<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
JUNE 30, 1999
SEMI-ANNUAL REPORT
PRINCIPAL OFFICE LOCATED AT:
#1 Franklin Square
Springfield, Illinois 62713
SEMI-ANNUAL REPORT DATED JUNE 30, 1999
- -------------------------------------------------------------------------------
The Semi-Annual Report of The Franklin Life Variable Annuity Fund is prepared
and provided by The Franklin Life Insurance Company.
- -------------------------------------------------------------------------------
This Semi-Annual Report is not to be construed as an offering for sale of any
Franklin Life contract. No offering is made except in conjunction with a
prospectus which must precede or accompany this report.
1
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
STATEMENT OF NET ASSETS
JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
------------------------------------------------------------------
STOCK INDEX STOCK INDEX MONEY MARKET
FUND FUND FUND
SUBACCOUNT A SUBACCOUNT B SUBACCOUNT C
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ASSETS
<S> <C> <C> <C>
Investments in Funds at fair value:
(cost: see below) $ 12,823,731 $ 1,796,771 $ 1,412,256
Due from (to) General Account 29 (96) -
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NET ASSETS $ 12,823,760 $ 1,796,675 $ 1,412,256
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Unit value, at June 30, 1999 $ 121.52 $ 141.59 $ 24.96
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Units outstanding, at June 30, 1999 105,532 12,689 56,574
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Cost of investments $ 12,929,922 $ 1,811,657 $ 1,412,256
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
------------------------------------------------------------
STOCK INDEX STOCK INDEX MONEY MARKET
FUND FUND FUND
SUBACCOUNT A SUBACCOUNT B SUBACCOUNT C
------------------------------------------------------------
<S> <C> <C> <C>
NET INVESTMENT INCOME (EXPENSE)
Income
Dividends and interest $ 77,036 $ 10,004 $ 31,663
Expenses
Mortality and expense risk charge 72,003 11,083 8,016
Investment management services 18,519 2,750 1,779
------------------------------------------------------------
Net investment income (expense) (13,486) (3,829) 21,868
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 7,631,867 1,211,333 -
Net unrealized appreciation (depreciation)
Beginning of period 7,670,674 1,265,910 -
End of period (106,191) (14,886) -
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Net change in unrealized appreciation
(depreciation) during the period (7,776,865) (1,280,796) -
------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments (144,998) (69,463) -
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Net increase (decrease) in net assets
from operations $ (158,484) $ (73,292) $ 21,868
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
---------------------------------------------------------
STOCK INDEX STOCK INDEX MONEY MARKET
FUND FUND FUND
SUBACCOUNT A SUBACCOUNT B SUBACCOUNT C
---------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1999
---------------------------------------------------------
<S> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ (13,486) $ (3,829) $ 21,868
Net realized gain (loss) on investments 7,631,867 1,211,333 --
Net change in unrealized appreciation
(depreciation) on investments (7,776,865) (1,280,796) --
------------------------------------------------
Net increase (decrease) in net assets
from operations (158,484) (73,292) 21,868
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 134,543 10,564 5,978
Withdrawals (763,607) (177,303) (161,369)
Transfers from (to) fixed account 69,808 -- --
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Net increase (decrease) in net assets
from contract related transactions (559,256) (166,739) (155,391)
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Increase (decrease) in net assets (717,740) (240,031) (133,523)
Net assets, beginning of period 13,541,500 2,036,706 1,545,779
------------------------------------------------
Net assets, end of period $ 12,823,760 $ 1,796,675 $ 1,412,256
------------------------------------------------
------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN LIFE FRANKLIN LIFE FRANKLIN LIFE
VARIABLE VARIABLE MONEY MARKET
ANNUITY ANNUITY VARIABLE ANNUITY
FUND A FUND B FUND C
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FOR THE YEAR ENDED DECEMBER 31, 1998
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<S> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 21,258 $ 61 $ 60,558
Net realized gain (loss) on investments 428,455 144,577 --
Net change in unrealized appreciation
(depreciation) on investments 2,372,232 397,045 --
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Net increase (decrease) in net assets
from operations 2,821,945 541,683 60,558
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 133,181 14,091 22,030
Withdrawals (1,729,939) (323,234) (457,908)
Transfers from (to) fixed account 21,424 (1,012) --
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Net increase (decrease) in net assets
from contract related transactions (1,575,334) (310,155) (435,878)
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Increase (decrease) in net assets 1,246,611 231,528 (375,320)
Net assets, beginning of period 12,294,889 1,805,178 1,921,099
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Net assets, end of period $ 13,541,500 $ 2,036,706 $ 1,545,779
-----------------------------------------------------
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
1. NATURE OF OPERATIONS AND REORGANIZATION
Franklin Life Variable Annuity Fund (the Fund or the Ongoing Fund) is a
separate account of The Franklin Life Insurance Company (Franklin)
under Illinois insurance law and a unit investment trust under the
Investment Company Act of 1940. The Fund supports the operations of
Franklin's variable annuity contracts (the Contracts). New contracts
are no longer being issued.
Prior to April 30, 1999, Franklin maintained Franklin Life Variable
Annuity Funds A, B, and C (the Former Funds) which were originally
established as open-end diversified management investment companies
under the Investment Company Act of 1940. On April 30, 1999, a
reorganization was effected under which Franklin Life Variable Annuity
Fund A was renamed Franklin Life Variable Annuity Fund, converted into
a unit investment trust, and consolidated with Franklin Life Variable
Annuity Fund B and Franklin Life Money Market Variable Annuity Fund C.
The assets of the Former Funds were transferred to Subaccounts A, B,
and C, respectively, of the Ongoing Fund.
The Ongoing Fund consists of three subaccounts invested in units of
beneficial interest (shares) of two portfolios of American General
Series Portfolio Company (AGSPC), an affiliated open-end management
investment company. Subaccounts A and B invest in the AGSPC Stock Index
Fund portfolio and Subaccount C invests in the AGSPC Money Market Fund
portfolio.
The Statement of Operations and the Statement of Changes in Net Assets
for the new Subaccounts A, B, and C reflect the consolidated activity
of the Former Funds through April 30, 1999, and Subaccounts A, B and C
of the Ongoing Fund from May 1, 1999 to June 30, 1999.
Franklin Financial Services Corporation, a wholly owned subsidiary of
Franklin, acts as principal underwriter for the Contracts, as defined
in the Investment Company Act of 1940. The assets of the Fund are the
property of Franklin; however, the portion of the Fund's assets
applicable to the Contracts is not chargeable with liabilities arising
out of any other business Franklin may conduct.
2. SIGNIFICANT ACCOUNTING POLICIES
Investments: Investments in shares of the Fund are carried at fair
value based on the net asset values of the respective AGSPC portfolios.
Investment transactions are recorded on the trade date. Dividends are
recorded as received. Realized gains and losses on sales of the Fund
shares are determined based on the specific identification method.
Taxation: Operations of the Fund form a part of, and are taxed with
those of, 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.
Reserves: Annuity reserves on Contracts, all involving life
contingencies, are calculated using the Progressive Annuity Table with
an assumed investment rate of 3-1/2%.
3. CONTRACT CHARGES
In conjunction with the reorganization, Franklin waived all sales
loads, surrender or deferred sales charges and administrative fees
specified in each Contract beginning October 1998. AGSPC deducts a
charge for investment management and other expenses for the Stock Index
Fund portfolio and for the Money Market Fund portfolio. In addition,
Franklin deducts a charge from the assets of the Fund to cover
mortality and expense risks related to the operations of the Fund at an
effective annual rate of 1.00% for Subaccounts A and B and 1.065% for
Subaccount C. As part of the reorganization, total annual Fund expenses
are capped at 1.44%. Total charges paid by the Fund to Franklin were
$38,263 for the period ended June 30, 1999.
5
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
<TABLE>
<CAPTION>
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
------------------------------------------------------
STOCK INDEX STOCK INDEX MONEY MARKET
FUND FUND FUND
SUBACCOUNT A SUBACCOUNT B SUBACCOUNT C
------------------------------------------------------
FOR THE SIX MONTHS ENDED JUNE 30, 1999
------------------------------------------------------
<S> <C> <C> <C>
Unit value, beginning of period $ 123.03 $ 147.18 $ 24.59
------------------------------------------------------
------------------------------------------------------
Unit value, end of period $ 121.52 $ 141.59 $ 24.96
------------------------------------------------------
------------------------------------------------------
Number of units outstanding
Beginning of period 109,896 13,839 62,851
Number of contract purchase
payments 1,197 73 239
Withdrawals (5,855) (1,223) (6,516)
Transfers from (to) fixed account 294 -- --
------------------------------------------------------
Number of units outstanding,
end of period 105,532 12,689 56,574
------------------------------------------------------
------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FRANKLIN LIFE FRANKLIN LIFE FRANKLIN LIFE
VARIABLE VARIABLE MONEY MARKET
ANNUITY ANNUITY VARIABLE ANNUITY
FUND A FUND B FUND C
----------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------
<S> <C> <C> <C>
Unit value, beginning of period $ 98.43 $ 110.59 $ 23.73
----------------------------------------------------------
----------------------------------------------------------
Unit value, end of period $ 123.03 $ 147.18 $ 24.59
----------------------------------------------------------
----------------------------------------------------------
Number of units outstanding
Beginning of period 124,714 16,323 80,944
Number of contract purchase
payments 1,559 115 930
Withdrawals (16,377) (2,599) (19,023)
Transfers from (to) fixed account -- -- --
----------------------------------------------------------
Number of units outstanding,
end of period 109,896 13,839 62,851
----------------------------------------------------------
----------------------------------------------------------
</TABLE>
6
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
5. REMUNERATION OF MANAGEMENT
The Account incurs no liability for payment to directors, members of
advisory boards, officers or any other person who might provide a service
for the Account, except as described in Note 3.
6. YEAR 2000
INTERNAL SYSTEMS. 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 have been performed by its key
business units with centralized oversight. Each business unit, including
Franklin, has executed a plan to minimize the risk of a significant
negative impact on its operations.
While the specifics of the plans varied, the plans included the following
activities: (1) perform an inventory of Franklin's information technology
and non-information technology systems; (2) assess which items in the
inventory may expose 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 June 30, 1999, these activities had been substantially completed,
making Franklin's critical systems Year 2000 ready. Franklin will continue
to test its systems throughout 1999 to maintain Year 2000 readiness. In
addition, Franklin currently is developing plans for the century
transition, which will restrict systems modifications from November 1999
through January 2000, create rapid response teams to address problems, and
limit vacations for key technical personnel.
THIRD PARTY RELATIONSHIPS. 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) Franklin and include
organizations with which 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 Franklin exercises less, or no, control over Year 2000
readiness.
Franklin assessed and mitigated the risks associated with the potential
failure of third parties to achieve Year 2000 readiness. Franklin's
activities included the following: (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 June 30, 1999, these activities
have been substantially completed. Where necessary, critical third party
dependencies have been included in Franklin's contingency plans. Due to the
various stages of Year 2000 readiness for these critical third party
dependencies, Franklin's testing activities related to critical third
parties will extend throughout 1999.
CONTINGENCY PLANS. Franklin has undertaken contingency planning to reduce
the risk of Year 2000-related business failures. The contingency plans,
which address both internal systems and third party relationships, included
the following activities: (1) evaluate the consequences of failure of
critical business processes with significant exposure to Year 2000 risk;
(2) determine the probability of a Year 2000-related failure for those
critical processes that have a high consequence of failure; (3) develop an
action plan to complete contingency plans for critical processes that rank
high in consequence and probability of failure; and (4) complete the
applicable contingency plans. As of June 30, 1999, these activities have
been substantially completed. The contingency plans will continue to be
tested and updated throughout 1999.
RISKS AND UNCERTAINTIES. Based on the Year 2000 readiness of internal
systems, century transition plans, plans to deal with third party
relationships, and contingency plans, 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 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 Franklin is
not able to predict a most reasonably likely worst case scenario. If Year
2000 readiness is not achieved due to Franklin's failure to maintain
critical systems as Year 2000 ready, failure of critical third parties to
achieve Year 2000 readiness on a timely basis, failure of contingency plans
to reduce Year 2000-related business failures, or other
7
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
unforeseen circumstances in completing Franklin's plans, the Year 2000
issues could have a material adverse impact on Franklin's operations
following the turn of the century.
COSTS. In 1999, Franklin has incurred and 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 Account. The cost of
activities related to Year 2000 readiness has not had a material adverse
effect on Franklin's results of operations or financial condition. In
addition, 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 Franklin's normal accounting policies.
8
