<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
DECEMBER 31, 1999
ANNUAL REPORT
PRINCIPAL OFFICE LOCATED AT:
#1 Franklin Square
Springfield, Illinois 62713
ANNUAL REPORT DATED DECEMBER 31, 1999
- --------------------------------------------------------------------------------
The Annual Report of The Franklin Life Variable Annuity Fund is prepared and
provided by The Franklin Life Insurance Company.
- --------------------------------------------------------------------------------
This 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.
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
STATEMENT OF NET ASSETS
DECEMBER 31, 1999
<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>
ASSETS
Investments in Funds at fair value
(cost: see below) $ 13,197,513 $ 1,629,903 $ 1,382,198
Due from (to) General Account - (116) (449)
------------------------------------------------------------------
NET ASSETS $ 13,197,513 $ 1,629,787 $ 1,381,749
------------------------------------------------------------------
------------------------------------------------------------------
Unit value $ 132.58 $ 154.47 $ 25.41
------------------------------------------------------------------
------------------------------------------------------------------
Units outstanding 99,547 10,551 54,370
------------------------------------------------------------------
------------------------------------------------------------------
Cost of investments $ 12,272,938 $ 1,515,557 $ 1,382,198
------------------------------------------------------------------
------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1999
<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 $ 139,531 $ 18,129 $ 66,101
Capital gains distributions 106,072 13,105 -
Expenses
Mortality and expense risk charge 164,834 23,912 17,831
Investment management services 18,519 2,750 1,779
------------------------------------------------------------
Net investment income (expense) 62,250 4,572 46,491
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain (loss) 7,637,684 1,213,110 -
Net unrealized appreciation (depreciation)
Beginning of year 7,670,674 1,265,910 -
End of year 924,575 114,346 -
------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year (6,746,099) (1,151,564) -
------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 891,585 61,546 -
------------------------------------------------------------
Net increase (decrease) in net assets
from operations $ 953,835 $ 66,118 $ 46,491
------------------------------------------------------------
------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
STATEMENT OF CHANGES IN NET ASSETS
YEAR ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
AMERICAN GENERAL SERIES PORTFOLIO COMPANY
---------------------------------------------------------
STOCK INDEX STOCK INDEX MONEY MARKET
FUND FUND FUND
SUBACCOUNT A SUBACCOUNT B SUBACCOUNT C
---------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------
<S> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 62,250 $ 4,572 $ 46,491
Net realized gain (loss) on investments 7,637,684 1,213,110 -
Net change in unrealized appreciation
(depreciation) on investments (6,746,099) (1,151,564) -
---------------------------------------------------------
Net increase (decrease) in net assets
from operations 953,835 66,118 46,491
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 234,854 16,346 15,560
Withdrawals (1,590,062) (489,383) (226,081)
Transfers from (to) fixed account 57,386 - -
---------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (1,297,822) (473,037) (210,521)
---------------------------------------------------------
Net increase (decrease) in net assets (343,987) (406,919) (164,030)
Net assets, beginning of year 13,541,500 2,036,706 1,545,779
---------------------------------------------------------
Net assets, end of year $ 13,197,513 $ 1,629,787 $ 1,381,749
---------------------------------------------------------
---------------------------------------------------------
<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>
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 -
-------------------------------------------------------------------
Net increase (decrease) in net assets
from operations 2,821,945 541,683 60,558
FROM CONTRACT RELATED TRANSACTIONS:
Net contract purchase payments 154,605 14,091 22,030
Withdrawals (1,729,939) (324,246) (457,908)
Transfers from (to) fixed account - - -
-------------------------------------------------------------------
Net increase (decrease) in net assets
from contract related transactions (1,575,334) (310,155) (435,878)
-------------------------------------------------------------------
Net increase (decrease) in net assets 1,246,611 231,528 (375,320)
Net assets, beginning of year 12,294,889 1,805,178 1,921,099
-------------------------------------------------------------------
Net assets, end of year $ 13,541,500 $ 2,036,706 $ 1,545,779
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
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 and B, and Franklin Life Money Market Variable Annuity Fund 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 year ended December 31, 1999 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 December 31, 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 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 investments 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%. At December 31, 1999, net assets includes
$18,918 for annuity reserves.
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 the
Money Market Fund portfolio of 0.35% and 0.50%, respectively. 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 0.94% for Subaccount C.
Total annual Fund expenses are capped at 1.44%. Total charges paid by the
Fund to Franklin were $206,577 and $172,060 for the years ended December
31, 1999 and 1998, respectively.
5
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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 YEAR ENDED DECEMBER 31, 1999
--------------------------------------------------------
<S> <C> <C> <C>
Unit value, beginning of year $123.03 $147.18 $24.59
--------------------------------------------------------
--------------------------------------------------------
Unit value, end of year $132.58 $154.47 $25.41
--------------------------------------------------------
--------------------------------------------------------
Number of units outstanding,
beginning of year 109,896 13,839 62,851
Net contract purchase payments 1,967 110 601
Withdrawals (12,508) (3,398) (9,082)
Transfers from (to) fixed account 192 - -
--------------------------------------------------------
Number of units outstanding,
end of year 99,547 10,551 54,370
--------------------------------------------------------
--------------------------------------------------------
<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 year $98.43 $110.59 $23.73
----------------------------------------------------------------
----------------------------------------------------------------
Unit value, end of year $123.03 $147.18 $24.59
----------------------------------------------------------------
----------------------------------------------------------------
Number of units outstanding,
beginning of year 124,714 16,323 80,944
Net 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 year 109,896 13,839 62,851
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
6
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
5. REMUNERATION OF MANAGEMENT
The Fund incurs no liability for payment to directors, members of advisory
boards, officers or any other person who might provide a service for the
Fund, except as described in Note 3.
6. YEAR 2000 (unaudited)
INTERNAL SYSTEMS. Franklin's ultimate parent, American General Corporation
("AGC"), has numerous technology and non-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, 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; and
(5) return the systems to operations. As of December 31, 1999, these
activities had been completed, making Franklin's critical systems Year 2000
ready.
Franklin continued to test its systems throughout 1999 to maintain Year
2000 readiness. In addition, Franklin implemented plans for the century
transition. These plans included a freeze on system modifications from
November 1999 through January 2000, the creation of rapid response teams to
address problems and limiting vacations for certain business and technical
personnel. In addition, AGC established Y2K command centers in Houston and
each of its locations across the country. Each command center monitored all
major business processing activities during the century transition and
reported progress to the Houston command center which coordinated the AGC's
nationwide Year 2000 effort. The command centers continued to operate 24
hours a day until January 7, 2000.
On January 1, 2000, AGC announced that its Year 2000 command centers
reported that all major technology systems, programs, and applications were
operating smoothly following the transition into the 21st century. As of
February 11, 2000, Franklin has experienced no interruptions to normal
business operations, including the processing of customer account data and
transactions. Franklin will continue to monitor its technology systems and
maintain quality customer service throughout the transition period.
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 such parties'
Year 2000 readiness.
Franklin developed plans to assess and mitigate the risks associated with
the potential failure of third parties to achieve Year 2000 readiness.
These plans included 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, and, where feasible, Franklin
has taken reasonable precautions to protect against the receipt of non-Year
2000 ready data. Where necessary, critical third party dependencies have
been included in Franklin's contingency plans.
CONTINGENCY PLANS. Franklin's contingency planning process was designed to
reduce the risk of Year 2000-related business failures related to both
internal systems and third party relationships. The contingency plans
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. The contingency plans were tested and updated
throughout 1999.
7
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
FRANKLIN LIFE VARIABLE ANNUITY FUND
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
RISKS AND UNCERTAINTIES. Based on the Year 2000 readiness of internal
systems, century transition plans, plans to deal with third party
relationships, contingency plans and the reports from the AGC command
centers described above, Franklin believes that Franklin will experience at
most isolated and minor disruptions of business processes due to the Year
2000 transition. 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 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. Through December 31, 1999, Franklin has incurred, and expects to
continue to incur, costs relative to achieving and maintaining Year 2000
readiness. 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. None of the costs associated with Year 2000 readiness are passed
to subaccounts of the Fund.
8
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors Franklin Life Insurance Company
Contractowners of Franklin Life Variable Annuity Fund
We have audited the accompanying statement of net assets of the Franklin Life
Variable Annuity Fund (comprising, respectively, the American General Series
Portfolio Company (AGSPC) Stock Index Fund Subaccount A, AGSPC Stock Index Fund
Subaccount B, and AGSPC Money Market Fund Subaccount C, formerly known as
Franklin Life Variable Annuity Fund A, Franklin Life Variable Annuity Fund B,
and Franklin Life Money Market Variable Annuity Fund C, respectively), as of
December 31, 1999, the related statement of operations for the year then ended
and the statements of changes in net assets for each of the two years then
ended. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. 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. Our
procedures included confirmation of securities owned as of December 31, 1999 by
correspondence with the custodian. 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 financial position of each of the respective
Subaccounts constituting Franklin Life Variable Annuity Fund at
December 31, 1999, and the results of its operations for the year then ended,
and the changes in net assets for each of the two years then ended, in
conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
February 11, 2000
9
