "Distribution of
the Contracts," below.)
NAME AND ADDRESS PRINCIPAL OCCUPATIONS DURING POSITIONS HELD WITH
PAST 5 YEARS THE FUND
ROBERT G. SPENCER* Officer of The Franklin; Chairman and Member,
#1 Franklin Square currently, Vice President of Board of Managers
Springfield, Illinois The Franklin; prior to 1996,
62713 also Treasurer of The Franklin
and Treasurer and Assistant
Secretary of Franklin
Financial Services
Corporation.
ELIZABETH E. ARTHUR* Officer of The Franklin; Secretary, Board of
#1 Franklin Square currently, Vice President, Managers
Springfield, Illinois Assistant Secretary and
62713 Associate General Counsel of
The Franklin. Ms. Arthur also
serves as Assistant Secretary
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 Court International Corp., South Managers
Granger, Indiana 46530 Bend, Indiana (marketing,
manufacturing and engineering
service to industry); prior to
1993, also President of
Resource International Corp.
NAME AND ADDRESS PRINCIPAL OCCUPATIONS POSITIONS HELD WITH
DURING PAST THE
4
<PAGE>
5 YEARS FUND
Director, President and Chief Member, Board of
CLIFFORD L. GREENWALT Executive Officer, CIPSCO Managers
607 East Adams Street Incorporated, since October,
Springfield, Illinois 1990 (utility holding
62739 company); Director, President
and Chief Executive Officer,
Central Illinois Public
Service Company, Springfield,
Illinois (a subsidiary of
CIPSCO Incorporated);
Director, Electric Energy,
Inc., Joppa, Illinois;
Director, First of America
Bank, Kalamazoo, Michigan;
Director, First of America
Bank - Illinois, N.A. (a
subsidiary of First of America
Bank).
(*) DENOTES INDIVIDUALS WHO ARE "INTERESTED PERSONS" (AS DEFINED IN THE
INVESTMENT COMPANY ACT OF 1940) OF THE FUND, THE FRANKLIN OR FRANKLIN FINANCIAL
SERVICES CORPORATION BY REASON OF THE CURRENT POSITIONS HELD BY THEM AS SET
FORTH IN THE ABOVE TABLE.
The following table sets forth a summary of compensation paid for services to
the Fund and certain other entities that are deemed to be part of the same "Fund
Complex" in accordance with the rules of the Securities and Exchange Commission
to all members of the Board of Managers for the year ended December 31, 1996.
Pursuant to the terms of its agreement to assume certain of the Fund's
administrative expenses, The Franklin pays all compensation received by the
members of the Board of Managers and the officers of the Fund. Members of the
Board of Managers or officers of the Fund who are also officers, directors or
employees of The Franklin do not receive any remuneration for their services as
members of the Board of Managers or officers of the Fund. Other members of the
Board of Managers received a fee of $1,400 for the year and, thus, the aggregate
direct remuneration of all such members of the Board of Managers was $4,200
during 1996. It is currently anticipated that the annual aggregate remuneration
of such members of the Board of Managers to be paid during 1997 will not exceed
$4,200.
NAME OF PERSON, POSITION AGGREGATE COMPENSATION TOTAL COMPENSATION
RELATING TO FUND RELATING TO FUND AND
FUND COMPLEX PAID TO
EACH MEMBER
Each member of the Board of
Managers (except Robert G. $1,400 (1) $4,200 (1)(2)
Spencer)
- ------------------------------
(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 21, 1997, the owner of any contract participating in the
investment experience of the Fund.
INVESTMENT ADVISORY AND OTHER SERVICES
5
<PAGE>
The Franklin acts as investment manager of the Fund pursuant to an Investment
Management Agreement executed and dated January 31, 1995, which was approved by
Contract Owners at their annual meeting held on April 17, 1995 and was renewed
to January 31, 1998 by the Board of Managers of the Fund at its meeting on
January 20, 1997. The method of determining the advisory charge is described in
the Prospectus under "Investment Management Service Charge."
The Investment Management Agreement:
(1) May not be terminated by The Franklin without the prior approval of a
new investment management agreement by a "majority" (as that term is defined
in the Investment Company Act of 1940) of the votes available to the Contract
Owners, and may be terminated without the payment of any penalty on 60 days'
written notice by a vote of the Board of Managers of the Fund or by a vote of a
majority of the votes available to the Contract Owners.
(2) Shall continue in effect from the date of its execution until the second
anniversary of such execution date and thereafter shall continue in effect from
year to year but only if such continuance is specifically approved at least
annually by the Board of Managers or by a vote of a majority of the votes
available to Contract Owners, provided that in either case the continuation is
also approved by the vote of a majority of the Board of Managers who are not
"interested persons" (as that term is defined in the Investment Company Act of
1940) of the Fund or of The Franklin, cast in person at a meeting called for the
purpose of voting on such approval.
(3) Shall not be amended without prior approval by a majority of the votes
available to the Contract Owners.
(4) Shall terminate automatically on "assignment" (as that term is defined
in the Investment Company Act of 1940).
A "majority" of the votes available to the Contract Owners is defined in the
Investment Company Act of 1940 as meaning the lesser of (i) Contract Owners
holding 67% or more of the voting power of the Contract Owners present at a
meeting if Contract Owners holding more than 50% of the total voting power of
all Contract Owners in the Fund are present or represented by proxy, or (ii)
Contract Owners holding more than 50% of the total voting power of all Contract
Owners in the Fund. For the voting rights of Contract Owners, see "Voting
Rights," in the Prospectus.
Under the Investment Management Agreement, The Franklin, subject to the
control of the Board of Managers of the Fund, is authorized and has the duty to
manage the investment of the assets of the Fund, subject to the Fund's
investment policies and the restrictions on investment activities set forth in
the Prospectus, and to order the purchase and sale of securities on behalf of
the Fund. In carrying out its obligations to manage the investment of the assets
of the Fund, The Franklin is committed by the Agreement, so long as it remains
in force, to pay all investment expenses of the Fund other than the following,
which the Fund will bear: (i) taxes, if any, based on the income of, capital
gains of assets in, or existence of, the Fund; (ii) taxes, if any, in connection
with the acquisition, disposition or transfer of assets of the Fund; (iii)
commissions or other capital items payable in connection with the purchase or
sale of the Fund's investments; and (iv) interest on account of any borrowings
by the Fund.
Robert G. Spencer and Elizabeth E. Arthur are "affiliated persons," as
defined in the Investment Company Act of 1940, of both The Franklin and the Fund
by reason of the positions held by them with The Franklin and the Fund as set
forth in the table under "Management," above.
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
6
<PAGE>
Managers and officers, agents, or employees of the Fund as is provided by the
Fund in its Rules and Regulations. The Franklin is not, however, obligated under
the Administration Agreement to pay the investment management service charge
discussed under "Investment Management Service Charge," in the Prospectus. The
Administration Agreement also provides that The Franklin will from time to time
adjust the assets of the Fund by withdrawing sums in cash or by transferring
cash to the Fund so that the assets of the Fund will be equal to the actuarial
value of the amounts payable under all outstanding Contracts having an interest
in the Fund. The Administration Agreement may be amended or terminated at any
time by mutual consent of the Fund and The Franklin.
DISTRIBUTION OF THE CONTRACTS
Franklin Financial Services Corporation ("Franklin Financial" ), #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State of
Delaware and is a wholly-owned subsidiary of The Franklin. Franklin Financial
serves as "principal underwriter" (as that term is defined in the Investment
Company Act of 1940) for the Contracts, pursuant to a Sales Agreement with the
Fund. The present Sales Agreement was approved by the Board of Managers of the
Fund, and came into effect, on January 31, 1995. It was last renewed by the
Board of Managers on January 20, 1997. 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 agreed to employ and supervise agents
chosen by The Franklin to sell the Contracts and to use its best efforts to
qualify such persons as registered representatives of Franklin Financial, which
is a broker-dealer registered with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. Franklin Financial also may enter into agreements with
The Franklin and each such agent with respect to the supervision of such agent.
Franklin Financial incurs certain sales expenses, such as sales literature
preparation and related costs, in connection with the sale of the Contracts
pursuant to a Sales Agreement with the Fund. 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
7
<PAGE>
and employees selling Contracts, where required, are also licensed as securities
salesmen under state law.
Elizabeth E. Arthur is an "affiliated person" (as that term is defined in the
Investment Company Act of 1940) of both Franklin Financial and the Fund by
reason of the positions held by her with Franklin Financial and the Fund as set
forth in the table under "Management," above.
PORTFOLIO TURNOVER AND BROKERAGE
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 1995, the portfolio turnover rate was 14.66%; for 1996 the rate was 4.77%.
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 1994, 1995 and 1996, a
total of $20,612, $4,260 and $1,865, 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," 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
8
<PAGE>
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 at 1776 Heritage Drive, North Quincy, Massachusetts,
under a Custodian Agreement dated April 17, 1995 to which The Franklin and State
Street are parties. The Franklin has requested that the Illinois Insurance
Department approve an arrangement under which State Street would hold the
securities of the Fund as sub-custodian under an agreement that would be entered
into by The Franklin, State Street Bank and Trust Company of Connecticut, as
custodian, and State Street, as sub-custodian. Representatives of the
Securities and Exchange Commission, the Illinois Insurance Department and the
NAIC zonal examination committee have access to such securities in the
performance of their official duties.
LEGAL MATTERS
Sutherland, Asbill & Brennan, L.L.P. of Washington, D.C. has provided
advice on certain matters relating to the federal securities laws.
EXPERTS
The statement of assets and liabilities, including the portfolio of
investments, as of December 31, 1996 and the related statement of operations for
the year then ended and the statements of changes in contract owners' equity and
the table of per-unit income and changes in accumulation unit value for each of
the two years 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 sheets as of December 31,
1996 and 1995 of The Franklin, and the related consolidated statements of
income, shareholder's equity and cash flows for the year ended December 31,
1996, 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
table of per-unit income and changes in accumulation unit value for each of the
three years in the period ended December 31, 1994 of the Fund, appearing herein,
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report thereon appearing elsewhere herein. The consolidated
statements of income, shareholder's equity and cash flows of The Franklin for
the year ended December 31, 1994, 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.
9
<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, 1996 F-4
Statement of Operations for the year ended
December 31, 1996 F-4
Statements of Changes in Contract Owners' Equity for the
years ended December 31, 1996 and 1995 F-4
Portfolio of Investments, December 31, 1996 F-5
Notes to Financial Statements F-6
Supplementary Information - Per-Unit Income and Changes in
Accumulation Unit Value F-7
for the five years ended December 31, 1996
The Franklin Life Insurance Company and Subsidiaries:*
Reports of Independent Auditors and Accountants F-8 - F-9
Financial Statements:
Consolidated Balance Sheet, December 31, 1996 and 1995 F-10 - F-11
Consolidated Statement of Income for the year ended
December 31, 1996, the eleven months ended
December 31, 1995, the one month ended January 31, 1995
and year ended December 31, 1994 F-12
Consolidated Statement of Shareholder's Equity for the
year ended December 31, 1996, the eleven months ended
December 31, 1995, the one month ended January 31, 1995
and year ended December 31, 1994 F-13
Consolidated Statement of Cash Flows for the year ended
December 31, 1996, the eleven months ended
December 31, 1995, the one month ended
January 31, 1995 and year ended December 31, 1994 F-14
Notes to Consolidated Financial Statements F-15 - F-41
*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, 1996, the related statement of operations for the year then ended
and the statements of changes in contract owners' equity, and the table of
per-unit income and changes in accumulation unit value for each of the two years
then ended. These financial statements and the table of per-unit income and
changes in accumulation unit value are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements and the table of per-unit income and changes in accumulation unit
value based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the table of
per-unit income and changes in accumulation unit value are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the table of per-unit income and changes in
accumulation unit value. An audit also 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, 1996. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the 1996 and 1995 table of per-unit
income and changes in accumulation unit value referred to above present fairly,
in all material respects, the financial position of Franklin Life Variable
Annuity Fund A at December 31, 1996, and the results of its operations for the
year then ended, and the changes in its contract owners' equity and per-unit
income and changes in accumulation unit value for each of the two years then
ended in conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
January 31, 1997
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 table of per-unit income and changes in
accumulation unit value of Franklin Life Variable Annuity Fund A for each of the
three years in the period ended December 31, 1994. This table of per-unit
income and changes in accumulation unit value is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this table of
per-unit income and changes in accumulation unit value based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the table of per-unit income and changes in
accumulation unit value is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the table of per-unit income and changes in accumulation unit value. An audit
also includes assessing the accounting principles used by management as well as
evaluating the overall presentation of the table of per-unit income and changes
in accumulation unit value. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the table of per-unit income and changes in accumulation unit
value referred to above presents fairly, in all material respects, the per-unit
income and changes in accumulation unit value for each of the three years in the
period ended December 31, 1994, 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, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Investments-at fair value (cost-$7,784,013):
Common stocks $ 9,595,990
Short-term notes 1,772,093
------------
11,368,083
Cash on deposit 43,985
Dividends and interest receivable 24,459
------------
Total Assets 11,436,527
Liability - Due to The Franklin Life Insurance Company 15,311
------------
Contract Owners' Equity
Annuity reserves $ 17,875
Value of 139,945 Accumulation Units outstanding,
equivalent to $81.48471104 per unit 11,403,341 $ 11,421,216
------------ ------------
------------
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
Investment Income
Dividends $ 166,120
Interest 75,477
------------
Total Income $ 241,597
Expenses
Mortality and expense charges $ 108,769
Investment management services 47,550
------------
Total Expenses 156,319
------------
Net Investment Income 85,278
Realized and Unrealized Gain on Investments
Net realized gain from investment transactions
Proceeds from sales $ 1,734,452
Cost of investments sold (identified cost method) 1,464,659
------------
Net Realized Gain 269,793
Net unrealized appreciation of investments
Beginning of year $ 2,177,308
End of year 3,584,070
------------
Net Unrealized Appreciation 1,406,762
------------
Net Gain On Investments 1,676,555
------------
Net Increase In Contract Owners'
Equity Resulting From Operations $ 1,761,833
------------
------------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1996 1995
----------------------------
<S> <C> <C>
Net investment income $ 85,278 $ 172,356
Net realized gain from investment transactions 269,793 16,856
Net unrealized appreciation of investments 1,406,762 2,255,131
----------------------------
Net Increase In Contract Owners' 1,761,833 2,444,343
Equity Resulting From Operations
Net contract purchase payments 475,974 354,276
Reimbursement for contract guarantees 3,178 407
Annuity payments (3,878) (3,262)
Withdrawals (1,244,804) (1,694,308)
----------------------------
Net Increase in Contract Owners' Equity 992,303 1,101,456
Contract Owners' Equity at Beginning of Year 10,428,913 9,327,457
----------------------------
Contract Owners' Equity At End of Year $11,421,216 $10,428,913
----------------------------
----------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
NUMBER
OF FAIR
SHARES VALUE
-------- -------
COMMON STOCKS (84.02%)
BANKING (3.0%)
3,675 Student Loan Marketing Association $ 342,234
BEVERAGES (1.13%)
4,400 PepsiCo, Incorporated 128,700
BUSINESS SERVICES (1.5%)
5,600 Equifax Inc. 171,500
CHEMICALS (1.85%)
2,700 Dow Chemical 211,612
COMPUTER SERVICES (2.87%)
8,100 Ceridian Corporation* 328,050
COSMETICS & HOUSEHOLD PRODUCTS (2.72%)
4,000 Gillette Company 311,000
DRUGS & HEALTH CARE (17.08%)
4,791 Eckerd Corporation* 153,312
4,000 Eli Lilly and Company 292,000
4,300 Merck & Company, Inc. 342,387
2,100 Pfizer, Incorporated 174,300
6,450 St. Jude Medical, Inc. 273,319
3,300 Schering-Plough Corporation 213,675
6,000 Stryker Corporation 179,250
8,000 Walgreen Company 322,000
----------
1,950,243
ELECTRONICS & INSTRUMENTATIONS (2.55%)
5,800 Hewlett-Packard Company 291,450
FOOD PROCESSING (2.31%)
5,300 ConAgra, Inc. 263,675
FOOD - RETAIL (1.78%)
5,700 Albertson s, Inc. 203,063
FOOD-WHOLESALE (1.91%)
6,700 Sysco Corporation 218,587
HOUSEHOLD PRODUCTS (1.02%)
3,700 Newell Co. 116,550
MACHINERY - INDUSTRIAL & CONSTRUCTION
(1.81%)
1,500 Fluor Corporation 94,125
3,000 Trinity Industry 112,500
----------
206,625
OFFICE EQUIPMENT & SERVICES (6.18%)
2,000 Compaq Computers Corporation* 148,750
5,350 Digital Equipment Corporation* 193,938
2,400 International Business Machines
Corporation 363,600
----------
706,288
OIL SERVICES & DRILLING (1.64%)
3,100 Halliburton Company 186,775
OILS & OIL RELATED PRODUCTS (8.15%)
2,700 Amoco Corporation $ 217,688
1,300 Atlantic Richfield Company 172,250
2,500 British Petroleum Company, p.l.c. 353,437
2,600 Kerr-McGee Corporation 187,200
----------
930,575
PACKAGING - CONTAINERS (2.6%)
8,400 Avery-Dennison Corporation 297,150
PHOTOGRAPHY (2.88%)
4,100 Eastman Kodak Company 329,025
RESTAURANTS/LODGING (1.64%)
3,400 Marriott International, Inc. 187,850
RETAIL-SPECIALTY (3.78%)
7,200 NIKE, Inc. 432,000
TECHNOLOGY (8.38%)
5,000 AMP, Incorporated 191,875
3,300 Diebold, Incorporated 207,488
2,400 Intel Corporation 314,250
3,100 Marshall, Incorporated* 94,937
3,600 Millipore Corporation 148,950
----------
957,500
UTILITIES-ELECTRIC (5.46%)
6,500 American Electric Power Company,
Inc. 267,313
6,900 Baltimore Gas and Electric Company 184,575
4,200 Texas Utilities Company 171,150
----------
623,038
UTILITIES - TELEPHONE (1.77%)
5,000 BellSouth Corporation 202,500
TOTAL COMMON STOCKS
(COST-$6,011,920) 9,595,990
----------
PRINCIPAL
AMOUNT
SHORT-TERM NOTES (15.52%)
$ 200,000 United States Treasury Bill
due 1/16/97 (cost-$199,322) 199,322
United States Treasury Bill
1,585,000 due 1/16/97 (cost-$1,572,771) 1,572,771
----------
TOTAL SHORT-TERM NOTES
(COST - $1,772,093) 1,772,093
TOTAL INVESTMENTS (99.5%)
(COST -$7,784,013) 11,368,083
CASH AND RECEIVABLES, LESS
LIABILITY (.5%) 53,133
----------
TOTAL CONTRACT OWNERS
EQUITY (100.0%) $11,421,216
----------
*NON-INCOME PRODUCING INVESTMENT IN 1996.
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
F-5
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
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 1996 aggregated $439,020 and $1,153,903,
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
Sales and administrative charges aggregating $21,860 and $30,845 were
deducted from the proceeds of the sales of accumulation units and retained by
Franklin Financial Services Corporation and The Franklin during 1996 and
1995, respectively. 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
YEAR ENDED YEAR ENDED
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------------------------------
UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ------
Balance at
beginning of year 150,474 $ 10,412,808 172,507 $ 9,313,322
Purchases 6,506 475,974 5,872 354,276
Net investment
income* - 85,005 - 171,988
Net realized gain
from investment
transactions* - 268,930 - 16,819
Net unrealized
appreciation of
investments* - 1,402,260 - 2,250,305
Withdrawals (17,035) (1,244,804) (27,905) (1,694,308)
Reimbursement for
contract
guarantees* - 3,168 - 406
------------------------------------------------------
Balance at end of
year 139,945 $ 11,403,341 150,474 $ 10,412,808
------------------------------------------------------
------------------------------------------------------
*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 officers or employees of The Franklin or Franklin
Financial Services Corporation. Amounts paid by the Fund to The Franklin and to
Franklin Financial Services Corporation are disclosed in this report.
NOTE G-NET UNREALIZED APPRECIATION OF INVESTMENTS
Net unrealized appreciation of investments at December 31, 1996 and 1995 was
as follows:
DECEMBER 31 DECEMBER 31
1996 1995
-------------------------------------------
Gross unrealized appreciation $3,670,260 $2,225,359
Gross unrealized depreciation 86,190 48,051
-------------------------------------------
Net unrealized
appreciation of investments $3,584,070 $2,177,308
-------------------------------------------
-------------------------------------------
F-6
<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)
YEAR ENDED DECEMBER 31
1996 1995 1994 1993 1992
----------------------------------------------
Investment income $1.685 $1.948 $1.408 $1.231 $1.064
Expenses 1.090 .875 .773 .773 .723
----------------------------------------------
Net investment income .595 1.073 .635 .458 .341
Net realized and unrealized 11.690 14.139 (.240) .112 .770
----------------------------------------------
gain (loss) on investments
Net increase in accumulation
unit value 12.285 15.212 .395 .570 1.111
Accumulation unit value:
Beginning of year 69.200 53.988 53.593 53.023 51.912
----------------------------------------------
End of year $81.485 $69.200 $53.988 $53.593 $53.023
----------------------------------------------
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 .79% 1.76% 1.18% .85% .68%
Portfolio turnover rate 4.77% 14.66% 88.99% 68.62% 59.84%
Number of accumulation units
outstanding at end of year 139,945 150,474 172,507 198,763 217,948
- --------------------------------------------------------------------------------
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
-----------------------------
Board of Directors
and Shareholder
The Franklin Life Insurance Company
We have audited the consolidated balance sheets of The Franklin Life
Insurance Company (an indirect wholly-owned subsidiary of American General
Corporation) and subsidiaries (the Company) as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholder s equity and
cash flows for the year ended December 31, 1996, 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Franklin
Life Insurance Company and subsidiaries at December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for the year
ended December 31, 1996, 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 14, 1997
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 statements of income, shareholder s equity
and cash flows of The Franklin Life Insurance Company and Subsidiaries for
the year ended December 31, 1994. 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.
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 results of operations and cash flows
of The Franklin Life Insurance Company and Subsidiaries for the year ended
December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
203 North LaSalle Street
Chicago, Illinois 60601
February 1, 1995
F-9
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions)
DECEMBER 31
-------------------------
ASSETS 1996 1995
-------------------------
Investments
Fixed maturity securities(amortized cost:
$5,152.3; $5,109.5) $ 5,476.5 $5,681.8
Mortgage loans on real estate 607.0 595.3
Equity securities (cost: $2.0; $2.4) 5.0 3.7
Policy loans 327.4 322.8
Other long-term investments 47.6 51.0
-------------------------
Total investments 6,463.5 6,654.6
Cash and cash equivalents 24.6 19.6
Accrued investment income 99.7 103.4
Note receivable from parent 116.4 116.0
Preferred stock of affiliates, at cost 8.5 8.5
Receivable from brokers 17.7 34.4
Receivable from agents, less allowance ($0.4; $0.4) 18.3 18.3
Amounts recoverable from reinsurers 84.0 19.0
Deferred policy acquisition costs 82.0 47.5
Cost of insurance purchased 407.8 353.0
Property and equipment, at cost, less accumulated
depreciation ($7.2; $3.4) 20.6 20.1
Other assets 29.6 30.7
Assets held in Separate Accounts 134.9 118.3
-------------------------
Total assets $ 7,507.6 $ 7,543.4
-------------------------
-------------------------
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions, except share data)
DECEMBER 31
--------------------------
LIABILITIES 1996 1995
--------------------------
Insurance liabilities
Life, annuity and accident and health reserves $ 2,864.7 $ 2,791.4
Policy and contract claims 38.1 41.2
Investment-type contract deposits
and dividend accumulations 2,992.7 2,993.0
Participating policyholders' interests 209.7 199.2
Other 49.5 48.4
Income taxes
Current 6.4 (12.0)
Deferred (19.0) 49.8
Intercompany payables 0.8 0.6
Accrued expenses and other liabilities 116.6 151.3
Liabilities related to Separate Accounts 134.9 118.3
--------------------------
Total liabilities 6,394.4 6,381.2
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 886.1 884.3
Net unrealized gains on securities 106.6 187.5
Retained earnings 78.5 48.4
--------------------------
Total shareholder's equity 1,113.2 1,162.2
--------------------------
Total liabilities and
shareholder's equity $ 7,507.6 $ 7,543.4
--------------------------
--------------------------
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
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------
1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $ 418.6 $ 449.6 $ 34.5 $ 502.7
Net investment income 521.5 468.8 41.3 478.7
Realized investment gains (losses) 2.5 7.2 (7.6) (14.4)
Other 68.3 55.9 4.1 68.5
--------------------------------------------------------
Total revenues 1,010.9 981.5 72.3 1,035.5
Benefits and expenses
Benefits paid or provided
Death claims and other policy
benefits 240.6 236.3 21.5 233.0
Investment-type contracts 173.3 168.3 14.0 170.5
Dividends to policyholders 81.9 85.6 7.5 87.0
Change in policy reserves 95.9 148.5 11.0 218.1
Increase in participating policy-
holders' interests 12.0 11.0 1.0 12.0
Operating costs and expenses 145.9 125.3 10.4 123.1
Amortization of deferred policy
acquisition costs 10.7 8.3 5.8 71.3
Amortization of cost of insurance
purchased 51.1 29.0 0.8 9.0
--------------------------------------------------------
Total benefits and expenses 811.4 812.3 72.0 924.0
--------------------------------------------------------
Income before income tax expense 199.5 169.2 0.3 111.5
Income tax expense (benefit)
Current 94.7 39.7 4.9 75.6
Deferred (25.3) 21.1 (4.7) (31.9)
--------------------------------------------------------
Total income tax expense 69.4 60.8 0.2 43.7
--------------------------------------------------------
Net income $ 130.1 $ 108.4 $ 0.1 $ 67.8
--------------------------------------------------------
--------------------------------------------------------
</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
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------
1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 42.0 $ 42.0 $ 42.0 $ 42.0
---------------------------------------------------------
Paid-in capital
Balance at beginning of period 884.3 884.3 803.0 803.0
Paid in during the period 1.8 - - -
Adjustment for the acquisition - - 81.3 -
---------------------------------------------------------
Balance at end of period 886.1 884.3 884.3 803.0
---------------------------------------------------------
Net unrealized gains (losses)
on available-for-sale securities
Balance at beginning of period 187.5 - (8.1) 5.3
Change during the period (80.9) 187.5 1.4 (13.4)
Adjustment for the acquisition - - 6.7 -
---------------------------------------------------------
Balance at end of period 106.6 187.5 - (8.1)
---------------------------------------------------------
Retained earnings
Balance at beginning of period 48.4 - 522.7 492.7
Net income 130.1 108.4 0.1 67.8
Dividends paid to parent (100.0) (60.0) (250.0) (37.8)
Adjustment for the acquisition - - (272.8) -
---------------------------------------------------------
Balance at end of period 78.5 48.4 - 522.7
---------------------------------------------------------
Total shareholder's equity
at end of period $ 1,113.2 $ 1,162.2 $ 926.3 $ 1,359.6
---------------------------------------------------------
---------------------------------------------------------
</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
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------
1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 130.1 $ 108.4 $ 0.1 $ 67.8
Reconciling adjustments to net cash
provided by operating activities
Insurance liabilities 121.5 155.4 19.9 232.8
Deferred policy acquisition costs (45.5) (59.4) (2.7) (40.1)
Investment (gains) losses (4.7) (11.4) (0.9) 14.4
Investment write-downs and reserves 2.2 4.2 8.5 -
Cost of insurance purchased and intangibles 51.1 29.0 1.0 12.3
Interest credited, net of charges on
investment contract deposits 103.2 153.7 12.0 153.0
Purchase of trading securities - - (1.5) (183.3)
Proceeds from sale of trading securities - - 85.5 247.0
Other, net (107.9) 14.3 (7.1) (37.3)
----------------------------------------------------
Net cash provided by operating activities 250.0 394.2 114.8 466.6
INVESTING ACTIVITIES
----------------------------------------------------
Investment purchases
Available-for-sale (5,479.1) (1,055.8) - (57.3)
Held-to-maturity - - (0.8) (621.8)
Other investments (122.6) (95.7) (27.2) (224.3)
Affiliated - (124.5) - -
Investment calls, maturities and sales
Available-for-sale 5,526.3 832.0 0.2 8.1
Held-to-maturity - - 24.9 470.0
Other investments 65.1 127.1 6.3 72.6
Additions to property and equipment (4.6) (3.5) (0.5) (5.0)
----------------------------------------------------
Net cash (used for) provided by
investing activities (14.9) (320.4) 2.9 (357.7)
----------------------------------------------------
FINANCING ACTIVITIES
Policyholder account deposits 165.3 357.8 29.2 336.6
Policyholder account withdrawals (297.1) (366.2) (32.6) (337.0)
Additional capital contribution 1.8 - - -
Proceeds from intercompany borrowings 62.0 105.2 - -
Repayments of intercompany borrowings (62.1) (105.1) - -
Dividend payments (100.0) (60.0) (250.0) (37.8)
----------------------------------------------------
Net cash used for financing activities (230.1) (68.3) (253.4) (38.2)
----------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 5.0 5.5 (135.7) 70.7
Cash and cash equivalents at beginning of
period 19.6 14.1 149.8 79.1
----------------------------------------------------
Cash and cash equivalents at end of period $ 24.6 $ 19.6 $ 14.1 $ 149.8
----------------------------------------------------
----------------------------------------------------
</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 2,900 agents.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) and include the accounts of
Franklin, and its significant subsidiaries, The American Franklin Life
Insurance Company (AMFLIC), Franklin Financial Services Corporation (FFSC)
and prior to December 31, 1995, The Franklin United Life Insurance Company
(FULIC). Franklin was formerly a wholly-owned subsidiary of American
Franklin Company (AFC), and is now an indirect, wholly-owned subsidiary of
American General Corporation (AGC) following the dissolution of AFC in June
of 1996. All material intercompany transactions have been eliminated in
consolidation.
On December 31, 1995, Franklin completed the sale of FULIC to American
General Life Insurance Company of New York (AGNY), an affiliated entity.
Franklin received $8.5 million of preferred stock of American General Life
Insurance Company, the parent of AGNY, as consideration. No gain or loss
was recognized on the transaction.
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities. Ultimate
results could differ from these estimates.
1.3 ACQUISITION
On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of
AGC, acquired AFC for $1.17 billion.
The purchase price consisted of $920 million in cash and a $250 million
extraordinary cash dividend paid by AFC to its former parent prior to
closing. In addition, $6.3 million of acquisition costs were capitalized
as part of the acquisition.
F-15
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.3 ACQUISITION (CONTINUED)
The acquisition was accounted for using the purchase method of accounting
in accordance with the provisions of Accounting Principles Board Opinion
16, "Business Combinations", and other existing accounting literature
pertaining to purchase accounting. Under purchase accounting, the total
purchase cost was allocated to the assets and liabilities acquired based on
a determination of their fair value. Franklin's consolidated statements of
income, shareholder's equity and cash flows for the year ended December 31,
1996 and the eleven months ended December 31, 1995, are reported under the
purchase method of accounting and, accordingly, are not consistent with the
basis of presentation of the "Predecessor Basis" consolidated statements of
income, shareholder's equity and cash flows for the one month ended January
31, 1995 and the year ended December 31, 1994.
1.4 ACCOUNTING CHANGES
CURRENT YEAR. In June 1996, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement provides accounting
standards for determining whether transfers of financial assets are treated
as sales or secured borrowings. The statement must be applied
prospectively to applicable transactions occurring after December 31, 1996;
however, certain provisions addressing secured borrowings and collateral
and transfers of financial assets that are part of repurchase agreements,
dollar-roll, securities lending, and similar transactions are effective for
transactions occurring after December 31, 1997. Earlier or retroactive
application is not permitted. Franklin does not anticipate a material
effect on consolidated results of operations or financial position related
to the adoption of this statement.
PRIOR YEAR. Effective January 1, 1995, Franklin adopted 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.
F-16
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.4 ACCOUNTING CHANGES - PRIOR YEARS (CONTINUED)
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 assumptions used to compute estimated gross profits were 7.75%
and 8.5% at December 31, 1996 and 1995, respectively. The initial effect
of adopting this statement was recorded as part of purchase accounting.
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.
1.5 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES. All fixed maturity securities and
equity securities are classified as available-for-sale and recorded at fair
value. After adjusting related balance sheet accounts as if unrealized
gains (losses) had been realized, the net adjustment is recorded in net
unrealized gains (losses) on securities within shareholder's equity. If
the fair value of a security classified as available-for-sale declines
below its cost and this decline is considered to be other than temporary,
the security is reduced to its fair value, and the reduction is recorded as
a realized loss.
MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of an
allowance for losses. The allowance for losses covers all non-performing
loans, consisting of loans delinquent 60 days or more and loans that have
been restructed. 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.
POLICY LOANS. Policy loans are reported at unpaid principal balance.
F-17
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.5 INVESTMENTS (CONTINUED)
INVESTMENT INCOME. Interest on fixed maturity securities and performing
and restructured mortgage loans is recorded as income when earned and is
adjusted for any amortization of premium or discount. Interest on
delinquent mortgage loans is recorded as income when received. Dividends
are recorded as income on ex-dividend dates.
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 gains (losses) on securities classified
as "trading securities" prior to January 31, 1995.
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)
Certain 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 contracts,
participating life insurance contracts and insurance 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.
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 also included in net
unrealized gains (losses) on securities within shareholder's equity.
Franklin reviews the carrying amount of DPAC on at least an annual basis.
In determining whether the carrying amount is recoverable, 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.
F-18
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.8 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to insurance contracts in force at January 31, 1995 is
reported 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 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.
1.10 INSURANCE LIABILITIES
Substantially all of Franklin's insurance liabilities relate to
long-duration contracts, which generally require performance over a period
of more than one year. The contract provisions normally cannot be changed
or canceled by Franklin during the contract period.
For interest-sensitive life insurance and investment contracts, reserves
equal the sum of the policyholder account balances and deferred revenue
charges. Reserves for non-participating long-duration contracts are based
on estimates of the cost of future policy benefits to be paid as a result
of present and future claims due to death, disability, surrender of a
policy, or payment of an endowment. Reserves are determined using the net
level premium method. Interest assumptions used to compute reserves ranged
from 2.0% to 8.5% at December 31, 1996.
1.11 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.
F-19
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.11 PREMIUM RECOGNITION (CONTINUED)
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.
1.12 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 47% and 48% of life
insurance in force at December 31, 1996 and 1995, respectively, and 62%,
58%, 69% and 61% of premiums and other considerations for the year ended
December 31, 1996, the eleven months ended December 31, 1995, the one month
ended January 31, 1995, and the year ended December 31, 1994, 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.
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.
1.14 RECLASSIFICATION
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
F-20
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Investments
2.1 INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------
In millions 1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 434.6 $ 394.3 $ 33.9 $ 400.8
Mortgage loans on real estate 58.8 54.3 4.6 54.9
Policy loans 18.9 18.6 1.7 18.3
Other investments 13.5 9.1 1.2 12.2
---------------------------------------------------------
Gross investment income 525.8 476.3 41.4 486.2
Investment expense 4.3 7.5 0.1 7.5
---------------------------------------------------------
Net investment income $ 521.5 $ 468.8 $ 41.3 $ 478.7
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
The carrying value of investments that produced no investment income during
1996 totaled $11.3 million, or less than 0.2% 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 or financial
position.
F-21
<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
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------
In millions 1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 25.0 $ 13.8 $ - $ 17.4
Gross losses 17.6 (1.9) - (0.9)
---------------------------------------------------------
Total fixed maturity securities 7.4 11.9 - 16.5
---------------------------------------------------------
Equity securities
Gross gains 1.8 1.9 4.1 23.2
Gross losses - (0.5) (5.4) (49.4)
---------------------------------------------------------
Total equity securities 1.8 1.4 (1.3) (26.2)
---------------------------------------------------------
Other (6.7) (6.1) (6.3) (4.7)
Realized investment gains (losses) $ 2.5 $ 7.2 $ (7.6) $ (14.4)
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
Voluntary sales of investments resulted in the following
realized gains(losses):
<TABLE>
<CAPTION>
Realized
-----------------------
In millions Category Proceeds Gains Losses
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1996 AVAILABLE-
FOR-SALE $ 807.0 $ 21.8 $ (15.4)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Eleven Months Ended
December 31, 1995 Available-
for-sale $ 268.7 $ 8.5 $ (0.4)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
One Month Ended
January 31, 1995 Trading $ 84.7 $ 4.1 $ (5.4)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Year Ended
December 31, 1994 Trading $ 236.7 $ 23.2 $ (49.4)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES
VALUATION. At December 31, 1996 and 1995, all fixed maturity and equity
securities were classified as available-for-sale and reported at fair
value. Amortized cost and fair value of fixed maturity and equity
securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In millions COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $ 2,747.7 $ 170.2 $ 6.3 $ 2,911.6
Below investment grade 239.7 9.0 1.4 247.3
Public utilities 1,064.7 86.9 - 1,151.6
Mortgage-backed 802.1 41.9 1.4 842.6
Foreign governments 96.2 11.0 - 107.2
U.S. government 190.1 13.9 0.1 203.9
States/political subdivisions 11.5 0.5 - 12.0
Redeemable preferred stocks 0.3 - - 0.3
--------------------------------------------------------
Total fixed maturity securities $ 5,152.3 $ 333.4 $ 9.2 $ 5,476.5
--------------------------------------------------------
--------------------------------------------------------
Equity securities $ 2.0 $ 3.0 $ - $ 5.0
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
F-23
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In millions COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $ 2,851.8 $ 303.4 $ (2.8) $ 3,152.4
Below investment grade 188.1 11.9 (0.7) 199.3
Public utilities 1,241.5 156.6 - 1,398.1
Mortgage-backed 520.7 62.3 (0.7) 582.3
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 $ 5,109.5 $ 576.5 $ (4.2) $ 5,681.8
--------------------------------------------------------------
--------------------------------------------------------------
Equity securities $ 2.4 $ 1.3 $ - $ 3.7
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
F-24
<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, 1996 were as follows:
DECEMBER 31, 1996
-----------------------------
AMORTIZED FAIR
In millions COST VALUE
---------------------------------------------------------------------
FIXED MATURITY SECURITIES, EXCLUDING
MORTGAGE-BACKED SECURITIES
Due in one year or less $ 112.0 $ 113.0
Due after one year through
five years 618.1 645.2
Due after five years through
ten years 1,935.0 2,046.9
Due after ten years 1,685.1 1,828.8
Mortgage-backed securities 802.1 842.6
------------------------------
Total fixed maturity securities $5,152.3 $5,476.5
------------------------------
------------------------------
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Investment strategies
may result in the sale of investments before maturity.
F-25
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.4 NET UNREALIZED GAINS ON SECURITIES
----------------------------------
Net unrealized gains on available-for-sale securities included in
shareholder's equity at December 31 were as follows:
DECEMBER 31
----------------------------
In millions 1996 1995
- --------------------------------------------------------------------------
Gross unrealized gains $ 336.4 $ 577.8
Gross unrealized losses (9.2) (4.2)
DPAC fair value adjustment (0.4) (11.7)
CIP fair value adjustment (160.9) (270.0)
Participating policyholders'
interest (1.8) (3.4)
Deferred federal income taxes (57.5) (101.0)
----------------------------
Net unrealized gains
on securities $ 106.6 $ 187.5
----------------------------
----------------------------
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 was as follows:
ONE MONTH
ENDED YEAR ENDED
JANUARY 31 DECEMBER 31
----------------------------
In millions 1995 1994
- -------------------------------------------------------------------------
Change in unrealized holding gain
or loss on trading securities $ 2.2 $ (5.3)
Deferred income taxes (0.8) 1.9
----------------------------
Change in net unrealized holding
gain or loss on trading securities $ 1.4 $ (3.4)
----------------------------
----------------------------
F-26
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE
-----------------------------
DIVERSIFICATION. Diversification of the geographic location and type of
property collateralizing mortgage loans reduces the concentration of credit
risk. For new loans, Franklin requires loan-to-value ratios of 75% or
less, based on management's credit assessment of the borrower. At December
31, the mortgage loan portfolio was distributed as follows:
DECEMBER 31
----------------------------
In millions 1996 1995
- --------------------------------------------------------------------------
Geographic distribution
East North Central $ 120.0 $ 135.3
East South Central 37.8 39.1
Mid Atlantic 21.5 17.9
Mountain 58.1 42.9
New England 19.2 20.6
Pacific 104.3 102.0
South Atlantic 167.7 153.8
West North Central 35.4 40.2
West South Central 57.9 56.2
Allowance for losses (14.9) (12.7)
- --------------------------------------------------------------------------
Total $ 607.0 $ 595.3
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Property type
Retail $ 312.3 $ 296.3
Office 147.5 159.7
Industrial 89.4 99.9
Residential and other 72.7 52.1
Allowance for losses (14.9) (12.7)
- --------------------------------------------------------------------------
Total $ 607.0 $ 595.3
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
F-27
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
-----------------------------------------
IMPAIRED LOANS. The carrying value of impaired mortgage loans on real
estate and related interest income were as follows:
As of and for the
Eleven Months
YEAR ENDED Ended
DECEMBER 31 December 31
------------------------------
In millions 1996 1995
-------------------------------------------------------------------
Impaired loans
With allowance * $ 21.4 $ 5.3
Without allowance - 17.8
------------------------------
Total impaired loans $ 21.4 $ 23.1
------------------------------
------------------------------
Average investment $ 22.3 $ 27.4
------------------------------
------------------------------
Interest income earned $ 1.5 $ 1.3
------------------------------
------------------------------
* Represents gross amounts before allowance for mortgage loan losses of
$4.9 million and $1.6 million at December 31, 1996 and 1995,
respectively.
ALLOWANCE. The allowance for mortgage loan losses was as follows:
Eleven Months One Month
YEAR ENDED Ended Ended
DECEMBER 31 December 31 January 31
---------------------------------------
In millions 1996 1995 1995
- -----------------------------------------------------------------------------
Balance at beginning of period $ 12.7 $ 8.5 $ -
Net additions * 2.2 4.2 8.5
---------------------------------------
Balance at end of period $ 14.9 $ 12.7 $ 8.5
---------------------------------------
---------------------------------------
* Charged to realized investment gains (losses).
F-28
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.6 INVESTMENTS ON DEPOSIT
----------------------
At December 31, 1996 and 1995, bonds and other investments carried at $22.6
million and $25.0 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, 1996 and
1995, Franklin's largest investment in any one entity other than U.S.
government obligations and related party amounts was $64.6 million and
$66.1 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
----------------------------------------------------------
1996 1995
----------------------------------------------------------
CARRYING FAIR Carrying Fair
In millions AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $ 5,476.5 $ 5,476.5 $ 5,681.8 $ 5,681.8
Mortgage loans on real estate 607.0 637.7 595.3 628.6
Equity securities 5.0 5.0 3.7 3.7
Liabilities
Insurance investment contracts $(1,967.9) $(1,892.9) $(1,985.0) $(1,901.3)
Dividend accumulations $ (755.9) $ (755.9) $ (731.0) $ (731.0)
</TABLE>
F-29
<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.
Care should be exercised in drawing conclusions from the estimated fair
value, since the estimates are based on assumptions regarding future
economic activity.
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 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.
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.
DIVIDEND ACCUMULATIONS. Fair value disclosed for dividend accumulations
equals the amount of dividend payable on demand at the reporting date.
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 1996 and 1995.
F-30
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Deferred Policy Acquisition Costs (DPAC)
An analysis of the changes in the DPAC asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Ended Ended Year Ended
DECEMBER 31 December 31 January 31 December 31
----------------------------------------------------------
In millions 1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ 47.5 $ - $ 510.6 $ 470.5
Capitalization 56.2 67.7 8.5 111.4
Amortization (10.7) (8.3) (5.8) (71.3)
Effect of unrealized gains on securities 11.3 (11.7) - -
Effect of realized investment gains (0.4) (0.2) - -
Adjustment for the acquisition (a) - - (513.3) -
Other (21.9) - - -
----------------------------------------------------------
End of period balance $ 82.0 $ 47.5 $ - $ 510.6
----------------------------------------------------------
----------------------------------------------------------
(a) Represents the necessary elimination of the historical DPAC asset required by purchase accounting.
</TABLE>
F-31
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP)
An analysis of the changes in the CIP asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Ended Ended Year Ended
DECEMBER 31 December 31 January 31 December 31
----------------------------------------------------------
In millions 1996 1995 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ 353.0 $ 656.6 $ 174.7 $ 169.9
Interest accretion 51.8 49.0 2.0 24.9
Additions 13.6 41.3 - 13.8
Amortization (116.5) (118.0) (2.8) (33.9)
Effect of unrealized gains
on securities 109.1 (270.0) - -
Effect of realized investment
gains (3.2) (5.9) - -
Incremental adjustment for
the acquisition (a) - - 482.7 -
----------------------------------------------------------
End of period balance $ 407.8 $ 353.0 $ 656.6 $ 174.7
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
(a) Represents the incremental amount necessary to recognize the new CIP
asset attributable to the January 31, 1995 acquisition.
CIP amortization, net of interest accretion and additions, expected to be
recorded in each of the next five years is $45.3 million, $41.7 million,
$38.4 million, $35.3 million, and $32.4 million.
6. Separate Accounts
Franklin administers three Separate Accounts for variable annuity
contracts. AMFLIC administers two Separate Accounts in connection with the
issuance of its Variable Universal Life product.
F-32
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes
Franklin and its life insurance company subsidiaries are subject to the
life insurance company provisions of the federal tax law.
Franklin files a life/life consolidated return which includes Franklin and
AMFLIC. FFSC, a broker-dealer and wholly-owned subsidiary of Franklin,
files a separate return. The 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:
In millions 1996 1995
---------------------------------------------------------------------
Deferred tax liabilities, applicable to:
Basis differential of investments $ 63.1 $ 151.9
DPAC and CIP 124.6 99.5
Other 15.7 27.0
------------------------
Total deferred tax liabilities 203.4 278.4
------------------------
Deferred tax assets, applicable to:
Policy reserves (128.3) (115.6)
Participating policyholders' interests (73.6) (69.9)
Postretirement benefits (4.0) (4.0)
Basis differential of investments (7.7) (14.4)
Other (8.8) (24.7)
------------------------
Total deferred tax assets (222.4) (228.6)
------------------------
Net deferred tax (asset) liability $ (19.0) $ 49.8
------------------------
------------------------
Franklin expects adequate future taxable income to realize the net deferred
tax assets. Accordingly, no valuation allowance is considered necessary.
A portion of life insurance income earned prior to 1984 is not taxable
unless it exceeds certain statutory limitations or is distributed as
dividends. Such income, accumulated in policyholders' surplus accounts,
totaled $200 million at December 31, 1996. 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.
F-33
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.2 TAX EXPENSE
-----------
A reconciliation between the federal income tax rate and the effective
income tax rate follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Ended Ended Year Ended
DECEMBER 31 December 31 January 31 December 31
--------------------------------------------------------------
1996 1995 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0% 35.0%
State taxes, net 0.3 0.9 36.3 1.1
Tax-exempt investment income (0.7) (0.6) (39.3) 0.7
Amortization of goodwill - - 34.3 1.0
Other 0.2 0.6 0.4 1.4
--------------------------------------------------------------
Effective tax rate 34.8% 35.9% 66.7% 39.2%
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
7.3 TAXES PAID
----------
Federal income taxes paid for the year ended December 31, 1996, the eleven
months ended December 31, 1995 and the year ended December 31, 1994 were
$74 million, $53 million, and $65 million, respectively. State income
taxes paid for the year ended December 31, 1996, the eleven months ended
December 31, 1995 and the year ended December 31, 1994, were $2 million, $1
million, and $3 million, respectively.
There were no federal or state income taxes paid during January 1995.
8. Benefit Plans
8.1 PENSION PLANS
-------------
On January 1, 1996, Franklin's existing defined benefit pension plan (The
Franklin Plan) was merged with the plan sponsored by AGC (the AGC Plan).
The AGC Plan covers most Franklin employees. Under the AGC Plan, pension
benefits are based on the participant's average monthly compensation and
length of credited service. AGC's funding policy is to contribute annually
no more than the maximum amount deductible for federal income tax purposes.
Equity and fixed maturity securities were 60% and 35%, respectively, of the
AGC Plan's assets at December 31, 1996.
F-34
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
-------------------------
The net pension cost and the computation of the projected benefit
obligation for years prior to January 1, 1996 were based on the provisions
of the Franklin Plan. The Franklin Plan provided for the payment of
retirement benefits; normally commencing at age 65, and also for the
payment of certain disability benefits. After meeting certain
qualifications, an employee acquired a vested right to future benefits.
Pension benefits were based on the participant's average monthly
compensation and length of credited service. Annual contributions made to
the plan were sufficient to satisfy legal funding requirements.
Fixed maturity securities constituted the majority of The Franklin Plan's
assets at December 31, 1995.
Prior to January 1, 1996, The Franklin Plan purchased annuity contracts
from Franklin to provide benefits for its retirees. For the eleven months
ended December 31, 1995, the one month ended January 31, 1995 and the year
ended December 31, 1994, these contracts provided approximately $3.9
million, $0.3 million, 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 Franklin Plan in 1995 to provide full retirement benefits for
these employees who elected to retire under the program.
Net pension cost included the following components:
<TABLE>
<CAPTION>
Eleven Months One Month Year
YEAR ENDED Ended Ended Ended
DECEMBER 31 December 31 January 31 December 31
--------------------------------------------------------------------------
In Millions 1996 1995 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned) $ 0.8 $ 0.9 $ 0.2 $ 2.8
Interest cost 2.0 3.7 0.4 4.2
Actual return on plan assets (7.8) (11.5) (0.4) 2.5
Net amortization and deferral 4.6 6.3 - (6.7)
--------------------------------------------------------------------------
Pension (income) expense $ (0.4) $ (0.6) $ 0.2 $ 2.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
F-35
<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:
In million 1996 1995
---------------------------------------------------------------------------
Accumulated benefit obligation, primarily vested $ 27.0 $ 27.6
Effect of increase in compensation levels 0.2 -
----------------------
Projected benefit obligation 27.2 27.6
Plan assets at fair value 35.5 31.3
----------------------
Plan assets at fair value in excess of projected
benefit obligation 8.3 3.7
Other unrecognized items, net 3.0 7.4
----------------------
Prepaid pension expense $ 11.3 $ 11.1
----------------------
----------------------
Weighted-average discount rate on benefit obligation 7.50% 7.25%
Rate of increase in compensation levels 4.00 4.00
Expected long-term rate of return on plan assets 10.00 10.00
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-36
<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:
In millions 1996 1995
-------------------------------------------------------------
Actuarial present value of
benefit obligation
Retirees $ 7.3 $ 8.9
Active plan participants
Fully eligible 0.2 1.1
Other 1.8 2.5
-------------------------
Accumulated postretirement
benefit obligation (APBO) 9.3 12.5
Unrecognized net gain 2.2 (1.4)
-------------------------
Accrued benefit cost $ 11.5 $ 11.1
-------------------------
-------------------------
Weighted-average discount
rate on benefit obligation 7.50% 7.25%
Postretirement benefit expense was as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Ended Ended Year
DECEMBER 31 Ended December 31 January 31 December 31
----------------------------------------------------------------
In millions 1996 1995 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned) $ 0.1 $ 0.1 $ - $ 1.1
Interest cost 0.7 0.9 (0.2) 2.8
----------------------------------------------------------------
Postretirement benefit expense
(income) $ 0.8 $ 1.0 $ (0.2) $ 3.9
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1997; the rate was
assumed to decrease gradually to 5% by the year 2005 and remain at that
level. A 1% increase in the assumed rate results in a $0.1 million
increase in the accumulated postretirement benefit obligation and no
increase in postretirement benefit expense.
F-37
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Statutory Accounting
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity of insurance companies. In
addition, state regulators may permit 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, 1996 and 1995, Franklin had statutory shareholder's equity
of $431.0 million and $386.0 million, respectively. Statutory net income
was $123.2 million, $100.2 million, and $28.7 million for the years ended
December 31, 1996, 1995, and 1994, respectively.
As determined on a statutory basis, the statutory shareholder's equity and
net income of subsidiaries, were reported as follows:
STATUTORY
---------------------------------------
In millions 1996 1995 1994
- --------------------------------------------------------------------------
Shareholder's Equity $ 18.1 $ 9.9 $ 17.5
---------------------------------------
---------------------------------------
Net Income $ (1.9) $ (4.7) $ (4.8)
---------------------------------------
---------------------------------------
Generally, Franklin is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends,
loans, or advances without the approval of the Illinois Insurance
Department. Under these restrictions, during 1997, loans or advances in
excess of $107.8 million and dividends in any twelve-month period
aggregating in excess of $123.2 million will require 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, and also
received approval to pay an extraordinary dividend of $60 million to AGCL.
F-38
<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, occurred:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Ended Ended Year Ended
DECEMBER 31 December 31 January 31 December 31
--------------------------------------------------------------------------
In millions 1996 1995 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest added to annuity and other
financial products $ 173.3 $ 168.3 $ 14.0 $ 170.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Fair value of assets acquired under
certain assumed reinsurance treaties $ - $ 14.7 $ - $ 18.3
--------------------------------------------------------------------------
Insurance liabilities assumed $ - $ 14.7 $ - $ 18.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</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-39
<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
YEAR ENDED Ended Ended Year Ended
DECEMBER 31 December 31 January 31 December 31
--------------------------------------------------------------------------
In millions 1996 1995 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct premiums and other
considerations $ 491.5 $ 500.1 $ 36.8 $ 507.1
Reinsurance assumed 15.9 44.2 (0.8) 114.7
Reinsurance ceded (88.8) (94.7) (1.5) (119.1)
- ------------------------------------------------------------------------------------------------------
Premiums and other
considerations $ 418.6 $ 449.6 $ 34.5 $ 502.7
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $67.3 million,
$63.3 million, $1.4 million and $69.6 million for the year ended December
31, 1996, the eleven months ended December 31, 1995, the one month ended
January 31, 1995, and the year ended December 31, 1994, respectively. The
amount of reinsurance recoverable (payable) on paid and unpaid losses was
$1.8 million, $0.4 million and $(1.0) million at December 31, 1996, 1995,
and 1994, respectively.
12. Related Party Transactions
Franklin participates in a program of short-term borrowing with AGC to
maintain its long-term commitments. Franklin borrowed $62.1 million and
$105.2 million, and repaid $62.2 million and $105.1 million in 1996 and
1995, respectively. Interest was paid on the outstanding balances based on
the Federal Reserve Board's monthly average H.15 rate for 30-day commercial
paper.
During 1995, Franklin purchased a 6.75% promissory note from AGCL for
$116.0 million to mature in 2005.
During 1995, Franklin received $8.5 million of 8% non-voting preferred
stock of American General Life Insurance Company as consideration for the
sale of FULIC.
F-40
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Related Party Transactions (continued)
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 for the year ended December 31, 1996 and $1.1
million for the eleven months ended December 31, 1995.
13. Legal Proceedings
Franklin and its subsidiaries are parties to various lawsuits and
proceedings arising in the ordinary course of business. Many of these
lawsuits and proceedings arise in jurisdictions, such as Alabama, that
permit damage awards disproportionate to the actual economic damages
incurred. Based upon information presently available, Franklin believes
that the total amounts that will ultimately be paid, if any, arising from
these lawsuits and proceedings will have no material adverse effect on
Franklin's consolidated results of operations and financial position.
However, it should be noted that the frequency of large damage awards,
including large punitive damage awards, that bear little or no relation to
actual economic damages incurred by plaintiffs in jurisdictions like
Alabama continues to increase and creates the potential for an
unpredictable judgment in any given suit.
14. State Guaranty Associations
State guaranty fund expense included in operating costs and expenses was
$0.7 million, $0.2 million, $0.6 million, and $2.3 million for the year
ended December 31, 1996, the eleven months ended December 31, 1995, the one
month ended January 31, 1995, and the year ended December 31, 1994,
respectively. Amounts assessed Franklin by state life and health insurance
guaranty funds resulting from past industry insolvencies were $0.1 million,
$0.1 million, $0.6 million, and $2.3 million for the year ended December
31, 1996, the eleven months ended December 31, 1995, the one month ended
January 31, 1995, and the year ended December 31, 1994. These assessments
are expected to be partially recovered through credits against the payment
of future premium taxes.
The accrued liability for anticipated assessments was $7.5 million and $8.5
million at December 31, 1996 and 1995, respectively. Franklin has recorded
a receivable of $11.2 million at December 31, 1996 and 1995, for expected
recoveries against the payment of future premium taxes.
The 1996 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-41
<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, 1996
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, 1996
Statement of Operations for the year ended December 31, 1996
Statements of Changes in Contract Owners' Equity for the two
years ended December 31, 1996
Portfolio of Investments, December 31, 1996
Notes to Financial Statements
Supplementary Information - Per-Unit Income and Changes in
Accumulation Unit Value for the five years ended December
31, 1996
The Franklin Life Insurance Company and Subsidiaries:
Reports of Independent Auditors and Accountants
Financial Statements:
Consolidated Balance Sheet, December 31, 1996 and 1995
Consolidated Statement of Income for the year ended
December 31, 1996, the eleven months
ended December 31, 1995, the one month ended January
31, 1995, and year ended December 31, 1994
Consolidated Statement of Shareholder's Equity for the
year ended December 31, 1996, the eleven months ended
December 31, 1995, the one month ended January 31,
1995, and year ended December 31, 1994
Consolidated Statement of Cash Flows for the year ended
December 31, 1996, the eleven months ended December
31, 1995, the one month ended January 31, 1995, and
year ended December 31, 1994
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).
C-1
<PAGE>
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 is incorporated herein by reference to Exhibit
3 to Post-Effective Amendment No. 42 to Registrant's
Registration Statement on Form N-3, filed April 30, 1996.
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).
(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).
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<PAGE>
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 Sutherland, Asbill & Brennan, L.L.P.
14 - 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 Robert G. Spencer and Elizabeth E.
Arthur, the only directors or officers of The Franklin who hold positions or
offices with the Fund, is hereby incorporated herein by reference to the table
under "Management" in the Statement of Additional Information.
Item 30. Persons Controlled by or under Common Control with the Insurance
Company or Registrant.
There is no person controlled by or under common control with Registrant.
The Franklin is an indirect wholly-owned subsidiary of American General
Corporation ("AGC"). A list of the subsidiaries of AGC is set forth below.
The following chart sets forth the identities of, and the
interrelationships among, AGC and all affiliated persons within the holding
company system.
The following is a list of American General Corporation's subsidiaries as
of December 31, 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(*).
NAME JURISDICTION OF INCORPORATION INSURER
- ---- ----------------------------- -------
AGC Life Insurance Company ("AGCL")(3) MO Yes
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
Southern Educators Life Insurance Company GA Yes
American General Life Insurance Company TX Yes
American General Annuity Service Corporation TX No
American General Life Insurance Company of New York NY Yes
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<PAGE>
NAME JURISDICTION OF INCORPORATION INSURER
- ---- ----------------------------- -------
The Winchester Agency Ltd. NY No
American General Securities Incorporated ("AGSI")(4) 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
VALIC Investment Services Company TX No
VALIC Retirement Services Company TX No
The Independent Life and Accident Insurance Company FL Yes
Independent Fire Insurance Company FL Yes
Independent Fire Insurance Company of Florida FL Yes
Old Faithful General Agency, Inc. TX No
Thomas Jefferson Insurance Company FL Yes
Independent Property & Casualty Insurance Company FL Yes
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 (5) IN No
American General Finance Group, Inc. DE No
American General Financial Services, Inc. (6) 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
American General Financial Center Thrift Company* CA No
Thrift, Incorporated* IN No
American General Realty Investment Corporation TX No
American General Mortgage Company 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
C-4
<PAGE>
NAME JURISDICTION OF INCORPORATION INSURER
- ---- ----------------------------- -------
American General Property Insurance Company TN Yes
Bayou Property Company DE No
AGLL Corporation ("AGLL")(7) DE No
American General Land Holding Company ("AGLH") DE No
AG Land Associates, LLC(7) CA No
Hunter's Creek Realty, Inc.* FL No
Summit Realty Company, Inc. SC No
Lincoln American Corporation DE No
Financial Life Assurance Company of Canada Canada Yes
Florida GL Corporation DE No
GPC Property Company DE No
Cinco Ranch Development Corporation TX No
Cinco Ranch East Development, Inc. DE No
Cinco Ranch West Development, Inc. DE No
The Colonies Development, Inc. DE No
Fieldstone Farms Development, Inc. DE No
Hickory Downs Development, Inc. DE No
Lake Houston Development, Inc. DE No
South Padre Development, Inc. DE No
Green Hills Corporation DE No
INFL Corporation DE No
Knickerbocker Corporation TX No
American Athletic Club, Inc. TX 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) On November 26, 1996, American General Institutional Capital A ("AG Cap
Trust"), a Delaware business trust was created. AG Cap Trust's business and
affairs are conducted through its trustees: Bankers Trust Company and
Bankers Trust (Delaware). Capital securities of AG Cap Trust are held by
non-affiliated third party investors and common securities of AG Cap Trust
are held by AGC.
(3) On December 23, 1994 AGCL became the owner of approximattely 40% of the
shares of common stock of Western National Corporation ("WNC") (DE). The
percentage of ownership by AGCL would increase to approximately 46% upon
conversion of WNC's Series A Convertible Preferred Stock which AGCL also owns.
WNC owns the following companies:
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.
C-5
<PAGE>
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.
(4) The following companies are indirectly controlled by, or related to, AGSI:
American General Insurance Agency of Ohio, Inc.
American General Insurance Agency of Texas, Inc.
American General Insurance Agency of Oklahoma, Inc.
Insurance Masters Agency, Inc.
(5) 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.
(6) 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.
(7) 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 21, 1997, the number of record holders of the sole class of
securities of Registrant was as indicated below:
(1) (2)
Title of Class Number of Record Holders
- ----------------------------------------------
Accumulation Units Under 5,008
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
C-6
<PAGE>
(1) (2)
Name Business or Employment
----------------------------------- ------------------------------
Earl W. Baucom. . . . . . . . . . . Senior Vice President and
Chief Financial Officer, The
Franklin, since June 10,
1996; Director, The Franklin,
since August 21, 1996; Chief
Financial Officer, Providian
Direct Insurance, from
October, 1993 to December,
1995.
Robert M. Beuerlein . . . . . . . . Senior Vice President-
Actuarial and Director, The
Franklin
Mark R. Butler. . . . . . . . . . . Vice President - Management
Development Director, The
Franklin
Philip D. Calderwood. . . . . . . . Vice President and Actuary,
The Franklin
Eldon R. Canary . . . . . . . . . . Vice President - Actuarial,
The Franklin
Brady W. Creel. . . . . . . . . . . Senior Vice President, Chief
Marketing Officer and
Director, The Franklin, since
September 3, 1996; Regional
Manager, The Franklin, prior
to September, 1996.
Robert M. Devlin. . . . . . . . . . Chairman of the Board, The
Franklin, since August 21,
1996; Director, The Franklin,
since February, 1995; Senior
Chairman, The Franklin, from
February, 1995 to August,
1996; Chief Executive
Officer, American General
Corporation, Houston, Texas,
since October 24, 1996;
Director, American General
Corporation; President,
American General Corporation,
from October, 1995 to
October, 1996; Vice Chairman,
American General Corporation,
prior to October, 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.
Ross D. Friend. . . . . . . . . . . Senior Vice President, General
Counsel, Secretary, and
Director, The Franklin, since
September 3, 1996; Attorney-
in-Charge, Prudential Life
Insurance Company,
Jacksonville, Florida, from
July, 1995 to September,
1996; Chief Legal Officer,
Confederation Life Insurance
Company, Atlanta, Georgia,
prior to July, 1995.
C-7
<PAGE>
(1) (2)
Name Business or Employment
----------------------------------- ------------------------------
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.
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 . . . . . . . . . Vice President, The Franklin
Margaret L. Manola. . . . . . . . . Vice President, The Franklin
Thomas K. McCracken . . . . . . . . Vice President, The Franklin
Mark R. McGuire . . . . . . . . . . Vice President, The Franklin,
since January 6, 1997;
Consultant/Manager, American
General Life Insurance
Company, Houston, Texas,
prior to January, 1997.
Sylvia A. Miller. . . . . . . . . . Vice President, The Franklin
Cheryl E. Morton. . . . . . . . . . Vice President - Actuarial,
The Franklin
Jon P. Newton . . . . . . . . . . . Director and Vice Chairman,
The Franklin, since January
31, 1996; Vice Chairman and
General Counsel, American
General Corporation, 2929
Allen Parkway, Houston, Texas
77019 since October 26, 1995;
Senior Vice President and
General Counsel, American
General Corporation, prior
thereto
John M. Pruitt. . . . . . . . . . . Vice President and Director of
Sales Services, The Franklin
James M. Quigley. . . . . . . . . . Vice President, The Franklin,
since August 24, 1995.
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.
Dale W. Sachtleben. . . . . . . . . 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
T. Clayton Spires . . . . . . . . . Director, Corporate Tax, The
Franklin, since February 3,
1997; Assistant Vice
President and Tax Manager,
First Colony Life, Lynchburg,
Virginia, prior to February,
1997.
C-8
<PAGE>
(1) (2)
Name Business or Employment
----------------------------------- ------------------------------
Peter V. Tuters . . . . . . . . . . Director, Vice President and
Chief Investment Officer, The
Franklin since February 22,
1995; Senior Vice President
since 1992 and Chief
Investment Officer since
December, 1993, American
General Corporation, 2929
Allen Parkway, Houston, Texas
77019
J. Alan Vala. . . . . . . . . . . . Vice President and Agency
Secretary, The Franklin
David G. Vanselow . . . . . . . . . Vice President, The Franklin
Cynthia P. Wieties. . . . . . . . . Director of Communications,
The Franklin, since March 19,
1997; Assistant Vice
President, The Franklin,
prior to March, 1997.
Item 34. Principal Underwriters.
(a) Franklin Life Variable Annuity Fund B, Franklin Life Money Market
Variable Annuity Fund C, Separate Account VUL and Separate Account VUL-2 of The
American Franklin Life Insurance Company, which offer interests in flexible
premium variable life insurance policies, and Separate Account VA-1 of The
American Franklin Life Insurance Company, which offers interests in variable
annuity contracts (The American Franklin Life Insurance Company is a
wholly-owned subsidiary of The Franklin), are the only investment companies
(other than Registrant) for which Franklin Financial Services Corporation, the
principal underwriter of Registrant, also acts as principal underwriter,
depositor, sponsor or investment adviser.
(b) Information required with respect to each director or officer of the
principal underwriter of Registrant is set forth below. Unless otherwise
indicated below, the principal business address of each individual is c/o The
Franklin Life Insurance Company, #1 Franklin Square, Springfield, Illinois
62713.
(1) (2) (3)
Name Positions and Offices with Underwriter Positions and
Offices with Registrant
- -------------------------------------------------------------------------------
Elizabeth E. Arthur Assistant Secretary Secretary to the
Board of Managers
Bruce R. Baker Assistant Vice President and None
665 North Newbridge Road Marketing Officer
Levitttown, NY 11756
Earl W. Baucom Treasurer and Director None
Robert M. Beuerlein Senior Vice President None
Tony Carter Vice President None
2900 Greenbrier Drive
Springfield, IL 62704
Peter Dawson Assistant Vice President and None
665 North Newbridge Road Marketing Officer
Levittown, NY 11756
C-9
<PAGE>
(1) (2) (3)
Name Positions and Offices with Underwriter Positions and
Offices with Registrant
- --------------------------------------------------------------------------------
Ross D. Friend Director, Vice President None
and Secretary
John E. Froberg Vice President None
Robert J. Gibbons Chairman of the Board and None
Chief Executive Officer
James L. Gleaves Assistant Treasurer None
2929 Allen Parkway
Houston, TX 77019
Deanna Osmonson Vice President None
and Assistant Secretary
Gary D. Osmonson President and Director None
Gary D. Reddick Executive Vice President None
James C. Rundblom Chief Financial Officer None
Dan E. Trudan Vice President and Assistant Secretary None
(c) Information regarding commissions and other compensation received by each
principal underwriter, directly or indirectly, from Registrant during 1996,
Registrant's last fiscal year, is set forth below:
(1) (2) (3) (4) (5)
NAME OF NET COMPENSATION ON
PRINCIPAL UNDERWRITING REDEMPTION OR BROKERAGE OTHER
UNDERWRITERS DISCOUNTS ANNUITIZATION COMMISIONS COMPENSATION
- --------------------------------------------------------------------------------
Franklin
Financial
Services
Corporation $14,575 -0- -0- -0-
Item 35. Location of Accounts and Records.
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 and Representations.
(b) The Registrant hereby undertakes to file a post-effective amendment to
this Registration Statement as frequently as is necessary to ensure that the
audited financial statements in the Registration Statement are never more than
16 months old for so long as payments under the Contracts may be accepted.
(c) The Registrant hereby undertakes to include either (1) as part of any
application to purchase a Contract offered by the Prospectus, a space that the
applicant can check to request a Statement of Additional Information, or (2) a
post card or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information.
(d) The Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statements required to be made available under
this Form N-3 promptly upon written or oral request.
C-10
<PAGE>
(e) The Registrant is relying upon the "no-action" letter of the
Securities and Exchange Commission dated November 28, 1988 in response to the
American Council of Life Insurance with respect to restrictions on withdrawal of
amounts from Contracts issued in connection with annuity purchase plans meeting
the requirements of Internal Revenue Code Section 403(b), which amounts are
attributable to contributions made on or after January 1, 1989 pursuant to a
salary reduction agreement or to income earned on or after January 1, 1989 with
respect to contributions made pursuant to a salary reduction agreement. The
Registrant represents that it has complied with the requirement of numbered
paragraphs (1) through (4) of such "no-action" letter.
(f) The Franklin Life Insurance Company hereby represents that the fees and
charges deducted under the Contracts, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by The Franklin Life Insurance Company.
C-11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 ("1933 Act")
and the Investment Company Act of 1940 ("1940 Act"), Franklin Life 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 24th day of April, 1997.
FRANKLIN LIFE VARIABLE ANNUITY FUND A
By: /S/ ELIZABETH E. ARTHUR
----------------------------------
(Elizabeth E. Arthur, Secretary, Board of Managers)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
Signature Title Date
/S/ CLIFFORD L. GREENWALT* Member, Board April 24, 1997
- --------------------------------- of Managers
(Clifford L. Greenwalt)
/S/ ROBERT C. SPENCER* Member, Board April 24 , 1997
- --------------------------------- of Managers
(Robert.C. Spencer)
/S/ ROBERT G. SPENCER* Chairman, Board April 24 , 1997
- --------------------------------- of Managers
(Robert G. Spencer)
/S/ JAMES W. VOTH* Member, Board April 24 , 1997
- --------------------------------- of Managers
(James W. Voth)
/S/ ELIZABETH E. ARTHUR Secretary, Board April 24 , 1997
- --------------------------------- of Managers
(Elizabeth E. Arthur)
/S/ ELIZABETH E. ARTHUR
- ---------------------------------
*By Elizabeth E. Arthur, Attorney-in-Fact
C-12
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 ("1933
Act") and the Investment Company Act of 1940 ("1940 Act"), The Franklin Life
Insurance Company certifies that it meets the requirements of 1933 Act Rule
485(b) for effectiveness of this Registration Statement and has duly caused
this Post-Effective Amendment to the Registration Statement under the 1933
Act and this Amendment to the Registration Statement under the 1940 Act to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Springfield, and State of Illinois, on the 24th day of April, 1997.
THE FRANKLIN LIFE INSURANCE COMPANY
By /S/ ROSS D. FRIEND
---------------------------------------------
(Ross D. Friend, 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/ EARL W. BAUCOM* Senior Vice April 24, 1997
- -------------------------- President, Chief
(Earl W. Baucom) Financial Officer
(principal financial
fficer and princi-
pal accounting
officer) and
Director
/S/ ROBERT M. BEUERLEIN* Senior Vice President- April 24 , 1997
- -------------------------- Actuarial and Director
(Robert M. Beuerlein)
/S/ BRADY W. CREEL* Senior Vice President, April 24 , 1997
- -------------------------- Chief Marketing
(Brady W. Creel) Officer and Director
Chairman of the Board , 1997
- -------------------------- ---------
(Robert M. Devlin)
/S/ ROSS D. FRIEND Senior Vice President, April 24, 1997
- -------------------------- General Counsel, Secretary
(Ross D. Friend) and Director
/S/ ROBERT J. GIBBONS* President, Chief Executive April 24, 1997
- ---------------------- Officer and Director
(Robert J. Gibbons) (principal executive officer)
Director and Vice Chairman _______, 1997
- ---------------------
(Jon P. Newton)
/S/ GARY D. REDDICK* Executive Vice President and April 24 , 1997
- -------------------- Director
(Gary D. Reddick)
Vice President, Chief Investment , 1997
- ---------------- Officer and Director ---------
(Peter V.Tuters)
/S/ ELIZABETH E. ARTHUR
- ------------------------------------------
* By Elizabeth E. Arthur, Attorney-in-Fact
C-13
<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 is incorporated herein by reference to Exhibit
3 to Post-Effective Amendment No. 42 to Registrant's
Registration Statement on form N-3, filed April 30, 1996.
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).
<PAGE>
(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).
(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 Sutherland, Asbill & Brennan, L.L.P.
14 - Not applicable.
<PAGE>
15 - Not applicable.
16 - Not applicable.
17 - Power of Attorney.
27 - Financial Data Schedule meeting the requirements of Rule 483.
<PAGE>
EXHIBIT 8(b)
B Y L A W S
O F
THE FRANKLIN LIFE INSURANCE COMPANY
SPRINGFIELD, ILLINOIS
(AMENDED NOVEMBER 21, 1996)
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.
A R T I C L E I I
DIRECTORS
<PAGE>
SECTION 1. The Board of Directors of the Company shall consist of not less
than seven (7) and not more than twelve (12) 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 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.
2
<PAGE>
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 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 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 in these Bylaws to
other persons, officers, or committees or reserved to the Board of Directors.
SECTION 3. 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 4. 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.
3
<PAGE>
SECTION 5. The Marketing Committee shall have general supervision of the
agency activities of the Company.
SECTION 6. 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 7. The Benefits Committee shall administer any Retirement and
Welfare Plan of the Company.
SECTION 8. The Consumer Affairs Committee shall have general supervision
of the Company's relations with the insuring public.
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
4
<PAGE>
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 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.
5
<PAGE>
(b) To assign, transfer, and cancel evidence of indebtedness and notes
secured by mortgage upon real estate when such notes have been paid or sold.
(c) To execute releases of mortgages upon real estate when the notes such
mortgages were given to secure have been paid, and to execute partial releases,
easements, and subordinations.
(d) To transfer bonds, stocks, and/or other securities held as collateral
security for loans when such loans have been paid or sold.
(e) To transfer bonds, stocks, and/or other assets or securities when such
bonds, stocks, and/or other assets or securities have been sold or called for
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
6
<PAGE>
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.
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 words "The
Franklin Life Insurance Company, Springfield, Ill." and in the center shall be
7
<PAGE>
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.
8
<PAGE>
Exhibit 13(a)
LIST OF CONSENTS PURSUANT TO RULE 483(c)
Consent of Ernst & Young LLP, independent auditors, appears as Exhibit 13(b)
hereto.
Consent of Coopers & Lybrand L.L.P., independent accountants, appears as Exhibit
13(c) hereto.
Consent of Sutherland, Asbill & Brennan, L.L.P. appears as Exhibit 13(d) hereto.
<PAGE>
Exhibit 13(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Per-Unit
Income and Changes in Accumulation Unit Value" and "Experts" and to the use
of our report dated January 31, 1997, with respect to the statement of assets
and liabilities, including the portfolio of investments, as of December 31,
1996 and the related statement of operations for the year then ended and the
statements of changes in contract owners' equity and table of per-unit income
and changes in accumulation unit value for each of the two years then ended
of Franklin Life Variable Annuity Fund A, and our report dated February 14,
1997, with respect to the consolidated balance sheets of The Franklin Life
Insurance Company and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income, shareholder's equity and cash
flows for the year ended December 31, 1996, the eleven months ended December
31, 1995 and the 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 28, 1997
<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 table of per-unit
income and changes in accumulation unit value of Franklin Life
Variable Annuity Fund A for each of the three years in the period
ended December 31, 1994; and
(2) Our report dated February 1, 1995, accompanying the consolidated
statements of income, shareholder's equity and cash flows of The
Franklin Life Insurance Company and Subsidiaries for the year ended
December 31, 1994.
We also consent to the references to our firm under the captions "Per Unit
Income and Changes in Accumulation Unit Value" and "Experts".
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 28, 1997
<PAGE>
Exhibit 13(d)
We consent to the reference to our firm under the heading "Legal
Matters" in the Prospectus constituting a part of this Post-Effective
Amendment No. 43 to the Registration Statement under the Securities Act of
1933. In giving this consent, we do not admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act of
1933.
/s/Sutherland, Asbill & Brennan, L.L.P.
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
Washington, D. C.
April 23, 1997
<PAGE>
Exhibit 17
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated opposite
their respective names below, hereby constitute and appoint ROSS D. FRIEND
and ELIZABETH E. ARTHUR, 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. 43 to the Registration Statement under the Securities Act of
1933, as amended (the "1933 Act"), and Amendment No. 19 to the Registration
Statement under the Investment Company Act of 1940, a 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/ Elizabeth E. Arthur Secretary, Board of Managers of April 15, 1997
- ------------------------ the Fund
Elizabeth E. Arthur
/s/ Earl W. Baucom Senior Vice President, Chief April 10, 1997
- ------------------------ Financial Officer (principal
Earl W. Baucom financial officer and principal
accounting officer) and Director
of The Franklin
/s/ Robert M. Beuerlein Senior Vice President - Actuarial March 31, 1997
- ------------------------ and Director of The Franklin
Robert M. Beuerlein
/s/ Brady W. Creel Senior Vice President and Chief April 1, 1997
- ----------------------- Marketing Officer and Director
Brady W. Creel of The Franklin
- ----------------------- Chairman of the Board of _________, 1997
Robert M. Devlin The Franklin
/s/ Ross D. Friend Senior Vice President, General April 10, 1997
- ----------------------- Counsel, Secretary and Director
Ross D. Friend of The Franklin
/s/ Robert J. Gibbons President, Chief Executive April 10, 1997
- ----------------------- Officer (principal executive
Robert J. Gibbons officer) and Director of The Franklin
/s/ Clifford L. Greenwalt Member, Board of Managers January 20, 1997
- ------------------------- of the Fund
Clifford L. Greenwalt
1
<PAGE>
Signature Title Date
--------- ----- ----
- ----------------------- Vice Chairman and Director _________, 1997
Jon P. Newton of The Franklin
/s/ Gary D. Reddick Executive Vice President April 14, 1997
- ------------------------ - Administration and
Gary D. Reddick Director of The Franklin
/s/ Robert C. Spencer Member, Board of Managers January 20, 1997
- ------------------------ of the Fund
Robert C. Spencer
/s/ Robert G. Spencer Member, Board of Managers January 20, 1997
- ------------------------ of the Fund
Robert G. Spencer
- ------------------------- Vice President, Chief Investment _________, 1997
Peter V. Tuters Officer and Director of
The Franklin
/s/ James W. Voth Member, Board of Managers January 20, 1997
- ------------------------- of the Fund
James W. Voth
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTRANT'S FINANCIAL STATEMENTS FOR THE YEAR ENDING 12-31-96 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 7,784,013
<INVESTMENTS-AT-VALUE> 11,368,083
<RECEIVABLES> 24,459
<ASSETS-OTHER> 43,985
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 11,436,527
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 15,311
<TOTAL-LIABILITIES> 15,311
<SENIOR-EQUITY> 0
<PAID-IN-CAPITAL-COMMON> 0
<SHARES-COMMON-STOCK> 0
<SHARES-COMMON-PRIOR> 0
<ACCUMULATED-NII-CURRENT> 0
<OVERDISTRIBUTION-NII> 0
<ACCUMULATED-NET-GAINS> 0
<OVERDISTRIBUTION-GAINS> 0
<ACCUM-APPREC-OR-DEPREC> 0
<NET-ASSETS> 11,421,216
<DIVIDEND-INCOME> 166,120
<INTEREST-INCOME> 75,477
<OTHER-INCOME> 0
<EXPENSES-NET> 156,319
<NET-INVESTMENT-INCOME> 85,278
<REALIZED-GAINS-CURRENT> 269,793
<APPREC-INCREASE-CURRENT> 1,406,762
<NET-CHANGE-FROM-OPS> 1,761,833
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 6,506
<NUMBER-OF-SHARES-REDEEMED> 17,035
<SHARES-REINVESTED> 0
<NET-CHANGE-IN-ASSETS> 0
<ACCUMULATED-NII-PRIOR> 0
<ACCUMULATED-GAINS-PRIOR> 0
<OVERDISTRIB-NII-PRIOR> 0
<OVERDIST-NET-GAINS-PRIOR> 0
<GROSS-ADVISORY-FEES> 0
<INTEREST-EXPENSE> 0
<GROSS-EXPENSE> 0
<AVERAGE-NET-ASSETS> 0
<PER-SHARE-NAV-BEGIN> 0
<PER-SHARE-NII> 0
<PER-SHARE-GAIN-APPREC> 0
<PER-SHARE-DIVIDEND> 0
<PER-SHARE-DISTRIBUTIONS> 0
<RETURNS-OF-CAPITAL> 0
<PER-SHARE-NAV-END> 0
<EXPENSE-RATIO> 0
<AVG-DEBT-OUTSTANDING> 0
<AVG-DEBT-PER-SHARE> 0
</TABLE>
