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[LOGO]
THE FRANKLIN
LIFE INSURANCE COMPANY
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*AN AMERICAN GENERAL COMPANY
#1 FRANKLIN SQUARE , SPRINGFIELD, ILLINOIS 62713-0001
Dear Contract Owner:
We are pleased to provide this 1997 annual report which shows the status of and
balances in your Franklin Life Variable Annuity Fund A contract.
<TABLE>
<CAPTION>
INVESTMENT POSITION
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DECEMBER 31, JUNE 30, DECEMBER 31,
1997 1997 1996
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VARIABLE PORTION:
- -----------------
<S> <C> <C> <C>
Accumulation Unit Value $98.43 $91.56 $81.48
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Percentage Change From:
December 31, 1996 +20.80%
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June 30, 1997 + 7.50%
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</TABLE>
The accumulation unit value is based on the market price of the investments held
by the Fund. A listing of the investments held at December 31, 1997 appears on
page 3.
FIXED PORTION:
Additional units in the fixed rate portion of your annuity arising from
contributions credited during the contract year ending in 1997 were based
on a 6.25% interest rate, less a contract expense charge. If your contract
anniversary is in the first half of 1998, the interest rate for the fixed
portion of your annuity applicable to contributions made during the
contract year ending in 1998 is anticipated to be 6.25%, less a contract
expense charge. Amounts selected for investment in the fixed rather than
the variable portion of your annuity do not participate in the investment
experience of the Fund. Contract units resulting from interest added or
contributions made prior to the contract year ending in 1997 continue to be
credited with additional interest based on investment yields which reflect
the years during which such units were purchased. Crediting rates are not
guaranteed for future years.
The U.S. economy continued to expand at a very rapid rate in 1997. It is
estimated that the Gross Domestic Product will increase some 3.5% to 4.0% for
the year, well ahead of the expectations expressed at the beginning of 1997.
Employment continues to grow, with the unemployment rate dropping to 4.7% in
December 1997, down from 5.3% in December 1996, but up from 4.6% in November
1997. The Federal Reserve Board has kept the Federal Funds rate steady the last
half of 1997 after raising the rate from 5.25% to 5.50% on March 25, 1997. The
stock market had another good year, the third year in a row, with the Standard &
Poor's 500 Index up 31.01% in 1997. This increase came with a great deal of
difficulty in the second half of the year, as the Asian markets ran into
financial uncertainty. The U.S. companies are showing very high price/earnings
ratios and the U.S. economic growth is expected to slow in the near future.
Inflation, as measured by the Gross Domestic Product deflator, was a very
acceptable 1.9% in 1996, then declining to 1.4% by the third quarter of 1997.
The Consumer Price Index increased 3.3% in 1996 and in 1997, 1.7%, the smallest
increase since 1986. The Producers Price Index declined 0.2% in December, with
a decline in nine of the twelve months of 1997 and an annual decline in 1997 of
1.2%. The decline in wholesale prices will be good news on the inflation front.
The stock market will likely have a period of consolidation as it works its way
through the Asian crisis, high price/earnings ratios and a slowing economy.
In today's fast-paced world, products, markets, client's needs, and individual
risk tolerance all change. In this environment, you may want to take some extra
time and review how well this product continues to meet your retirement
investment objectives. A Franklin Life representative would be happy to review
your financial situation with you and suggest the most appropriate mix of
products to provide financial security consistent with your risk tolerance.
Cordially yours,
/s/ William A. Simpson
William A. Simpson
Chairman, Chief Executive Officer
and President
1
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FRANKLIN LIFE VARIABLE ANNUITY FUND A
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Assets
Investments-at fair value (cost-$6,923,517):
Common stocks $ 10,325,291
Short-term notes 1,896,668
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12,221,959
Cash on deposit 54,548
Dividends and interest receivable 19,871
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Total Assets 12,296,378
Liability -due to The Franklin Life Insurance Company 1,489
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Contract owners' equity
Annuity reserves $ 19,380
Value of 124,714.114 accumulation units outstanding,
equivalent to $98.42918992 per unit 12,275,509 $ 12,294,889
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STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
Investment income
Dividends $ 167,447
Interest 83,552
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Total Income $ 250,999
Expenses
Mortality and expense charges $ 119,981
Investment management services 52,451
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Total expenses 172,432
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Net investment income 78,567
Realized and unrealized gain on investments:
Net realized gain from investment transactions
(excluding short-term investments):
Proceeds from sales $1,508,962
Cost of investments sold (identified cost method) 1,056,000
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Net realized gain 452,962
Net unrealized appreciation of investments
Beginning of year $3,584,070
End of year 5,298,442
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Net unrealized appreciation 1,714,372
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Net gain on investments 2,167,334
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Net increase in contract owners'
equity resulting from operations $ 2,245,901
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STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
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<S> <C> <C>
Net investment income $ 78,567 $ 85,278
Net realized gain from investment transactions 452,962 269,793
Net unrealized appreciation of investments 1,714,372 1,406,762
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Net increase In contract owners' equity resulting from operations 2,245,901 1,761,833
Net contract purchase payments 268,272 226,321
Reimbursement for contract guarantees 172 3,178
Annuity payments (4,568) (3,878)
Withdrawals (1,636,104) (995,151)
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Net increase in contract owners' equity 873,673 992,303
Contract owners' equity at beginning of year 11,421,216 10,428,913
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Contract owners' equity at end of year $12,294,889 $11,421,216
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
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FRANKLIN LIFE VARIABLE ANNUITY FUND A
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
------------ ---------------
<S> <C> <C>
COMMON STOCKS (83.98%)
BANKING (4.16%)
3,675 SLM Holding Corporation $ 511,284
BEVERAGES (1.30%)
4,400 PepsiCo, Incorporated 159,500
BUSINESS SERVICES (1.61%)
5,600 Equifax Inc. 198,450
CHEMICALS (2.23%)
2,700 Dow Chemical 274,050
COMPUTER SERVICES (3.00%)
8,100 Ceridian Corporation* 371,081
COSMETICS & HOUSEHOLD PRODUCTS
(3.27%)
4,000 Gillette Company 401,750
DRUGS & HEALTH CARE (21.62%)
8,000 Eli Lilly and Company 557,000
4,300 Merck & Company, Inc. 455,800
4,200 Pfizer, Incorporated 313,163
6,450 St. Jude Medical, Inc.* 196,725
6,600 Schering-Plough Corporation 410,025
6,000 Stryker Corporation 223,500
16,000 Walgreen Company 502,000
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2,658,213
ELECTRONICS & INSTRUMENTATIONS
(2.94%)
5,800 Hewlett-Packard Company 361,775
FOOD PROCESSING (2.86%)
10,600 ConAgra, Inc. 351,125
FOOD - RETAIL (2.19%)
5,700 Albertson's, Inc. 269,325
FOOD - WHOLESALE ( 2.48%)
6,700 Sysco Corporation 305,269
HOUSEHOLD PRODUCTS (1.28%)
3,700 Newell Co. 157,250
MACHINERY - INDUSTRIAL & CONSTRUCTION
(.46%)
1,500 Fluor Corporation 56,062
OFFICE EQUIPMENT & SERVICES (8.00%)
5,000 Compaq Computers Corporation* 282,500
5,350 Digital Equipment Corporation* 198,619
4,800 International Business Machines
Corporation 502,200
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983,319
OIL SERVICES & DRILLING ( 2.62%)
6,200 Halliburton Company 321,625
OILS & OIL RELATED PRODUCTS (4.9%)
2,700 Amoco Corporation 229,838
2,600 Atlantic Richfield Company 208,325
2,600 Kerr-McGee Corporation 164,612
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602,775
PACKAGING - CONTAINERS ( 3.06%)
8,400 Avery-Dennison Corporation 375,900
PHOTOGRAPHY ( 2.02%)
4,100 Eastman Kodak Company 248,306
RESTAURANTS/LODGING (1.92%)
3,400 Marriott International, Inc. 235,450
RETAIL-SPECIALTY (2.29%)
7,200 NIKE, Inc. 281,250
TECHNOLOGY (7.48%)
5,000 AMP, Incorporated 210,000
4,950 Diebold, Incorporated 250,594
4,800 Intel Corporation 337,200
3,600 Millipore Corporation 122,175
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919,969
UTILITIES - TELEPHONE (2.29%)
5,000 BellSouth Corporation 281,562
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TOTAL COMMON STOCKS
(COST-$5,026,849) 10,325,290
<CAPTION>
PRINCIPAL
AMOUNT
- ---------
<S> <C> <C>
SHORT-TERM NOTES (15.43%)
$ 450,000 United States Treasury Bill
4.93%, due 2/5/98 (cost-$446,549) 446,549
$1,460,000 United States Treasury Bill
5.05%, due 2/5/98 (cost-$1,450,119) 1,450,119
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TOTAL SHORT-TERM NOTES
1,896,669
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TOTAL INVESTMENTS (99.41%)
(COST -$6,923,517) 12,221,959
CASH AND RECEIVABLES, LESS
LIABILITY (.59 %) 72,930
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TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $12,294,889
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</TABLE>
*NON-INCOME PRODUCING INVESTMENT IN 1997.
SEE NOTES TO FINANCIAL STATEMENTS
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THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE
ANNUITY FUND A CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
3
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FRANKLIN LIFE VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Variable Annuity Fund A (the Fund) is a segregated investment
account of The Franklin Life Insurance Company (The Franklin) and is registered
as an open-end diversified management investment company under the Investment
Company Act of 1940, as amended. The Fund no longer issues new contracts.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS: 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 1997 aggregated $70,929 and $1,508,962,
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 $16,926 and $21,860 were deducted
from the proceeds of the sales of accumulation units and retained by Franklin
Financial Services Corporation and The Franklin during 1997 and 1996,
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
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<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
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UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ------
<S> <C> <C> <C> <C>
Balance at
beginning of
year 139,945 $11,403,341 150,474 $10,412,808
Purchases 2,945 268,272 3,007 226,321
Net investment
income* - 78,354 - 85,005
Net realized gain
from investment
transactions* - 451,738 - 268,930
Net unrealized
appreciation
of investments* - 1,709,736 - 1,402,260
Withdrawals (18,176) (1,636,104) (13,536) (995,151)
Reimbursement
for contract
guarantees* - 172 - 3,168
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Balance at end
of year 124,714 $12,275,509 139,945 $11,403,341
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</TABLE>
*Excludes portion allocated to annuity reserves on a pro rata basis.
NOTE F-REMUNERATION OF MANAGEMENT
No person receives any remuneration from the Fund because The Franklin pays the
fees of members of the Board of Managers and officers and employees of the Fund
pursuant to expense assurances. Certain members of the Board of Managers and
officers of the Fund are also directors, officers or employees of The Franklin
or Franklin Financial Services Corporation. Amounts paid by the Fund to The
Franklin and to Franklin Financial Services Corporation are disclosed in this
report.
NOTE G-NET UNREALIZED APPRECIATION OF
INVESTMENTS
Net unrealized appreciation of investments at December 31, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
--------------------------------
<S> <C> <C>
Gross unrealized appreciation $5,387,633 $3,670,260
Gross unrealized depreciation 89,191 86,190
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Net unrealized appreciation
of investments $5,298,442 $3,584,070
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--------------------------------
</TABLE>
4
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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)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
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<S> <C> <C> <C> <C> <C>
Investment income $1.910 $1.685 $1.948 $1.408 $1.231
Expenses 1.312 1.090 .875 .773 .773
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Net investment income .598 .595 1.073 .635 .458
Net realized and unrealized gain (loss) on investments 16.346 11.690 14.139 (.240) .112
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Net increase in accumulation unit value 16.944 12.285 15.212 .395 .570
Accumulation unit value:
Beginning of year 81.485 69.200 53.988 53.593 53.023
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End of year $98.429 $81.485 $69.200 $53.988 $53.593
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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 .66% .79% 1.76% 1.18% .85%
Portfolio turnover rate .70% 4.77% 14.66% 88.99% 68.62%
Number of accumulation units outstanding at end of year 124,714 139,945 150,474 172,507 198,763
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</TABLE>
MATTERS SUBMITTED TO VOTE OF CONTRACT OWNERS
An annual meeting of Contract Owners of the Fund was held on April 21, 1997. At
the meeting, the individuals named below were elected as Members of the Board of
Managers of the Fund, and Ernst & Young LLP was ratified as the Fund's
independent auditors for the ensuing fiscal year. The number of votes cast for,
against or withheld, as well as the number of abstentions and broker non-votes,
if applicable, as to each matter is set forth in the table below.
<TABLE>
<CAPTION>
MATTER VOTES:
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FOR AGAINST ABSTAIN
------- -------- -------
<S> <C> <C> <C>
Election of
Robert G. Spencer as
Member, Board of Managers 59,899 1,753 0
Election of
Dr. Robert C. Spencer as
Member, Board of Managers 59,899 1,753 0
Election of
James W. Voth as
Member, Board of Managers 60,015 1,637 0
Election of
Clifford L. Greenwalt as
Member, Board of Managers 60,015 1,637 0
Ratification of Selection
of Ernst & Young LLP as
independent auditors 59,688 1,135 829
</TABLE>
5
<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, 1997, the related statement of operations for the year then ended
and the statements of changes in contract owners' equity for each of the two
years then ended, and the table of per-unit income and changes in accumulation
unit value for each of the three years then ended. These financial statements
and the table of per-unit income and changes in accumulation unit value are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the table of per-unit income and
changes in accumulation unit value based on our audits. The table of per-unit
income and changes in accumulation unit value for each of the two years in the
period ended December 31, 1994 was audited by other auditors whose report dated
February 1, 1995, expressed an unqualified opinion on that table.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the table of
per-unit income and changes in accumulation unit value are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of investments held by the custodian as of December 31,
1997. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the 1997, 1996, and 1995 table of
per-unit income and changes in accumulation unit value referred to above present
fairly, in all material respects, the financial position of Franklin Life
Variable Annuity Fund A at December 31, 1997, and the results of its operations
for the year then ended, and the changes in its contract owners' equity for each
of the two years then ended, and per-unit income and changes in accumulation
unit value for each of the three years then ended in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 30, 1998
6
