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[LOGO]
FRANKLIN LIFE INSURANCE COMPANY
* AN AMERICAN GENERAL COMPANY
#1 FRANKLIN SQUARE, SPRINGFIELD, ILLINOIS 62713-0001
Dear Contract Owner:
We are pleased to provide this 1998 annual report which shows the status of and
balances in your Franklin Life Variable Annuity Fund A contract.
INVESTMENT POSITION
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998 December 31, 1997
----------------- ------------- -----------------
<S> <C> <C> <C>
VARIABLE PORTION:
Accumulation Unit Value $123.03 $108.49 $98.43
------- ------- ------
------- ------- ------
Percentage Change From:
December 31, 1997 +24.99%
--------
--------
June 30, 1998 +13.40%
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--------
</TABLE>
The accumulation unit value is based on the market price of the investments held
by the Fund. A listing of the investments held at December 31, 1998 appears on
page 3.
FIXED PORTION:
Additional units in the fixed rate portion of your annuity arising from
contributions credited during the contract year ending in 1998 were based
on a 6.25% interest rate, less a contract expense charge. If your contract
anniversary is in the first half of 1999, the interest rate for the fixed
portion of your annuity applicable to contributions made during the
contract year ending in 1999 is anticipated to be 5.00%, less a contract
expense charge. Amounts selected for investment in the fixed rather than
the variable portion of your annuity do not participate in the investment
experience of the Fund. Contract units resulting from interest added or
contributions made prior to the contract year ending in 1998 continue to be
credited with additional interest based on investment yields which reflect
the years during which such units were purchased. Crediting rates are not
guaranteed for future years.
The United States economy continued its strong growth in 1998, as measured by
the Gross Domestic Product (GDP), increasing at an annual rate of 3.9%. GDP is
expected to slow in 1999, with growth being 2.0% to 2.5%. Employment finished
strong in 1998, with the December unemployment rate at 4.3% and the average
unemployment rate for all of 1998 at 4.5%. New jobs continued to be created
during the year, especially in the service sector. The Federal Reserve Board
lowered the Federal Funds rate by a total of 75 basis points, over three months
in late 1998, to the current level of 4.75%. The stock market had another
excellent year, the fourth year in a row. The Standard & Poor's 500 Index was up
26.69% in 1998. The stock market had a correction in the third quarter, but with
the short term interest rate reduction in the fourth quarter, the stock market
rebounded in the fourth quarter to close at or near record levels. Stocks of
U.S. corporations continue to carry very high price/earnings ratios and
corporate earnings could slow if the economy slows as indicated above.
Inflation, as measured by the Gross Domestic Product deflator, was a very
acceptable 1.7% in 1997, declining to 1.0% by the third quarter of 1998. The
Consumer Price Index increased by 1.7% in 1997 and a slightly lower +1.6% for
1998. The Producers Price Index declined 0.2% in November, but increased 0.4% in
December in light of higher tobacco prices. A decline was recorded in six of the
twelve months of 1998, producing a decline in wholesale prices of 0.1% in 1998,
against a decline in 1997 of 1.2%. The Producers Price Index indicates that
inflation should remain under control for several more months. For stocks to
continue to move higher, corporate earnings will need to improve, interest rates
decline and investors willing to accept higher price/earnings ratios for stocks.
1999 will be a very challenging year for investors in the stock market.
In today's fast-paced world, products, markets, client's needs, and individual
risk tolerance all change. In this environment, you may want to take some extra
time and review how well this product continues to meet your retirement
investment objectives. A Franklin Life representative would be happy to review
your financial situation with you and suggest the most appropriate mix of
products to provide financial security consistent with your risk tolerance.
Cordially yours,
/s/ William A. Simpson
William A. Simpson
Chairman and Chief Executive Officer
1
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FRANKLIN LIFE VARIABLE ANNUITY FUND A
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
ASSETS
Investments-at fair value (cost-$5,825,740)
Common stocks $ 11,653,302
Short-term notes 1,843,112
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13,496,414
Cash on deposit 49,523
Dividends and interest receivable 19,458
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Total Assets 13,565,395
Liability -due to The Franklin Life Insurance Company 23,895
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Contract owners' equity
Annuity reserves $ 20,793
Value of 109,896.4574 accumulation units outstanding,
equivalent to $123.03132938 per unit 13,520,707 $ 13,541,500
----------- ------------
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</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Investment income
Dividends $ 130,455
Interest 69,792
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Total Income $ 200,247
Expenses
Mortality and expense charges $ 124,538
Investment management services 54,443
Miscellaneous expense 8
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Total expenses 178,989
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Net investment income 21,258
Realized and unrealized gain on investments:
Net realized gain from investment transactions
(excluding short-term investments):
Proceeds from sales $ 1,626,314
Cost of investments sold (identified cost method) 1,197,859
-----------
Net realized gain 428,455
Net unrealized appreciation of investments
Beginning of year $ 5,298,442
End of year 7,670,674
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Net unrealized appreciation 2,372,232
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Net gain on investments 2,800,687
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Net increase in contract owners'
equity resulting from operations $ 2,821,945
------------
------------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
----------- -----------
<S> <C> <C>
Net investment income $ 21,258 $ 78,567
Net realized gain from investment transactions 428,455 452,962
Net unrealized appreciation of investments 2,372,232 1,714,372
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Net increase In contract owners' equity resulting from
operations 2,821,945 2,245,901
Net contract purchase payments 133,181 268,272
Reimbursement for contract guarantees - 172
Annuity payments (4,788) (4,568)
Withdrawals of funds on terminated contracts (1,725,151) (1,636,104)
Transfers from (to) fixed account 21,424 -
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Net increase in contract owners' equity 1,246,611 873,673
Contract owners' equity at beginning of year 12,294,889 11,421,216
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Contract owners' equity at end of year $13,541,500 $12,294,889
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
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FRANKLIN LIFE VARIABLE ANNUITY FUND A
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
- --------------- ------------
<S> <C> <C>
COMMON STOCKS (86.06%)
BANKING (4.56%)
12,862 SLM Holding Corporation $617,376
BEVERAGES (1.33%)
4,400 PepsiCo, Incorporated 180,125
BUSINESS SERVICES (1.41%)
5,600 Equifax Inc. 191,450
CHEMICALS (1.81%)
2,700 Dow Chemical 245,531
COMPUTER SERVICES (4.18%)
8,100 Ceridian Corporation* 565,481
COSMETICS & HOUSEHOLD PRODUCTS
(2.85%)
8,000 Gillette Company 386,500
DRUGS & HEALTH CARE (29.89%)
8,000 Eli Lilly and Company 711,000
4,300 Merck & Company, Inc. 635,056
4,200 Pfizer, Incorporated 526,838
6,450 St. Jude Medical, Inc.* 178,584
13,200 Schering-Plough Corporation 729,300
6,000 Stryker Corporation 330,375
16,000 Walgreen Company 937,000
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4,048,153
ELECTRONICS & INSTRUMENTATIONS
(2.93%)
5,800 Hewlett-Packard Company 396,213
FOOD - RETAIL (2.68%)
5,700 Albertson's, Inc. 363,019
FOOD - WHOLESALE ( 2.72%)
13,400 Sysco Corporation 367,662
HOUSEHOLD PRODUCTS (1.13%)
3,700 Newell Co. 152,625
OFFICE EQUIPMENT & SERVICES
(11.21%)
15,055 Compaq Computers Corporation 631,369
4,800 International Business
Machines Corporation 886,800
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1,518,169
OIL SERVICES & DRILLING (1.36%)
6,200 Halliburton Company $183,675
PACKAGING - CONTAINERS (2.80%)
8,400 Avery-Dennison Corporation 378,525
PHOTOGRAPHY ( 2.18%)
4,100 Eastman Kodak Company 295,200
RETAIL-SPECIALTY (2.16%)
7,200 NIKE, Inc. 292,050
TECHNOLOGY (7.18%)
4,361 AMP, Incorporated 227,045
4,950 Diebold, Incorporated 176,653
4,800 Intel Corporation 569,100
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972,798
UTILITIES - TELEPHONE (3.68%)
10,000 BellSouth Corporation 498,750
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TOTAL COMMON STOCKS
(COST-$3,982,628) 11,653,302
<CAPTION>
PRINCIPAL
AMOUNT
- ---------
<S> <C> <C>
SHORT-TERM NOTES (13.61%)
$1,855,000 United States Treasury Bill
4.12%, due 1/7/99
(cost-$1,843,112) 1,843,112
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TOTAL INVESTMENTS (99.67%)
(COST-$5,825,740) 13,496,414
CASH AND RECEIVABLES, LESS
LIABILITY (.33%) 45,086
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TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $13,541,500
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</TABLE>
*NON-INCOME PRODUCING INVESTMENT IN 1998.
SEE NOTES TO FINANCIAL STATEMENTS
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THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE
ANNUITY FUND A CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
3
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FRANKLIN LIFE VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Variable Annuity Fund A (the Fund) is a segregated investment
account of The Franklin Life Insurance Company (The Franklin) and is registered
as an open-end diversified management investment company under the Investment
Company Act of 1940, as amended. The Fund no longer issues new contracts.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS: Investments in common stocks listed on national stock
exchanges are valued at closing sales prices. Unlisted common stocks are valued
at the most recent bid prices, as supplied by broker-dealers.
Short-term notes are valued at cost, which approximates fair value.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions
are accounted for on the trade date. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
FEDERAL INCOME TAXES: Operations of the Fund form a part of, and are 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 1998 aggregated $153,637 and $1,626,314,
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 $10,036 and $16,926 were deducted
from the proceeds of the sales of accumulation units and retained by Franklin
Financial Services Corporation and The Franklin during 1998 and 1997,
respectively. Franklin Financial Services Corporation is a wholly-owned
subsidiary of The Franklin and principal underwriter for the Fund.
Beginning in October 1998, The Franklin began waiving all sales and
administrative charges specified in each Contract in anticipation of the Funds'
proposed reorganization (See Note H-Subsequent Event).
NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
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UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ------
<S> <C> <C> <C> <C>
Balance at
beginning of
year 124,714 $12,275,509 139,945 $11,403,341
Purchases and
transfers 1,559 154,605 2,945 268,272
Net investment
income* - 21,210 - 78,354
Net realized gain
from investment
transactions* - 427,513 - 451,738
Net unrealized
appreciation
of investments* - 2,367,021 - 1,709,736
Withdrawals (16,377) (1,725,151) (18,176) (1,636,104)
Reimbursement
for contract
guarantees* - - - 172
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Balance at end
of year 109,896 $13,520,707 124,714 $12,275,509
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</TABLE>
*Excludes portion allocated to annuity reserves on a pro rata basis.
NOTE F-REMUNERATION OF MANAGEMENT
No person receives any remuneration from the Fund because The Franklin pays the
fees of members of the Board of Managers and officers and employees of the Fund
pursuant to expense assurances. Certain members of the Board of Managers and
officers of the Fund are also directors, officers or employees of The Franklin
or Franklin Financial Services Corporation. Amounts paid by the Fund to The
Franklin and to Franklin Financial Services Corporation are disclosed in this
report.
NOTE G-NET UNREALIZED APPRECIATION OF INVESTMENTS
Net unrealized appreciation of investments was as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
---------- ----------
<S> <C> <C>
Gross unrealized appreciation $7,670,674 $5,387,633
Gross unrealized depreciation - 89,191
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Net unrealized
appreciation of
investments $7,670,674 $5,298,442
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---------- ----------
</TABLE>
4
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NOTE H-SUBSEQUENT EVENT
The Fund's Board of Managers has approved resolutions whereby Contract Owners
will be asked during 1999 to approve a reorganization under which the Fund,
together with Franklin Life Variable Annuity Fund B and Franklin Life Money
Market Variable Annuity Fund C, will be restructured into a unit investment
trust investing exclusively in shares of specified mutual fund portfolios.
Contract Owners will be provided with a proxy statement describing the
reorganization in detail.
NOTE I-YEAR 2000 (UNAUDITED)
INTERNAL SYSTEMS. The Franklin's ultimate parent, American General
Corporation (AGC), has numerous technology systems that are managed on a
decentralized basis. AGC's Year 2000 readiness efforts are therefore being
undertaken by its key business units with centralized oversight. Each business
unit, including The Franklin, has developed and is implementing a plan to
minimize the risk of a significant negative impact on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of The Franklin's information technology
and non-information technology systems; (2) assess which items in the inventory
may expose The Franklin to business interruptions due to Year 2000 issues; (3)
reprogram or replace systems that are not Year 2000 ready; (4) test systems to
prove that they will function into the next century as they do currently; and
(5) return the systems to operations. As of December 31, 1998, substantially all
of The Franklin's critical systems are Year 2000 ready and have been returned to
operations. However, activities (3) through (5) for certain systems are ongoing,
with vendor upgrades expected to be received during the first half of 1999.
THIRD PARTY RELATIONSHIPS. The Franklin has relationships with various
third parties who must also be Year 2000 ready. These third parties provide (or
receive) resources and services to (or from) The Franklin and include
organizations with which The Franklin exchanges information. Third parties
include vendors of hardware, software, and information services; providers of
infrastructure services such as voice and data communications and utilities for
office facilities; investors; customers; distribution channels; and joint
venture partners. Third parties differ from internal systems in that The
Franklin exercises less, or no, control over Year 2000 readiness. The Franklin
has developed a plan to assess and attempt to mitigate the risks associated with
the potential failure of third parties to achieve Year 2000 readiness. The plan
includes the following activities: (1) identify and classify third party
dependencies; (2) research, analyze, and document Year 2000 readiness for
critical third parties; and (3) test critical hardware and software products and
electronic interfaces. As of December 31, 1998, AGC has identified and assessed
approximately 700 critical third party dependencies, including those relating to
The Franklin. A more detailed evaluation will be completed during first quarter
1999 as part of The Franklin's contingency planning efforts. Due to the various
stages of third parties' Year 2000 readiness, The Franklin's testing activities
will extend through 1999.
CONTINGENCY PLANS. The Franklin has commenced contingency planning to
reduce the risk of Year 2000-related business failures. The contingency plans,
which address both internal systems and third party relationships, include the
following activities: (1) evaluate the consequences of failure of business
processes with significant exposure to Year 2000 risk; (2) determine the
probability of a Year 2000-related failure for those processes that have a high
consequence of failure; (3) develop an action plan to complete contingency plans
for those processes that rank high in consequence and probability of failure;
and (4) complete the applicable action plans. The Franklin is currently
developing contingency plans and expects to substantially complete all
contingency planning activities by April 30, 1999.
RISKS AND UNCERTAINTIES. Based on its plans to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, The Franklin believes that it will experience at most
isolated and minor disruptions of business processes following the turn of the
century. Such disruptions are not expected to have a material effect on The
Franklin's future results of operations, liquidity, or financial condition.
However, due to the magnitude and complexity of this project, risks and
uncertainties exist and The Franklin is not able to predict a most reasonably
likely worst case scenario. If conversion of The Franklin's internal systems is
not completed on a timely basis (due to non-performance by significant third
party-vendors, lack of qualified personnel to perform the Year 2000 work, or
other unforeseen circumstances in completing The Franklin's plans), or if
critical third parties fail to achieve Year 2000 readiness on a timely basis,
the Year 2000 issues could have a material adverse impact on The Franklin's
operations following the turn of the century.
COSTS. Through December 31, 1998, The Franklin has incurred, and
anticipates that it will continue to incur, costs for internal staff, third
party vendors, and other expenses to achieve Year 2000 readiness. These costs
are not passed to the Fund. The cost of activities related to Year 2000
readiness has not had a material adverse effect on The Franklin's results of
operations or financial condition. In addition, The Franklin has elected to
accelerate the planned replacement of certain systems as part of the Year 2000
plans. Costs of the replacement systems are being capitalized and amortized over
their useful lives, in accordance with The Franklin's normal accounting
policies.
5
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FRANKLIN LIFE VARIABLE ANNUITY FUND A
SUPPLEMENTARY INFORMATION
PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE
(SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT
OUTSTANDING THROUGHOUT EACH YEAR)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Investment income $1.720 $ 1.910 $ 1.685 $ 1.948 $ 1.408
Expenses 1.537 1.312 1.090 .875 .773
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Net investment income 0.183 .598 .595 1.073 .635
Net realized and unrealized gain (loss) on
investments 24.419 16.346 11.690 14.139 (.240)
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Net increase in accumulation unit value 24.602 16.944 12.285 15.212 .395
Accumulation unit value:
Beginning of year 98.429 81.485 69.200 53.988 53.593
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End of year $123.031 $98.429 $81.485 $69.200 $53.988
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Ratio of expenses to average net assets 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment income to average net assets .17% .66% .79% 1.76% 1.18%
Portfolio turnover rate 1.42% .70% 4.77% 14.66% 88.99%
Number of accumulation units outstanding at end of
year 109,896 124,714 139,945 150,474 172,507
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
MATTERS SUBMITTED TO VOTE OF CONTRACT OWNERS
An annual meeting of Contract Owners of the Fund was held on April 20, 1998. At
the meeting, the individuals named below were elected as Members of the Board of
Managers of the Fund, and Ernst & Young LLP was ratified as the Fund's
independent auditors for the ensuing fiscal year. The number of votes cast for,
against or withheld, as well as the number of abstentions and broker non-votes,
if applicable, as to each matter is set forth in the table below.
<TABLE>
<CAPTION>
Matter Votes:
-------------------- -------------------------------------
For Against Abstain
------- ------- -------
<S> <C> <C> <C>
Election of
Robert G. Spencer as
Member, Board of Managers 52,846 683 0
Election of
Dr. Robert C. Spencer as
Member, Board of Managers 52,751 778 0
Election of
James W. Voth as
Member, Board of Managers 52,846 683 0
Election of
Clifford L. Greenwalt as
Member, Board of Managers 52,846 683 0
Ratification of Selection
of Ernst & Young LLP as
independent auditors 52,200 573 756
</TABLE>
6
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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, 1998, 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 four 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 the year 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, 1998. 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 1998, 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, 1998, 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 four years then ended in conformity with
generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 29, 1999
7
