<PAGE>
1933 Act Registration No. 2-36394
1940 Act Registration No. 811-1990
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Form N-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 45
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21
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, Assistant
Secretary and General Counsel
THE FRANKLIN LIFE INSURANCE COMPANY
#1 Franklin Square
Springfield, Illinois 62713
(Name and Address of Agent for Service)
Copy to:
STEPHEN E. ROTH, ESQ.
SUTHERLAND, ASBILL & BRENNAN LLP
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2415
Title of Securities Being Registered: individual immediate and
deferred variable annuity contracts.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on April 30, 1998 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (i)
/ / on April 30, 1998 pursuant to paragraph (a) (i)
/ / 75 days after filing pursuant to paragraph (a) (ii)
/ / on April 30, 1998 pursuant to paragraph (a) (ii) of Rule
485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective
date for a previously filed post-effective amendment.
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- --------------------------------------------------------------------------------
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
Post-Effective Amendment No. 45
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
<CAPTION>
Part B INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
<S> <C>
Item 16. Cover Page . . . . . . . . . . . . . . . . . . . . . Cover Page (SAI)
<PAGE>
Item 17. Table of Contents. . . . . . . . . . . . . . . . . . Table of Contents (SAI)
Item 18. General Information and History. . . . . . . . . . . General Information
Item 19. Investment Objectives and Policies . . . . . . . . . Investment Policies and Restrictions of the Fund (P); Investment
Objectives
Item 20. Management . . . . . . . . . . . . . . . . . . . . . Management (SAI)
Item 21. Investment Advisory and Other Services . . . . . . . Summary (P); Deductions and Charges under the Contracts (P);
Management (P); Management (SAI); Investment Advisory and Other
Services
Item 22. Brokerage Allocation . . . . . . . . . . . . . . . . Portfolio Turnover and Brokerage
Item 23. Purchase and Pricing of Securities Being Offered . . Summary (P); Introduction (P); Deductions and Charges under the
Contracts-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, 1998 TO PROSPECTUS
OF FRANKLIN LIFE VARIABLE ANNUITY FUND A
DATED APRIL 30, 1998
The contracts offered by this Prospectus to participants in the Texas
Optional Retirement Program, as codified in Chapter 830 of Title 8 of the
Government Code of the State of Texas, contain restrictions on redemption in
addition to those set forth in the Prospectus under the heading captioned
"Deferred Variable Annuity Accumulation Period-5. Redemption." In accordance
with such Chapter, redemption of contracts required by a participant in the
Texas Optional Retirement Program will not be permitted prior to such
participant's termination of employment in the Texas public institutions of
higher education, retirement, death or attainment of age 70-1/2.
<PAGE>
FRANKLIN LIFE 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, 1998, WHICH HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED
FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING
THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE
REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED
IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE.
THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON
PAGE 37 OF THIS PROSPECTUS.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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. . . . . . . . . . . . . . 12
D. Investment Management Service Charge . . . . . . . . . . . . 12
E. Transfers to 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. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The Franklin. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
The Contracts: Qualified Plans. . . . . . . . . . . . . . . . . . 28
A. Qualified Pension, Profit-Sharing and Annuity Plans. . . . . 29
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. . . . . . . . . . . . . . . . . . . . . 34
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . . 34
Year 2000 Transition . . . . . . . . . . . . . . . . . . . . . . . . . 35
Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . 35
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . 35
Other Variable Annuity Contracts; Effect of Non-Qualification. . . . . 36
Table of Contents of Statement of Additional Information . . . . . . . 37
</TABLE>
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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), 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>
<S> <C>
Contract Owner Transaction Expenses
Sales Load Imposed on Purchases (as a percentage of
purchase payments)
Single Stipulated Payment Contract 5.00%
Periodic Stipulated Payment Contract 6.00%
Administration Fee (as a percentage of purchase payments)
Single Stipulated Payment Contract 4.00% ($100
maximum)
Periodic Stipulated Payment Contract 3.00%
Annual Expenses
(as a percentage of average net assets)
Management Fees 0.44%
Mortality and Expense Risk Fees
Mortality Fees 0.90%
Expense Risk Fees 0.10%
----
Total Annual Expenses 1.44%
</TABLE>
Example
<TABLE>
<CAPTION>
If you surrender your contract at the end of the applicable
time period: 1 year 3 years 5 years 10 years
<S> <C> <C> <C> <C>
You would pay the following expenses on a $1,000
investment, assuming 5% annual return on assets:
Single Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247
Periodic Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247
</TABLE>
THIS EXAMPLE SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR FUTURE
EXPENSES AND ACTUAL EXPENSES MAY BE GREATER OR LESS THAN THOSE SHOWN.
The Table of Deductions and Charges is intended to assist Contract Owners in
understanding the various fees and expenses that they bear directly or
indirectly. Additional deductions may be made from Stipulated Payments for any
premium taxes payable by The Franklin on the consideration received from the
sale of the Contracts. See "Premium Taxes," 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 periodic Stipulated Payment is currently $10 ($120 on an annual basis). See
"Purchase Limits," below.
NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the Contract's initial Annuity
Payment Date, may, subject to any limitations on early settlement contained in
an applicable Qualified Plan and subject to limitations on early withdrawals
imposed in connection with Section 403(b) annuity purchase plans (see "Federal
Income Tax Status," below), redeem all or part of the Contract and receive the
Cash Value (equal to the number of Accumulation Units credited to the part of
the Contract redeemed times the value of an Accumulation Unit at the end of the
Valuation Period in which the request for redemption is received) less 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 each of the three years in the
period ended December 31, 1997 has been audited by Ernst & Young LLP,
independent auditors. The financial information in this table for each of the
two years in the period ended December 31, 1994 was audited by Coopers & Lybrand
L.L.P., independent accountants. This table should be read in conjunction with
the financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income $1.910 $ 1.685 $ 1.948 $ 1.408 $ 1.231 $ 1.064 $ 1.194 $ 1.326 $ 1.343 $ .235
Expenses 1.312 1.090 .875 .773 .773 .723 .654 .569 .528 .454
---------------------------------------------------------------------------------------------------
Net Investment
income .598 .595 1.073 .635 .458 .341 .540 .757 .815 .781
Net realized and
unrealized gain
(loss) on
securities 16.346 11.690 14.139 (.240) .112 .770 14.238 (3.287) 7.021 .043
---------------------------------------------------------------------------------------------------
Net change in
accumulation unit
value 16.944 12.285 15.212 .395 .570 1.111 14.778 (2.530) 7.836 .824
Accumulation unit
value:
Beginning of year 81.485 69.200 53.988 53.593 53.023 51.912 37.134 39.664 31.828 31.004
---------------------------------------------------------------------------------------------------
End of year $98.429 $81.485 $69.200 $53.988 $53.593 $53.023 $51.912 $37.134 $39.664 $31.828
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
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 .66% .79% 1.76% 1.18% .85% .68% 1.19% 1.91% 2.22% 2.47%
Portfolio turnover
rate .70% 4.77% 14.66% 88.99% 68.62% 59.84% 28.47% 24.01% 64.55% 104.96%
Number of
accumulation
units outstanding
at end of year 124,714 139,945 150,474 172,507 198,763 217,948 229,368 256,831 277,735 305,265
---------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------
</TABLE>
------------------------------------
FINANCIAL STATEMENTS
The financial statements for the Fund and The Franklin and the reports of
the independent auditors and accountants for the Fund and The Franklin are
included in the Statement of Additional Information.
8
<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.
9
<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
10
<PAGE>
considered separately from the other operations of The Franklin in computing The
Franklin's tax liability and the Fund is not affected by federal income taxes
paid by The Franklin with respect to its other operations. The operations of the
Fund are treated separately from the other operations of The Franklin for
accounting and financial statement purposes. Under existing law, no federal
income tax is payable by The Franklin on investment income and realized capital
gains of the Fund. See "Federal Income Tax Status," below.
DEDUCTIONS AND CHARGES UNDER THE CONTRACTS
The Franklin deducts the charges described below to cover costs and
expenses, services provided, and risks assumed under the Contracts. The amount
of a charge may not necessarily correspond to the costs associated with
providing the services or benefits indicated by the designation of the charge or
associated with the particular contract. For example, the sales deductions may
not fully cover all of the sales and distribution expenses actually incurred by
The Franklin, and proceeds from other charges, including the mortality and
expense risk charge, may be used in part to cover such expenses.
A. 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 1995, 1996 and 1997 were $20,566, $14,575 and $11,286,
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, 1995,
1996 and 1997 were $10,279, $7,285 and $5,640, 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
11
<PAGE>
taxes ranging up to 5% are charged by various jurisdictions in which The
Franklin is transacting business and in which it may, after appropriate
qualification, offer Contracts.
C. MORTALITY AND EXPENSE RISK CHARGE
While Annuity Payments will reflect the investment performance of the
Fund, they will not be affected by adverse mortality experience or by any
excess in the actual expenses of the Contracts and the Fund over the maximum
administration deductions provided for in the Contracts. The Franklin assumes
the risk that Annuity Payments will continue for a longer period than
anticipated because the Variable Annuitant lives longer than expected (or the
Variable Annuitants as a class do so) and also assumes the risk that the
administration deductions may be insufficient to cover the actual expenses of
the administration of the Contracts and of the Fund (except those expenses
listed under "Investment Management Service Charge," 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. If the money collected from this charge
is not needed, it will be to The Franklin's gain and may be used to cover
contract distribution expenses.
During 1995, 1996 and 1997, The Franklin earned and was paid $97,809,
$108,769 and $119,981, respectively, by reason of these charges. Such charges
during 1997 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, 1999 by the Board of
Managers of the Fund at its meeting on January 19, 1998. The Investment
Management Agreement is described under "Investment Advisory and Other
Services" in the Statement of Additional Information.
During 1995, 1996 and 1997, The Franklin earned and was paid $42,758,
$47,550 and $52,451, 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.
12
<PAGE>
It is not clear whether gain or loss will be recognized for federal
income tax purposes upon the redemption of a Contract, another annuity
contract or a life insurance contract issued by The Franklin for purposes of
applying the redemption proceeds to the purchase of another contract issued
by The Franklin. Federal tax penalties may also apply to such redemptions.
Since the income and withholding tax consequences of such redemption and
purchase depend on many factors, any person contemplating redemption of a
Contract or another contract issued by The Franklin for purposes of
purchasing a different contract issued by The Franklin (or any other
contract) is advised to consult a qualified tax advisor prior to the time of
redemption.
F. MISCELLANEOUS
The Fund's total expenses for 1997 were $172,432, or 1.440% of average net
assets during 1997.
THE CONTRACTS
A. GENERAL
Certain significant provisions of the Contracts and administrative
practices of The Franklin with respect thereto are discussed in the following
paragraphs.
Contract Owner inquiries may be directed to the Equity Administration
Department of The Franklin at the address or telephone number set forth on the
cover of this Prospectus.
1. ANNUITY PAYMENTS
Variable Annuity Payments are determined on the basis of (i) an annuity
rate table specified in the Contract, and (ii) the investment performance of
the Fund. In the case of Deferred Variable Annuity Contracts, the annuity
rate table is set forth in the Contract (but see below). In the case of
Immediate Variable Annuities, the table is that used by The Franklin on the
date of issue of the Contract. The amount of the Annuity Payments will not be
affected by mortality experience adverse to The Franklin or by an increase in
The Franklin's expenses related to the Fund or the Contracts in excess of the
expense deductions provided for in the Contracts. The Variable Annuitant
under an annuity with a life contingency or one providing for a number of
Annuity Payments certain will receive the value of a fixed number of Annuity
Units each month, determined as of the initial Annuity Payment Date on the
basis of the applicable annuity rate table and the then value of his or her
account. The value of Annuity Units, and thus the amounts of the monthly
Annuity Payments, will, however, reflect investment gains and losses and
investment income occurring after the initial Annuity Payment Date, and thus
the amount of the Annuity Payments will vary with the investment experience
of the Fund. See "Annuity Period," below.
Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS,
have held that the use of gender-based mortality tables to determine benefits
under an employer-related retirement or benefit plan may violate Title VII of
the Civil Rights Act of 1964 ("Title VII"). These cases indicate that plans
sponsored by employers subject to Title VII generally may not provide
different benefits for similarly-situated men and women.
The Contracts described in this Prospectus incorporate annuity rate
tables which reflect the age and sex of the Variable Annuitant and the
Settlement Option selected. Such sex-distinct tables continue to be
appropriate for use, for example, under Contracts which are not purchased in
connection with an "employer-related" plan subject to NORRIS (such as
individual retirement annuities not sponsored by an employer). However, in
order to enable subject employers to comply with NORRIS, The Franklin will
provide "unisex" annuity rate tables for use under Contracts purchased in
connection with "employer-related" plans. Persons contemplating purchase of a
Contract, as well as current Contract Owners,
13
<PAGE>
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 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 ($120 on an
annual basis). Under the terms of the Contract, The Franklin may increase the
minimum periodic Stipulated Payment to $20 ($240 on an annual basis). No single
Stipulated Payment may be less than $2,500, except that in the case of a
deferred Single Stipulated Payment Contract to be used as an Individual
Retirement Annuity funded with a Rollover Contribution, the total Stipulated
Payment applicable to the Variable Annuity, prior to administration 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 $30,000.
Single Stipulated Payment Contracts are not available as Individual Retirement
Annuities except for those funded with Rollover Contributions and except for
those to be used as Simplified Employee Pensions.
14
<PAGE>
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 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.
15
<PAGE>
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.
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.
16
<PAGE>
4. VALUATION OF FUND ASSETS
In determining the value of the assets of the Fund, each security traded on
a national securities exchange is valued at the last reported sale price on the
Valuation Date. If there has been no sale on such day, then the value of such
security is taken to be the current bid price at the time as of which the value
is being ascertained. Any security not traded on a securities exchange but
traded in the over-the-counter market is valued at the current bid price on the
Valuation Date. Any securities or other assets for which market quotations are
not readily available are valued at fair value as determined in good faith by
the Board of Managers.
5. REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the initial Annuity Payment Date,
may, subject to any limitations on early settlement contained in an applicable
Qualified Plan, redeem the Contract, in whole or in part, by submission of the
Contract and a written request for its redemption to The Franklin's Home Office,
and will receive the Cash Value of the part of the Contract redeemed. Early
withdrawal of certain amounts attributable to Contracts issued pursuant to an
annuity purchase plan meeting the requirements of Code Section 403(b) may be
prohibited. See "Federal Income Tax Status," 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
payment or under an available Settlement Option may be subject to federal income
tax withholding and federal tax penalties. See "Federal Income Tax Status,"
below.
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
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<PAGE>
surviving at the death of the Variable Annuitant, see "Change of Beneficiary or
Mode of Payment of Proceeds; Death of Beneficiaries," below. The Code imposes
certain requirements concerning payment of death benefits payable before the
initial Annuity Payment Date in the case of Qualified Contracts. Under those
Contracts, death benefits will be paid as required by the Code and as specified
in the governing plan documents. The terms of such documents should be consulted
to determine the death benefits and any limitations the plan may impose. You
should consult your legal counsel and tax advisor regarding these requirements.
Subject to the foregoing, the Contract Owner may, at any time prior to the
initial Annuity Payment Date, elect that all or any portion of such death
proceeds be paid to the Beneficiary under any one of the available Settlement
Options. See "Settlement Options," below. If the Contract Owner has not made
such an election, the Beneficiary may do so after the death of the Variable
Annuitant. The Contract Owner or the Beneficiary, whichever selects the method
of settlement, may designate contingent Beneficiaries to receive any other
amounts due should the first Beneficiary die before completion of the specified
payments. If neither the Contract Owner nor the Beneficiary elects payment of
death proceeds under an available Settlement Option, payment will be made to the
Beneficiary in a single sum.
Death proceeds may be applied to provide variable payments, fixed-dollar
payments or a combination of both.
The payment of death proceeds may be subject to federal income tax
withholding. See "Income Tax Withholding," below.
In the event of the death of the Variable Annuitant after the initial
Annuity Payment Date, payments under a Contract will be made as described in
"Settlement Options," below.
7. OPTIONS UPON FAILURE TO MAKE STIPULATED PAYMENTS
Upon a failure to make a Stipulated Payment under a Periodic Stipulated
Payment Contract, subject to The Franklin's power of termination described under
"Termination by The Franklin," above, and subject to the right of The Franklin
to pay the value of the Contract Owner's account in a single sum at the initial
Annuity Payment Date if the value on such date is less than $2,000, the Contract
Owner may elect, prior to the death of the Variable Annuitant and prior to the
initial Annuity Payment Date, either of the following options:
(a) to exercise any of the available Settlement Options described
under "Settlement Options," below, or redeem the Contract as described
under "Redemption," above; or
(b) to have the Contract continued from the date of failure to make
a Stipulated Payment as a paid-up annuity to commence on the initial
Annuity Payment Date stated in the Contract.
If no option is elected by the Contract Owner within 31 days after
failure to make a Stipulated Payment, the Contract will automatically be
continued under the paid-up annuity option.
8. REINSTATEMENT (AS TO PERIODIC STIPULATED PAYMENT CONTRACTS)
A Contract Owner, by making one Stipulated Payment, may reinstate a
Periodic Stipulated Payment Contract as to which there has been a failure to
make a Stipulated Payment, if the Contract at the time of the payment is being
continued as a paid-up annuity. However, such reinstatement does not
automatically reinstate the benefits provided by any riders to the Contract
providing life insurance or disability benefits.
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9. CHANGE OF BENEFICIARY OR MODE OF PAYMENT OF PROCEEDS; DEATH OF
BENEFICIARIES
While the Contract is in force the Contract Owner may (by filing a written
request at the Home Office of The Franklin) change the Beneficiary or Settlement
Option, or, if agreed to by The Franklin, change to a mode of payment different
from one of the Settlement Options, subject to applicable limitations under the
Code and any governing Qualified Plan.
If any Beneficiary predeceases the Variable Annuitant, the interest of such
Beneficiary will pass to the surviving Beneficiaries, if any, unless otherwise
provided by endorsement. If no Beneficiary survives the Variable Annuitant and
no other provision has been made, then, upon the death of the Variable
Annuitant, the proceeds will be paid in a single sum to the Contract Owner or,
if the Variable Annuitant was the Contract Owner, to the executors or
administrators of the Contract Owner's estate.
10. SETTLEMENT OPTIONS
At any time prior to the initial Annuity Payment Date and during the
lifetime of the Variable Annuitant, the Contract Owner may elect to have all or
a portion of the amount due in settlement of the Contract applied under any of
the available Settlement Options described below. If the Contract Owner fails to
elect a Settlement Option, payment automatically will be made in the form of a
life annuity. See "First Option," below, and "Deferred Variable Annuity
Contracts," below.
Annuity Payments under a Settlement Option are made to the Variable
Annuitant during his or her lifetime, or for such shorter period that may apply
under the particular Settlement Option. Upon the death of the original Variable
Annuitant after the initial Annuity Payment Date, any remaining Annuity Payments
that are due under the Settlement Option elected will be continued to the
Beneficiary or, if elected by the Contract Owner (or, if so designated by the
Contract Owner, by the Beneficiary), the Cash Value of the Contract, as
described under such Settlement Option below, will be paid to the Beneficiary in
one lump sum. Upon the death of any Beneficiary to whom payments are being made
under a Settlement Option, a single payment equal to the then remaining Cash
Value of the Contract, if any, will be paid to the executors or administrators
of the Beneficiary, unless other provision has been specified and accepted by
The Franklin. For a discussion of payments if no Beneficiary is surviving at the
death of the Variable Annuitant, see "Change of Beneficiary or Mode of Payment
of Proceeds; Death of Beneficiaries," immediately above.
Payment to a Contract Owner upon redemption of a Contract, and payment of
death proceeds to a Beneficiary upon the death of the Variable Annuitant prior
to the initial Annuity Payment Date, may also be made under an available
Settlement Option in certain circumstances. See "Redemption," above, and
"Payment of Accumulated Value at Time of Death," above.
Available Settlement Options may be selected on a fixed or variable basis
or a combination thereof, except 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.
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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 Contract are advised to consult a qualified tax advisor concerning the effect
of the distribution rules on the Settlement Option or Options he or she is
contemplating.
Neither this Prospectus nor the Statement of Additional Information,
however, describes limitations on Settlement Options based on applicable
distribution rules in the case of Contracts issued in connection with qualified
pension and profit-sharing plans under Section 401(a) of the Code and annuity
plans under Section 403(a) of the Code. Under those Contracts, available
Settlement Options are limited to those Options specified in the governing plan
documents. The terms of such documents should be consulted to determine
Settlement Option availability and any other limitations the plan may impose on
early redemption of the Contract, payment in settlement thereof, or similar
matters. Generally, limitations comparable to those described in the Statement
of Additional Information for Individual Retirement Annuities and Section 403(b)
annuity purchase plans also apply with respect to such qualified pension,
profit-sharing and annuity plans (including H.R. 10 Plans).
Persons contemplating election of the Fifth or Sixth Option should consult
a qualified tax advisor to determine whether the continuing right of redemption
under any such Option might be deemed for tax purposes to result in the
"constructive receipt" of the Cash Value of the Contract.
FIRST OPTION-LIFE ANNUITY. An annuity payable monthly during the lifetime
of the Variable Annuitant, ceasing with the last Annuity Payment due prior to
the death of the Variable Annuitant. This Option offers the maximum level of
monthly Annuity Payments since there is no guarantee of a minimum number of
Annuity Payments or provision for any continued payments to a Beneficiary upon
the death of the Variable Annuitant. It would be possible under this Option for
the Variable Annuitant to receive only one Annuity Payment if he or she died
before the second Annuity Payment Date, or to receive only two Annuity Payments
if he or she died after the second Annuity Payment Date but before the third
Annuity Payment Date, and so forth.
SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN.
An annuity payable monthly during the lifetime of the Variable Annuitant
including the commitment that if, at the death of the Variable Annuitant,
Annuity Payments have been made for less than 120 months, 180 months or 240
months (as selected by the Contract Owner in electing this Option), Annuity
Payments shall be continued during the remainder of the selected period to the
Beneficiary. The cash value under this Settlement Option is the present value of
the current dollar amount of any unpaid Annuity Payments certain.
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THIRD OPTION-UNIT REFUND LIFE ANNUITY. An annuity payable monthly during
the lifetime of the Variable Annuitant, ceasing with the last Annuity Payment
due prior to the death of the Variable Annuitant, provided that, at the death of
the Variable Annuitant, the Beneficiary will receive a payment of the then
dollar value of the number of Annuity Units equal to the excess, if any, of (a)
over (b) where (a) is the total amount applied under this Option divided by the
Annuity Unit value at the initial Annuity Payment Date and (b) is the number of
Annuity Units represented by each Annuity Payment multiplied by the number of
Annuity Payments made.
For example, if $10,000 were applied on the first Annuity Payment Date to the
purchase of an annuity under this Option, the Annuity Unit value at the initial
Annuity Payment Date were $2.00, the number of Annuity Units represented by each
Annuity Payment were 30.55, 10 Annuity Payments were paid prior to the date of
the Variable Annuitant's death and the value of an Annuity Unit on the Valuation
Date following the Variable Annuitant's death were $2.05, the amount paid to the
Beneficiary would be $9,623.73, computed as follows:
<TABLE>
<S><C>
($10.000 - (30.55 x 10)) X 2.05 = (5,000 - 305.5) X $2.05 = 4,694.5 X $2.05 = $9,623.73
------
$2.00
</TABLE>
FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. An annuity payable
monthly during the joint lifetime of the Variable Annuitant and a secondary
variable annuitant, and thereafter during the remaining lifetime of the
survivor, ceasing with the last Annuity Payment due prior to the death of the
survivor. Since there is no minimum number of guaranteed payments under this
Option, it would be possible under this Option to receive only one Annuity
Payment if both the Variable Annuitant and the secondary variable annuitant died
before the second Annuity Payment Date, or to receive only two Annuity Payments
if both the Variable Annuitant and the secondary variable annuitant died after
the second Annuity Payment Date but before the third Annuity Payment Date, and
so forth.
FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. An amount payable monthly
to the Variable Annuitant for a number of years which may be from one to 30 (as
selected by the Contract Owner in electing this Option). At the death of the
Variable Annuitant, payments will be continued to the Beneficiary for the
remaining period. The cash value under this Settlement Option is the then
present value of the current dollar amount of any unpaid Annuity Payments
certain. A Contract under which Annuity Payments are being made under this
Settlement Option may be redeemed in whole or in part at any time by the
Contract Owner for the aforesaid cash value of the part of the Contract
redeemed. See "Redemption," 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.
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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
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
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<PAGE>
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.
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
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<PAGE>
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.
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%.
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<PAGE>
6. ASSUMED NET INVESTMENT RATE
The objective of a Variable Annuity Contract is to provide level Annuity
Payments during periods when the economy, price levels and investment returns
are relatively stable and to reflect as increased Annuity Payments only the
excess investment results flowing from inflation, increases in productivity or
other factors increasing investment returns. The achievement of this objective
will depend in part upon the validity of the assumption in the annuity factor
that a 3-1/2% net investment rate would be realized in the periods of relative
stability assumed. A higher rate assumption would mean a higher initial Annuity
Payment but a more slowly rising series of subsequent Annuity Payments in the
event of a rising actual investment rate (or a more rapidly falling series of
subsequent Annuity Payments in the event of a lower actual investment rate). A
lower assumption would have the opposite effect. If the actual net investment
rate is at the annual rate of 3-1/2%, the Annuity Payments under Contracts whose
Annuity Payments are measured by Annuity Units will be level.
INVESTMENT POLICIES AND RESTRICTIONS OF THE FUND
The following are the fundamental investment policies of the Fund:
(1) The primary objective of the Fund in making investments is long-term
appreciation of capital. Occasional investments for the purpose of seeking
short-term capital appreciation may also be made.
(2) Realization of current investment return is a secondary objective,
subordinate to the primary objective.
(3) Any investment income and realized capital gains (net of any capital
gains tax) will be retained and reinvested.
(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
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greater opportunities for appreciation and greater risk of depreciation. There
is no assurance that the Cash Value of the Contract during the years prior to
the Variable Annuitant's retirement or the aggregate amount received during the
years following the initial Annuity Payment Date will equal or exceed the
Stipulated Payments on the Contract.
The investment policies of the Fund include a provision that investments
may be made in securities other than common stocks if they are advantageous in
reaching the Fund's objectives, on the basis of combined considerations of risk,
income and appreciation. No assurance can be given, however, that investment in
such other securities will accomplish such objectives. Investments may be made
in bonds, debentures, notes or other evidences of indebtedness, issued publicly
or placed privately, of a type customarily purchased for investment by
institutional investors, including United States Government securities, and may
also be made in corporate preferred stock or in certificates of deposit, or
funds may be retained in cash. Such debt securities may, or may not, be
convertible into stock or be accompanied by stock purchase options or warrants.
Funds may also be temporarily invested in United States Government securities,
certificates of deposit, short-term corporate debt securities (subject to
certain restrictions) and other similar securities, pending long-term
investment. Although debt securities and preferred stocks of the type in which
the Fund would invest are generally considered to present less risk than common
stocks, the value of such securities is subject to market fluctuations as a
result of money market rates, the demand for such securities and factors
relating to the individual issuers of such securities. In the event the Fund
invests in such securities, such factors may limit the ability of the Fund to
convert such securities to cash and reinvest in other types of securities.
Historically, the Fund has not invested significant amounts in debt securities
or preferred stocks except for short-term investments in debt securities pending
ultimate long-term application of funds for investment purposes.
The following are the fundamental investment restrictions applicable to the
Fund:
(1) The Fund will not concentrate its investments in any one industry or
group of related industries, and no more than 25% of the value of the Fund's
assets will be invested in any one industry or group of related industries.
(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
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foregoing does not restrict the purchase by the Fund of a portion of an issue of
publicly distributed bonds, debentures or other securities, whether or not the
purchase is made upon the original issuance of such securities.
(7) The Fund will not engage in the purchase or sale of commodities or
commodity contracts.
(8) The Fund will not purchase the securities of any one issuer, other
than obligations issued or guaranteed by the United States Government and its
agencies or instrumentalities, if such purchase would cause more than 5% of the
Fund's assets to be invested in the securities of such issuer, except that up to
25% of the Fund's total assets taken at current value may be invested without
regard to such 5% limitation.
(9) The Fund will not acquire more than 10% of the outstanding voting
securities of any one issuer, other than obligations issued or guaranteed by the
United States Government and its agencies or instrumentalities, except that up
to 25% of the Fund's total assets taken at current value may be invested without
regard to such 10% limitation.
The fundamental investment policies and the fundamental investment
restrictions stated above may not be changed without approval by a vote of a
majority of the votes available to the Contract Owners. This means that the
policies or restrictions in question may not be changed without the approval of
the lesser of (a) the Contract Owners holding 67% or more of the voting power of
the Contract Owners present or represented at a meeting if Contract Owners
holding more than 50% of the total voting power of all Contract Owners in the
Fund are present or represented by proxy, or (b) Contract Owners holding more
than 50% of the total voting power of all Contract Owners in the Fund.
The following investment restrictions are not fundamental and may be
changed by action of the Board of Managers of the Fund:
(10) All securities in which the Fund invests shall be permissible for the
Fund under the Illinois Insurance Code. The Illinois Insurance Code provides
that investments of a separate account, like the Fund, are free of the
restrictions or provisions generally applicable to insurance companies under
that Code, and does not currently provide any special investment restrictions
applicable to separate accounts. However, no investment permitted 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
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INTRODUCTION
The Contracts are designed for use by individuals in connection with
Qualified Plans under the Code. The federal income tax treatment of the
Contracts and payments received thereunder depends on various factors,
including, among other factors, the tax status of The Franklin, the type of
retirement plan or program in connection with which the Contracts are used and
the form in which payments are received. The discussion of federal income taxes
contained in this Prospectus, which focuses on rules applicable to Contracts
purchased under this Prospectus, is general in nature and is based on existing
federal income tax law, which is subject to change. The tax discussion is not
intended as tax advice. The applicable federal income tax law is complex and
contains many special rules and exceptions in addition to the general rules
summarized herein. For these reasons, various questions about the applicable
rules exist. Accordingly, each person contemplating the purchase of a Contract
is advised to consult with a qualified tax advisor concerning federal income
taxes and any other federal, state or local taxes that may be applicable.
THE FRANKLIN
The Franklin is taxed as a "life insurance company" under the Code. Since
the operations of the Fund are part of the overall operations of The Franklin,
the Fund is subject to tax as part of The Franklin for federal income tax
purposes. Thus, the Fund is not taxed separately as a "regulated investment
company" under the Code.
Under the Code a life insurance company like The Franklin is generally
taxed at regular corporate rates, under a single-phase system, on its
specially-computed life insurance company taxable income. Some special rules
continue to apply, however, in the case of segregated asset accounts like the
Fund.
Investment income and realized capital gains on the assets of the Fund are
reinvested by The Franklin for the benefit of the Fund and are taken into
account in determining the value of Accumulation Units and Annuity Units. As a
result, such income and gains are applied to increase reserves applicable to the
Fund. Under the Code, no federal income tax is payable by The Franklin on such
investment income or on realized capital gains of the Fund on assets held in the
Fund. However, if changes in the federal tax laws or interpretations thereof
result in The Franklin being taxed on income or gains attributable to the Fund,
then The Franklin may impose a charge against the Fund (with respect to some or
all Contracts) in order to set aside provisions to pay such taxes.
THE CONTRACTS: QUALIFIED PLANS
The manner in which payments received under a Contract are taxed for federal
income tax purposes depends on the form of payment. If payments are received in
the form of an annuity, then, in general, under Section 72 of the Code, such
payment is taxable to the recipient as ordinary income to the extent that such
payment exceeds the portion, if any, of the cost basis of the Contract that is
allocable to that payment. A payment received on account of partial redemption
of an annuity contract generally is taxable in whole or part. The taxation of a
partial redemption is governed by complex rules and a qualified tax advisor
should be consulted prior to a proposed partial redemption. If the Variable
Annuitant's life span exceeds his or her life expectancy, the Variable
Annuitant's cost basis will eventually be recovered, and any payments made after
that point will be fully taxable. If, however, the Annuity Payments cease after
the initial Annuity Payment Date by reason of the death of the Variable
Annuitant, the amount of any unrecovered cost basis in the Qualified Contract
will generally be allowed as a deduction to the Variable Annuitant for his or
her last taxable year.
Generally, payment of the proceeds of a Qualified Contract in a lump sum
instead of in the form of an annuity, either at or before maturity, also is
taxable as ordinary income to the extent the lump sum exceeds the cost basis of
the Qualified Contract. Taxation may be deferred, however, to the extent, if
any, that "rollover" treatment is available and elected for a particular
distribution.
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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 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
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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.
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 (other than
rollovers), if any, made to the Individual Retirement Annuity. Under special
rules, all individual retirement plans will be treated as one plan for purposes
of these rules.
Section 408(b) sets forth various requirements that an annuity contract
must satisfy before it will be treated as an Individual Retirement Annuity.
Although final regulations that interpret some of these requirements have been
adopted, other regulations have been proposed that interpret the additional
requirement that, under a Section 408(b) Individual Retirement Annuity, the
premiums may not be fixed. These proposed regulations, which contain certain
ambiguities, may, of course, be changed before they are issued in final form.
ACCORDINGLY, WHILE THE FRANKLIN BELIEVES THAT THE CONTRACTS OFFERED BY THIS
PROSPECTUS MEET THE REQUIREMENTS OF SECTION 408(b), THE FINAL REGULATIONS AND
THE CURRENTLY PROPOSED REGULATIONS THEREUNDER, THERE CAN BE NO ASSURANCE THAT
THE CONTRACTS QUALIFY AS INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408(b)
PENDING THE ISSUANCE OF COMPLETE FINAL REGULATIONS UNDER THAT CODE SECTION.
Individuals who are not "active participants" in an employer-related
retirement plan described in Section 219(g) of the Code will, in general, be
allowed to contribute to an Individual Retirement Annuity and to deduct a
maximum of $2,000 annually (or 100% of the individual's compensation if less).
This deduction is phased out at certain income levels for individuals who are
active participants in employer-related retirement plans. These income levels
vary depending on an individual's marital and tax filing status and are
scheduled to gradually increase in the future. Individuals who may not make
deductible contributions to an Individual Retirement Annuity may, instead, make
non-deductible contributions (up to the applicable maximum described above) on
which earnings will accumulate on a tax-deferred basis. If the Individual
Retirement Annuity includes non-deductible contributions, distributions will be
divided on a pro rata basis between taxable and non-taxable amounts. Special
rules apply if, for example, an
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individual contributes to an Individual Retirement Annuity for his or her own
benefit and to another Individual Retirement Annuity for the benefit of his or
her spouse.
Individual Retirement Annuities are subject to limitations on the time when
distributions must commence. In addition, the 10% penalty tax on early
withdrawals described under "Qualified Pension, Profit-Sharing and Annuity
Plans," above, also applies to Individual Retirement Annuities, except that the
circumstances in which the penalty tax will not apply are different in certain
respects. Further, for any year in which a Contract Owner borrows any money
under or by use of the Individual Retirement Annuity, the Contract ceases to
qualify under Section 408(b), and an amount equal to the fair market value of
the Contract as of the first day of such year will be includible in the Contract
Owner's gross income for such year.
The sale of a Contract for use with an Individual Retirement Annuity may be
subject to special disclosure requirements of the Internal Revenue Service.
Purchasers of a Contract for use with Individual Retirement Annuities will be
provided with supplemental information required by the Internal Revenue Service
or other appropriate agency. Such purchasers will have the right to revoke
their purchase within 7 days of the earlier of the establishment of the
Individual Retirement Annuity or their purchase. A Qualified Contract issued in
connection with an Individual Retirement Annuity will be amended as necessary to
conform to the requirements of the Code. Purchasers should seek competent
advice as to the suitability of the Contract for use with Individual Retirement
Annuities.
2. SECTION 408(k) SIMPLIFIED EMPLOYEE PENSIONS
An Individual Retirement Annuity described in Section 408(b) of the Code
that also meets the special requirements of Section 408(k) qualifies as a
Simplified Employee Pension. Under a Simplified Employee Pension, employers may
contribute to the Individual Retirement Annuities of their employees subject to
the 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
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which is not rolled over directly from a Section 401(a) qualified trust, a
Section 403(a) qualified annuity plan or a Section 403(b) qualified annuity
contract to an "eligible retirement plan" is subject to mandatory federal income
tax withholding in an amount equal to 20% of the eligible rollover distribution.
An "eligible retirement plan" generally includes a qualified trust described in
Section 401(a) of the Code, a qualified annuity plan described in Section 403(a)
of the Code, an individual retirement account described in Section 408(a) of the
Code or an Individual Retirement Annuity described in Section 408(b) of the
Code. Mandatory federal income tax withholding is required even if the Variable
Annuitant receives an eligible rollover distribution and rolls it over within 60
days to an eligible retirement plan. Federal income tax is not required to be
withheld from any eligible rollover distribution which is rolled over directly
from a qualified trust described in Section 401(a) of the Code, a qualified
annuity plan described in Section 403(a) of the Code or a qualified annuity
contract described in Section 403(b) of the Code to an eligible retirement plan.
Except with respect to certain payments delivered outside the United States
or any possession of the United States, federal income tax is not required to be
withheld from any Distribution which does not constitute an eligible rollover
distribution, if the Variable Annuitant or Beneficiary properly elects in
accordance with the prescribed procedures not to have withholding apply. In the
absence of a proper election not to have withholding apply, the amount to be
withheld from a Distribution which is not an eligible rollover distribution
depends upon the type of payment being made. Generally, in the case of a
periodic payment which is not an eligible rollover distribution, the amount to
be withheld from such payment is the amount that would be withheld therefrom
under specified wage withholding tables if the payment were a payment of wages
for the appropriate payroll period. In the case of a nonperiodic payment which
is not an eligible rollover distribution, the amount to be withheld is generally
equal to 10% of the amount of the Distribution.
The applicable federal law pertaining to income tax withholding from
Distributions is complex and contains many special rules and exceptions in
addition to the general rules summarized above. Special rules apply, for
example, if the Distribution is made to the surviving spouse of a Variable
Annuitant or if the Distribution is an eligible rollover distribution from a
qualified annuity contract under Section 403(b) of the Code. Any Variable
Annuitant or Beneficiary considering a Distribution should consult a qualified
tax advisor.
MANAGEMENT
The Fund is managed by a Board of Managers elected annually by the Contract
Owners. The Board of Managers currently has four members. The members of the
Board of Managers also serve as the Board of Managers of Franklin Life Variable
Annuity Fund 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.
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(3) Any change in the fundamental investment policies or fundamental
investment restrictions of the Fund.
(4) Election of members of the Board of Managers of the Fund (cumulative
voting is not permitted).
(5) Termination of the investment management agreement (such termination
may also be effected by the Board of Managers).
(6) Any other matter submitted to them by the Board of Managers.
The number of votes which a Contract Owner may cast as to any Contract,
except after the initial Annuity Payment Date, is equal to the number of
Accumulation Units credited to the Contract. With respect to any Contract as to
which Annuity Payments measured by Annuity Units have commenced, the Contract
Owner may cast a number of votes equal to (i) the amount of the assets in the
Fund to meet the Variable Annuity obligations related to such Contract, divided
by (ii) the value of an Accumulation Unit. Accordingly, the voting rights of a
Contract Owner will decline during the Annuity Payment period as the amount of
assets in the Fund required to meet the Annuity Payments decreases and, in
addition, will decline as the value of an Accumulation Unit increases.
Fractional votes will be counted.
An employee covered by an H.R. 10 Plan, if not the Contract Owner, will
have the right to instruct the Contract Owner with respect to all votes
attributable to the Contract. An employee covered by a Contract issued in
connection with a qualified pension or profit-sharing plan described in Section
401 of the Code will have the right to instruct the Contract Owner with respect
to votes attributable to his or her payments to the plan, if any, and, to the
extent authorized by the terms of the plan, with respect to any additional votes
under the Contract. If Annuity Payments are being made under an annuity to a
person who is not a Contract Owner, that person will have the right to instruct
the Contract Owner with respect to votes attributable to the amount of the
assets in the Fund to meet the Annuity Payments related to the Contract.
Contract Owners will cast votes with respect to which instructions have
been received in accordance with such instructions. Votes with respect to which
employees, Variable Annuitants or other persons to whom payments are being made
under a Contract are entitled to instruct the Contract Owner, but for which the
Contract Owner has received no instructions, shall be cast by the Contract Owner
for or against each proposal to be voted on in the same proportion as votes for
which instructions have been received by such Contract Owner. If no one is
entitled to instruct the Contract Owner, or if the Contract Owner receives no
instructions, all votes which the Contract Owner is entitled to cast may be cast
at his or her sole discretion. Neither the Fund nor The Franklin has any duty to
inquire as to the instructions received or the authority of the Contract Owner
to cast such votes; except to the extent that the Fund or The Franklin has
actual knowledge to the contrary, the votes cast by Contract Owners will be
considered valid and effective as among the Fund, The Franklin and other persons
having voting rights with respect to the Fund.
Should assets be maintained in the Fund with respect to contracts other
than those offered by this Prospectus, contract owners under such contracts
would be entitled to vote, and their votes would be computed in a similar
manner. Assets maintained by The Franklin in the Fund in excess of the amounts
attributable to the Contracts or other contracts of The Franklin will entitle
The Franklin to vote and its vote would be computed in a similar manner. The
Franklin will cast its votes in the same proportion as the votes cast by
Contract Owners and the owners of such other contracts.
The number of votes which each Contract Owner may cast at a meeting shall
be determined as of a record date to be chosen by the Board of Managers within
120 days of the date of the meeting. At least 20 days' written notice of the
meeting will be given to Contract Owners of record. To be entitled to vote or to
receive notice, a Contract Owner must have been such on the record date.
33
<PAGE>
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.
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.
The Board of Managers of the Fund, and the respective Board of Managers of
each of Franklin Life Variable Annuity Fund B ("Fund B") and Franklin Life Money
Market Variable Annuity Fund C ("Fund C"), have approved resolutions whereby
Contract Owners will be asked during 1998 to approve or to disapprove an
Agreement and Plan of Reorganization (the "Agreement") and related transactions
(together, the Agreement and related transactions are the "Reorganization")
whereby: (i) the Fund will be
34
<PAGE>
restructured into a single unit investment trust consisting of three
subaccounts; (ii) the assets of each of the Fund, Fund B and Fund C will be
liquidated and the proceeds transferred to one of the three subaccounts in the
restructured Fund (so that the interests of Contract Owners and of Fund B and
Fund C contract owners will continue as interests in the restructured Fund); and
(iii) each subaccount will invest exclusively in shares of a specified mutual
fund portfolio.
Contract Owners will be provided with a proxy statement describing the
Reorganization in detail. If the Reorganization is approved, then immediately
following the consummation of the Reorganization, each Contract Owner will have
an interest in a number of units in a subaccount of the restructured Fund having
a value equal to the value of that Contract Owner's interest in a Fund
immediately prior to the Reorganization.
YEAR 2000 TRANSITION
Like all financial services providers, The Franklin utilizes systems that
may be affected by Year 2000 transition issues and it relies on service
providers, including banks, custodians, and investment managers that also may be
affected. The Franklin and its affiliates have developed, and are in the
process of implementing, a Year 2000 transition plan, and are confirming that
their service providers are also so engaged. The resources that are being
devoted to this effort are substantial. It is difficult to predict with
precision whether the amount of resources ultimately devoted, or the outcome of
these efforts, will have any negative impact on The Franklin. However, as of
the date of this prospectus, it is not anticipated that Contract Owners will
experience negative effects on their investment, or on the services provided in
connection therewith, as a result of the Year 2000 transition implementation.
The Franklin currently anticipates that its systems will be Year 2000 compliant
on or about December 31, 1998, but there can be no assurance that The Franklin
will be successful, or that interaction with other service providers will not
impair The Franklin's services at that time.
LEGAL PROCEEDINGS
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and sales
practices, and a number of these lawsuits have resulted in substantial
settlements. The Franklin is a defendant in certain purported class action
lawsuits. These claims are being defended vigorously by The Franklin. Given
the uncertain nature of litigation and the early stages of this litigation, the
outcome of these actions cannot be predicted at this time. The Franklin
nevertheless believes that the ultimate outcome of all such pending litigation
should not have a material adverse effect on the Fund or on The Franklin's
financial position; however, it is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings could
have a material adverse effect on The Franklin's results of operations for a
given period. No provision has been made in the consolidated financial
statements related to this pending litigation because the amount of loss, if
any, from these actions cannot be reasonably estimated at this time.
The Franklin is a party to various other lawsuits and proceedings arising
in the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, The Franklin believes that the total amounts
that will ultimately be paid, if any, arising from these lawsuits and
proceedings will not have a material adverse effect on the Fund or on The
Franklin's results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred by
plaintiffs in jurisdictions like Alabama continues to increase and creates the
potential for an unpredictable judgment in any given suit.
REGISTRATION STATEMENT
35
<PAGE>
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 Other Contracts," above.
36
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
<S> <C>
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
</TABLE>
37
<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, 1998 for
Franklin Life Variable Annuity Fund A.
- -------------------------------------------------------------------------------
(Name)
- -------------------------------------------------------------------------------
(Street)
- -------------------------------------------------------------------------------
(City) (State) (Zip Code)
- -------------------------------------------------------------------------------
<PAGE>
INDIVIDUAL VARIABLE ANNUITY
CONTRACTS FOR 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, 1998 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, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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
</TABLE>
1
<PAGE>
GENERAL INFORMATION
The individual variable annuity contracts offered by the Prospectus dated
April 30, 1998 (the "Prospectus") are designed primarily to provide annuity
payments which will vary with the investment performance of Franklin Life
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 March 5, 1998.
INVESTMENT OBJECTIVES
The investment objectives and policies of the Fund are described under
"Investment Policies and Restrictions of the Fund" in the Prospectus.
LIMITATIONS ON SETTLEMENT OPTIONS
A. LIMITATIONS ON CHOICE OF SETTLEMENT OPTION
Described below are certain limitations on Settlement Options based on The
Franklin's current understanding of the distribution rules generally applicable
to 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.
3
<PAGE>
SEVENTH OPTION-INVESTMENT OPTION. This Option is not available under
Qualified Contracts issued in connection with any Qualified Plan.
B. LIMITATIONS ON COMMENCEMENT OF ANNUITY PAYMENTS
The Contract Owner may defer the initial Annuity Payment Date and continue
the Contract to a date not later than age 75 unless the provisions of the Code
or any governing Qualified Plan require Annuity Payments to commence at an
earlier date. For example, under Qualified Contracts, other than those issued
for use as Individual Retirement Annuities, the Contract Owner may not defer the
initial Annuity Payment Date beyond April 1 of the calendar year following the
later of the calendar year in which the Variable Annuitant (i) attains age
70-1/2, or (ii) retires, and must be made in a specified form or manner. In
addition, if the plan participant is a "5 percent owner" (as defined in the
Code), or if the Contract is issued for use as an Individual Retirement Annuity,
distributions generally must begin no later than the date described in (i). The
Franklin will require satisfactory proof of age of the Variable Annuitant prior
to the initial Annuity Payment Date.
MANAGEMENT
The following persons hold the positions designated with respect to the
Board of Managers. The table also shows any positions held with The Franklin and
Franklin Financial Services Corporation, a wholly-owned subsidiary of The
Franklin which serves as distributor for the Contracts. (See "Distribution of
the Contracts," below.)
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATIONS
NAME AND ADDRESS DURING PAST 5 YEARS POSITIONS HELD WITH THE FUND
<S> <C> <C>
ROBERT G. SPENCER* Officer of The Franklin; Chairman and Member, Board of Managers
#1 Franklin Square currently, Vice President
Springfield, Illinois 62713 of The Franklin; prior to
1996, 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 Managers
#1 Franklin Square currently, Director,
Springfield, Illinois 62713 Assistant Secretary and
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 Managers
2303 South 3rd Avenue Government, Montana State
Bozeman, Montana 59715 University, since 1992;
Professor of Government and
Public Affairs, Sangamon
State University, prior
thereto.
JAMES W. VOTH Chairman, Resource International Member, Board of Managers
50738 Meadow Green Court Corp., South Bend, Indiana
Granger, Indiana 46530 (marketing, manufacturing and
engineering service to industry);
prior to 1993, also President of
Resource International Corp.
4
<PAGE>
<CAPTION>
PRINCIPAL OCCUPATIONS DURING
NAME AND ADDRESS PAST 5 YEARS POSITIONS HELD WITH THE FUND
CLIFFORD L. GREENWALT Director, President and Chief Executive Member, Board of Managers
607 East Adams Street Officer, CIPSCO Incorporated, since
Springfield, Illinois 62739 October, 1990 (utility holding company);
Director, President and Chief Executive
Officer, Central Illinois Public Service
Company, Springfield, Illinois (a subsidiary
of CIPSCO Incorporated); Director, Electric
Energy, Inc., Joppa, Illinois; Director,
First of America Bank, Kalamazoo, Michigan;
Director, First of America Bank - Illinois,
N.A. (a subsidiary of First of America Bank).
</TABLE>
*DENOTES INDIVIDUALS WHO ARE "INTERESTED PERSONS" (AS DEFINED IN THE INVESTMENT
COMPANY ACT OF 1940) OF THE FUND, THE FRANKLIN OR FRANKLIN FINANCIAL SERVICES
CORPORATION BY REASON OF THE CURRENT POSITIONS HELD BY THEM AS SET FORTH IN THE
ABOVE TABLE.
The following table sets forth a summary of compensation paid for services
to the Fund and certain other entities that are deemed to be part of the same
"Fund Complex" in accordance with the rules of the Securities and Exchange
Commission to all members of the Board of Managers for the year ended December
31, 1997. Pursuant to the terms of its agreement to assume certain of the
Fund's administrative expenses, The Franklin pays all compensation received by
the members of the Board of Managers and the officers of the Fund. Members of
the Board of Managers or officers of the Fund who are also officers, directors
or employees of The Franklin do not receive any remuneration for their services
as members of the Board of Managers or officers of the Fund. Other members of
the Board of Managers received a fee of $1,400 for the year and, thus, the
aggregate direct remuneration of all such members of the Board of Managers was
$4,200 during 1997. It is currently anticipated that the annual aggregate
remuneration of such members of the Board of Managers to be paid during 1998
will not exceed $4,200.
<TABLE>
<CAPTION>
NAME OF PERSON, POSITION AGGREGATE TOTAL COMPENSATION
COMPENSATION RELATING TO FUND AND
RELATING TO FUND FUND COMPLEX PAID TO
EACH MEMBER
<S> <C> <C>
Each member of the Board
of Managers (except $1,400 (1) $4,200 (1)(2)
Robert G. Spencer)
</TABLE>
- --------------------------
(1) Paid by The Franklin pursuant to an agreement to assume certain Fund
administrative expenses.
(2) Includes amounts paid to members of the Board of Managers who are not
officers, directors or employees of The Franklin for service on the Boards
of Managers of Franklin Life Variable Annuity Fund 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 20, 1998, the owner of any contract participating in the
investment experience of the Fund.
5
<PAGE>
INVESTMENT ADVISORY AND OTHER SERVICES
The Franklin acts as investment manager of the Fund pursuant to an
Investment Management Agreement executed and dated January 31, 1995, which was
approved by Contract Owners at their annual meeting held on April 17, 1995 and
was renewed to January 31, 1999 by the Board of Managers of the Fund at its
meeting on January 19, 1998. The method of determining the advisory charge is
described in the Prospectus under "Investment Management Service Charge."
The Investment Management Agreement:
(1) May not be terminated by The Franklin without the prior approval of a
new investment management agreement by a "majority" (as that term is defined in
the Investment Company Act of 1940) of the votes available to the Contract
Owners, and may be terminated without the payment of any penalty on 60 days'
written notice by a vote of the Board of Managers of the Fund or by a vote of a
majority of the votes available to the Contract Owners.
(2) Shall continue in effect from the date of its execution until the
second anniversary of such execution date and thereafter shall continue in
effect from year to year but only if such continuance is specifically approved
at least annually by the Board of Managers or by a vote of a majority of the
votes available to Contract Owners, provided that in either case the
continuation is also approved by the vote of a majority of the Board of
Managers who are not "interested persons" (as that term is defined in the
Investment Company Act of 1940) of the Fund or of The Franklin, cast in person
at a meeting called for the purpose of voting on such approval.
(3) Shall not be amended without prior approval by a majority of the
votes available to the Contract Owners.
(4) Shall terminate automatically on "assignment" (as that term is defined
in the Investment Company Act of 1940).
A "majority" of the votes available to the Contract Owners is defined in
the Investment Company Act of 1940 as meaning the lesser of (i) Contract Owners
holding 67% or more of the voting power of the Contract Owners present at a
meeting if Contract Owners holding more than 50% of the total voting power of
all Contract Owners in the Fund are present or represented by proxy, or (ii)
Contract Owners holding more than 50% of the total voting power of all Contract
Owners in the Fund. For the voting rights of Contract Owners, see "Voting
Rights," in the Prospectus.
Under the Investment Management Agreement, The Franklin, subject to the
control of the Board of Managers of the Fund, is authorized and has the duty to
manage the investment of the assets of the Fund, subject to the Fund's
investment policies and the restrictions on investment activities set forth in
the Prospectus, and to order the purchase and sale of securities on behalf of
the Fund. In carrying out its obligations to manage the investment of the assets
of the Fund, The Franklin is committed by the Agreement, so long as it remains
in force, to pay all investment expenses of the Fund other than the following,
which the Fund will bear: (i) taxes, if any, based on the income of, capital
gains of assets in, or existence of, the Fund; (ii) taxes, if any, in connection
with the acquisition, disposition or transfer of assets of the Fund; (iii)
commissions or other capital items payable in connection with the purchase or
sale of the Fund's investments; and (iv) interest on account of any borrowings
by the Fund.
Robert G. Spencer and Elizabeth E. Arthur are "affiliated persons," as
defined in the Investment Company Act of 1940, of both The Franklin and the Fund
by reason of the positions held by them with The Franklin and the Fund as set
forth in the table under "Management," above.
6
<PAGE>
The Administration Agreement discussed under "Deductions and Charges Under
the Contracts-Sales and Administration Deduction" in the Prospectus provides
that The Franklin will provide all services and will assume all expenses
required for the administration of the Contracts, including expenses for legal
and accounting services to the Fund and the cost of such indemnification of
members of the Board of Managers and officers, agents, or employees of the Fund
as is provided by the Fund in its Rules and Regulations. The Franklin is not,
however, obligated under the Administration Agreement to pay the investment
management service charge discussed under "Investment Management Service
Charge," in the Prospectus. The Administration Agreement also provides that The
Franklin will from time to time adjust the assets of the Fund by withdrawing
sums in cash or by transferring cash to the Fund so that the assets of the Fund
will be equal to the actuarial value of the amounts payable under all
outstanding Contracts having an interest in the Fund. The Administration
Agreement may be amended or terminated at any time by mutual consent of the Fund
and The Franklin.
DISTRIBUTION OF THE CONTRACTS
Franklin Financial Services Corporation ("Franklin Financial"), #1 Franklin
Square, Springfield, Illinois 62713, is organized under the laws of the State of
Delaware and is a wholly-owned subsidiary of The Franklin. Franklin Financial
serves as "principal underwriter" (as that term is defined in the Investment
Company Act of 1940) for the Contracts, pursuant to a Sales Agreement with the
Fund. The present Sales Agreement was approved by the Board of Managers of the
Fund, and came into effect, on January 31, 1995. It was last renewed by the
Board of Managers on January 19, 1998. Franklin Financial's employment will
continue thereunder if specifically approved at least annually by the Board of
Managers of the Fund, or by a majority of votes available to Contract Owners,
provided that in either case the continuance of the Sales Agreement is also
approved by a majority of the members of the Board of Managers of the Fund who
are not "interested persons" (as that term is defined in the Investment Company
Act of 1940) of the Fund or Franklin Financial. The employment of Franklin
Financial as principal underwriter automatically terminates upon "assignment"
(as that term is defined in the Investment Company Act of 1940) of the Sales
Agreement and is terminable by either party on not more than 60 days' and not
less than 30 days' notice.
The Fund no longer issues new Contracts. To the extent that Stipulated
Payments continue to be made on Contracts, the Fund may nevertheless be deemed
to be offering interests in Contracts on a continuous basis. Contracts are sold
primarily by persons who are insurance agents or brokers for The Franklin
authorized by applicable law to sell life and other forms of personal insurance
and who are similarly authorized to sell Variable Annuities. Pursuant to an
Agreement, dated 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.
7
<PAGE>
Registration as a broker-dealer does not mean that the Securities and
Exchange Commission has in any way passed upon the financial standing, fitness
or conduct of any broker or dealer, upon the merits of any securities offering
or upon any other matter relating to the business of any broker or dealer.
Salesmen and employees selling Contracts, where required, are also licensed as
securities salesmen under state law.
Elizabeth E. Arthur is an "affiliated person" (as that term is defined in
the Investment Company Act of 1940) of both Franklin Financial and the Fund by
reason of the positions held by her with Franklin Financial and the Fund as set
forth in the table under "Management," above.
PORTFOLIO TURNOVER AND BROKERAGE
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 1996, the portfolio turnover rate was 4.77%; for 1997 the rate was
.70%.
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 1995, 1996 and 1997, a
total of $4,260, $1,865, and $1,695, 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
8
<PAGE>
affiliated with any brokerage firm (except with Franklin Financial Services
Corporation, as described under "Investment Management Service Charge," in the
Prospectus, and "Distribution of the Contracts," above) and no beneficial owner
of 5% or more of the total voting power of The Franklin or any of its parents is
known to be affiliated with any brokerage firm utilized by the Fund (except with
Franklin Financial 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. 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 LLP of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws.
EXPERTS
The statement of assets and liabilities, including the portfolio of
investments, as of December 31, 1997 and the related statement of operations for
the year then ended and the statements of changes in contract owners' equity for
each of the two years in the period then ended and the table of per-unit income
and changes in accumulation unit value for each of the three years in the period
then ended of the Fund, appearing herein, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein. The consolidated financial statements of The Franklin at
December 31, 1997 and 1996 and for each of the two years in the period ended
December 31, 1997, the eleven months ended December 31, 1995 and the one month
ended January 31, 1995, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein. The
table of per-unit income and changes in accumulation unit value for each of the
two years in the period ended December 31, 1994 of the Fund, appearing herein,
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report thereon appearing elsewhere herein. Such financial
statements and tables of per-unit income and changes in accumulation unit value
referred to above are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
9
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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, 1997 F-4
Statement of Operations for the year ended
December 31, 1997 F-4
Statements of Changes in Contract Owners' Equity
for the years ended December 31, 1997 and 1996 F-4
Portfolio of Investments, December 31, 1997 F-5
Notes to Financial Statements F-6
Supplementary Information - Per-Unit Income and Changes
in Accumulation Unit Value for the five years ended
December 31, 1997 F-7
The Franklin Life Insurance Company and Subsidiaries:*
Report of Independent Auditors F-8
Financial Statements:
Consolidated Statement of Income for the years ended
December 31, 1997 and 1996, the eleven months ended
December 31, 1995, and the one month ended January
31, 1995 F-9
Consolidated Balance Sheet, December 31, 1997 and 1996 F-10- F-11
Consolidated Statement of Shareholder's Equity for the
years ended December 31, 1997 and 1996, the eleven
months ended December 31, 1995, and the one month
ended January 31, 1995 F-12
Consolidated Statement of Cash Flows for the years
ended December 31, 1997 and 1996, the eleven months
ended December 31, 1995, and the one month ended,
January 31, 1995 F-13
Notes to Consolidated Financial Statements F-14 - F-38
</TABLE>
*The consolidated financial statements of The Franklin contained herein should
be considered only as bearing upon the ability of The Franklin to meet its
obligations under the Contracts.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Franklin Life 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.
ERNST & YOUNG LLP
Chicago, Illinois
January 30, 1998
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
two years in the period ended December 31, 1994. This table of per-unit income
and changes in accumulation unit value is the responsibility of the Fund's
management. Our responsibility is to express an opinion on this table of
per-unit income and changes in accumulation unit value based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the table of per-unit income and changes in
accumulation unit value is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the table of per-unit income and changes in accumulation unit value. An audit
also includes assessing the accounting principles used by management as well as
evaluating the overall presentation of the table of per-unit income and changes
in accumulation unit value. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the table of per-unit income and changes in accumulation unit
value referred to above presents fairly, in all material respects, the per-unit
income and changes in accumulation unit value for each of the two years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 1, 1995
F-3
<PAGE>
FRANKLIN LIFE 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
-------------
12,221,959
Cash on deposit 54,548
Dividends and interest receivable 19,871
-------------
Total Assets 12,296,378
Liability -due to The Franklin Life Insurance Company 1,489
-------------
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
---------- -------------
-------------
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Investment income
Dividends $ 167,447
Interest 83,552
----------
Total Income $ 250,999
Expenses
Mortality and expense charges $ 119,981
Investment management services 52,451
----------
Total expenses 172,432
------------
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
----------
Net realized gain 452,962
Net unrealized appreciation of investments
Beginning of year $3,584,070
End of year 5,298,442
----------
Net unrealized appreciation 1,714,372
------------
Net gain on investments 2,167,334
------------
Net increase in contract owners'
equity resulting from operations $2,245,901
------------
------------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
--------------------------
<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
--------------------------
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)
--------------------------
Net increase in contract owners' equity 873,673 992,303
Contract owners' equity at beginning
of year 11,421,216 10,428,913
--------------------------
Contract owners' equity at end of year $12,294,889 $11,421,216
--------------------------
--------------------------
</TABLE>
See Notes to Financial Statements
F-4
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
- ------------- -----------
<C> <S> <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
-----------
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
International Business
4,800 Machines Corporation 502,200
-----------
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
-----------
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
-----------
919,969
UTILITIES - TELEPHONE (2.29%)
5,000 BellSouth Corporation 281,562
-----------
TOTAL COMMON STOCKS
(COST-$5,026,849) 10,325,290
PRINCIPAL
AMOUNT
------
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
-----------
TOTAL SHORT-TERM NOTES
1,896,669
-----------
TOTAL INVESTMENTS (99.41%)
(COST-$6,923,517) 12,221,959
CASH AND RECEIVABLES, LESS
LIABILITY (.59%) 72,930
-----------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $12,294,889
-----------
-----------
</TABLE>
*NON-INCOME PRODUCING INVESTMENT IN 1997.
See Notes to Financial Statements
- --------------------------------------------------------------------------------
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.
F-5
<PAGE>
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
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
---------------------------------------------------------------------
UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ----------
<S> <C> <C> <C> <C>
Balance at
beginning of year 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
-----------------------------------------------------------------------
Balance at end
of year 124,714 $12,275,509 139,945 $11,403,341
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</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
--------------------------------
Net unrealized appreciation
of investments $5,298,442 $3,584,070
--------------------------------
--------------------------------
</TABLE>
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)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995 1994 1993
----------------------------------------------------------------------------
<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
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
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
----------------------------------------------------------------------------
End of year $98.429 $81.485 $69.200 $53.988 $53.593
----------------------------------------------------------------------------
----------------------------------------------------------------------------
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
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
-----------------------------
Board of Directors
and Shareholder
The Franklin Life Insurance Company
We have audited the accompanying consolidated balance sheet of The Franklin
Life Insurance Company (an indirect wholly-owned subsidiary of American
General Corporation) (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholder's equity and cash
flows for the years ended December 31, 1997 and 1996, the eleven months ended
December 31, 1995 and the one month ended January 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Franklin
Life Insurance Company at December 31, 1997 and 1996 and the consolidated
results of its operations and its cash flows for the years ended
December 31, 1997 and 1996, the eleven months ended December 31, 1995 and the
one month ended January 31, 1995, in conformity with generally accepted
accounting principles.
/s/ ERNST & YOUNG LLP
Chicago, Illinois
February 23, 1998
F-8
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
------------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-----------------------------------------------------------------------------
1997 1996 1995 1995
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $370.2 $ 418.6 $449.6 $34.5
Net investment income 518.6 521.5 468.8 41.3
Realized investment gains (losses) 12.8 2.5 7.2 (7.6)
Other 75.8 68.3 55.9 4.1
-----------------------------------------------------------------------------
Total revenues 977.4 1,010.9 981.5 72.3
Benefits and expenses
Benefits paid or provided
Death claims and other policy
benefits 250.6 240.6 236.3 21.5
Investment-type contracts 169.4 173.3 168.3 14.0
Dividends to policyholders 86.3 81.9 85.6 7.5
Change in policy reserves 54.6 95.9 148.5 11.0
Increase in participating policy-
holders' interests 4.7 12.0 11.0 1.0
Commissions 106.5 110.2 108.0 7.6
Operating costs and expenses 33.5 35.7 17.3 2.8
Amortization of deferred policy
acquisition costs 11.5 10.7 8.3 5.8
Amortization of cost of insurance
purchased, net of deferrals 45.3 51.1 29.0 0.8
-----------------------------------------------------------------------------
Total benefits and expenses 762.4 811.4 812.3 72.0
-----------------------------------------------------------------------------
Income before income tax expense 215.0 199.5 169.2 0.3
Income tax expense
Current 74.8 94.7 39.7 4.9
Deferred (benefit) (0.4) (25.3) 21.1 (4.7)
-----------------------------------------------------------------------------
Total income tax expense 74.4 69.4 60.8 0.2
-----------------------------------------------------------------------------
Net income $140.6 $ 130.1 $108.4 $ 0.1
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
ASSETS 1997 1996
------------ -----------
<S> <C> <C>
Investments
Fixed maturity securities(amortized cost:
$5,157.7; $5,152.3) $5,615.2 $5,476.5
Mortgage loans on real estate 621.6 607.0
Equity securities (cost: $1.1; $2.0) 4.4 5.0
Policy loans 332.7 327.4
Other long-term investments 46.3 47.6
-----------------------
Total investments 6,620.2 6,463.5
Cash and cash equivalents 39.5 24.6
Accrued investment income 100.3 99.7
Note receivable from parent 116.4 116.4
Preferred stock of affiliates, at cost 8.5 8.5
Receivable from brokers 26.5 17.7
Receivable from agents, less allowance ($4.3; 14.4 18.3
$0.4)
Amounts recoverable from reinsurers 41.5 84.0
Deferred policy acquisition costs 111.7 82.0
Cost of insurance purchased 303.9 407.8
Property and equipment, at cost, less accumulated
depreciation ($10.2; $7.2) 23.4 20.6
Other assets 27.4 29.6
Assets held in Separate Accounts 239.6 134.9
-----------------------
Total assets $7,673.3 $7,507.6
-----------------------
-----------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
<TABLE>
<CAPTION>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (CONTINUED)
(In millions, except share data)
DECEMBER 31
-------------------------
LIABILITIES 1997 1996
-------------------------
<S> <C> <C>
Insurance liabilities
Life, annuity and accident and health reserves $2,882.8 $2,864.7
Policy and contract claims 34.4 38.1
Investment-type contract deposits
and dividend accumulations 2,907.6 2,992.7
Participating policyholders' interests 211.4 209.7
Other 50.7 49.5
Income taxes
Current 2.2 6.4
Deferred 4.5 (19.0)
Intercompany payables 0.5 0.8
Accrued expenses and other liabilities 109.6 116.6
Liabilities related to Separate Accounts 239.6 134.9
-------------------------
Total liabilities 6,443.3 6,394.4
SHAREHOLDER'S EQUITY
Common stock ($2 par value;
30,000,000 shares authorized,
21,002,000 shares issued and outstanding) 42.0 42.0
Paid-in capital 886.1 886.1
Net unrealized gains on securities 150.8 106.6
Retained earnings 151.1 78.5
-------------------------
Total shareholder's equity 1,230.0 1,113.2
-------------------------
Total liabilities and shareholder's equity $7,673.3 $7,507.6
-------------------------
-------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven
Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------
1997 1996 1995 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 42.0 $ 42.0 $ 42.0 $ 42.0
-------------------------------------------------
-------------------------------------------------
Paid-in capital
Balance at beginning of period 886.1 884.3 884.3 803.0
Paid in during the period - 1.8 - -
Adjustment for the acquisition - - - 81.3
-------------------------------------------------
Balance at end of period 886.1 886.1 884.3 884.3
-------------------------------------------------
Net unrealized gains (losses)
on securities
Balance at beginning of period 106.6 187.5 - (8.1)
Change during the period 44.2 (80.9) 187.5 1.4
Adjustment for the acquisition - - - 6.7
-------------------------------------------------
Balance at end of period 150.8 106.6 187.5 -
-------------------------------------------------
Retained earnings
Balance at beginning of period 78.5 48.4 - 522.7
Net income 140.6 130.1 108.4 0.1
Dividends paid to parent (68.0) (100.0) (60.0) (250.0)
Adjustment for the acquisition - - - (272.8)
-------------------------------------------------
Balance at end of period 151.1 78.5 48.4 -
-------------------------------------------------
Total shareholder's equity
at end of period $1,230.0 $1,113.2 $1,162.2 $ 926.3
-------------------------------------------------
-------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
-------------------------------------------------------------------
1997 1996 1995 1995
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C> <C>
Net income $ 140.6 $ 130.1 $108.4 $ 0.1
Reconciling adjustments
Insurance liabilities 33.4 121.5 155.4 19.9
Deferred policy acquisition costs (40.4) (45.5) (59.4) (2.7)
Investment (gains) losses (6.1) (4.7) (11.4) (0.9)
Investment write-downs and reserves (6.7) 2.2 4.2 8.5
Cost of insurance purchased and intangibles 45.3 51.1 29.0 1.0
Interest credited, net of charges on investment
contract deposits 92.5 103.2 153.7 12.0
Purchase of trading securities - - - (1.5)
Proceeds from sale of trading securities - - - 85.5
Other, net (5.4) (107.9) 14.3 (7.1)
-------------------------------------------------------------------
Net cash provided by operating activities 253.2 250.0 394.2 114.8
-------------------------------------------------------------------
INVESTING ACTIVITIES
Investment purchases
Available-for-sale (891.8) (5,479.1) (1,055.8) -
Held-to-maturity - - - (0.8)
Other investments (125.2) (122.6) (95.7) (27.2)
Affiliated - - (124.5) -
Investment calls, maturities and sales
Available-for-sale 978.0 5,526.3 832.0 0.2
Held-to-maturity - - - 24.9
Other investments 70.7 65.1 127.1 6.3
Additions to property and equipment (6.7) (4.6) (3.5) (0.5)
-------------------------------------------------------------------
Net cash provided by (used for) investing activities 25.0 (14.9) (320.4) 2.9
-------------------------------------------------------------------
FINANCING ACTIVITIES
Policyholder account deposits 194.5 165.3 357.8 29.2
Policyholder account withdrawals (389.8) (297.1) (366.2) (32.6)
Additional capital contribution - 1.8 - -
Proceeds from intercompany borrowings 230.4 62.0 105.2 -
Repayments of intercompany borrowings (230.4) (62.1) (105.1) -
Dividend payments (68.0) (100.0) (60.0) (250.0)
-------------------------------------------------------------------
Net cash used for financing activities (263.3) (230.1) (68.3) (253.4)
-------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 14.9 5.0 5.5 (135.7)
Cash and cash equivalents at beginning of period 24.6 19.6 14.1 149.8
-------------------------------------------------------------------
Cash and cash equivalents at end of period $ 39.5 $ 24.6 $ 19.6 $ 14.1
-------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
1.1 NATURE OF OPERATIONS
The Franklin Life Insurance Company (Franklin) and its subsidiaries,
headquartered in Springfield, Illinois, provide life insurance and
annuity products to middle-income customers throughout the United
States. Franklin serves this customer base through 3,200 agents.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (GAAP) and include the
accounts of Franklin, and its subsidiaries, The American Franklin Life
Insurance Company (AMFLIC), Franklin Financial Services Corporation
(FFSC) and prior to December 31, 1995, The Franklin United Life
Insurance Company (FULIC). Franklin was formerly a wholly-owned
subsidiary of American Franklin Company (AFC), and is now an indirect,
wholly-owned subsidiary of American General Corporation (AGC) following
the dissolution of AFC in June of 1996. All material intercompany
transactions have been eliminated in consolidation.
On December 31, 1995, Franklin completed the sale of FULIC to American
General Life Insurance Company of New York (AGNY), an affiliated entity.
Franklin received $8.5 million of preferred stock of American General
Life Insurance Company, the parent of AGNY, as consideration. No gain
or loss was recognized on the transaction.
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities.
Ultimate results could differ from these estimates.
1.3 ACQUISITION
On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of
AGC, acquired AFC for $1.17 billion. The purchase price consisted of
$920 million in cash and a $250 million extraordinary cash dividend paid
by AFC to its former parent prior to closing. In addition, $6.3 million
of acquisition costs were capitalized as part of the acquisition.
F-14
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.3 ACQUISITION (CONTINUED)
The acquisition was accounted for using the purchase method of
accounting in accordance with the provisions of Accounting Principles
Board Opinion 16, "Business Combinations", and other existing accounting
literature pertaining to purchase accounting. Under purchase
accounting, the total purchase cost was allocated to the assets and
liabilities acquired based on a determination of their fair value.
Franklin's consolidated statements of income, shareholder's equity and
cash flows for the years ended December 31, 1997 and 1996, and the
eleven months ended December 31, 1995, are reported under the purchase
method of accounting and, accordingly, are not consistent with the basis
of presentation of the "Predecessor Basis" consolidated statements of
income, shareholder's equity and cash flows for the one month ended
January 31, 1995.
1.4 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES. All fixed maturity securities and
equity securities are classified as available-for-sale and recorded at
fair value. After adjusting related balance sheet accounts as if
unrealized gains (losses) had been realized, the net adjustment is
recorded in net unrealized gains (losses) on securities within
shareholder's equity. If the fair value of a security classified as
available-for-sale declines below its cost and this decline is
considered to be other than temporary, the security is reduced to its
fair value, and the reduction is recorded as a realized loss.
MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of
an allowance for losses. The allowance for losses covers all
non-performing loans and loans for which management has a concern based
on management's assessment of risk factors, such as potential
non-payment or non-monetary default. The allowance is based on a
loan-specific review and a formula that reflects past results and
current trends.
Loans for which Franklin determines that collection of all amounts due
under the contractual terms is not probable are considered to be
impaired. Franklin generally looks to the underlying collateral for
repayment of impaired loans. Therefore, impaired loans are considered
to be collateral dependent and are reported at the lower of amortized
cost or fair value of the underlying collateral, less estimated cost to
sell.
POLICY LOANS. Policy loans are reported at unpaid principal balance.
INVESTMENT INCOME. Interest on fixed maturity securities, policy loans
and performing and restructured mortgage loans is recorded as income
when earned and is adjusted for any amortization of premium or discount.
Interest on delinquent mortgage loans is recorded as income when
received. Dividends are recorded as income on ex-dividend dates.
F-15
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.4 INVESTMENTS (CONTINUED)
OTHER LONG TERM INVESTMENTS. Other long term investments represent
investments in joint ventures and limited partnerships and are reported
on the equity method.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses)
are recognized using the specific identification method.
1.5 CASH AND CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or
less are included in cash and cash equivalents. The carrying amount
approximates fair value.
1.6 DEFERRED POLICY ACQUISITION COSTS (DPAC)
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life contracts, insurance
investment contracts, and participating life insurance contracts is
charged to expense in relation to the estimated gross profits of those
contracts. The interest assumptions used to compute estimated gross
profits with respect to participating life insurance contracts were
7.75% at December 31, 1997 and 1996, and 8.5% at December 31, 1995.
DPAC associated with all other insurance contracts is charged to expense
over the premium-paying period or as the premiums are earned over the
life of the contract.
DPAC is adjusted for the impact on estimated future gross profits as if
net unrealized gains (losses) on securities had been realized at the
balance sheet date. The impact of this adjustment is included in net
unrealized gains (losses) on securities within shareholder's equity.
Franklin reviews the carrying amount of DPAC on at least an annual
basis. Management considers estimated future gross profits or future
premiums, expected mortality, interest earned and credited rates,
persistency, and expenses in determining whether the carrying amount is
recoverable.
1.7 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to certain insurance contracts in force at January 31,
1995 is reported as CIP. Interest is accreted on the unamortized
balance of CIP at rates of 7.0% to 8.5%. CIP is charged to expense and
adjusted for the impact of net unrealized gains (losses) on securities
in the same manner as DPAC. Franklin reviews the carrying amount of CIP
on at least an annual basis using the same methods used to evaluate
DPAC.
F-16
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.8 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the contract
holder. Therefore, Franklin's liability for these accounts equals the
value of the account assets. Investment income, realized investment
gains (losses), and policyholder account deposits and withdrawals
related to Separate Accounts are excluded from the consolidated
statements of income. Assets held in Separate Accounts are carried at
fair value.
1.9 INSURANCE LIABILITIES
Substantially all of Franklin's insurance liabilities relate to
long-duration contracts, which generally require performance over a
period of more than one year. The contract provisions normally cannot be
changed or canceled by Franklin during the contract period.
For interest-sensitive life insurance and insurance investment
contracts, reserves equal the sum of the policy account balances and
deferred revenue charges. Reserves for non-participating long-duration
contracts are based on estimates of the cost of future policy benefits
to be paid as a result of present and future claims due to death,
disability, surrender of a policy, or payment of an endowment. Reserves
are determined using the net level premium method. Interest assumptions
used to compute reserves ranged from 2.0% to 8.5% at December 31, 1997.
The liability for future policy benefits on participating life insurance
contracts is a net level reserve using the nonforfeiture interest rate
and mortality table of the plan of insurance.
1.10 PREMIUM RECOGNITION
Most receipts for annuities and interest-sensitive life insurance
contracts are classified as deposits instead of revenues. Revenues for
these contracts consist of mortality, expense, and surrender charges.
Policy charges that are designed to compensate Franklin for future
services are deferred and recognized in income over the period earned,
using the same assumptions used to amortize DPAC.
For limited-payment contracts, net premiums are recorded as revenue, and
the difference between the gross premium received and the net premium is
deferred and recognized in income in a constant relationship to
insurance in force. For all other long-duration contracts, premiums are
recognized when due.
F-17
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.11 PARTICIPATING LIFE INSURANCE
Participating life insurance contracts contain dividend payment
provisions that entitle the policyholders to participate in the earnings
of the contracts. Participating life insurance accounted for 46% and
47% of life insurance in force at December 31, 1997 and 1996
respectively, and 70%, 62%, 58%, and 69% of premiums and other
considerations for the years ended December 31, 1997 and 1996, the
eleven months ended December 31, 1995, and the one month ended January
31, 1995, respectively.
The portion of earnings allocated to participating policyholders that
cannot be expected to inure to Franklin's shareholder is excluded from
net income and shareholder's equity. Dividends to be paid on
participating life insurance contracts are determined annually based on
estimates of the contracts' earnings.
1.12 INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in
effect when the temporary differences reverse. The effect of a tax rate
change is recognized in income in the period of enactment. State income
taxes are included in income tax expense.
A change in deferred taxes related to fluctuations in fair value of
available-for-sale securities is included in net unrealized gains
(losses) on securities in shareholder's equity.
1.13 RECLASSIFICATION
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.
1.14 NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. Beginning in 1998, Franklin must adopt this statement for
all periods presented. Application of this statement will not change
recognition or measurement of net income and, therefore, will not impact
Franklin's consolidated results of operations or financial position.
F-18
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Investments
2.1 INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
Eleven
Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
---------------------------------------------------
In millions 1997 1996 1995 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $435.5 $434.6 $394.3 $33.9
Mortgage loans on real 58.3 58.8 54.3 4.6
estate
Policy loans 19.3 18.9 18.6 1.7
Other investments 9.5 13.5 9.1 1.2
---------------------------------------------------
Gross investment income 522.6 525.8 476.3 41.4
Investment expense 4.0 4.3 7.5 0.1
---------------------------------------------------
Net investment income $518.6 $521.5 $468.8 $41.3
---------------------------------------------------
---------------------------------------------------
</TABLE>
The carrying value of investments that produced no investment income
during 1997 totaled $12.4 million, or less than .19% of total invested
assets at December 31, 1997. The ultimate disposition of these assets
is not expected to have a material effect on Franklin's consolidated
results of operations or financial position.
F-19
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.2 REALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for fixed maturity and equity
securities, net of DPAC and CIP amortization were as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------------------------------
In millions 1997 1996 1995 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 15.4 $ 25.0 $ 13.8 $ -
Gross losses (6.2) (17.6) (1.9) -
------------------------------------------------------------------------
Total fixed maturity securities 9.2 7.4 11.9 -
------------------------------------------------------------------------
Equity securities
Gross gains 1.0 1.8 1.9 4.1
Gross losses - - (0.5) (5.4)
------------------------------------------------------------------------
Total equity securities 1.0 1.8 1.4 (1.3)
------------------------------------------------------------------------
Other 2.6 (6.7) (6.1) (6.3)
------------------------------------------------------------------------
Realized investment gains (losses) $ 12.8 $ 2.5 $ 7.2 $(7.6)
------------------------------------------------------------------------
------------------------------------------------------------------------
</TABLE>
Voluntary sales of investments resulted in the following realized gains
(losses):
<TABLE>
<CAPTION>
Realized
------------------
In millions Category Proceeds Gains Losses
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1997 AVAILABLE-FOR-SALE $577.6 $10.5 $ 3.1
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
Year Ended
December 31, 1996 Available-for-sale $807.0 $21.8 $15.4
- -------------------------------------------------------------------------------------
Eleven Months Ended
December 31, 1995 Available-for-sale $268.7 $ 8.5 $ 0.4
- -------------------------------------------------------------------------------------
One Month Ended
January 31, 1995 Trading $ 84.7 $ 4.1 $ 5.4
- -------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES
VALUATION. Amortized cost and fair value of fixed maturity and equity
securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In millions COST GAINS LOSSES VALUE
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $2,845.2 $228.9 $0.3 $3,073.8
Below investment grade 307.8 13.7 1.1 320.4
Public utilities 972.3 116.1 - 1,088.4
Mortgage-backed 750.7 67.4 0.1 818.0
Foreign governments 90.0 15.4 0.4 105.0
U.S. government 186.7 17.7 - 204.4
States/political subdivisions 4.8 0.2 - 5.0
Redeemable preferred stocks 0.2 - - 0.2
----------------------------------------------------------------------
Total fixed maturity securities $5,157.7 $459.4 $1.9 $5,615.2
----------------------------------------------------------------------
----------------------------------------------------------------------
Equity securities $ 1.1 $ 3.3 $ - $ 4.4
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
In millions Cost Gains Losses Value
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $2,747.7 $170.2
$6.3 $2,911.6
Below investment grade 239.7 9.0 1.4 247.3
Public utilities 1,064.7 86.9 - 1,151.6
Mortgage-backed 802.1 41.9 1.4 842.6
Foreign governments 96.2 11.0 - 107.2
U.S. government 190.1 13.9 0.1 203.9
States/political subdivisions 11.5 0.5 - 12.0
Redeemable preferred stocks 0.3 - - 0.3
-------------------------------------------------------------------
Total fixed maturity securities $5,152.3 $333.4 $9.2 $5,476.5
-------------------------------------------------------------------
-------------------------------------------------------------------
Equity securities $ 2.0 $ 3.0 $ - $ 5.0
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
MATURITIES. The contractual maturities of fixed maturity securities at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
In millions COST VALUE
- --------------------------------------------------------------------------------
FIXED MATURITY SECURITIES, EXCLUDING
MORTGAGE-BACKED SECURITIES, DUE
<S> <C> <C>
In one year or less $ 55.0 $ 55.4
In years two through five 785.0 825.8
In years six through ten 1,993.5 2,140.3
After ten years 1,573.5 1,775.7
Mortgage-backed securities 750.7 818.0
----------------------------
Total fixed maturity securities $5,157.7 $5,615.2
----------------------------
----------------------------
</TABLE>
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Corporate
requirements and investment strategies may result in the sale of
investments before maturity.
2.4 NET UNREALIZED GAINS ON SECURITIES
Net unrealized gains on available-for-sale securities included in
shareholder's equity at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- -------------------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 462.7 $ 336.4
Gross unrealized losses (1.9) (9.2)
DPAC fair value adjustment (10.4) (0.4)
CIP fair value adjustment (215.7) (160.9)
Participating policyholders'
interest (2.5) (1.8)
Deferred federal income taxes (81.4) (57.5)
-----------------------
Net unrealized gains
on securities $ 150.8 $ 106.6
-----------------------
-----------------------
</TABLE>
F-23
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE
DIVERSIFICATION. Diversification of the geographic location and type of
property collateralizing mortgage loans reduces the concentration of credit
risk. For new loans, Franklin requires loan-to-value ratios of 75% or
less, based on management's credit assessment of the borrower. At December
31, the mortgage loan portfolio was distributed as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------
In millions 1997 1996
-----------------------------------------------------------------------
<S> <C> <C>
Geographic distribution
East North Central $119.6 $120.0
East South Central 36.2 37.8
Mid Atlantic 35.5 21.5
Mountain 53.5 58.1
New England 22.5 19.2
Pacific 99.5 104.3
South Atlantic 175.2 167.7
West North Central 34.3 35.4
West South Central 53.5 57.9
Allowance for losses (8.2) (14.9)
-----------------------------------------------------------------------
Total $621.6 $607.0
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Property type
Retail $333.5 $312.3
Office 131.9 147.5
Industrial 96.7 89.4
Residential and other 67.7 72.7
Allowance for losses (8.2) (14.9)
-----------------------------------------------------------------------
Total $621.6 $607.0
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
IMPAIRED LOANS. The carrying value of impaired mortgage loans on real
estate and related interest income were as follows as of and for the year
ended December 31:
<TABLE>
<CAPTION>
In millions 1997 1996 1995
-------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans
With allowance * $ 8.0 $21.4 5.3
Without allowance 8.1 - 17.8
----------------------------------------------
Total impaired loans $16.1 $21.4 23.1
----------------------------------------------
----------------------------------------------
Average investment $18.8 $22.3 27.4
----------------------------------------------
----------------------------------------------
Interest income earned $ 0.8 $ 1.5 1.3
----------------------------------------------
----------------------------------------------
</TABLE>
* Represents gross amounts before allowance for mortgage loan losses of
$3.0 million, $4.9 million, and $1.6 million at December 31, 1997,
1996, and 1995, respectively. There were no impaired loans as of
January 31, 1995.
ALLOWANCE. Activity in the allowance for mortgage loan losses was as
follows:
<TABLE>
<CAPTION>
Eleven One Month
YEAR ENDED Year Ended Months Ended Ended
DECEMBER 31 December 31 December 31 January 31
---------------------------------------------------
In millions 1997 1996 1995 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of
period $14.9 $12.7 8.5 -
Net change in allowance * (6.7) 2.2 4.2 8.5
---------------------------------------------------
Balance at end of period $ 8.2 $14.9 12.7 8.5
---------------------------------------------------
</TABLE>
* Charged to realized investment gains (losses).
F-25
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.6 INVESTMENTS ON DEPOSIT
At December 31, 1997 and 1996, bonds and other investments carried at $19.3
million and $22.6 million, respectively, were on deposit with regulatory
authorities to comply with state insurance laws.
2.7 INVESTMENT RESTRICTIONS
Franklin is restricted by the insurance laws of its domiciliary state as to
the amount which it can invest in any entity. At December 31, 1997 and
1996, Franklin's largest investment in any one entity other than U.S.
government obligations and related party amounts was $62.8 million and
$64.6 million, respectively.
3. Fair Value of Financial Instruments
Carrying amounts and fair values for certain of Franklin's financial
instruments at December 31 are presented below. Care should be exercised
in drawing conclusions based on fair value, since (1) the fair values
presented do not include the value associated with all of Franklin's assets
and liabilities, and (2) the reporting of investments at fair value without
a corresponding revaluation of related policyholder liabilities can be
misinterpreted.
<TABLE>
<CAPTION>
DECEMBER 31
------------------------------------------------
1997 1996
------------------------------------------------
CARRYING FAIR Carrying Fair
In millions AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $5,615.2 $5,615.2 $5,476.5 $5,476.5
Mortgage loans on real
estate 621.6 659.4 607.0 637.7
Equity securities 4.4 4.4 5.0 5.0
Liabilities
Insurance investment
contracts $1,881.4 $ 1,813.3 $1,967.9 $1,892.9
Dividend accumulations $ 780.1 $ 780.1 $ 755.9 $ 755.9
</TABLE>
F-26
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used to estimate the fair value
of financial instruments.
FIXED MATURITY AND EQUITY SECURITIES. Fair values of fixed maturity and
equity securities were based on quoted market prices, where available. For
investments not actively traded, fair values were estimated using values
obtained from independent pricing services or, in the case of some private
placements, by discounting expected future cash flows using a current
market rate applicable to yield, credit quality, and average life of the
investments.
MORTGAGE LOANS ON REAL ESTATE. Fair value of mortgage loans was estimated
primarily using discounted cash flows, based on contractual maturities and
risk-adjusted discount rates.
POLICY LOANS. Policy loans have no stated maturity dates and are an
integral part of the related insurance contract. Accordingly, it is not
practicable to estimate a fair value. The weighted average interest rate
on policy loans was 6% in 1997 and 1996.
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts was estimated using cash flows discounted at market interest
rates.
DIVIDEND ACCUMULATIONS. Fair value disclosed for dividend accumulations
equals the amount of dividends payable on demand at the reporting date.
F-27
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Deferred Policy Acquisition Costs (DPAC)
An analysis of the changes in the DPAC asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
--------------------------------------------------------
In millions 1997 1996 1995 1995
- ------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period
balance $ 82.0 $ 47.5 $ - $ 510.6
Capitalization 51.9 56.2 67.7 8.5
Amortization (11.5) (10.7) (8.3) (5.8)
Effect of unrealized
gains on securities (10.0) 11.3 (11.7) -
Effect of realized
investment gains (0.7) (0.4) (0.2) -
Adjustment for the
acquisition(a) - - - (513.3)
Other - (21.9) - -
--------------------------------------------------------
End of period balance $111.7 $ 82.0 $47.5 $ -
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
(a) Represents the necessary elimination of the historical DPAC asset
required by purchase accounting.
F-28
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP)
An analysis of the changes in the CIP asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
---------------------------------------------------
In millions 1997 1996 1995 1995
- -----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period $ 407.8 $ 353.0 $ 656.6 $174.7
balance
Interest accretion 47.3 51.8 49.0 2.0
Additions 15.1 13.6 41.3 -
Amortization (107.7) (116.5) (118.0) (2.8)
Effect of unrealized
gains on securities (54.8) 109.1 (270.0) -
Effect of realized
investment gains (3.8) (3.2) (5.9) -
Incremental adjustment
for the acquisition(a) - - - 482.7
---------------------------------------------------
End of period balance $ 303.9 $ 407.8 $ 353.0 $656.6
---------------------------------------------------
</TABLE>
(a) Represents the incremental amount necessary to recognize the new CIP
asset attributable to the January 31, 1995 acquisition.
CIP amortization, net of interest accretion and additions, expected to
be recorded in each of the next five years is $41.7 million, $38.4
million, $35.3 million, $32.4 million, and $29.8 million.
6. Separate Accounts
Franklin administers three Separate Accounts for variable annuity
contracts. AMFLIC administers three Separate Accounts in connection
with the issuance of its Variable Universal Life and Variable Annuity
products.
F-29
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes
Franklin files a life/life consolidated return which includes Franklin and
AMFLIC. FFSC, a broker-dealer and wholly-owned subsidiary of Franklin,
files a separate return.
The method of allocation of tax expense is subject to a written agreement.
Allocation is based upon separate return calculations with current credit
for net losses and tax credits. Consolidated alternative minimum tax,
excise tax or surtax, if any, is allocated separately. The tax liability
of each subsidiary under this agreement shall not exceed the amount such
subsidiary would have paid if it had filed on a separate return basis.
Intercompany tax balances are to be settled no later than thirty (30) days
after the date of filing the consolidated return.
7.1 DEFERRED TAXES
Components of deferred tax liabilities and assets at December 31, were as
follows:
<TABLE>
<CAPTION>
In millions 1997 1996
---------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of investments $ 122.8 $ 63.1
DPAC and CIP 98.6 124.6
Other 10.2 15.7
-----------------------------
Total deferred tax liabilities 231.6 203.4
-----------------------------
Deferred tax assets, applicable to:
Policy reserves (124.5) (128.3)
Participating policyholders' (74.0) (73.6)
interests
Postretirement benefits (3.4) (4.0)
Basis differential of investments (7.5) (7.7)
Other (17.7) (8.8)
-----------------------------
Total deferred tax assets (227.1) (222.4)
-----------------------------
Net deferred tax liability (asset) $ 4.5 $ (19.0)
-----------------------------
-----------------------------
</TABLE>
Franklin expects adequate future taxable income to realize the deferred tax
assets. Accordingly, no valuation allowance is considered necessary.
A portion of life insurance income earned prior to 1984 is not taxable
unless it exceeds certain statutory limitations or is distributed as
dividends. Such income, accumulated in policyholders' surplus accounts,
totaled $200 million at December 31, 1997. At current corporate income tax
rates, the maximum amount of tax on such income is approximately $70
million. Deferred income taxes on these accumulations are not required
because no distributions are expected.
F-30
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.2 TAX EXPENSE
A reconciliation between the federal income tax rate and the effective tax
rate follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
--------------------------------------------------
1997 1996 1995 1995
--------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0% 35.0%
State taxes, net 0.9 0.3 0.9 36.3
Tax-exempt investment income (0.5) (0.7) (0.6) (39.3)
Amortization of goodwill - - - 34.3
Other (0.8) 0.2 0.6 0.4
--------------------------------------------------
Effective tax rate 34.6% 34.8% 35.9% 66.7%
--------------------------------------------------
--------------------------------------------------
</TABLE>
7.3 TAXES PAID
Federal income taxes paid for the years ended December 31, 1997 and 1996,
and the eleven months ended December 31, 1995, were $77 million, $74
million, and $53 million, respectively. State income taxes paid for the
years ended December 31, 1997 and 1996, and the eleven months ended
December 31, 1995, were $2 million, $2 million, and $1 million,
respectively. There were no federal or state income taxes paid during
January 1995.
8. Benefit Plans
8.1 PENSION PLANS
On January 1, 1996, Franklin's existing defined benefit pension plan (The
Franklin Plan) was merged with the plan sponsored by AGC (the AGC Plan).
The AGC Plan is a non-contributory defined benefit plan covering most
Franklin employees. Under the AGC Plan, pension benefits are based on the
participant's compensation and length of credited service. AGC's funding
policy is to contribute annually no more than the maximum deductible for
federal income tax purposes.
Equity and fixed maturity securities were 63% and 28%, respectively, of the
AGC Plan's assets at the Plan's most recent balance sheet date.
Additionally, 5% of the Plan's assets were invested in general investment
accounts of AGC's subsidiaries through deposit administration insurance
contracts.
F-31
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (continued)
The net pension (income)/expense and the computation of the projected
benefit obligation for years prior to January 1, 1996 were based on the
provisions of the Franklin Plan. The Franklin Plan provided for the
payment of retirement benefits; normally commencing at age 65, and also for
the payment of certain disability benefits. After meeting certain
qualifications, an employee acquired a vested right to future benefits.
Pension benefits were based on the participant's average monthly
compensation and length of credited service. Annual contributions made to
the plan were sufficient to satisfy legal funding requirements.
At December 31, 1995, fixed maturity securities constituted the majority of
The Franklin Plan's assets.
Prior to January 1, 1996, The Franklin Plan purchased annuity contracts
from Franklin to provide benefits for its retirees. For the eleven months
ended December 31, 1995, and the one month ended January 31, 1995, these
contracts provided approximately $3.9 million and $0.3 million annually for
retiree benefits, respectively.
During the fourth quarter of 1995, Franklin sponsored a program of special
incentives to those employees age 55 and over who elected early retirement.
The program concluded December 31, 1995. A withdrawal of $26.5 million was
made from the Franklin Plan in 1995 to provide full retirement benefits for
these employees who elected to retire under the program.
Net pension (income)/expense included the following components:
<TABLE>
<CAPTION>
Eleven One Month
YEAR ENDED Year Ended Months Ended Ended
DECEMBER 31 December 31 December 31 January 31
-----------------------------------------------------
In millions 1997 1996 1995 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits
earned) $ 0.7 $ 0.8 $ 0.9 $ 0.2
Interest cost 1.9 2.0 3.7 0.4
Actual return on plan
assets (8.4) (7.8) (11.5) (0.4)
Net amortization and
deferral 5.0 4.6 6.3 -
-----------------------------------------------------
Pension (income) expense $(0.8) $ (0.4) $ (0.6) $ 0.2
-----------------------------------------------------
</TABLE>
F-32
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (continued)
The funded status and the prepaid pension expense (included in other
assets) at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation, primarily vested $ 27.7 $ 27.0
Effect of increase in compensation levels 0.5 0.2
---------------------------
Projected benefit obligation 28.2 27.2
Plan assets at fair value 43.8 35.5
---------------------------
Plan assets at fair value in excess of projected
benefit obligation 15.6 8.3
Other unrecognized items, net (3.5) 3.0
---------------------------
Prepaid pension expense $ 12.1 $ 11.3
---------------------------
---------------------------
Weighted-average discount rate on benefit 7.25% 7.50%
obligation
Rate of increase in compensation levels 4.00 4.00
Expected long-term rate of return on plan assets 10.00 10.00
</TABLE>
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
On January 1, 1996, the assets in Franklin's voluntary employees'
beneficiary association (Franklin VEBA) for the retiree health and welfare
plan were transferred to the AGC VEBA Plan. No changes in assumptions or
plan provisions were made as a result of the transfer.
Under the AGC VEBA Plan, Franklin has life, medical, supplemental major
medical and dental plans for certain retired employees and agents. Most
plans are contributory, with retiree contributions adjusted annually to
limit employer contributions to predetermined amounts. Franklin has
reserved the right to change or eliminate these benefits at any time.
The life plans are fully insured for a two-year period. A portion of the
retiree medical and dental plans is funded through the AGC VEBA Plan; the
remainder is unfunded and self-insured. All of the retiree medical and
dental plans' assets held in the AGC VEBA Plan were invested in readily
marketable securities.
F-33
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
The funded status and the accrued postretirement benefit cost (included in
other liabilities) at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligation
Retirees $7.2 $ 7.3
Active plan participants
Fully eligible 0.3 0.2
Other 2.0 1.8
------------------------------------
Accumulated postretirement
benefit obligation (APBO) 9.5 9.3
Plan assets at fair value 0.2 -
------------------------------------
APBO in excess of plan assets
at fair value 9.3 9.3
Unrecognized net gain 0.5 2.2
------------------------------------
Accrued benefit cost $9.8 $11.5
------------------------------------
------------------------------------
Weighted-average discount
rate on benefit obligation 7.25% 7.50%
</TABLE>
Postretirement benefit expense (income) was as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
In millions 1997 1996 1995 1995
Service cost (benefits $0.1 $0.1 $0.1 $ -
earned)
Interest cost 0.7 0.7 0.9 (0.2)
Postretirement benefit
expense (income) $0.8 $0.8 $1.0 $(0.2)
</TABLE>
For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998; the rate was
assumed to decrease gradually to 5% by the year 2005 and remain at that
level. A 1% increase in the assumed rate results in a $0.1 million
increase in the accumulated postretirement benefit obligation and no
increase in postretirement benefit expense.
F-34
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Statutory Accounting
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity. In addition, state regulators
may permit statutory accounting practices that differ from prescribed
practices.
During 1995, Franklin received approval to loan $116.0 million to AGCL.
Franklin also received approval to pay an extraordinary dividend of $250
million to its former parent as part of the 1995 acquisition, and also
received approval to pay an extraordinary dividend of $60 million to AGCL.
At December 31, 1997 and 1996, Franklin had statutory shareholder's equity
of $521.0 million and $431.0 million, respectively. Statutory net income
was $129.7 million, $123.2 million, and $100.2 million for the years ended
December 31, 1997, 1996, and 1995, respectively.
As determined on a statutory basis, the statutory shareholder's equity and
net income of subsidiaries, were reported as follows:
<TABLE>
<CAPTION>
STATUTORY
-------------------------------------
In millions 1997 1996 1995
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Shareholder's Equity $17.7 $18.1 $ 9.9
-------------------------------------
-------------------------------------
Net Income $(0.6) $(1.9) $(4.7)
-------------------------------------
-------------------------------------
</TABLE>
Generally, Franklin is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends,
loans, or advances without the approval of the Illinois Insurance
Department. Under these restrictions, during 1998, loans or advances in
excess of $130.3 million and dividends in any twelve-month period
aggregating in excess of $129.7 million will require the approval of the
Illinois Insurance Department.
10. Consolidated Statement of Cash Flows
In addition to the cash activities shown in the consolidated statement of
cash flows, the following transactions, occurred:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest added to annuity and
other financial products $169.4 $173.3 $168.3 $14.0
</TABLE>
F-35
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance
Franklin limits its exposure to loss on any single insured to $2.1 million
by ceding additional risks through reinsurance contracts with other
insurers. Franklin diversifies its risk of reinsurance loss by using a
number of reinsurers that have strong claims-paying ability ratings. If
the reinsurer could not meet its obligations, Franklin would reassume the
liability. The likelihood of a material reinsurance liability being
reassumed by Franklin is considered to be remote.
A receivable is recorded for the portion of benefits paid and insurance
liabilities that have been reinsured. Reinsurance recoveries on ceded
reinsurance contracts were $41.5 million, $67.3 million, $63.3 million and
$1.4 million for the years ended December 31, 1997 and 1996, the eleven
months ended December 31, 1995, and the one month ended January 31, 1995,
respectively. The amount of reinsurance recoverable (payable) on paid and
unpaid losses was $(0.5) million and $1.8 million at December 31, 1997 and
1996, respectively. The cost of reinsurance is recognized over the life of
the reinsured policies using assumptions consistent with those used to
account for the underlying policies.
Reinsurance premiums included in premiums and other considerations were as
follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------------
<S> <C> <C> <C> <C>
In millions 1997 1996 1995 1995
- -------------------------------------------------------------------------------
Direct premiums
and other
considerations $415.3 $491.5 $500.1 $36.8
Reinsurance assumed 8.3 15.9 44.2 (0.8)
Reinsurance ceded (53.4) (88.8) (94.7) (1.5)
- -------------------------------------------------------------------------------
Premiums and other
considerations $370.2 $418.6 $449.6 $34.5
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
</TABLE>
12. Related Party Transactions
Franklin participates in a program of short-term borrowing with AGC to
maintain its long-term commitments. Franklin borrowed $230.4 million and
$62.0 million, and repaid $230.4 million and $62.1 million in 1997 and
1996, respectively. Interest was paid on the outstanding balances based on
the rate as stipulated in the program.
During 1995, Franklin purchased a 6.75% promissory note from AGCL for
$116.0 million to mature in 2005 (see Note 9).
During 1995, Franklin received $8.5 million of 8% non-voting preferred
stock of American General Life Insurance Company as consideration for the
sale of FULIC.
F-36
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Related Party Transactions (continued)
Franklin has entered into indefinite contracts for the performance of all
investment management services as well as cost allocation agreements with
its ultimate parent. Total expenses under these agreements were $2.5
million and $2.3 million for the years ended December 31, 1997 and 1996,
respectively, and $1.1 million for the eleven months ended December 31,
1995.
13. Legal Proceedings
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in
substantial settlements. Franklin is a defendant in such purported class
action lawsuits filed in 1997, asserting claims related to pricing and
sales practices. These claims are being defended vigorously by Franklin.
Given the uncertain nature of litigation and the early stages of this
litigation, the outcome of these actions cannot be predicted at this time.
Franklin management nevertheless believes the ultimate outcome of all such
pending litigation should not have a material adverse effect on Franklin's
financial position. It is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings
could have a material adverse effect on results of operations for a given
period. No provision for any adverse determinations in this pending
litigation has been made in the consolidated financial statements because
the amount of loss, if any, from these actions cannot be reasonably
estimated at this time.
Franklin is a party to various other lawsuits and proceedings arising in
the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, Franklin management believes the total
amounts that will ultimately be paid, if any, arising from these lawsuits
and proceedings will not have a material adverse effect on Franklin's
results of operations and financial position. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred
by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any given suit.
F-37
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guaranty Fund Assessments
Information about state guaranty fund assessments was as follows as of and
for the:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
------------------------------------------------------
In millions 1997 1996 1995 1995
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expense, included
in operating costs
and expenses $1.2 $ 0.7 $ 0.2 $0.6
Liability for
anticipated
assessments 3.6 7.5 8.5 -
Receivable for
expected recoveries
against future
premium taxes 7.4 11.2 11.2 -
- -------------------------------------------------------------------------------
</TABLE>
Changes in state laws could decrease the amount recoverable against future
premium taxes.
F-38
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN LIFE 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, 1997
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, 1997
Statement of Operations for the year ended
December 31, 1997
Statements of Changes in Contract Owners' Equity for
the two years ended December 31, 1997
Portfolio of Investments, December 31, 1997
Notes to Financial Statements
Supplementary Information - Per-Unit Income and Changes
in Accumulation Unit Value for the five years ended
December 31, 1997
The Franklin Life Insurance Company and Subsidiaries:
Report of Independent Auditors
Financial Statements:
Consolidated Statement of Income for the years ended
December 31, 1997 and 1996, the eleven months ended
December 31, 1995, and the one month ended
January 31, 1995
Consolidated Balance Sheet, December 31, 1997 and 1996
Consolidated Statement of Shareholder's Equity for the
years ended December 31, 1997 and 1996, the eleven
months ended December 31, 1995, and the one month
ended January 31, 1995
Consolidated Statement of Cash Flows for the years
ended December 31, 1997 and 1996, the eleven months
ended December 31, 1995, and the one month ended
January 31, 1995
Notes to Consolidated Financial Statements
Schedules to the financial statements have been omitted because they are
not required under the related instructions or are not applicable, or the
information has been shown elsewhere.
<TABLE>
<CAPTION>
(b) Exhibits:
<S> <C>
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).
C-1
<PAGE>
3 -- Custodian Agreement dated April 17, 1995 between The
Franklin Life Insurance Company and State Street Bank and
Trust Company is incorporated herein by reference to Exhibit
3 to Post-Effective Amendment No. 42 to Registrant's
Registration Statement on Form N-3, filed April 30, 1996
(File No. 2-36394).
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 (File No. 2-36394).
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 (File No. 2-36394).
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 are
incorporated herein by reference to Exhibit 8(b) to
Post-Effective Amendment No. 43 to Registrant's Registration
Statement on Form N-3, filed April 30, 1997 (File No.
2-36394).
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).
C-2
<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 LLP.
14 -- Not applicable.
15 -- Not applicable.
16 -- Not applicable.
17 -- Power of Attorney is incorporated herein by reference to
Exhibit 17 to Post-Effective Amendment No. 44 to
Registrant's Registration Statement on Form N-3, filed
February 26, 1998 (File No. 2-36394).
27 -- Financial Data Schedule meeting the requirements of
Rule 483.
</TABLE>
Item 29. Directors and Officers of Insurance Company
Information concerning the name, principal business address and positions and
offices with The Franklin of each officer and director of The Franklin is hereby
incorporated herein by reference to Item 33. Information concerning the
positions and offices with the Fund of Robert G. Spencer and Elizabeth E.
Arthur, the only directors or officers of The Franklin who hold positions or
offices with the Fund, is hereby incorporated herein by reference to the table
under "Management" in the Statement of Additional Information.
Item 30. Persons Controlled by or under Common Control with the Insurance
Company or Registrant.
There is no person controlled by or under common control with Registrant.
The Franklin is an indirect wholly-owned subsidiary of American General
Corporation ("AGC"). A list of the subsidiaries of AGC is set forth below.
The following chart sets forth the identities of, and the interrelationships
among, AGC and all affiliated persons within the holding company system.
The following is a list of American General Corporation's
subsidiaries(1),(2),(3),(4) as of December 31, 1997. All subsidiaries listed
are corporations, unless otherwise indicated. Subsidiaries of subsidiaries
are indicated by indentations and unless otherwise indicated, all
subsidiaries are wholly owned. Inactive subsidiaries are denoted by an
asterisk (*).
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation Insurer
- ---- ------------- -------
<S> <C> <C>
AGC Life Insurance Company(5) Missouri Yes
American General Life and Accident Insurance Company(6) Tennessee Yes
American General Exchange, Inc. Tennessee No
Independent Fire Insurance Company Florida Yes
American General Property Insurance Company of Florida Florida Yes
Old Faithful General Agency, Inc. Texas No
Independent Life Insurance Company Georgia Yes
C-3
<PAGE>
<CAPTION>
Jurisdiction of
Name Incorporation Insurer
- ---- ------------- -------
<S> <C> <C>
American General Life Insurance Company(7) Texas Yes
American General Annuity Service Corporation Texas No
American General Life Insurance Company of New York New York Yes
The Winchester Agency Ltd. New York No
The Variable Annuity Life Insurance Company Texas Yes
The Variable Annuity Marketing Company Texas No
VALIC Investment Services Company Texas No
VALIC Retirement Services Company Texas No
VALIC Trust Company Texas No
Astro Acquisition Corp. Delaware No
The Franklin Life Insurance Company Illinois Yes
The American Franklin Life Insurance Company Illinois Yes
Franklin Financial Services Corporation Delaware No
HBC Development Corporation Virginia No
Allen Property Company Delaware No
Florida Westchase Corporation Delaware No
Hunter's Creek Communications Corporation Florida No
Westchase Development Corporation Delaware No
American General Capital Services, Inc. Delaware No
American General Corporation* Delaware No
American General Delaware Management Corporation(1) Delaware No
American General Finance, Inc. Indiana No
AGF Investment Corp. Indiana No
American General Auto Finance, Inc. Delaware No
American General Finance Corporation(8) Indiana No
American General Finance Group, Inc. Delaware No
American General Financial Services, Inc.(9) Delaware No
The National Life and Accident Insurance Company Texas Yes
Merit Life Insurance Co. Indiana Yes
C-4
<PAGE>
<CAPTION>
Jurisdiction of
Name Incorporation Insurer
- ---- ------------- -------
<S> <C> <C>
Yosemite Insurance Company California Yes
American General Finance, Inc. Alabama No
American General Financial Center Utah No
American General Financial Center, Inc.* Indiana No
American General Financial Center, Incorporated* Indiana No
American General Financial Center Thrift Company* California No
Thrift, Incorporated* Indiana No
American General Independent Producer Division Co. Delaware No
American General Investment Advisory Services, Inc.* Texas No
American General Investment Holding Corporation(10) Delaware No
American General Investment Management Corporation(10) Delaware No
American General Realty Advisors, Inc. Delaware No
American General Realty Investment Corporation Texas No
American General Mortgage Company Delaware No
GDI Holding, Inc.*(11) California No
Ontario Vineyard Corporation Delaware No
Pebble Creek Country Club Corporation Florida No
Pebble Creek Service Corporation Florida No
SR/HP/CM Corporation Texas No
American General Property Insurance Company Tennessee Yes
Bayou Property Company Delaware No
AGLL Corporation(12) Delaware No
American General Land Holding Company Delaware No
AG Land Associates, LLC(12) California No
Hunter's Creek Realty, Inc.* Florida No
Summit Realty Company, Inc. So. Carolina No
Florida GL Corporation Delaware No
GPC Property Company Delaware No
Cinco Ranch East Development, Inc. Delaware No
C-5
<PAGE>
<CAPTION>
Jurisdiction of
Name Incorporation Insurer
- ---- ------------- -------
<S> <C> <C>
Cinco Ranch West Development, Inc. Delaware No
Hickory Downs Development, Inc. Delaware No
Lake Houston Development, Inc. Delaware No
South Padre Development, Inc. Delaware No
Green Hills Corporation Delaware No
Knickerbocker Corporation Texas No
American Athletic Club, Inc. Texas No
Pavilions Corporation Delaware No
USLIFE Corporation New York No
All American Life Insurance Company Illinois Yes
1149 Investment Corp. Delaware No
American General Life Insurance Company of Pennsylvania Pennsylvania Yes
New D Corporation* Iowa No
The Old Line Life Insurance Company of America Wisconsin Yes
The United States Life Insurance Company in the City of New York Yes
New York
USLIFE Advisers, Inc. New York No
USLIFE Agency Services, Inc. Illinois No
USLIFE Credit Life Insurance Company Illinois Yes
USLIFE Credit Life Insurance Company of Arizona Arizona Yes
USLIFE Indemnity Company Nebraska Yes
USLIFE Financial Corporation of Delaware* Delaware No
Midwest Holding Corporation Delaware No
I.C. Cal* Nebraska No
Midwest Property Management Co. Nebraska No
USLIFE Financial Institution Marketing Group, Inc. California No
USLIFE Insurance Services Corporation Texas No
USLIFE Realty Corporation Texas No
405 Leasehold Operating Corporation New York No
405 Properties Corporation* New York No
C-6
<PAGE>
<CAPTION>
Jurisdiction of
Name Incorporation Insurer
- ---- ------------- -------
<S> <C> <C>
USLIFE Real Estate Services Corporation Texas No
USLIFE Realty Corporation of Florida Florida No
USLIFE Systems Corporation Delaware No
</TABLE>
American General Finance Foundation, Inc. is not included on this list. It is a
non-profit corporation.
NOTES
1 The following limited liability companies were formed in the State of
Delaware on March 28, 1995. The limited liability interests of each are
jointly owned by AGC and AGDMC and the business and affairs of each are
managed by AGDMC:
American General Capital, L.L.C.
American General Delaware, L.L.C.
2 On November 26, 1996, American General Institutional Capital A ("AG Cap
Trust A"), a Delaware business trust, was created. On March 10, 1997,
American General Institutional Capital B ("AG Cap Trust B"), also a
Delaware business trust, was created. Both AG Cap Trust A's and AG Cap
Trust B's business and affairs are conducted through their trustees:
Bankers Trust Company and Bankers Trust (Delaware). Capital securities of
each are held by non-affiliated third party investors and common securities
of AG Cap Trust A and AG Cap Trust B are held by AGC.
3 On November 14, 1997, American General Capital I, American General Capital
II, American General Capital III, and American General Capital IV
(collectively, the "Trusts"), all Delaware business trusts, were created.
Each of the Trusts' business and affairs are conducted through its
trustees: Bankers Trust (Delaware) and James L. Gleaves (not in his
individual capacity but solely as Trustee).
4 On July 10, 1997, the following insurance subsidiaries of AGC became the
direct owners of the parenthetically indicated percentages of membership
units of SBIL B, L.L.C. ("SBIL B"), a U.S. limited liability company: VALIC
(22.6%), FL (8.1%), AGLA (4.8%) and AGL (4.8%).
Through its aggregate 40.3% interest in SBIL B, VALIC, FL, AGLA and AGL
indirectly own approximately 28% of the securities of SBI, an English
company, and 14% of the securities of ESBL, an English company, SBP, an
English company, and SBFL, a Cayman Islands company. These interests are
held for investment purposes only.
5 On December 23, 1994, AGCL purchased approximately 40% of the shares of
common stock of Western National Corporation ("WNC"), Western National Life
Insurance Company's ("WNL") indirect intermediate parent. Therefore, WNL
became approximately 40% indirectly controlled by AGC. On September 30,
1996, AGC purchased 7,254,464 shares of WNC's Series A Participating
Convertible Preferred Stock (the "Convertible Preferred Stock"). On
November 30, 1996, AGC contributed the Convertible Preferred Stock to AGCL.
On May 14, 1997, WNC's shareholders approved the conversion of 7,254,464
shares of WNC's Series A Participating Convertible Preferred Stock held by
AGCL into an equal number of WNC common stock. Thus, at present, the
percentage of WNC common stock owned directly by AGCL (and indirectly by
AGC) is 46.2%. WNC, a Delaware corporation, owns the following companies:
WNL Holding Corporation
Western National Life Insurance Company (TX)
Independent Advantage Financial & Insurance Services, Inc.
C-7
<PAGE>
WNL Investment Advisory Services, Inc.
Conseco Annuity Guarantee Corp.
WNL Brokerage Services, Inc.
WNL Insurance Services, Inc.
However, AGCL (1) holds the direct interest in WNC (and the indirect
interests in WNC's subsidiaries) for investment purposes; (2) does not
direct the operations of WNC or WNL; (3) has no representatives on the
Board of Directors of WNC; and (4) is restricted, pursuant to a
Shareholder's Agreement between WNC and AGCL, in its right to vote its
shares against the slate of directors proposed by WNC's Board of Directors.
Accordingly, although WNC and its subsidiaries technically are members of
the American General insurance holding company system under insurance
holding company laws, AGCL does not direct the operations of WNC or its
subsidiaries.
6 AGLA owns approximately 11% of Whirlpool Financial Corp. ("Whirlpool") on
a fully diluted basis. The total investment of AGLA in Whirlpool
represents approximately 3% of the voting power of the capital stock of
Whirlpool, but approximately 11% of the Whirlpool stock which has voting
rights. The interests in Whirlpool (which is a corporations that is not
associated with AGC) are held for investment purposes only.
7 AGL owns 100% of the common stock of American General Securities
Incorporated ("AGSI"), a full-service NASD broker-dealer. AGSI, in turn,
owns 100% of the stock of the following insurance agencies:
American General Insurance Agency, Inc. (Missouri)
American General Insurance Agency of Hawaii, Inc. (Hawaii)
American General Insurance Agency of Massachusetts, Inc.
(Massachusetts)
In addition, the following agencies are indirectly related to AGSI, but not
owned or controlled by AGSI:
American General Insurance Agency of Ohio, Inc. (Ohio)
American General Insurance Agency of Texas, Inc. (Texas)
American General Insurance Agency of Oklahoma, Inc. (Oklahoma)
Insurance Masters Agency, Inc. (Texas)
AGSI and the foregoing agencies are not affiliates or subsidiaries of AGL
under applicable holding company laws, but they are part of the AGC group
of companies under other laws.
8 American General Finance Corporation is the parent of an additional 48
wholly owned subsidiaries incorporated in 30 states and Puerto Rico for the
purpose of conducting its consumer finance operations, INCLUDING those
noted in footnote 7 below.
9 American General Financial Services, Inc. is the parent of an additional 7
wholly owned subsidiaries incorporated in 4 states and Puerto Rico for the
purpose of conducting its consumer finance operations.
10 American General Investment Management, L.P. is jointly owned by AGIHC and
AGIMC. AGIHC holds a 99% limited partnership interest, and AGIMC owns a 1%
general partnership interest.
11 AGRI owns only a 75% interest in GDI Holding, Inc.
12 AG Land Associates, LLC is jointly owned by AGLH and AGLL. AGLH holds a
98.75% managing interest and AGLL owns a 1.25% managing interest.
Item 31. Number of Holders of Securities.
As of February 20, 1998, the number of record holders of the sole class of
securities of Registrant was as indicated below:
C-8
<PAGE>
<TABLE>
<CAPTION>
(1) (2)
Title of Class Number of Record Holders
- ------------------------------------
<S> <C>
Accumulation Units Under 4,424
Variable Annuity Contracts
</TABLE>
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:
<TABLE>
<CAPTION>
(1) (2)
Name Business or Employment
- ------------------------------- --------------------------------------------
<S> <C>
Vickie J. Alton. . . . . . . . Director - Marketing Training, The Franklin
Elizabeth E. Arthur. . . . . . Director, Associate General Counsel and Assistant
Secretary, The Franklin
B. Shelby Baetz. . . . . . . . Secretary, The Franklin, since November, 1997; General
Counsel, American General Independent Producer Division,
Houston, Texas, since January, 1998; Associate General
Counsel, American General Corporation, Houston, Texas,
prior to January, 1998.
Earl W. Baucom . . . . . . . . Treasurer, The Franklin, since June 30, 1997; Senior Vice
President and Chief Financial Officer, The Franklin, since
June 10, 1996; Director, The Franklin, since August 21, 1996.
Robert M. Beuerlein. . . . . . Senior Vice President-Actuarial and Director, The Franklin
Mark R. Butler . . . . . . . . Director - Special Projects, Marketing, The Franklin
Philip D. Calderwood . . . . . Director - Actuary, The Franklin
Eldon R. Canary. . . . . . . . Vice President - Actuarial, The Franklin
Brady W. Creel . . . . . . . . Senior Vice President, Chief Marketing Officer and Director,
The Franklin, since September 3, 1996; Regional Manager,
The Franklin, prior to September, 1996.
C-9
<PAGE>
<CAPTION>
(1) (2)
Name Business or Employment
- ------------------------------- --------------------------------------------
<S> <C>
James S. D'Agostino, Jr. . . . Vice Chairman and Director, The Franklin, since May 27, 1997;
President, American General Corporation, Houston, Texas,
since April 24, 1997; Chief Executive Officer, American
General Life and Accident Insurance Company, Nashville,
Tennessee, from July 1, 1995 to March 5, 1997.
Steve A. Dmytrack. . . . . . . Vice President, The Franklin, since August 24, 1995
Paul C. Ely. . . . . . . . . . Director - Group Insurance, The Franklin
Barbara Fossum . . . . . . . . Senior Vice President, The Franklin, since March 20, 1998;
Vice President, The Franklin, from June, 1995 to March 20, 1998.
Ross D. Friend . . . . . . . . Senior Vice President and General Counsel, The Franklin,
since September 3, 1996; Assistant Secretary, The Franklin, since
November 13, 1997; Secretary, The Franklin, from September 3,
1996 to November 13, 1997; Attorney-in-Charge, Prudential Life
Insurance Company, Jacksonville, Florida, from July, 1995 to
September, 1996.
Jerry P. Jourdan . . . . . . . Director of Information Services, The Franklin, since January 31, 1996;
Assistant Vice President, The Franklin, prior thereto
Darrell J. Malano. . . . . . . Vice President, The Franklin
Margaret L. Manola . . . . . . Director - Marketing, The Franklin
Rodney O. Martin, Jr.. . . . . Director and Senior Chairman, The Franklin; President and Chief
Executive Officer, American General Life Insurance Company,
Houston, Texas, since August, 1996; President, American General Life
Insurance Company of New York, Syracuse, New York, from
November, 1995 to August, 1996.
Thomas K. McCracken. . . . . . Director - Marketing, The Franklin
Mark R. McGuire. . . . . . . . Vice President, The Franklin, since January 6, 1997; Consultant/Manager,
American General Life Insurance Company, Houston, Texas, prior to
January, 1997.
Sylvia A. Miller . . . . . . . Vice President, The Franklin
Cheryl E. Morton . . . . . . . Vice President - Actuarial, The Franklin
C-10
<PAGE>
<CAPTION>
(1) (2)
Name Business or Employment
- ------------------------------- --------------------------------------------
<S> <C>
Jon P. Newton. . . . . . . . . Director and Vice Chairman, The Franklin, since January 31, 1996;
Vice Chairman and General Counsel, American General Corporation,
2929 Allen Parkway, Houston, Texas 77019 since October 26, 1995.
James M. Quigley . . . . . . . Vice President, The Franklin, since August 24, 1995.
Gary D. Reddick. . . . . . . . Director, The Franklin since February 22, 1995; Vice Chairman,
The Franklin, since July 1, 1997; Executive Vice President,
The Franklin, from February 22, 1995 to July 1, 1997.
Dale W. Sachtleben . . . . . . Vice President, The Franklin
Richard W. Scott . . . . . . . Vice President and Chief Investment Officer, The Franklin,
since April, 1998; Executive Vice President and Chief Investment
Officer, American General Corporation, Houston, Texas, since
February, 1998; Vice Chairman and Chief Investment Officer, Western
National Corporation, Houston, Texas, from February, 1997 to
February, 1998; Vice Chairman, Chief Investment Officer and General
Counsel, Western National Corporation, from July, 1996 to
February, 1997; Executive Vice President, General Counsel and
Chief Investment Officer, Western National Corporation, from
May, 1995 to July, 1996.
William A. Simpson . . . . . . Chairman, Chief Executive Officer and President, The Franklin,
since September 5, 1997; President and Chief Executive Officer,
The Old Line Life Insurance Company of America, Milwaukee,
Wisconsin, from May 1, 1990 to September 8, 1997; President-Life
Insurance Division, USLIFE Corporation, New York, New York, from
February, 1996 to May, 1996; President and Chief Executive Officer,
USLIFE Corporation from January, 1995 to February, 1996.
Robert G. Spencer. . . . . . . Vice President, The Franklin
T. Clayton Spires. . . . . . . Director, Corporate Tax, The Franklin, since February 3, 1997;
Assistant Vice President and Tax Manager, First Colony Life,
Lynchburg, Virginia, prior to February, 1997.
J. Alan Vala . . . . . . . . . Director - Agency Secretary, The Franklin
David G. Vanselow. . . . . . . Director - Communications, The Franklin
Cynthia P. Wieties . . . . . . Director of Communications, The Franklin, since March 19, 1997; Assistant
Vice President, The Franklin, prior to March, 1997.
</TABLE>
Item 34. Principal Underwriters.
(a) Franklin Life Variable Annuity Fund 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
C-11
<PAGE>
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.
<TABLE>
<CAPTION>
(1) (2) (3)
Name Positions and Offices with Positions and Offices with
Underwriter Registrant
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Elizabeth E. Arthur Assistant Secretary Secretary to the Board of Managers
Bruce R. Baker Assistant Vice President and None
665 North Newbridge 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 Marketing Officer
Levittown, NY 11756
Ross D. Friend Director, Vice President None
and Secretary
James L. Gleaves Assistant Treasurer None
2929 Allen Parkway
Houston, TX 77019
Karen Kunz Chief Financial Officer None
and Director of
Compliance and Administration
Deanna Osmonson Vice President None
and Assistant Secretary
Gary D. Osmonson President and Director None
Gary D. Reddick Vice Chairman and Director None
William A. Simpson Chairman of the Board None
Dan E. Trudan Vice President and Assistant None
Secretary
</TABLE>
C-12
<PAGE>
(c) Information regarding commissions and other compensation received by each
principal underwriter, directly or indirectly, from Registrant during 1997,
Registrant's last fiscal year, is set forth below:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Net Underwriting Compensation on
Name of Principal Discounts and Redemption or Brokerage Other
Underwriters Commissions Annuitization Commissions Compensation
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Franklin Financial $11,286 -0- -0- -0-
Services Corporation
</TABLE>
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.
(e) The Registrant is relying upon the "no-action" letter of the Securities
and Exchange Commission dated November 28, 1988 in response to the American
Council of Life Insurance with respect to restrictions on withdrawal of amounts
from Contracts issued in connection with annuity purchase plans meeting the
requirements of Internal Revenue Code Section 403(b), which amounts are
attributable to contributions made on or after January 1, 1989 pursuant to a
salary reduction agreement or to income earned on or after January 1, 1989 with
respect to contributions made pursuant to a salary reduction agreement. The
Registrant represents that it has complied with the requirement of numbered
paragraphs (1) through (4) of such "no-action" letter.
(f) The Franklin Life Insurance Company hereby represents that the fees and
charges deducted under the Contracts, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by The Franklin Life Insurance Company.
C-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 ("1933 Act") and
the Investment Company Act of 1940 ("1940 Act"), Franklin Life 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 28th day of April, 1998.
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Clifford L. Greenwalt* Member, Board April 28, 1998
- --------------------------- of Managers
(Clifford L. Greenwalt)
/s/ Robert C. Spencer* Member, Board April 28, 1998
- --------------------------- of Managers
(Robert.C. Spencer)
/s/ Robert G. Spencer* Chairman, Board April 28, 1998
- --------------------------- of Managers
(Robert G. Spencer)
/s/ James W. Voth* Member, Board April 28, 1998
- --------------------------- of Managers
(James W. Voth)
/s/ Elizabeth E. Arthur Secretary, Board April 28, 1998
- --------------------------- of Managers
(Elizabeth E. Arthur)
/s/ Elizabeth E. Arthur
- ---------------------------
*By Elizabeth E. Arthur, Attorney-in-Fact
</TABLE>
C-14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 ("1933 Act") and
the Investment Company Act of 1940 ("1940 Act"), The Franklin Life Insurance
Company certifies that it meets the requirements of 1933 Act Rule 485(b) for
effectiveness of this Registration Statement and has duly caused this
Post-Effective Amendment to the Registration Statement under the 1933 Act and
this Amendment to the Registration Statement under the 1940 Act to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Springfield, and State of Illinois, on the 28th day of April, 1998.
THE FRANKLIN LIFE INSURANCE COMPANY
By /s/ William A. Simpson
----------------------------------------------
(William A. Simpson, Chairman, Chief Executive
Officer and President)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below by
the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Earl W. Baucom* Senior Vice President, Chief April 28, 1998
- ------------------------------ Financial Officer and Treasurer
(Earl W. Baucom) (principal financial officer and
principal accounting officer)
and Director
/s/ Robert M. Beuerlein* Senior Vice President- April 28, 1998
- ------------------------------ Actuarial and Director
(Robert M. Beuerlein)
/s/ Brady W. Creel* Senior Vice President, April 28, 1998
- ------------------------------ Chief Marketing Officer and Director
(Brady W. Creel)
- ------------------------------ Director _________, 1998
(James S. D'Agostino, Jr.)
- ------------------------------ Director _________, 1998
(Rodney O. Martin, Jr.)
- ------------------------------ Director _________, 1998
(Jon P. Newton)
/s/ Gary D. Reddick* Vice Chairman April 28, 1998
- ------------------------------ and Director
(Gary D. Reddick)
/s/ William A. Simpson Chief Executive Officer, April 28, 1998
- ------------------------------ President and Director
(William A. Simpson) (principal executive officer)
/s/ Elizabeth E. Arthur
- ------------------------------
* By Elizabeth E. Arthur,
Attorney-in-Fact
</TABLE>
C-15
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Page
-------
<C> <S> <C>
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 (File No. 2-36394).
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 (File No.
2-36394).
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 (File No. 2-36394).
(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>
<CAPTION>
Exhibit Page
-------
<C> <S> <C>
(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 are incorporated herein by reference
to Exhibit 8(b) to Post-Effective Amendment
No. 43 to Registrant's Registration Statement
on Form N-3, Filed April 30, 1997 (File No.
2-36394).
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.
<PAGE>
<CAPTION>
Exhibit Page
-------
<C> <S> <C>
(c) -- Consent of Coopers & Lybrand L.L.P.,
Independent Accountants.
(d) -- Consent of Sutherland, Asbill & Brennan LLP.
14 -- Not applicable.
15 -- Not applicable.
16 -- Not applicable.
17 -- Power of Attorney is incorporated herein by
reference to Exhibit 17 to Post-Effective
Amendment No. 44 to Registrant's Registration
Statement on Form N-3, filed February 26,
1998 (File No. 2-36394).
27 -- Financial Data Schedule meeting the
requirements of Rule 483.
</TABLE>
<PAGE>
Exhibit 13(a)
LIST OF CONSENTS PURSUANT TO RULE 483(c)
Consent of Ernst & Young LLP, independent auditors, appears as Exhibit 13(b)
hereto.
Consent of Coopers & Lybrand L.L.P., independent accountants, appears as Exhibit
13(c) hereto.
Consent of Sutherland, Asbill & Brennan LLP appears as Exhibit 13(d) hereto.
<PAGE>
Exhibit 13(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions "Per-Unit Income
and Changes in Accumulation Unit Value" and "Experts" and to the use of our
report dated January 30, 1998, with respect to the statement of assets and
liabilities, including the portfolio of investments, as of December 31, 1997 and
the related statement of operations for the year then ended and the statements
of changes in contract owners' equity for each of the two years in the period
then ended and the table of per-unit income and changes in accumulation unit
value for each of the three years in the period then ended of Franklin Life
Variable Annuity Fund A, and our report dated February 23, 1998, with respect to
the consolidated financial statements of The Franklin Life Insurance Company as
of December 31, 1997 and 1996 and for each of the two years in the period ended
December 31, 1997, the eleven months ended December 31, 1995 and the one month
ended January 31, 1995, in this Post-Effective Amendment No. 45 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, 1998
<PAGE>
Exhibit 13(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form N-3 (File
No. 2-36394) and related Prospectus and Statement of Additional Information of
Franklin Life Variable Annuity Fund A of 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 two years in the period
ended December 31, 1994.
We also consent to the references to our firm under the captions "Per Unit
Income and Changes in Accumulation Unit Value" and "Experts".
/s/ Coopers & Lybrand L.L.P.
------------------------
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 28, 1998
<PAGE>
Exhibit 13(d)
We consent to the reference to our firm under the heading "Legal
Matters" in the statement of additional information included in Post-Effective
Amendment No. 45 to the Registration Statement on Form N-3 for Franklin Life
Variable Annuity Fund A (File No. 2-36394). In giving this consent, we do
not admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act of 1933.
/s/ Sutherland, Asbill & Brennan LLP
--------------------------------
SUTHERLAND, ASBILL & BRENNAN LLP
Washington, D. C.
April 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE YEAR ENDING 12-31-97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<INVESTMENTS-AT-COST> 6,923,517
<INVESTMENTS-AT-VALUE> 12,221,959
<RECEIVABLES> 19,871
<ASSETS-OTHER> 54,548
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 12,296,378
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 1,489
<TOTAL-LIABILITIES> 1,489
<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> 12,294,889
<DIVIDEND-INCOME> 167,447
<INTEREST-INCOME> 83,552
<OTHER-INCOME> 0
<EXPENSES-NET> 172,432
<NET-INVESTMENT-INCOME> 78,567
<REALIZED-GAINS-CURRENT> 452,962
<APPREC-INCREASE-CURRENT> 1,714,372
<NET-CHANGE-FROM-OPS> 2,245,901
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 2,945
<NUMBER-OF-SHARES-REDEEMED> 18,176
<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>
