<PAGE>
1933 Act Registration No. 2-38502
1940 Act Registration No. 811-2110
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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. 39
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 19
FRANKLIN LIFE
VARIABLE ANNUITY FUND B
(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,
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, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington D.C. 20004-2404
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on April 30, 1997 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (I)
/ / on April 30, 1997 pursuant to paragraph (a) (i)
/ / 75 days after filing pursuant to paragraph (a) (ii)
/ / on April 30, 1997 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
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
Post-Effective Amendment No. 39
Cross Reference Sheet Required by Rule 495(a)
<TABLE>
<CAPTION>
Registration Item Location in Prospectus ("P") or
Statement of Additional Information ("SAI")
<S> <C>
Part A INFORMATION REQUIRED IN PROSPECTUS
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
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
Part B INFORMATION REQUIRED IN STATEMENT OF ADDITIONAL INFORMATION
Item 16. Cover Page. . . . . . . . . . . . . . . . . . . Cover Page (SAI)
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>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(NOT USED IN CONNECTION WITH QUALIFIED
TRUSTS OR PLANS) ISSUED BY
#1 Franklin Square
Springfield, Illinois 62713
Telephone (800) 528-2011
THIS PROSPECTUS DESCRIBES INDIVIDUAL IMMEDIATE AND DEFERRED VARIABLE
ANNUITY CONTRACTS PROVIDING ANNUITY INSTALLMENTS FOR LIFE COMMENCING ON A
MATURITY DATE SELECTED BY THE CONTRACT OWNER; OTHER SETTLEMENT OPTIONS ARE ALSO
PROVIDED. 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 B (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, 1997, 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 35 OF THIS PROSPECTUS.
___________________________________
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, 1997.
<PAGE>
TABLE OF CONTENTS
Page
Special Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Table of Deductions and Charges. . . . . . . . . . . . . . . . . . . . . . 5
Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Per-Unit Income and Changes in Accumulation Unit Value . . . . . . . . . . 9
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Description of the Separate Account. . . . . . . . . . . . . . . . . . . . 11
Deductions and Charges Under the Contracts . . . . . . . . . . . . . . . . 11
A. Sales and Administration Deductions . . . . . . . . . . . . . . . 11
B. Premium Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . 14
C. Mortality and Expense Risk Charge . . . . . . . . . . . . . . . . 14
D. Investment Management Service Charge. . . . . . . . . . . . . . . 14
E. Transfers to and from Other Contracts . . . . . . . . . . . . . . 15
F. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . 15
The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
A. General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
B. Deferred Variable Annuity Accumulation Period . . . . . . . . . . 17
C. Annuity Period. . . . . . . . . . . . . . . . . . . . . . . . . . 25
Investment Policies and Restrictions of the Fund . . . . . . . . . . . . . 27
Federal Income Tax Status. . . . . . . . . . . . . . . . . . . . . . . . . 30
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . . . . 33
State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Other Variable Annuity Contracts . . . . . . . . . . . . . . . . . . . . . 34
Table of Contents of Statement of Additional Information . . . . . . . . . 35
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 B 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 B that is offered by this Prospectus.
CONTRACT ANNIVERSARY-An anniversary of the Effective Date of the Contract.
CONTRACT OWNER-The Contract Owner is the individual Variable Annuitant to whom
the contract is issued or his or her assignee, or if an owner other than the
Variable Annuitant is designated in the application for the Contract, such other
person. 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.
INDIVIDUAL RETIREMENT ANNUITY-An annuity contract described in Section 408(b) of
the Code.
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.
SETTLEMENT OPTION OR OPTIONS-Alternative terms under which payment of the
amounts due in settlement of the Contracts may be received.
3
<PAGE>
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>
<CAPTION>
<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 15.00% to 1.00% (for a Contract with a stipulated payment period of 12 or
more years; 4.33% aggregate over all years for a 12-year Contract)
10.00% to 3.00% (for a Contract with a stipulated payment period of 9 to 11 years;
4.44% aggregate over all years for a 9-year Contract)
6.00% to 3.00% (for a Contract with a stipulated payment period of 6 to 8 years;
4.50% aggregate over all years for a 6-year Contract)
4.00% to 3.00% (for a Contract with a stipulated payment period of 2 to 5 years;
4.00% aggregate over all years for a 2-year Contract)
Administration Fee (as a percentage of
purchase payment)
Single Stipulated Payment Contract $100
Periodic Stipulated Payment Contract 0.00% to 10.00% (for a Contract with a stipulated payment period of 12 or
more years; 4.67% aggregate over all years for a 12-year Contract)
3.00% to 10.00% (for a Contract with a stipulated payment period of 9 to 11
years; 4.44% aggregate over all years for a 9-year Contract)
3.00% to 6.00% (for a Contract with a stipulated payment period of 6 to 8 years;
4.50% aggregate over all years for a 6-year Contract)
3.00% to 5.00% (for a Contract with a stipulated payment period of 2 to 5 years;
5.00% aggregate over all years for a 2-year Contract)
5
<PAGE>
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 $ 162 $ 189 $ 217 $ 297
Periodic Stipulated Payment Contracts:
Stipulated Payment Period:
12 years or more $ 162 $ 189 $ 217 $ 297
9 to 11 years $ 162 $ 189 $ 217 $ 297
6 to 8 years $ 123 $ 151 $ 180 $ 263
2 to 5 years $ 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.
6
<PAGE>
SUMMARY
The Contracts
The individual variable annuity contracts ("the Contracts") being offered
by this Prospectus are designed for retirement planning for individuals. They
are not designed for use in connection with employer-related plans or qualified
plans and trusts (including Individual Retirement Annuities) accorded special
tax treatment under the Code. The basic purpose of the Contracts is to provide
Annuity Payments which will vary with the investment performance of Franklin
Life Variable Annuity Fund B ("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. In the event of death
prior to the initial Annuity Payment Date, the contract value is paid to the
Beneficiary. Periodic Stipulated Payment Contracts and Single Stipulated
Payment Contracts are offered. 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.
Additional refund rights apply to Periodic Stipulated Payment Contracts having a
Stipulated Payment Period of more than five years. See "Withdrawal by the
Contract Owner," below.
Contracts held by a person (such as a corporation or partnership) who is
not a natural person are subject to special federal income tax treatment and the
income on such Contracts allocable to Stipulated Payments made after February
28, 1986 may, subject to certain exceptions, be taxable to the Contract Owner in
the year earned. This special rule does not apply to Contracts held by natural
persons. See "Federal Income Tax Status," 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, which varies
depending upon the length of the Stipulated Payment period agreed upon in the
Contract and the Contract Year with respect to which the payment is scheduled to
be made, is made for sales and administrative expenses. Over the entire life of
a 12-year Periodic Stipulated Payment Contract, total deductions equal to 4.33%
of all periodic payments are made for sales expenses and total deductions equal
to 4.67% of all periodic payments are made for administrative expenses (for a
combined total of 9%); the combined total deductions amount to 9.89% of the net
amount invested assuming no premium taxes are applicable (4.76% for sales
expenses and 5.13% for administrative expenses). During the first four years of
a 12-year contract, however, combined total deductions amount to 17.65%. 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 of $100 is made
for
7
<PAGE>
administrative expenses (for a combined total, in the case of a minimum Single
Stipulated Payment Contract sold, of 9%). In the case of a 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.
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 Variable 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
The minimum single Stipulated Payment is $2,500. The minimum Periodic
Stipulated Payment Contract sold is one under which the annual payments are
currently $120 and each periodic Stipulated Payment (after an initial $20
payment) is currently $10. 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 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,"
"The Contracts," and "Federal Income Tax Status," below.
TERMINATION BY THE FRANKLIN
The Franklin currently reserves the right to terminate Contracts the Cash
Value of which has been less than $500 for three years if the Stipulated
Payments in the amount of $120 have not been made in each of the three contract
years of such period, but The Franklin has agreed not to exercise this right in
certain cirumstances. See "Termination by The Franklin," below.
8
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
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 the years ended December 31, 1996
and December 31, 1995 has been audited by Ernst & Young LLP, independent
auditors. The financial information in this table for each of the three 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
--------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988 1987
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income $1.777 $ 2.043 $ 1.569 $ 1.305 $ 1.120 $ 1.197 $ 1.303 $ 1.271 $ 1.102 $ 1.088
Expenses 1.169 .935 .850 .841 .766 .691 .595 .541 .463 .460
--------------------------------------------------------------------------------------------------------
Net Investment income .608 1.108 .719 .464 .354 .506 .708 .730 .639 .628
Net realized and
unrealized gain
(loss) on securities 13.251 14.278 (.943) 1.697 1.236 13.776 (1.871) 7.822 .016 3.825
--------------------------------------------------------------------------------------------------------
Net change in
accumulation unit
value 13.859 15.386 (.224) 2.161 1.590 14.282 (1.163) 8.552 .655 4.453
Accumulation unit
value:
Beginning of year 73.016 57.630 57.854 55.693 54.103 39.821 40.984 32.432 31.777 27.324
--------------------------------------------------------------------------------------------------------
End of year $86.875 $73.016 $57.630 $57.854 $55.693 $54.103 $39.821 $40.984 $32.432 $31.777
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
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 .75% 1.71% 1.22% .80% .67% 1.05% 1.71% 1.94% 1.99% 1.96%
Portfolio turnover rate 3.35% 22.26% 82.18% 61.50% 60.64% 24.18% 28.41% 64.08% 81.20% 119.45%
Number of
accumulation
units outstanding
at end of year 18,648 21,059 23,165 26,542 29,973 31,205 48,192 53,877 61,038 74,195
--------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------
</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.
9
<PAGE>
INTRODUCTION
FRANKLIN LIFE VARIABLE ANNUITY FUND B
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. They are not designed for use in
connection with employer-related plans or qualified plans and trusts (including
Individual Retirement Annuities) accorded special tax treatment under the Code.
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 Life
Insurance Company ("The Franklin") under Illinois insurance law. For the
primary investment objective of the Fund, see "Investment Policies and
Restrictions of the Fund," below.
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.
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 obtained or other
Settlement Option elected by the Contract Owner, at any time prior to
commencement of annuity instalments 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 (other than the first payment, which must be at
least $20) which purchases the Variable Annuity be at least $10. See generally
"Redemption," and "Settlement Options," 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 operations.
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.
10
<PAGE>
DESCRIPTION OF THE SEPARATE ACCOUNT
The Fund was established as a separate account on April 1, 1970 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 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
A. SALES AND ADMINISTRATION DEDUCTIONS
Deductions will be made as follows for sales expenses with respect to the
Contracts and administrative expenses with respect to the Contracts and the
Fund:
(1) Under Single Stipulated Payment Contracts, a deduction 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 single Stipulated
Payment. In the case of the minimum Single Stipulated Payment Contract sold
(which is $2,500), 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 Stipulated Payment Contracts, a sales and administration
deduction is made from each Stipulated Payment. The amount of the deduction
varies depending upon the length of the stipulated payment period agreed upon in
the Contract and the Contract Year with respect to which a payment is scheduled
to be made. The deductions are applied whether the Stipulated Payment is made on
time or in arrears. Prepayments will not be accepted. The following tables
indicate the deductions made:
11
<PAGE>
<TABLE>
<CAPTION>
STIPULATED PAYMENT PERIOD OF 12 OR MORE YEARS
- --------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
----------------------------------------- ----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1 17.65% 0.00% 17.65% 15% 0% 15%
2 TO 4 5.88% 11.76% 17.65% 5% 10% 15%
5 5.56% 5.56% 11.11% 5% 5% 10%
6 TO 10 3.19% 3.19% 6.38% 3% 3% 6%
11 OR SUBSEQUENT 1.04% 3.13% 4.17% 1% 3% 4%
AGGREGATE OVER ALL
YEARS FOR A
12-YEAR CONTRACT: 4.76% 5.13% 9.89% 4.33% 4.67% 9%
STIPULATED PAYMENT PERIOD OF 9-11 YEARS
- --------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
----------------------------------------- ----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- --------------------------------------------------------------------------------------------------------------
1 11.78% 5.88% 17.65% 10% 5% 15%
2 5.88% 11.76% 17.65% 5% 10% 15%
3 TO 4 5.56% 5.56% 11.11% 5% 5% 10%
5 TO 11 3.19% 3.19% 6.38% 3% 3% 6%
AGGREGATE OVER ALL
YEARS FOR A
9-YEAR CONTRACT: 4.88% 4.88% 9.76% 4.44% 4.44% 8.89%
STIPULATED PAYMENT PERIOD OF 6-8 YEARS
- --------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
----------------------------------------- ----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- --------------------------------------------------------------------------------------------------------------
1 6.74% 5.62% 12.36% 6% 5% 11%
2 5.62% 6.74% 12.36% 5% 6% 11%
3 TO 4 5.56% 5.56% 11.11% 5% 5% 10%
5 OR SUBSEQUENT 3.19% 3.19% 6.38% 3% 3% 6%
AGGREGATE OVER ALL
YEARS FOR A
6-YEAR CONTRACT: 4.95% 4.95% 9.89% 4.50% 4.50% 9%
STIPULATED PAYMENT PERIOD OF 2-5 YEARS
- --------------------------------------------------------------------------------------------------------------
AS PERCENTAGE OF AS PERCENTAGE OF
NET AMOUNT INVESTED: TOTAL STIPULATED PAYMENT:
----------------------------------------- ----------------------------------------
SALES ADMINISTRATION TOTAL SALES ADMINISTRATION TOTAL
CONTRACT YEAR DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION DEDUCTION
- --------------------------------------------------------------------------------------------------------------
1 TO 4 4.40% 5.49% 9.89% 4% 5% 9%
5 3.19% 3.19% 6.38% 3% 3% 6%
AGGREGATE OVER ALL
YEARS FOR A
2-YEAR CONTRACT: 4.40% 5.49% 9.89% 4% 5% 9%
</TABLE>
12
<PAGE>
NOTE: The foregoing tables assume that no premium taxes are payable in the
jurisdiction in question. See discussion under "Premium Taxes," below.
Percentage figures may not add due to rounding.
Deductions for sales expenses are made pursuant to a Sales Agreement with
Franklin Financial Services Corporation ("Franklin Financial"). See
"Distribution of the Contracts," below, and in the Statement of Additional
Information. Deductions for administrative expenses, and for mortality and
expense risk assurances discussed under "Mortality and Expense Risk
Charge," below, are made pursuant to an Administration Agreement dated March
23, 1972 between the Fund and The Franklin. The Administration Agreement is
described under "Investment Advisory and Other Services" in the Statement
of Additional Information.
The Franklin will not accept more than the stipulated dollar amounts of
payments on any Contract except in the case of a Contract having a Stipulated
Payment period of 12 or more years. In the case of monthly Stipulated Payment
Contracts, where the Stipulated Payment per month (subsequent to the initial
payment) is less than $20, the initial monthly payment must be at least $20,
and the total payments to be received during the first Contract Year will be
twelve times the amount of the Stipulated Payment per month (subsequent to
the initial payment). This will be done either by ending the first Contract
Year earlier than twelve months after the receipt of the initial Stipulated
Payment or by omitting certain monthly payments which otherwise would follow
the initial payment. The purpose of this procedure is to prevent the
imposition of total deductions over the life of the contract in an amount in
excess of the amounts set forth in the tables above opposite the items
"Aggregate over all years" for sample Contracts.
The table below illustrates, in the case of assumed Contracts for 10 years
and for 15 years providing for stipulated monthly payments amounting to $50
per month, the allocation of the cumulative payments and deductions at the
end of certain specified periods of time. In Contracts for less than nine
years, the amounts deducted from the earlier Stipulated Payments are less
than those deducted from the Stipulated Payments in the earlier periods for
the Contracts illustrated in the table, and, accordingly, in those Contracts
proportionately more of the total Stipulated Payments would be invested at
the end of one, two and five years than in the case of the illustrations
given.
10 YEAR CONTRACT
<TABLE>
<CAPTION>
AT THE END OF. . . . 10 YEARS 1 YEAR 2 YEARS 5 YEARS
(120 PAYMENTS) (13 PAYMENTS) (25 PAYMENTS) (61 PAYMENTS)
- ------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL PAYMENTS . . . $6,000.00 100.00% $650.00 100.00% $1,250.00 100.00% $3,050.00 100.00%
DEDUCT:
SALES EXPENSE
DEDUCTION 258.00 4.30% 62.50 9.61% 92.50 7.40% 169.50 5.555%
ADMINISTRATIVE
DEDUCTION 258.00 4.30% 35.00 5.39% 92.50 7.40% 169.50 5.555%
- ------------------------------------------------------------------------------------------------------------------------
TOTAL DEDUCTIONS. . $ 516.00 8.60% $ 97.50 15.00% $ 185.00 14.80% $ 339.00 11.110%
NET AMOUNT INVESTED. $5,484.00 91.40% $552.50 85.00% $1,065.00 85.20% $2,711.00 88.890%
15 YEAR CONTRACT
AT THE END OF. . . . 15 YEARS 1 YEAR 2 YEARS 5 YEARS
(180 PAYMENTS) (13 PAYMENTS) (25 PAYMENTS) (61 PAYMENTS)
- ------------------------------------------------------------------------------------------------------------------------
Amount % Amount % Amount % Amount %
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
TOTAL PAYMENTS . . . $9,000.00 100.00% $650.00 100.00% $1,250.00 100.00% $3,050.00 100.00%
DEDUCT:
SALES EXPENSE
DEDUCTION 330.00 3.67% 92.50 14.23% 122.50 9.80% 211.50 6.935%
ADMINISTRATION
DEDUCTION 390.00 4.33% 5.00 0.77% 65.00 5.20% 211.50 6.935%
- -------------------------------------------------------------------------------------------------------------------------
TOTAL DEDUCTIONS. . $ 720.00 8.00% $ 97.50 15.00% $ 187.50 15.00% $ 423.00 13.870%
NET AMOUNT INVESTED. $8,280.00 92.00% $552.50 85.00% $1,062.50 85.00% $2,627.00 86.130%
</TABLE>
13
<PAGE>
NOTE: The foregoing table assumes that no premium taxes are payable in the
jurisdiction in question. See the discussion under "Premium Taxes,"
below. The percentages shown are percentages of the total payments made.
The total deductions made in respect of sales expenses of Franklin
Financial in 1994, 1995 and 1996 were $1,592, $825 and $370, 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, 1994,
1995 and 1996 were $1,474, $1,316 and $632, 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 taxes ranging up to
5% as of February 6, 1997 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," immediately
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 beyond the
stated maximum with respect thereto 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 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.
During 1994, 1995 and 1996, The Franklin earned and was paid $14,300,
$14,273 and $15,752, respectively, by reason of these charges. Such charges
during 1996 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, 1998 by the Board
of Managers of the Fund at its meeting on January 20, 1997. The Investment
Management Agreement is described under "Investment Advisory and Other
Services" in the Statement of Additional Information.
During 1994, 1995 and 1996, The Franklin earned and was paid $6,251, $6,240
and $6,886, respectively, under the Investment Management Agreement then in
effect.
14
<PAGE>
E. TRANSFERS TO OTHER CONTRACTS
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 Variable Annuity
Fund A and Franklin Life Money Market Variable Annuity Fund C, other
separate accounts of The Franklin funding Variable Annuity contracts, no
longer issue new Variable Annuity contracts.
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
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. Contract
Owners who are not natural persons should also consider whether such a
redemption would cause them to lose certain advantages applicable to
stipulated payments made on or before February 28, 1986. See "Federal Income
Tax Status-The Contracts," below.
F. MISCELLANEOUS
The Fund's total expenses for 1996 were $22,639, or 1.440% of average net
assets during 1996.
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, which reflects the age and sex of the
Variable Annuitant and the type of Settlement Option selected, and (ii) the
investment performance of the Fund. In the case of Deferred Variable
Annuities, the annuity rate table is set forth in the Contract. 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.
15
<PAGE>
2. DECREASE BY CONTRACT OWNER IN AMOUNT OF PERIODIC STIPULATED
PAYMENTS; INCREASE BY CONTRACT OWNER IN 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.
Subject to the limitations described under "Purchase Limits," below, the
amount of a periodic Stipulated Payment may be decreased by the Contract
Owner on any date a Stipulated Payment is due. Submission of a Stipulated
Payment in an amount less than that of the previous Stipulated Payment,
subject to the aforesaid purchase limits, will constitute notice of the
election of the Contract Owner to make such change. After such a decrease,
the Contract Owner is permitted to increase his periodic Stipulated Payments
up to, but not in excess of, the amount originally provided in the
Contract. Unless otherwise agreed to by The Franklin, the mode of Stipulated
Payment may be changed only on a Contract Anniversary.
In the case of Contracts having a Stipulated Payment period of 12 years or
more, the Contract Owner may continue making Stipulated Payments after the
agreed amount of Stipulated Payments has been made, subject to the
limitation that no more than twice the amount of Stipulated Payments
specified in the Contract will be received by The Franklin, and The Franklin
reserves the right not to accept the Stipulated Payments after age 75. The
deductions for sales and administrative expenses from these additional
Stipulated Payments will be that applicable to Stipulated Payments in the
final agreed year for Stipulated Payments as set forth in the table as to
Stipulated Payment periods of 12 or more years under "Sales and
Administration Deductions," above. No similar privilege is available with
respect to Contracts having a Stipulated Payment period of less than 12
years.
3. ASSIGNMENT OR PLEDGE
A Contract may be assigned by the Contract Owner or pledged by him or her as
collateral security as provided in the Contract. The Franklin will make
Contract loans only as provided under "Contract Loans," below. Assignments
or pledges of the Contract and Contract loans will be treated as
distributions that may be taxable. Moreover, in certain instances, pledges or
assignments of the Contract and Contract Loans may result in the imposition
of certain tax penalties. See "Federal Income Tax Status-The Contracts,"
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
No single Stipulated Payment may be less than $2,500. Currently, no annual
Stipulated Payment may be less than $120; no semiannual Stipulated Payment
may be less than $60; no quarterly Stipulated Payment may be less than $30;
and, in the case of monthly Stipulated Payment contracts, the initial
payment must be at least $20 and each subsequent monthly payment at least
$10. Under the terms of the Contract, The Franklin may increase the minimum
periodic Stipulated Payment to $20 per month ($240 per year).
5. TERMINATION BY THE FRANKLIN
The Franklin currently reserves the right to terminate any Contract 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.
Upon termination as described above, The Franklin will pay to the Contract
Owner the Cash Value of the Contract, less federal income tax withholding and
any indebtedness, if applicable. For certain tax consequences upon such
payment, see "Federal Income Tax Status," below.
16
<PAGE>
6. WITHDRAWAL BY THE CONTRACT OWNER
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.
In addition, with respect to any Periodic Stipulated Payment Contract
having a Stipulated Payment period of more than five years, The Franklin
will send to the Contract Owner of such Contract, within 60 days after the
Date of Issue, a statement of charges to be deducted from the Stipulated
Payments and a notice of the right to withdraw from the Contract, which may
be exercised by surrendering the Contract within 45 days after the mailing
of the notice. In the case of such surrender, the Contract Owner will be
entitled to the Cash Value of the Contract, plus an amount, payable by The
Franklin or by Franklin Financial Services Corporation, distributor of the
Contracts, equal to the difference between the gross payments made on the
Contract and the net amount invested. The Franklin has guaranteed the
obligations of Franklin Financial Services Corporation in this respect and
accordingly, in connection with The Franklin's ability to meet these
obligations, the financial statements of The Franklin contained herein
should be considered. Payments upon such surrender may be subject to federal
income tax withholding and federal tax penalties. See "Income Tax
Withholding," below and "Federal Income Tax Status-The Contracts," below.
Any request for revocation or withdrawal must be made by mailing or
hand-delivering the Contract and a written request for revocation or
withdrawal within the applicable time 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.
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.
17
<PAGE>
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.
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.
18
<PAGE>
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 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. 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 the limited circumstances described 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 the method
of valuation of Accumulation Units, see "Crediting Accumulation Units;
Deductions for Sales and Administration Expenses," above.
The Code imposes certain distribution requirements which affect the payment
of death benefits. See "Settlement Options," below. Subject to these
requirements, 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. 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.
19
<PAGE>
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.
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.
Under a single stipulated payment deferred contract, the Contract Owner may
terminate his Contract and exercise any of the Settlement Options described
below at any time prior to the initial Annuity Payment Date.
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. Following reinstatement, the
Contract Owner may exercise any of the options upon failure to make
Stipulated Payments or Settlement Options described herein. Sales and
administration deductions from Stipulated Payments made upon or after
reinstatement will be equivalent to those that would have been made if the
payments had been made at the time originally stipulated.
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.
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.
20
<PAGE>
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 the Seventh Option, which is available on a
fixed basis only. 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. 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.
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.
Persons contemplating election of the Fifth, Sixth or Seventh 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 or
proceeds remaining on deposit with The Franklin.
In general, certain distribution requirements are imposed by the Code in
the case of annuity contracts issued after January 18, 1985 in order for the
contracts to qualify as "annuity contracts" under the Code. Certain
questions exist about the application of these rules to distributions from
the Contracts and their effect on Settlement Option availability thereunder.
21
<PAGE>
Under these distribution requirements, if the Contract Owner of a Contract
issued after January 18, 1985 dies on or after the date Annuity Payments
commence but before the entire interest in the Contract has been
distributed, then the remaining portion of such interest must be distributed
at least as rapidly as under the method of distribution being used as of the
date of his or her death. Also, if the Contract Owner of such a Contract dies
before the commencement of Annuity Payments, then the entire interest in
the Contract must be distributed within five years after the date of death.
Under a special exception, this 5-year distribution rule is deemed satisfied
if (i) any portion of the Contract Owner's interest is payable to a
designated beneficiary, (ii) that interest is distributed to the designated
beneficiary over the life of such beneficiary (or over a period not
extending beyond the beneficiary's life expectancy) and (iii) such
distributions begin not later than one year after the death of the Contract
Owner. If the designated beneficiary is the surviving spouse of the Contract
Owner and such surviving spouse dies before Annuity Payments to the spouse
commence, the surviving spouse will be treated as the Contract Owner for
purposes of these distribution rules. Also, if the Contract Owner is not an
individual, then the Variable Annuitant shall be treated as the Contract
Owner in applying these distribution requirements and a change in the
Variable Annuitant shall be treated as the death of the Contract Owner.
The effect of the distribution requirements described above is that, in the
case of Contracts issued after January 18, 1985, Settlement Option
availability will be limited as necessary to comply with the applicable
distribution rules. For example, under these rules, it appears that the
First Option (Life Annuity) would not be available to a designated
beneficiary under such a Contract unless distributions to the beneficiary
begin not later than one year after the date of the Contract Owner's death.
Other Settlement Options may be restricted or unavailable as well under the
distribution rules. All Settlement Options under Contracts issued after
January 18, 1985 are offered subject to the limitations of the distribution
rules. Persons contemplating the purchase of a Contract should consult a
qualified tax advisor concerning the effect of the distribution rules on the
Settlement Option or Options he or she is contemplating.
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.
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>
22
<PAGE>
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.
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, immediately
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 its election.
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<PAGE>
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 unloaned
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.)
12. CONTRACT LOANS
While the Contract is in force, prior to the initial Annuity Payment Date
or the death of the Variable Annuitant, The Franklin will make a contract
loan on the sole security of the Contract.
Upon receiving a request for a contract loan, The Franklin will convert
Accumulation Units under the Contract to a fixed-dollar contract loan account
in an amount necessary to provide a sufficient "loan value" for the
proposed loan. The maximum amount which may be borrowed on a Contract (the
"loan value") is that amount which, when added to any existing contract
loan and interest on the total contract loan to the next Contract
Anniversary, will equal what the Cash Value of the contract loan account
would be on such anniversary. The Contract, except to the extent so
converted, has no loan value and The Franklin will not make loans or arrange
for the making of loans thereon.
The Accumulation Units in the contract loan account do not participate in
the investment experience of the Fund, but receive interest credits at the
rate then paid by The Franklin upon Fixed-Dollar Annuity accumulations. At
the current time, that rate is 4-1/2% per annum during the first five
contract years, 4% per annum for the sixth through tenth contract years, and
3-1/2% per annum thereafter.
Where the Contract Owner has both a Variable Annuity and a Fixed-Dollar
Annuity under the same Contract, unless he otherwise indicates, a contract
loan request will be considered a request for a loan on each annuity and
will be allocated pro rata according to the loan values available under
each annuity.
Whenever the total contract loan is equal to or exceeds the Cash Value, the
Contract shall terminate, but in no event shall such termination take effect
until 31 days after notice shall have been mailed to the last known address
of the Contract Owner and any known assignee.
On Contracts currently being issued in South Carolina the interest rate on
the principal of the contract loan is 7.4% per annum payable in advance to
the end of the current Contract Year, and annually in advance thereafter. In
all other states the rate is adjustable. This means that the rate may be
changed each policy year, effective on the Contract Anniversary. The
adjustable loan interest rate will be reflective of the rates then available
to The Franklin for corporate bonds as indicated by the "Moody's Corporate
Bond Yield Average." Interest not paid when due will be added to the
principal of the loan and bear the same rate of interest. Upon a repayment of
the contract loan prior to the date through which interest has been paid in
advance, the Contract Owner will receive a pro rata credit for the unearned
interest.
It should be noted that the annual rate of interest charged on contract
loans is in excess of the interest credited by The Franklin upon the contract
loan account; thus, there is, in effect, a continuing net charge against the
Contract Owner of the difference between the two rates while the contract
loan is outstanding.
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<PAGE>
The whole or any part of the contract loan may be repaid at any time while
the Contract is in force prior to its maturity. Where variable Accumulation
Units have been converted into a contract loan account prior to the making of
a contract loan, repayments of the loan will result in the conversion of
accumulation units under the contract loan account to variable Accumulation
Units at net asset value without any sales or administration deduction,
unless the Contract Owner elects that such conversion shall not take place.
The Contract Owner has the power to designate whether a payment made by him
or her is to be applied as a Stipulated Payment (within the limitations on
Stipulated Payments set forth under "Annuity Payments," above, "Decrease by
Contract Owner in Amount of Periodic Stipulated Payments; Increase by
Contract Owner in Number of Periodic Stipulated Payments," above) or as a
repayment in the contract loan account. In the case of payments by a Contract
Owner having a contract loan outstanding which are not identified, The
Franklin will make inquiry as to the intention of the Contract Owner.
Contract loans will be treated as distributions that may be taxable. See
"Federal Income Tax Status," below. Any Contract Owner contemplating
obtaining a contract loan is advised to consult a qualified tax advisor
concerning the possibly unfavorable federal income tax treatment of contract
loan proceeds and interest payments with respect thereto.
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. 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. 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 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.
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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.)
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," above. Thus, there will be a
double effect of the investment experience of 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)," immediately 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)
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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 date of issue 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 Date of Issue 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 Date of Issue in excess of 70 years for male Variable Annuitants and
in excess of 75 years for female Variable Annuitants).
The Annuity Change Factors used by The Franklin for Immediate Variable
Annuity Contracts assume a net investment rate of 3-1/2%.
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 investment 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.
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(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 stocks 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 (3), 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 Payments 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 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.
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(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 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.
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<PAGE>
(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
INTRODUCTION
The Contracts are designed for retirement planning for individuals. 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 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.
THE CONTRACTS
Payments received under a Contract are subject to tax under Code Section
72. Under the Code, an increase in the value of the Contract Owner's
Contract ordinarily is not taxable to the Contract Owner until received by
him or her as annuity payments, a lump sum or a partial redemption. A
special rule, however, applies to certain annuity contracts held by a person
(such as a corporation or partnership) who is not a natural person. With
respect to contributions (i.e., Stipulated Payments) made after February 28,
1986 to a Contract held by a non-natural person, the Contract is not
treated as an "annuity contract" for certain federal income tax purposes
and
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the income on the Contract for any taxable year allocable to such
contributions is treated as ordinary income taxable to the Contract Owner
during such year. This special rule, however, does not apply to any annuity
contract which, among other exceptions: (1) is an immediate annuity that is
purchased with a single premium or annuity consideration, that has an
annuity starting date commencing no later than one year from the date of the
purchase of the Contract and which provides for a series of substantially
equal periodic payments (to be made not less frequently than annually) during
the annuity period; (2) is acquired by the estate of a decedent by reason of
the decedent's death; or (3) is held by a trust or other entity as an agent
for a natural person. Non-natural persons now holding or contemplating the
future purchase of a Contract are advised to consult a qualified tax advisor
concerning the tax consequences of such holding or purchase.
If payments under a Contract are received in the form of an annuity, then,
in general, each payment is taxable as ordinary income to the extent that
such payment exceeds the portion of the cost basis of the annuity contract
that is allocable to that payment. Payment of the proceeds of an annuity
contract in a lump sum either before or at maturity is taxable as ordinary
income to the extent the lump sum exceeds the cost basis of the annuity
contract. 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 Contract will generally be allowed as a
deduction to the Variable Annuitant for his or her last taxable year.
A payment received on account of a partial redemption of an annuity
contract generally is taxable as ordinary income in whole or part. Also, if
prior to the initial Annuity Payment Date, (i) an annuity contract is
assigned or pledged, (ii) a contract loan is obtained or (iii) a Contract
issued after April 22, 1987 is transferred without adequate consideration,
then the amount assigned, pledged, borrowed or transferred may similarly be
taxable. Special rules may apply with respect to investments in a Contract
made before August 14, 1982. Because the applicable tax treatment is
complex, a qualified tax advisor should be consulted prior to a partial
withdrawal, assignment, pledge, contract loan or contract transfer.
In addition, under a provision of federal tax law effective for annuity
contracts entered into after October 21, 1988, all annuity contracts (other
than contracts held in connection with certain qualified plans and trusts
(including Individual Retirement Annuities) accorded special treatment under
the Code) issued by the same company (or affiliates) to the same contract
owner during any calendar year will generally be treated as one annuity
contract for the purpose of determining the amount of any distribution not in
the form of an annuity that is includable in gross income. This rule may have
the effect of causing more rapid taxation of the distributed amounts from
such combination of contracts. It is not certain how this rule will be
applied or interpreted by the Internal Revenue Service. In particular, it is
not clear if or how this rule applies to Immediate Variable Annuities or
"split" annuity arrangements. Accordingly, a qualified tax advisor should be
consulted about the application and effect of this rule.
Further, in general, in the case of a payment received under a Contract in
a taxable year beginning after December 31, 1986, a penalty may be imposed
equal to 10% of the taxable portion of the payment. However, the 10% penalty
does not apply in various circumstances. For example, the penalty is
generally inapplicable to payments that are: (i) made on or after age
59-1/2; (ii) allocable to investments in the Contract before August 14, 1982;
(iii) made on or after the death of the Contract Owner (or when the Contract
Owner is not an individual, the death of the Variable Annuitant); (iv) made
incident to disability; (v) part of a series of substantially equal
periodic payments (not less frequently than annually) made for the life (or
the life expectancy) of the Variable Annuitant or the joint lives (or joint
life expectancies) of the Variable Annuitant and his or her beneficiary; or
(vi) made under a Contract purchased with a single premium and which has an
annuity starting date commencing no later than one year from the purchase
date of the annuity and which provides for a series of substantially equal
periodic payments (to be made not less frequently than annually) during the
annuity period.
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A Contract will not be treated as an annuity contract for purposes of
certain Code sections, including Section 72, for any period (and any
subsequent period) for which the investments made by the Fund attributable to
such Contract are not, in accordance with Treasury regulations, adequately
diversified. Although certain questions exist about the diversification
standards, The Franklin believes that the Fund presently satisfies those
standards and intends that the Fund will continue to be adequately
diversified for those purposes.
INCOME TAX WITHHOLDING
Withholding of federal income tax is generally required from distributions
from the Contracts to the extent the distributions are taxable and are not
otherwise subject to withholding as wages ("Distributions"). See "The
Contracts" immediately above, regarding the taxation of Distributions.
However, except in the case of certain payments delivered outside the United
States or any possession of the United States, no withholding is required
from any Distribution if the payee properly elects, in accordance with
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 depends on the type of payment
being made. Generally, in the case of periodic payments, the amount to be
withheld from each 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 most other
Distributions, including partial redemptions and lump sum payments, the
amount to be withheld is equal to 10% of the amount of the Distribution.
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 A, a separate account of The Franklin having investment
objectives similar to the Fund but the assets of which are held solely with
respect to Variable Annuity Contracts used in accordance with certain
qualified plans and trusts or individual retirement annuities accorded
special tax treatment under the Code, 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.
(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.
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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.
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.
DISTRIBUTION OF THE CONTRACTS
Franklin Financial Services ("Franklin Financial") Corporation 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 4% 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.
33
<PAGE>
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 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.
REGISTRATION STATEMENT
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
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.
34
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
- --------------------------------------------------------------------------
General Information . . . . . . . . . . . . . 2
Investment Objectives. . . . . . . . . . . . . 2
Management . . . . . . . . . . . . . . . . . . 3
Investment Advisory and Other Services . . . . 4
Distribution of The Contracts. . . . . . . . . 6
Portfolio Turnover and Brokerage . . . . . . . 7
Safekeeper of Securities . . . . . . . . . . . 7
Legal Matters. . . . . . . . . . . . . . . . . 8
Experts. . . . . . . . . . . . . . . . . . . . 8
Index to Financial Statements. . . . . . . . . F-1
35
<PAGE>
PROSPECTUS
FRANKLIN LIFE
VARIABLE ANNUITY FUND B
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(NOT FOR USE IN CONNECTION WITH
QUALIFIED TRUSTS OR PLANS)
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 Infomration dated April 30, 1997
for Franklin Life Variable Annuity Fund B.
- -------------------------------------------------------------------------------
(Name)
- -------------------------------------------------------------------------------
(Street)
- -------------------------------------------------------------------------------
(City) (State) (Zip Code)
<PAGE>
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(NOT FOR USE IN CONNECTION WITH
QUALIFIED TRUSTS OR PLANS)
FRANKLIN LIFE VARIABLE ANNUITY
ISSUED BY
FUND B
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, 1997 relating to the
offering of individual variable annuities designed for retirement planning by
individuals. Such annuities are not designed for use in connection with
certain qualified plans and trust accorded special tax treatment. 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, 1997.
<PAGE>
TABLE OF CONTENTS
PAGE
General Information . . . . . . . . . . . . 2
Investment Objectives. . . . . . . . . . . . 2
Management . . . . . . . . . . . . . . . . . 3
Investment Advisory and Other Services . . . 4
Distribution of The Contracts. . . . . . . . 6
Portfolio Turnover and Brokerage . . . . . . 7
Safekeeper of Securities . . . . . . . . . . 7
Legal Matters. . . . . . . . . . . . . . . . 8
Experts. . . . . . . . . . . . . . . . . . . 8
Index to Financial Statements. . . . . . . . F-1
1
<PAGE>
GENERAL INFORMATION
The individual variable annuity contracts offered by the Prospectus dated
April 30, 1996 (the "Prospectus") are designed primarily to provide annuity
payments which will vary with the investment performance of Franklin Life
Variable Annuity Fund B (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 January 29, 1997.
INVESTMENT OBJECTIVES
The investment objectives and policies of the Fund are described under
"Investment Policies and Restrictions of the Fund" in the Prospectus.
2
<PAGE>
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 POSITIONS HELD
NAME AND ADDRESS DURING PAST 5 YEARS WITH THE FUND
<S> <C> <C>
ROBERT G. SPENCER* Officer of The Franklin; currently, Chairman and Member, Board
#1 Franklin Square Vice President of The Franklin; of Managers
Springfield, Illinois 62713 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; currently, Secretary, Board of Managers
#1 Franklin Square Vice President, Assistant Secretary
Springfield, Illinois 62713 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 Government, Montana Member, Board of Managers
2303 South Third Avenue State University, since 1992; Professor
Bozeman, Montana 59715 of Government and Public Affairs, Sangamon
State University, prior thereto.
JAMES W. VOTH Chairman, Resource International Corp., Member, Board of Managers
50738 Meadow Green Court South Bend, Indiana (marketing,
Granger, Indiana 46530 manufacturing and engineering service to
industry); prior to 1993, also President
of Resource International Corp.
CLIFFORD L. GREENWALT Director, President and Chief Executive Member, Board of Managers
607 East Adams Street Officer, CIPSCO Incorporated, since October,
Springfield, Illinois 62739 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.
3
<PAGE>
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, 1996. 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 1996. It is
currently anticipated that the annual aggregate remuneration of such members
of the Board of Managers to be paid during 1997 will not exceed $4,200.
Total Compensation Relating
Aggregate Compensation to Fund and Fund Complex
Name of Person, Position Relating to Fund Paid to Each Member
Each member of the Board of $1,400(1) $4,200(1)(2)
Managers (except
Robert G. Spencer)
- -------------------------------------------------------------------------------
(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 A 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 21, 1997, the owner of any contract participating in the
investment experience of the Fund.
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, 1998 by the Board of Managers of the Fund
at its meeting on January 20, 1997. 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.
4
<PAGE>
(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.
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.
5
<PAGE>
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 20, 1997. 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.
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.
6
<PAGE>
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,"
immediately below.
For 1995, the portfolio turnover rate was 22.26%; for 1996 the rate was
3.35%.
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 1994, 1995 and 1996, a total of $3,101, $759
and $139, 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 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. The Franklin has requested that the
Illinois Insurance Department approve an arrangement under which State Street
would hold the securities of the Fund as sub-custodian under an agreement
that would be entered into by The Franklin, State Street Bank and Trust
Company of Connecticut, as custodian, and State Street, as sub-custodian.
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.
7
<PAGE>
LEGAL MATTERS
Sutherland, Asbill & Brennan, L.L.P. 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, 1996 and the related statement of operations
for the year then ended and the statements of changes in contract owners'
equity and the table of per-unit income and changes in accumulation unit
value for each of the two years 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 balance
sheets as of December 31, 1996 and 1995 of The Franklin, and the related
consolidated statements of income, shareholder's equity and cash flows for
the year ended December 31, 1996, the eleven months ended December 31, 1995
and the one month ended January 31, 1995, appearing herein, 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 three 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. The consolidated statements of income,
shareholder's equity and cash flows of The Franklin for the year ended
December 31, 1994, 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.
8
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
---------
Franklin Life Variable Annuity Fund B:
Reports of Independent Auditors and Accountants F-2 - F-3
Financial Statements:
Statement of Assets and Liabilities, December 31, 1996 F-4
Statement of Operations for the year ended
December 31, 1996 F-4
Statements of Changes in Contract Owners' Equity for the
two years ended December 31, 1996 and 1995 F-4
Portfolio of Investments, December 31, 1996 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, 1996 F-7
The Franklin Life Insurance Company and Subsidiaries:*
Reports of Independent Auditors and Accountants F-8 - F-9
Financial Statements:
Consolidated Balance Sheet, December 31, 1996 and 1995 F-10 - F-11
Consolidated Statement of Income for the year ended
December 31, 1996, the eleven months ended
December 31, 1995, the one month ended January 31, 1995
and year ended December 31, 1994 F-12
Consolidated Statement of Shareholder's Equity for the
year ended December 31, 1996, the eleven months ended
December 31, 1995, the one month ended January 31, 1995
and year ended December 31, 1994 F-13
Consolidated Statement of Cash Flows for the year ended
December 31, 1996, the eleven months ended December 31, 1995,
the one month ended January 31, 1995 and year ended
December 31, 1994 F-14
Notes to Consolidated Financial Statements F-15 - F-41
*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 B
We have audited the accompanying statement of assets and liabilities of
Franklin Life Variable Annuity Fund B, including the portfolio of
investments, as of December 31, 1996, the related statement of operations for
the year then ended and the statements of changes in contract owners' equity,
and the table of per-unit income and changes in accumulation unit value for
each of the two 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.
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, 1996. 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 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 B at December 31, 1996, and the results of its
operations for the year then ended, and the changes in its contract owners'
equity and per-unit income and changes in accumulation unit value for each of
the two years then ended in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
January 31, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund B
Springfield, Illinois
We have audited the accompanying table of per-unit income and changes in
accumulation unit value of Franklin Life Variable Annuity Fund B for each of
the three 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 three
years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 1, 1995
F-3
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<S> <C>
Assets
Investments-at fair value (cost-$1,012,333):
Common stocks $1,351,192
Short-term note 198,457
----------
1,549,649
Cash on deposit 69,438
Dividends and interest receivable 3,256
----------
Total Assets 1,622,343
Liability - Due to The Franklin Life Insurance Company 2,273
----------
Contract Owners' Equity
Value of 18,648 Accumulation Units outstanding,
equivalent to $86.87564946 per unit $1,620,070
----------
----------
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
<TABLE>
<S> <C> <C>
Investment Income
Dividends $ 23,341
Interest 11,058
---------
Total Income $ 34,399
Expenses
Mortality and expense charges $ 15,752
Investment management services 6,886
Miscellaneous Expenses 1
--------
Total Expenses 22,639
----------
Net Investment Income 11,760
Realized and Unrealized Gain on Investments
Net realized gain from investment transactions
Proceeds from sales $312,124
Cost of investments sold
(identified cost method) 273,200
--------
Net Realized Gain 38,924
Net unrealized appreciation of investments
Beginning of year $317,742
End of year 537,316
--------
Net Unrealized Appreciation 219,574
----------
Net Gain On Investments 258,498
----------
Net Increase In Contract Owners'
Equity Resulting From Operations $ 270,258
----------
----------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
Year Ended December 31
1996 1995
-------------------------
<S> <C> <C>
Net investment income $ 11,760 $ 24,337
Net realized gain from investment transactions 38,924 5,359
Net unrealized appreciation of investments 219,574 309,631
-------------------------
Net Increase In Contract Owners' Equity
Resulting From Operations 270,258 339,327
Net contract purchase payments 10,053 22,240
Payment for contract guarantees (139) (505)
Withdrawals (197,732) (158,420)
-------------------------
Net Increase in Contract Owners' Equity 82,440 202,642
Contract Owners' Equity at Beginning of Year 1,537,630 1,334,988
-------------------------
Contract Owners' Equity At End of Year $1,620,070 $1,537,630
-------------------------
-------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
NUMBER
OF FAIR
SHARES VALUE
- ------ ----------
COMMON STOCKS (83.4%)
AEROSPACE/AVIATION (5.04%)
450 Boeing Company $ 47,925
700 Raytheon Company 33,687
----------
81,612
BANKING (4.02%)
700 Student Loan Marketing Association 65,188
BEVERAGES (1.08%)
600 PepsiCo, Incorporated 17,550
BUSINESS SERVICES (1.7%)
900 Equifax Inc. 27,562
CHEMICALS (1.94%)
400 Dow Chemical 31,350
COMPUTER SERVICES (3.25%)
1,300 Ceridian Corporation 52,650
COSMETICS & HOUSEHOLD PRODUCTS (3.36%)
700 Gillette Company 54,425
DRUG & HEALTH CARE (17.26%)
668 Eckerd Corporation* 21,376
1,000 Eli Lilly and Company 73,000
675 Merck & Company, Inc. 53,747
300 Pfizer, Incorporated 24,900
900 Schering-Plough Corporation 58,275
1,200 Walgreen Company 48,300
----------
279,598
ELECTRONICS & INSTRUMENTATIONS (2.79%)
900 Hewlett-Packard Company 45,225
FOOD - RETAIL (3.41%)
1,550 Albertson's, Inc. 55,219
FOOD - WHOLESALE (1.41%)
700 Sysco Corporation 22,837
MACHINERY - INDUSTRIAL & CONSTRUCTION (2.48%)
400 Fluor Corporation 25,100
400 Trinity Industry 15,000
----------
40,100
OFFICE EQUIPMENT & SERVICES (7.57%)
300 Compaq Computers Corporation* 22,312
350 International Business Machines
Corporation 53,025
900 Xerox Corporation 47,363
----------
122,700
NUMBER
OF FAIR
SHARES VALUE
- ------ ----------
OILS & OIL RELATED PRODUCTS (7.86%)
250 Amoco Corporation $ 20,156
575 British Petroleum Company, p.l.c. 81,291
600 Enron Corporation 25,875
----------
127,322
PACKAGING - CONTAINERS (1.75%)
800 Avery-Dennison Corporation 28,300
PHOTOGRAPHY (1.24%)
250 Eastman Kodak Company 20,063
RESTAURANTS/LODGING (4.53%)
1,000 Marriott International, Inc. 55,250
400 McDonald's Corporation 18,150
----------
73,400
TECHNOLOGY (7.08%)
700 AMP, Incorporated 26,863
450 Diebold, Incorporated 28,294
350 Intel Corporation 45,828
450 Marshall, Incorporated* 13,781
----------
114,766
UTILITIES - ELECTRIC (3.14%)
1,900 Baltimore Gas and Electric Company 50,825
UTILITIES - TELEPHONE (2.5%)
1,000 BellSouth Corporation 40,500
----------
TOTAL COMMON STOCKS
(COST-$813,87) 1,351,192
PRINCIPAL
AMOUNT
- ---------
SHORT-TERM NOTE (12.3%)
$200,000 United States Treasury Bill
due 1/16/97 (cost-$198,457) 198,457
TOTAL INVESTMENTS (95.7%)
(COST-$1,012,333) 1,549,649
CASH AND RECEIVABLES, LESS
LIABILITY (4.3%) 70,421
----------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $1,620,070
----------
----------
*Non-income producing investment in 1996
SEE NOTES TO FINANCIAL STATEMENTS
F-5
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Variable Annuity Fund B (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.
NOTE B-INVESTMENTS
Exclusive of short-term investments, the cost of
investments purchased and the proceeds from
investments sold during 1996 aggregated $43,780 and
$163,265, 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 $1,002
and $2,141 were deducted from the proceeds of the
sales of accumulation units and retained by Franklin
Financial Services Corporation and The Franklin during
1996 and 1995, 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
Year Ended Year Ended
December 31, 1996 December 31, 1995
----------------------------------------------
UNITS AMOUNT UNITS AMOUNT
------ ---------- ------ ----------
Balance at
beginning of year 21,059 $1,537,630 23,165 $1,334,988
Purchases 200 10,053 366 22,240
Net investment income - 11,760 - 24,337
Net realized gain
from investment
transactions - 38,924 - 5,359
Net unrealized
appreciation
of investments - 219,574 - 309,631
Withdrawals (2,611) (197,732) (2,472) (158,420)
Payment for
contract guarantees - (139) - (505)
----------------------------------------------
Balance at end of
year 18,648 $1,620,070 21,059 $1,537,630
----------------------------------------------
----------------------------------------------
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 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, 1996 and 1995 was as follows:
DECEMBER 31 DECEMBER 31
1996 1995
----------------------------
Gross unrealized appreciation $539,392 $322,151
Gross unrealized depreciation 2,076 4,409
----------------------------
Net unrealized appreciation
of Investments $537,316 $317,742
----------------------------
----------------------------
F-6
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
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
1996 1995 1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $1.777 $2.043 $1.569 $1.305 $1.120
Expenses 1.169 .935 .850 .841 .766
---------------------------------------------------------------------
Net investment income .608 1.108 .719 .464 .354
Net realized and unrealized gain (loss)
on investments 13.251 14.278 (.943) 1.697 1.236
---------------------------------------------------------------------
Net increase (decrease) in accumulation unit value 13.859 15.386 (.224) 2.161 1.590
Accumulation unit value:
Beginning of year 73.016 57.630 57.854 55.693 54.103
---------------------------------------------------------------------
End of year $86.875 $73.016 $57.630 $57.854 $55.693
---------------------------------------------------------------------
---------------------------------------------------------------------
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 .75% 1.71% 1.22% .80% .67%
Portfolio turnover rate 3.35% 22.26% 82.18% 61.50% 60.64%
Number of accumulation units outstanding
at end of year 18,648 21,059 23,165 26,542 29,973
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
_____________________________________________
Board of Directors
and Shareholder
The Franklin Life Insurance Company
We have audited the consolidated balance sheets of The Franklin Life
Insurance Company (an indirect wholly-owned subsidiary of American General
Corporation) and subsidiaries (the Company) as of December 31, 1996 and 1995,
and the related consolidated statements of income, shareholder's equity and
cash flows for the year ended December 31, 1996, the eleven months ended
December 31, 1995 and the one month ended January 31, 1995. These
consolidated 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 and subsidiaries at December 31, 1996 and 1995 and the
consolidated results of their operations and their cash flows for the year
ended December 31, 1996, the eleven months ended December 31, 1995 and the
one month ended January 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in the notes to the consolidated financial statements, in
January 1995, the Company changed its method of accounting for mortgage loans.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
February 14, 1997
F-8
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
and Shareholder of
The Franklin Life Insurance Company
We have audited the consolidated statements of income, shareholder's equity
and cash flows of The Franklin Life Insurance Company and Subsidiaries for
the year ended December 31, 1994. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit 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 audit provides a
reasonable basis for our opinion.
As discussed in Note 1 to the Consolidated Financial Statements, on January
31, 1995, American Brands, Inc. completed the sale of American Franklin
Company and Subsidiaries (including The Franklin Life Insurance Company) to
American General Corporation. These financial statements have been prepared
on a basis consistent with prior years and have not been adjusted to reflect
the effects of this sale.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows
of The Franklin Life Insurance Company and Subsidiaries for the year ended
December 31, 1994, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
203 North LaSalle Street
Chicago, Illinois
February 1, 1995
F-9
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions)
DECEMBER 31
-------------------------
ASSETS 1996 1995
-------------------------
Investments
Fixed maturity securities(amortized cost:
$5,152.3; $5,109.5) $ 5,476.5 $5,681.8
Mortgage loans on real estate 607.0 595.3
Equity securities (cost: $2.0; $2.4) 5.0 3.7
Policy loans 327.4 322.8
Other long-term investments 47.6 51.0
-------------------------
Total investments 6,463.5 6,654.6
Cash and cash equivalents 24.6 19.6
Accrued investment income 99.7 103.4
Note receivable from parent 116.4 116.0
Preferred stock of affiliates, at cost 8.5 8.5
Receivable from brokers 17.7 34.4
Receivable from agents, less allowance ($0.4; $0.4) 18.3 18.3
Amounts recoverable from reinsurers 84.0 19.0
Deferred policy acquisition costs 82.0 47.5
Cost of insurance purchased 407.8 353.0
Property and equipment, at cost, less accumulated
depreciation ($7.2; $3.4) 20.6 20.1
Other assets 29.6 30.7
Assets held in Separate Accounts 134.9 118.3
-------------------------
Total assets $ 7,507.6 $ 7,543.4
-------------------------
-------------------------
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions, except share data)
DECEMBER 31
--------------------------
LIABILITIES 1996 1995
--------------------------
Insurance liabilities
Life, annuity and accident and health reserves $ 2,864.7 $ 2,791.4
Policy and contract claims 38.1 41.2
Investment-type contract deposits
and dividend accumulations 2,992.7 2,993.0
Participating policyholders' interests 209.7 199.2
Other 49.5 48.4
Income taxes
Current 6.4 (12.0)
Deferred (19.0) 49.8
Intercompany payables 0.8 0.6
Accrued expenses and other liabilities 116.6 151.3
Liabilities related to Separate Accounts 134.9 118.3
--------------------------
Total liabilities 6,394.4 6,381.2
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 886.1 884.3
Net unrealized gains on securities 106.6 187.5
Retained earnings 78.5 48.4
--------------------------
Total shareholder's equity 1,113.2 1,162.2
--------------------------
Total liabilities and
shareholder's equity $ 7,507.6 $ 7,543.4
--------------------------
--------------------------
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
---------------------------
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------
1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $ 418.6 $ 449.6 $ 34.5 $ 502.7
Net investment income 521.5 468.8 41.3 478.7
Realized investment gains (losses) 2.5 7.2 (7.6) (14.4)
Other 68.3 55.9 4.1 68.5
--------------------------------------------------------
Total revenues 1,010.9 981.5 72.3 1,035.5
Benefits and expenses
Benefits paid or provided
Death claims and other policy
benefits 240.6 236.3 21.5 233.0
Investment-type contracts 173.3 168.3 14.0 170.5
Dividends to policyholders 81.9 85.6 7.5 87.0
Change in policy reserves 95.9 148.5 11.0 218.1
Increase in participating policy-
holders' interests 12.0 11.0 1.0 12.0
Operating costs and expenses 145.9 125.3 10.4 123.1
Amortization of deferred policy
acquisition costs 10.7 8.3 5.8 71.3
Amortization of cost of insurance
purchased 51.1 29.0 0.8 9.0
--------------------------------------------------------
Total benefits and expenses 811.4 812.3 72.0 924.0
--------------------------------------------------------
Income before income tax expense 199.5 169.2 0.3 111.5
Income tax expense (benefit)
Current 94.7 39.7 4.9 75.6
Deferred (25.3) 21.1 (4.7) (31.9)
--------------------------------------------------------
Total income tax expense 69.4 60.8 0.2 43.7
--------------------------------------------------------
Net income $ 130.1 $ 108.4 $ 0.1 $ 67.8
--------------------------------------------------------
--------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
---------------------------
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------
1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $ 42.0 $ 42.0 $ 42.0 $ 42.0
---------------------------------------------------------
Paid-in capital
Balance at beginning of period 884.3 884.3 803.0 803.0
Paid in during the period 1.8 - - -
Adjustment for the acquisition - - 81.3 -
---------------------------------------------------------
Balance at end of period 886.1 884.3 884.3 803.0
---------------------------------------------------------
Net unrealized gains (losses)
on available-for-sale securities
Balance at beginning of period 187.5 - (8.1) 5.3
Change during the period (80.9) 187.5 1.4 (13.4)
Adjustment for the acquisition - - 6.7 -
---------------------------------------------------------
Balance at end of period 106.6 187.5 - (8.1)
---------------------------------------------------------
Retained earnings
Balance at beginning of period 48.4 - 522.7 492.7
Net income 130.1 108.4 0.1 67.8
Dividends paid to parent (100.0) (60.0) (250.0) (37.8)
Adjustment for the acquisition - - (272.8) -
---------------------------------------------------------
Balance at end of period 78.5 48.4 - 522.7
---------------------------------------------------------
Total shareholder's equity
at end of period $ 1,113.2 $ 1,162.2 $ 926.3 $ 1,359.6
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
---------------------------
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------
1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 130.1 $ 108.4 $ 0.1 $ 67.8
Reconciling adjustments to net cash
provided by operating activities
Insurance liabilities 121.5 155.4 19.9 232.8
Deferred policy acquisition costs (45.5) (59.4) (2.7) (40.1)
Investment (gains) losses (4.7) (11.4) (0.9) 14.4
Investment write-downs and reserves 2.2 4.2 8.5 -
Cost of insurance purchased and intangibles 51.1 29.0 1.0 12.3
Interest credited, net of charges on
investment contract deposits 103.2 153.7 12.0 153.0
Purchase of trading securities - - (1.5) (183.3)
Proceeds from sale of trading securities - - 85.5 247.0
Other, net (107.9) 14.3 (7.1) (37.3)
----------------------------------------------------
Net cash provided by operating activities 250.0 394.2 114.8 466.6
INVESTING ACTIVITIES
----------------------------------------------------
Investment purchases
Available-for-sale (5,479.1) (1,055.8) - (57.3)
Held-to-maturity - - (0.8) (621.8)
Other investments (122.6) (95.7) (27.2) (224.3)
Affiliated - (124.5) - -
Investment calls, maturities and sales
Available-for-sale 5,526.3 832.0 0.2 8.1
Held-to-maturity - - 24.9 470.0
Other investments 65.1 127.1 6.3 72.6
Additions to property and equipment (4.6) (3.5) (0.5) (5.0)
----------------------------------------------------
Net cash (used for) provided by
investing activities (14.9) (320.4) 2.9 (357.7)
----------------------------------------------------
FINANCING ACTIVITIES
Policyholder account deposits 165.3 357.8 29.2 336.6
Policyholder account withdrawals (297.1) (366.2) (32.6) (337.0)
Additional capital contribution 1.8 - - -
Proceeds from intercompany borrowings 62.0 105.2 - -
Repayments of intercompany borrowings (62.1) (105.1) - -
Dividend payments (100.0) (60.0) (250.0) (37.8)
----------------------------------------------------
Net cash used for financing activities (230.1) (68.3) (253.4) (38.2)
----------------------------------------------------
Net increase (decrease) in
cash and cash equivalents 5.0 5.5 (135.7) 70.7
Cash and cash equivalents at beginning of
period 19.6 14.1 149.8 79.1
----------------------------------------------------
Cash and cash equivalents at end of period $ 24.6 $ 19.6 $ 14.1 $ 149.8
----------------------------------------------------
----------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-14
<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 2,900 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 significant 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-15
<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 year ended December 31,
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 and the year ended December 31, 1994.
1.4 ACCOUNTING CHANGES
CURRENT YEAR. In June 1996, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards (SFAS) 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." This statement provides accounting
standards for determining whether transfers of financial assets are treated
as sales or secured borrowings. The statement must be applied
prospectively to applicable transactions occurring after December 31, 1996;
however, certain provisions addressing secured borrowings and collateral
and transfers of financial assets that are part of repurchase agreements,
dollar-roll, securities lending, and similar transactions are effective for
transactions occurring after December 31, 1997. Earlier or retroactive
application is not permitted. Franklin does not anticipate a material
effect on consolidated results of operations or financial position related
to the adoption of this statement.
PRIOR YEAR. Effective January 1, 1995, Franklin adopted SFAS 114,
"Accounting by Creditors for Impairment of a Loan." SFAS 114 requires that
certain impaired loans be reported at the present value of expected future
cash flows discounted using the loan's initial effective interest rate, the
loan's observable market price, or the fair value of underlying collateral.
The initial effect of adopting this statement was recorded as part of
realized investment losses and resulted in a one-time reduction of net
income of $5.5 million ($8.5 million pretax) for the one month ended
January 31, 1995.
F-16
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.4 ACCOUNTING CHANGES - PRIOR YEARS (CONTINUED)
Effective January 31, 1995, Franklin adopted SFAS 120, "Accounting and
Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises
for Certain Long-Duration Participating Contracts". SFAS 120 requires that
benefit reserves for participating life insurance contracts be computed on
a net level premium basis using nonforfeiture interest and mortality rates.
The interest assumptions used to compute estimated gross profits were 7.75%
and 8.5% at December 31, 1996 and 1995, respectively. The initial effect
of adopting this statement was recorded as part of purchase accounting.
Effective January 31, 1995, Franklin adopted SFAS 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of". The adoption of this statement did not have a material impact on
Franklin's consolidated financial statements.
1.5 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, consisting of loans delinquent 60 days or more and loans that have
been restructed. The allowance also covers loans for which there is 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.
Impaired loans, those for which Franklin determines that it is probable
that all amounts due under the contractual terms will not be collected, are
reported at the lower of amortized cost or fair value of the underlying
collateral, less estimated costs to sell.
POLICY LOANS. Policy loans are reported at unpaid principal balance.
F-17
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.5 INVESTMENTS (CONTINUED)
INVESTMENT INCOME. Interest on fixed maturity securities 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.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are
recognized using the specific identification method and include declines in
the fair value of investments below cost that are considered other than
temporary, and the net unrealized gains (losses) on securities classified
as "trading securities" prior to January 31, 1995.
1.6 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.
1.7 DEFERRED POLICY ACQUISITION COSTS (DPAC)
Certain costs of writing an insurance policy, including agents' commissions
and underwriting and marketing expenses, are deferred and included in the
DPAC asset.
DPAC associated with interest-sensitive life insurance contracts,
participating life insurance contracts and insurance investment contracts
is charged to expense in relation to the estimated gross profits of those
contracts. 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 also 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.
In determining whether the carrying amount is recoverable, Franklin
considers estimated future gross profits or future premiums, as applicable
for the type of contract. In all cases, Franklin considers expected
mortality, interest earned and credited rates, persistency, and expenses.
F-18
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.8 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to insurance contracts in force at January 31, 1995 is
reported as CIP. CIP is charged to expense using the same assumptions as
DPAC. Interest is accreted on the unamortized balance of CIP at rates of
7% to 8.5%. CIP is also 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.
1.9 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the holder of the
contract rather than Franklin. Consequently, the insurer'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 and cash flows. Assets held in Separate Accounts are
carried at fair value.
1.10 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 investment contracts, reserves
equal the sum of the policyholder 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, 1996.
1.11 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 the mortality, expense, and surrender charges assessed
against the account balance. 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.
F-19
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.11 PREMIUM RECOGNITION (CONTINUED)
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.
1.12 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 47% and 48% of life
insurance in force at December 31, 1996 and 1995, respectively, and 62%,
58%, 69% and 61% of premiums and other considerations for the year ended
December 31, 1996, the eleven months ended December 31, 1995, the one month
ended January 31, 1995, and the year ended December 31, 1994, respectively.
The portion of earnings allocated to participating policyholders which
cannot be expected to inure to Franklin's shareholder is excluded from net
income and shareholder's equity.
The amount of dividends to be paid on participating life insurance
contracts is determined annually, based on estimates of amounts incurred
for the contracts in effect during the period.
1.13 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.
1.14 RECLASSIFICATION
Certain amounts in the 1995 financial statements have been reclassified to
conform to the 1996 presentation.
F-20
<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 Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------
In millions 1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $ 434.6 $ 394.3 $ 33.9 $ 400.8
Mortgage loans on real estate 58.8 54.3 4.6 54.9
Policy loans 18.9 18.6 1.7 18.3
Other investments 13.5 9.1 1.2 12.2
---------------------------------------------------------
Gross investment income 525.8 476.3 41.4 486.2
Investment expense 4.3 7.5 0.1 7.5
---------------------------------------------------------
Net investment income $ 521.5 $ 468.8 $ 41.3 $ 478.7
---------------------------------------------------------
---------------------------------------------------------
</TABLE>
The carrying value of investments that produced no investment income during
1996 totaled $11.3 million, or less than 0.2% of total invested assets.
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-21
<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 participating policyholders' interest and DPAC and CIP
amortization were as follows:
<TABLE>
<CAPTION>
---------------------------------------------------------
Eleven Months One Month
Year Ended Ended Ended Year Ended
December 31 December 31 January 31 December 31
--------------------------------------------------------
In millions 1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $ 25.0 $ 13.8 $ - $ 17.4
Gross losses 17.6 (1.9) - (0.9)
---------------------------------------------------------
Total fixed maturity securities 7.4 11.9 - 16.5
---------------------------------------------------------
Equity securities
Gross gains 1.8 1.9 4.1 23.2
Gross losses - (0.5) (5.4) (49.4)
---------------------------------------------------------
Total equity securities 1.8 1.4 (1.3) (26.2)
---------------------------------------------------------
Other (6.7) (6.1) (6.3) (4.7)
Realized investment gains (losses) $ 2.5 $ 7.2 $ (7.6) $ (14.4)
---------------------------------------------------------
---------------------------------------------------------
</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, 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)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
Year Ended
December 31, 1994 Trading $ 236.7 $ 23.2 $ (49.4)
- ------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------
</TABLE>
F-22
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES
VALUATION. At December 31, 1996 and 1995, all fixed maturity and equity
securities were classified as available-for-sale and reported at fair
value. Amortized cost and fair value of fixed maturity and equity
securities were as follows:
<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-23
<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 $ 2,851.8 $ 303.4 $ (2.8) $ 3,152.4
Below investment grade 188.1 11.9 (0.7) 199.3
Public utilities 1,241.5 156.6 - 1,398.1
Mortgage-backed 520.7 62.3 (0.7) 582.3
Foreign governments 101.5 17.7 - 119.2
U.S. government 191.8 23.7 - 215.5
States/political subdivisions 13.6 0.9 - 14.5
Redeemable preferred stocks 0.5 - - 0.5
--------------------------------------------------------------
Total fixed maturity
securities $ 5,109.5 $ 576.5 $ (4.2) $ 5,681.8
--------------------------------------------------------------
--------------------------------------------------------------
Equity securities $ 2.4 $ 1.3 $ - $ 3.7
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
F-24
<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, 1996 were as follows:
DECEMBER 31, 1996
-----------------------------
AMORTIZED FAIR
In millions COST VALUE
---------------------------------------------------------------------
FIXED MATURITY SECURITIES, EXCLUDING
MORTGAGE-BACKED SECURITIES
Due in one year or less $ 112.0 $ 113.0
Due after one year through
five years 618.1 645.2
Due after five years through
ten years 1,935.0 2,046.9
Due after ten years 1,685.1 1,828.8
Mortgage-backed securities 802.1 842.6
------------------------------
Total fixed maturity securities $5,152.3 $5,476.5
------------------------------
------------------------------
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Investment strategies
may result in the sale of investments before maturity.
F-25
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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:
DECEMBER 31
----------------------------
In millions 1996 1995
- --------------------------------------------------------------------------
Gross unrealized gains $ 336.4 $ 577.8
Gross unrealized losses (9.2) (4.2)
DPAC fair value adjustment (0.4) (11.7)
CIP fair value adjustment (160.9) (270.0)
Participating policyholders'
interest (1.8) (3.4)
Deferred federal income taxes (57.5) (101.0)
----------------------------
Net unrealized gains
on securities $ 106.6 $ 187.5
----------------------------
----------------------------
The change in net unrealized holding gain or loss on trading securities
which was included in earnings during the one month ended January 31, 1995
and for the year ended December 31, 1994 was as follows:
ONE MONTH
ENDED YEAR ENDED
JANUARY 31 DECEMBER 31
----------------------------
In millions 1995 1994
- -------------------------------------------------------------------------
Change in unrealized holding gain
or loss on trading securities $ 2.2 $ (5.3)
Deferred income taxes (0.8) 1.9
----------------------------
Change in net unrealized holding
gain or loss on trading securities $ 1.4 $ (3.4)
----------------------------
----------------------------
F-26
<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:
DECEMBER 31
----------------------------
In millions 1996 1995
- --------------------------------------------------------------------------
Geographic distribution
East North Central $ 120.0 $ 135.3
East South Central 37.8 39.1
Mid Atlantic 21.5 17.9
Mountain 58.1 42.9
New England 19.2 20.6
Pacific 104.3 102.0
South Atlantic 167.7 153.8
West North Central 35.4 40.2
West South Central 57.9 56.2
Allowance for losses (14.9) (12.7)
- --------------------------------------------------------------------------
Total $ 607.0 $ 595.3
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
Property type
Retail $ 312.3 $ 296.3
Office 147.5 159.7
Industrial 89.4 99.9
Residential and other 72.7 52.1
Allowance for losses (14.9) (12.7)
- --------------------------------------------------------------------------
Total $ 607.0 $ 595.3
- --------------------------------------------------------------------------
- --------------------------------------------------------------------------
F-27
<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
Eleven Months
YEAR ENDED Ended
DECEMBER 31 December 31
------------------------------
In millions 1996 1995
-------------------------------------------------------------------
Impaired loans
With allowance * $ 21.4 $ 5.3
Without allowance - 17.8
------------------------------
Total impaired loans $ 21.4 $ 23.1
------------------------------
------------------------------
Average investment $ 22.3 $ 27.4
------------------------------
------------------------------
Interest income earned $ 1.5 $ 1.3
------------------------------
------------------------------
* Represents gross amounts before allowance for mortgage loan losses of
$4.9 million and $1.6 million at December 31, 1996 and 1995,
respectively.
ALLOWANCE. The allowance for mortgage loan losses was as follows:
Eleven Months One Month
YEAR ENDED Ended Ended
DECEMBER 31 December 31 January 31
---------------------------------------
In millions 1996 1995 1995
- -----------------------------------------------------------------------------
Balance at beginning of period $ 12.7 $ 8.5 $ -
Net additions * 2.2 4.2 8.5
---------------------------------------
Balance at end of period $ 14.9 $ 12.7 $ 8.5
---------------------------------------
---------------------------------------
* Charged to realized investment gains (losses).
F-28
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.6 INVESTMENTS ON DEPOSIT
----------------------
At December 31, 1996 and 1995, bonds and other investments carried at $22.6
million and $25.0 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, 1996 and
1995, Franklin's largest investment in any one entity other than U.S.
government obligations and related party amounts was $64.6 million and
$66.1 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 the Company'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
----------------------------------------------------------
1996 1995
----------------------------------------------------------
CARRYING FAIR Carrying Fair
In millions AMOUNT VALUE Amount Value
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $ 5,476.5 $ 5,476.5 $ 5,681.8 $ 5,681.8
Mortgage loans on real estate 607.0 637.7 595.3 628.6
Equity securities 5.0 5.0 3.7 3.7
Liabilities
Insurance investment contracts $(1,967.9) $(1,892.9) $(1,985.0) $(1,901.3)
Dividend accumulations $ (755.9) $ (755.9) $ (731.0) $ (731.0)
</TABLE>
F-29
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Fair Value of Financial Instruments (continued)
The methods and assumptions used to estimate fair value were as follows.
Care should be exercised in drawing conclusions from the estimated fair
value, since the estimates are based on assumptions regarding future
economic activity.
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 current market
rates applicable to the 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
discount rates that were based on U.S. Treasury rates for similar maturity
ranges, adjusted for risk, based on property type.
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts, which do not subject Franklin to significant risks arising from
policyholder mortality or morbidity, was estimated using cash flows
discounted at market interest rates.
DIVIDEND ACCUMULATIONS. Fair value disclosed for dividend accumulations
equals the amount of dividend payable on demand at the reporting date.
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 1996 and 1995.
F-30
<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 Ended Ended Year Ended
DECEMBER 31 December 31 January 31 December 31
----------------------------------------------------------
In millions 1996 1995 1995 1994
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ 47.5 $ - $ 510.6 $ 470.5
Capitalization 56.2 67.7 8.5 111.4
Amortization (10.7) (8.3) (5.8) (71.3)
Effect of unrealized gains on securities 11.3 (11.7) - -
Effect of realized investment gains (0.4) (0.2) - -
Adjustment for the acquisition (a) - - (513.3) -
Other (21.9) - - -
----------------------------------------------------------
End of period balance $ 82.0 $ 47.5 $ - $ 510.6
----------------------------------------------------------
----------------------------------------------------------
(a) Represents the necessary elimination of the historical DPAC asset required by purchase accounting.
</TABLE>
F-31
<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 Ended Ended Year Ended
DECEMBER 31 December 31 January 31 December 31
----------------------------------------------------------
In millions 1996 1995 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ 353.0 $ 656.6 $ 174.7 $ 169.9
Interest accretion 51.8 49.0 2.0 24.9
Additions 13.6 41.3 - 13.8
Amortization (116.5) (118.0) (2.8) (33.9)
Effect of unrealized gains
on securities 109.1 (270.0) - -
Effect of realized investment
gains (3.2) (5.9) - -
Incremental adjustment for
the acquisition (a) - - 482.7 -
----------------------------------------------------------
End of period balance $ 407.8 $ 353.0 $ 656.6 $ 174.7
----------------------------------------------------------
----------------------------------------------------------
</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 $45.3 million, $41.7 million,
$38.4 million, $35.3 million, and $32.4 million.
6. Separate Accounts
Franklin administers three Separate Accounts for variable annuity
contracts. AMFLIC administers two Separate Accounts in connection with the
issuance of its Variable Universal Life product.
F-32
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes
Franklin and its life insurance company subsidiaries are subject to the
life insurance company provisions of the federal tax law.
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 tax allocation agreement is in the process of
being drafted, executed and approved by the Board of Directors.
7.1 DEFERRED TAXES
--------------
Components of deferred tax liabilities and assets at December 31, were as
follows:
In millions 1996 1995
---------------------------------------------------------------------
Deferred tax liabilities, applicable to:
Basis differential of investments $ 63.1 $ 151.9
DPAC and CIP 124.6 99.5
Other 15.7 27.0
------------------------
Total deferred tax liabilities 203.4 278.4
------------------------
Deferred tax assets, applicable to:
Policy reserves (128.3) (115.6)
Participating policyholders' interests (73.6) (69.9)
Postretirement benefits (4.0) (4.0)
Basis differential of investments (7.7) (14.4)
Other (8.8) (24.7)
------------------------
Total deferred tax assets (222.4) (228.6)
------------------------
Net deferred tax (asset) liability $ (19.0) $ 49.8
------------------------
------------------------
Franklin expects adequate future taxable income to realize the net 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, 1996. At current corporate 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-33
<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
income tax rate follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Ended Ended Year Ended
DECEMBER 31 December 31 January 31 December 31
--------------------------------------------------------------
1996 1995 1995 1994
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0% 35.0%
State taxes, net 0.3 0.9 36.3 1.1
Tax-exempt investment income (0.7) (0.6) (39.3) 0.7
Amortization of goodwill - - 34.3 1.0
Other 0.2 0.6 0.4 1.4
--------------------------------------------------------------
Effective tax rate 34.8% 35.9% 66.7% 39.2%
--------------------------------------------------------------
--------------------------------------------------------------
</TABLE>
7.3 TAXES PAID
----------
Federal income taxes paid for the year ended December 31, 1996, the eleven
months ended December 31, 1995 and the year ended December 31, 1994 were
$74 million, $53 million, and $65 million, respectively. State income
taxes paid for the year ended December 31, 1996, the eleven months ended
December 31, 1995 and the year ended December 31, 1994, were $2 million, $1
million, and $3 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 covers most Franklin employees. Under the AGC Plan, pension
benefits are based on the participant's average monthly compensation and
length of credited service. AGC's funding policy is to contribute annually
no more than the maximum amount deductible for federal income tax purposes.
Equity and fixed maturity securities were 60% and 35%, respectively, of the
AGC Plan's assets at December 31, 1996.
F-34
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
-------------------------
The net pension cost 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.
Fixed maturity securities constituted the majority of The Franklin Plan's
assets at December 31, 1995.
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, the one month ended January 31, 1995 and the year
ended December 31, 1994, these contracts provided approximately $3.9
million, $0.3 million, and $4.0 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 cost included the following components:
<TABLE>
<CAPTION>
Eleven Months One Month Year
YEAR ENDED Ended Ended Ended
DECEMBER 31 December 31 January 31 December 31
--------------------------------------------------------------------------
In Millions 1996 1995 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned) $ 0.8 $ 0.9 $ 0.2 $ 2.8
Interest cost 2.0 3.7 0.4 4.2
Actual return on plan assets (7.8) (11.5) (0.4) 2.5
Net amortization and deferral 4.6 6.3 - (6.7)
--------------------------------------------------------------------------
Pension (income) expense $ (0.4) $ (0.6) $ 0.2 $ 2.8
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
F-35
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (CONTINUED)
-------------------------
The funded status of the plan and the prepaid pension expense included in
other assets at December 31 were as follows:
In million 1996 1995
---------------------------------------------------------------------------
Accumulated benefit obligation, primarily vested $ 27.0 $ 27.6
Effect of increase in compensation levels 0.2 -
----------------------
Projected benefit obligation 27.2 27.6
Plan assets at fair value 35.5 31.3
----------------------
Plan assets at fair value in excess of projected
benefit obligation 8.3 3.7
Other unrecognized items, net 3.0 7.4
----------------------
Prepaid pension expense $ 11.3 $ 11.1
----------------------
----------------------
Weighted-average discount rate on benefit obligation 7.50% 7.25%
Rate of increase in compensation levels 4.00 4.00
Expected long-term rate of return on plan assets 10.00 10.00
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
-------------------------------------------
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.
F-36
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED)
-------------------------------------------------------
The life plans are fully insured. The plan's funded status and the accrued
postretirement benefit cost included in other liabilities at December 31
were as follows:
In millions 1996 1995
-------------------------------------------------------------
Actuarial present value of
benefit obligation
Retirees $ 7.3 $ 8.9
Active plan participants
Fully eligible 0.2 1.1
Other 1.8 2.5
-------------------------
Accumulated postretirement
benefit obligation (APBO) 9.3 12.5
Unrecognized net gain 2.2 (1.4)
-------------------------
Accrued benefit cost $ 11.5 $ 11.1
-------------------------
-------------------------
Weighted-average discount
rate on benefit obligation 7.50% 7.25%
Postretirement benefit expense was as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Ended Ended Year
DECEMBER 31 Ended December 31 January 31 December 31
----------------------------------------------------------------
In millions 1996 1995 1995 1994
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned) $ 0.1 $ 0.1 $ - $ 1.1
Interest cost 0.7 0.9 (0.2) 2.8
----------------------------------------------------------------
Postretirement benefit expense
(income) $ 0.8 $ 1.0 $ (0.2) $ 3.9
----------------------------------------------------------------
----------------------------------------------------------------
</TABLE>
For measurement purposes, a 9% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1997; 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-37
<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 of insurance companies. In
addition, state regulators may permit statutory accounting practices that
differ from prescribed practices.
During 1995, Franklin, with the approval of the Illinois Insurance
Department, reclassified $203 million of its statutory surplus from
contributed to unassigned surplus.
At December 31, 1996 and 1995, Franklin had statutory shareholder's equity
of $431.0 million and $386.0 million, respectively. Statutory net income
was $123.2 million, $100.2 million, and $28.7 million for the years ended
December 31, 1996, 1995, and 1994, respectively.
As determined on a statutory basis, the statutory shareholder's equity and
net income of subsidiaries, were reported as follows:
STATUTORY
---------------------------------------
In millions 1996 1995 1994
- --------------------------------------------------------------------------
Shareholder's Equity $ 18.1 $ 9.9 $ 17.5
---------------------------------------
---------------------------------------
Net Income $ (1.9) $ (4.7) $ (4.8)
---------------------------------------
---------------------------------------
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 1997, loans or advances in
excess of $107.8 million and dividends in any twelve-month period
aggregating in excess of $123.2 million will require the approval of the
Illinois Insurance Department.
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.
F-38
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Ended Ended Year Ended
DECEMBER 31 December 31 January 31 December 31
--------------------------------------------------------------------------
In millions 1996 1995 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest added to annuity and other
financial products $ 173.3 $ 168.3 $ 14.0 $ 170.5
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Fair value of assets acquired under
certain assumed reinsurance treaties $ - $ 14.7 $ - $ 18.3
--------------------------------------------------------------------------
Insurance liabilities assumed $ - $ 14.7 $ - $ 18.3
--------------------------------------------------------------------------
--------------------------------------------------------------------------
</TABLE>
11. Reinsurance
Franklin is routinely involved in reinsurance transactions. Ceded
insurance becomes a liability of the reinsurer that assumes the risk. 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. Franklin and its
insurance subsidiaries diversify their risk of exposure to reinsurance loss
by using a number of life reinsurers that have strong claims-paying ability
ratings. The maximum retention on one life for individual life insurance
is $1.0 million.
Amounts paid or deemed to have been paid in connection with ceded
reinsurance contracts are recorded as reinsurance receivables. The cost of
reinsurance related to long-duration contracts is recognized over the life
of the underlying reinsured policies using assumptions consistent with
those used to account for the underlying policies.
F-39
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance (continued)
Reinsurance premiums included in premiums and other considerations were as
follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Ended Ended Year Ended
DECEMBER 31 December 31 January 31 December 31
--------------------------------------------------------------------------
In millions 1996 1995 1995 1994
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct premiums and other
considerations $ 491.5 $ 500.1 $ 36.8 $ 507.1
Reinsurance assumed 15.9 44.2 (0.8) 114.7
Reinsurance ceded (88.8) (94.7) (1.5) (119.1)
- ------------------------------------------------------------------------------------------------------
Premiums and other
considerations $ 418.6 $ 449.6 $ 34.5 $ 502.7
- ------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------
</TABLE>
Reinsurance recoveries on ceded reinsurance contracts were $67.3 million,
$63.3 million, $1.4 million and $69.6 million for the year ended December
31, 1996, the eleven months ended December 31, 1995, the one month ended
January 31, 1995, and the year ended December 31, 1994, respectively. The
amount of reinsurance recoverable (payable) on paid and unpaid losses was
$1.8 million, $0.4 million and $(1.0) million at December 31, 1996, 1995,
and 1994, respectively.
12. Related Party Transactions
Franklin participates in a program of short-term borrowing with AGC to
maintain its long-term commitments. Franklin borrowed $62.1 million and
$105.2 million, and repaid $62.2 million and $105.1 million in 1996 and
1995, respectively. Interest was paid on the outstanding balances based on
the Federal Reserve Board's monthly average H.15 rate for 30-day commercial
paper.
During 1995, Franklin purchased a 6.75% promissory note from AGCL for
$116.0 million to mature in 2005.
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-40
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Related Party Transactions (continued)
Additionally, 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 $2.3 million for the year ended December 31, 1996 and $1.1
million for the eleven months ended December 31, 1995.
13. Legal Proceedings
Franklin and its subsidiaries are parties to various 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 believes
that the total amounts that will ultimately be paid, if any, arising from
these lawsuits and proceedings will have no material adverse effect on
Franklin's consolidated 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.
14. State Guaranty Associations
State guaranty fund expense included in operating costs and expenses was
$0.7 million, $0.2 million, $0.6 million, and $2.3 million for the year
ended December 31, 1996, the eleven months ended December 31, 1995, the one
month ended January 31, 1995, and the year ended December 31, 1994,
respectively. Amounts assessed Franklin by state life and health insurance
guaranty funds resulting from past industry insolvencies were $0.1 million,
$0.1 million, $0.6 million, and $2.3 million for the year ended December
31, 1996, the eleven months ended December 31, 1995, the one month ended
January 31, 1995, and the year ended December 31, 1994. These assessments
are expected to be partially recovered through credits against the payment
of future premium taxes.
The accrued liability for anticipated assessments was $7.5 million and $8.5
million at December 31, 1996 and 1995, respectively. Franklin has recorded
a receivable of $11.2 million at December 31, 1996 and 1995, for expected
recoveries against the payment of future premium taxes.
The 1996 liability was estimated by Franklin using the latest information
available from the National Organization of Life and Health Insurance
Guaranty Associations. Although the amount accrued represents Franklin's
best estimate of its liability, this estimate may change in the future.
Additionally, changes in state laws could decrease the amount recoverable
against future premium taxes.
F-41
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN LIFE VARIABLE ANNUITY FUND B
INDIVIDUAL VARIABLE ANNUITY CONTRACTS
(NOT FOR USE IN CONNECTION WITH QUALIFIED
TRUST OR PLANS)
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 B:
Per-Unit Income and Changes in Accumulation Unit Value for the ten
years ended December 31, 1996
Included in the Statement of Additional Information:
Franklin Life Variable Annuity Fund B:
Reports of Independent Auditors and Accountants
Financial Statements:
Statement of Assets and Liabilities, December 31, 1996
Statement of Operations for the year ended December 31, 1996
Statements of Changes in Contract Owners' Equity for the two years
ended December 31, 1996
Portfolio of Investments, December 31, 1996
Notes to Financial Statements
Supplementary Information - Per-Unit Income and Changes
in Accumulation Unit Value for the five years ended
December 31, 1996
The Franklin Life Insurance Company and Subsidiaries:
Reports of Independent Auditors and Accountants
Financial Statements:
Consolidated Balance Sheet, December 31, 1996 and 1995
Consolidated Statement of Income for the year ended December 31,
1996, the eleven months ended December 31, 1995, the one month
ended January 31, 1995, and year ended December 31, 1994
Consolidated Statement of Shareholder's Equity for the year ended
December 31, 1996, the eleven months ended December 31, 1995, the
one month ended January 31, 1995, and year ended December 31, 1994
Consolidated Statement of Cash Flows for the year ended December 31,
1996, the eleven months ended December 31, 1995, the one month
ended January 31, 1995, and year ended December 31, 1994
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.
(b) Exhibits:
1 - Resolution of The Franklin Life Insurance Company's Board of
Directors creating Franklin Life Variable Annuity Fund B is
incorporated herein by reference to Exhibit 1.1 of Registrant's
Registration Statement on Form S-5, filed September 29, 1970
(File No. 2-38502).
2 - Rules and Regulations adopted by Registrant are incorporated herein
by reference to Exhibit 1.2 of Registrant's Registration Statement
Amendment No. 1 on Form S-5, filed September 23, 1971
(File No. 2-38502).
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. 38 to Registrant's Registration Statement on Form N-3,
filed April 30, 1996..
4 - Investment Management Agreement dated January 31, 1995 between
Registrant and The Franklin Life Insurance Company is incorporated
herein by reference to Exhibit 4 of Registrant's Post-Effective
Amendment No. 37 on Form N-3, filed March 2, 1995.
5(a)- Sales Agreement among Franklin Financial Services Corporation, The
Franklin Life Insurance Company and Registrant dated January 31, 1995
is incorporated herein by reference to Exhibit 5(a) of Registrant's
Post-Effective Amendment No. 37 on Form N-3, filed March 2, 1995.
(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 Registrant's Registration Statement
Amendment No. 2 on Form S-5, filed March 23, 1972 (File No. 2-38502).
C-1
<PAGE>
6(a)- Revised specimen copy of Form 1180, deferred periodic payment variable
annuity contract, is incorporated herein by reference to
Exhibit 1.4(a)(i) of Registrant's Registration Statement Amendment
No. 2 on Form S-5, filed March 23, 1972 (File No. 2-38502).
(b)- Waiver of minimum payment provision of Form 1180 is incorporated
herein by reference to Exhibit 1.4(a)(i) of Registrant's Registration
Statement Post-Effective Amendment No. 2 on Form S-5, filed March 29,
1973 (File No. 2-38502).
(c)- Revised specimen copy of Form 1181, single payment deferred variable
annuity contract, is incorporated herein by reference to Exhibit
1.4(a)(ii) of Registrant's Registration Statement Amendment No. 2 on
Form S-5, filed March 23, 1972 (File No. 2-38502).
(d)- Revised specimen copy of Form 1182, single payment immediate life
variable annuity contract, is incorporated herein by reference to
Exhibit 1.4(a)(iii) of Registrant's Registration Statement Amendment
No. 1 on Form S-5, filed September 23, 1971 (File No. 2-38502).
(e)- Revised specimen copy of Form 1183, single payment immediate life
variable annuity contract with guaranteed period, is incorporated
herein by reference to Exhibit 1.4(a)(iv) of Registrant's Registration
Statement Amendment No. 1 onForm S-5, filed September 23, 1971
(File No. 2-38502).
(f)- Revised specimen copy of Form 1184, single payment immediate joint and
last survivor life variable annuity contract, is incorporated herein
by reference to Exhibit 1.4(a)(v) of Registrant's Registration
Statement Amendment No. 1 on Form S-5, filed September 23, 1971
(File No. 2-38502).
(g)- Specimen copy of endorsement to Forms 1180, 1181, 1182, 1183 and 1184
when such contracts are issued to variable annuitants in the State of
Texas is incorporated herein by reference to Exhibit 6 (g) to
Post-Effective Amendment No. 32 to Registrant's Registration Statement
on Form N-3, filed March 1, 1990 (File No. 2-38502).
7 - The applications for Forms 1180, 1181, 1182, 1183 and 1184 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. 32 to Registrant's Registration Statement
on Form N-3, filed March 1, 1990 (File No. 2-38502).
(b)- By-Laws of The Franklin Life Insurance Company.
9 - Not applicable.
10 - Not applicable.
11(a)- Administration Agreement between Registrant and The Franklin Life
Insurance Company, dated March 23, 1972, is incorporated herein by
reference to Exhibit 9(a) of Registrant's Registration Statement
Amendment No. 1 on Form N-8B-1, filed May 18, 1972 (File No. 811-2110).
(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) of Registrant's Registration
Statement Amendment No. 1 on Form N-8B-1, filed July 15, 1971
(File No. 811-2110).
(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) of Registrant's
Registration Statement Amendment No. 7 on Form S-5, filed November 5,
1975 (File No. 2-38502).
12 - Opinion and consent dated April 2, 1986 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 10(b) of Registrant's Post-Effective Amendment No. 27 on
Form N-1, filed April 29, 1986 (File No. 2-38502).
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, L.L.P.
14 - Not applicable.
C-2
<PAGE>
15 - Not applicable.
16 - Not applicable.
17 - Power of Attorney.
27 - Financial Data Schedule meeting the requirements of Rule 483.
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, American General Corporation and all affiliated
persons within the holding company system.
The following is a list of American General Corporation's subsidiaries as
of December 31, 1996(1). Subsidiaries of subsidiaries are indicated by
indentations and unless otherwise indicated all subsidiaries are
wholly-owned. Inactive subsidiaries are denoted by an asterisk (*).
Jurisdiction of
Name Incorporation Insurer
- ---- --------------- -------
AGC Life Insurance Company ("AGCL")(3) MO Yes
The Franklin Life Insurance Company IL Yes
The American Franklin Life Insurance Company IL Yes
Franklin Financial Services Corporation DE No
American General Life and Accident Insurance Company TN Yes
American General Exchange, Inc. TN No
Southern Educators Life Insurance Company GA Yes
American General Life Insurance Company TX Yes
American General Annuity Service Corporation TX No
American General Life Insurance Company of New York NY Yes
The Winchester Agency Ltd. NY No
American General Securities Incorporated ("AGSI")(4) TX No
American General Insurance Agency, Inc. MO No
American General Insurance Agency of Hawaii, Inc. HI No
American General Insurance Agency of Massachusetts, Inc. MA No
The Variable Annuity Life Insurance Company TX Yes
The Variable Annuity Marketing Company TX No
VALIC Investment Services Company TX No
C-3
<PAGE>
Jurisdiction of
Name Incorporation Insurer
- ---- --------------- -------
VALIC Retirement Services Company TX No
The Independent Life and Accident Insurance Company FL Yes
Independent Fire Insurance Company FL Yes
Independent Fire Insurance Company of Florida FL Yes
Old Faithful General Agency, Inc. TX No
Thomas Jefferson Insurance Company FL Yes
Independent Property & Casualty Insurance Company FL Yes
Allen Property Company DE No
Florida Westchase Corporation DE No
Greatwood Development, Inc. DE No
Greatwood Golf Club, Inc. TX No
Highland Creek Golf Club, Inc. NC No
Hunter's Creek Communications Corporation FL No
Pebble Creek Corporation DE No
Pebble Creek Development Corporation FL No
Westchase Development Corporation DE No
Westchase Golf Corporation FL No
American General Capital Services, Inc. DE No
American General Delaware Management Corporation ("AGDMC")(1)DE No
American General Finance, Inc. IN No
AGF Investment Corp. IN No
American General Auto Finance, Inc. DE No
American General Finance Corporation (5) IN No
American General Finance Group, Inc. DE No
American General Financial Services, Inc. (6) DE No
The National Life and Accident Insurance Company TX Yes
Merit Life Insurance Company IN Yes
Yosemite Insurance Company CA Yes
American General Finance, Inc. AL No
American General Financial Center UT No
American General Financial Center, Inc.* IN No
American General Financial Center, Incorporated* IN No
American General Financial Center Thrift Company* CA No
Thrift, Incorporated* IN No
American General Realty Investment Corporation TX No
American General Mortgage Company DE No
Ontario Vineyard Corporation DE No
Pebble Creek Country Club Corporation FL No
Pebble Creek Service Corporation FL No
SR/HP/CM Corporation TX No
American General Mortgage and Land Development, Inc. DE No
American General Land Development, Inc. DE No
American General Realty Advisors, Inc. DE No
American General Property Insurance Company TN Yes
Bayou Property Company DE No
AGLL Corporation ("AGLL")(7) DE No
American General Land Holding Company ("AGLH") DE No
AG Land Associates, LLC(7) CA No
Hunter's Creek Realty, Inc.* FL No
Summit Realty Company, Inc. SC No
Lincoln American Corporation DE No
Financial Life Assurance Company of Canada Canada Yes
Florida GL Corporation DE No
GPC Property Company DE No
Cinco Ranch Development Corporation TX No
Cinco Ranch East Development, Inc. DE No
Cinco Ranch West Development, Inc. DE No
The Colonies Development, Inc. DE No
C-4
<PAGE>
Fieldstone Farms Development, Inc. DE No
Hickory Downs Development, Inc. DE No
Lake Houston Development, Inc. DE No
South Padre Development, Inc. DE No
Green Hills Corporation DE No
INFL Corporation DE No
Knickerbocker Corporation TX No
American Athletic Club, Inc. TX No
Pavilions Corporation DE No
American General Finance Foundation, Inc. is not included on this list. It
is a non-profit corporation.
(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 Delaware business trust was created. AG Cap Trust's business
and affairs are conducted through its trustees: Bankers Trust Company and
Bankers Trust (Delaware). Capital securities of AG Cap Trust are held by
non-affiliated third party investors and common securities of AG Cap Trust
are held by AGC.
(3) On December 23, 1994 AGCL became the owner of approximattely 40% of the
shares of common stock of Western National Corporation ("WNC") (DE). The
percentage of ownership by AGCL would increase to approximately 46% upon
conversion of WNC's Series A Convertible Preferred Stock which AGCL also
owns. WNC owns the following companies:
WNL Holding Corporation
Western National Life Insurance Company (TX)
Western Save (401K Plan)
Independent Advantage Financial & Insurance Services, Inc.
WNL Investment Advisory Services, Inc.
Conseco Annuity Guarantee Corp.
WNL Brokerage Services, Inc.
WNL Insurance Services, Inc.
Accordingly, these companies became AGCL affiliates under insurance
holding company laws. However, the WNC stock is held for investment
purposes by AGCL and there are no plans for AGCL to direct the operations of
any of these companies.
(4) The following companies are indirectly controlled by, or related to, AGSI:
American General Insurance Agency of Ohio, Inc.
American General Insurance Agency of Texas, Inc.
American General Insurance Agency of Oklahoma, Inc.
Insurance Masters Agency, Inc.
(5) American General Finance Corporation is the parent of an additional 41
wholly owned subsidiaries incorporated in 26 states for the pupose of
conducting its consumer finance operations.
(6) 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.
(7) 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.
C-5
<PAGE>
Item 31. Number of Holders of Securities.
As of February 21, 1997, the number of record holders of the sole class of
securities of Registrant was as indicated below:
(1) (2)
Title of Class Number of Record Holders
- ------------------------------ ----------------------------------
Accumulation Units Under 367
Variable Annuity Contracts
Item 32. Indemnification.
The information called for by this item has not changed from that provided
in Registrant's Post-Effective Amendment No. 20 on Form N-1 (File No.
2-38502) 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 A 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:
(1) (2)
Name Business or Employment
_______________________ ________________________________________
Vickie J. Alton . . . . Vice President, The Franklin
Elizabeth E. Arthur . . Vice President, Associate General Counsel and
Assistant Secretary, The Franklin
Earl W. Baucom. . . . . Senior Vice President and Chief Financial
Officer, The Franklin, since June 10,
1996; Director, The Franklin, since August 21,
1996; Chief Financial Officer, Providian
Direct Insurance, from October, 1993 to
December, 1995.
Robert M. Beuerlein . . Senior Vice President-Actuarial and Director,
The Franklin
Mark R. Butler. . . . . Vice President - Management Development
Director, The Franklin
Philip D. Calderwood. . Vice President and 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.
Robert M. Devlin. . . . Chairman of the Board, The Franklin, since
August 21, 1996; Director, The Franklin,
since February, 1995; Senior Chairman, The
Franklin, from February, 1995 to August,
1996; Chief Executive Officer, American
General
C-6
<PAGE>
(1) (2)
Name Business or Employment
_______________________ ________________________________________
Corporation, Houston, Texas, since October 24,
1996; Director, American
General Corporation; President, American
General Corporation, from October, 1995 to
October, 1996; Vice Chairman, American
General Corporation, prior to October, 1995.
Steve A. Dmytrack . . . Vice President, The Franklin, since August 24,
1995; Assistant Vice President, The
Franklin, prior thereto
Paul C. Ely . . . . . . Vice President, The Franklin
Stephen H. Field. . . . Vice President, The Franklin, since December
22, 1995; President and Chief Executive
Officer, American General Mortgage and Land
Development, Inc., 2929 Allen Parkway,
Houston, Texas 77019
Barbara Fossum. . . . . Vice President, The Franklin, since June,
1995; Vice President, American General Life
Insurance Company, prior thereto.
Ross D. Friend. . . . . Senior Vice President, General Counsel,
Secretary, and Director, The Franklin, since
September 3, 1996; Attorney-in-Charge,
Prudential Life Insurance Company,
Jacksonville, Florida, from July, 1995 to
September, 1996; Chief Legal Officer,
Confederation Life Insurance Company,
Atlanta, Georgia, prior to July, 1995.
Robert J. Gibbons . . . Chief Executive Officer, The Franklin, since
November 30, 1995; Director and President,
The Franklin since February 22, 1995;
President and Chief Executive Officer,
American General Life Insurance Company of
New York prior to February 22, 1995.
Jerry P. Jourdan. . . . Director of Information Services - Technical
Support, The Franklin, since January 31,
1996; Assistant Vice President, The
Franklin, prior thereto
Darrell J. Malano . . . Vice President, The Franklin
Margaret L. Manola. . . Vice President, The Franklin
Thomas K. McCracken . . Vice President, 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
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; Senior
Vice President and General Counsel, American
General Corporation, prior thereto
C-7
<PAGE>
(1) (2)
Name Business or Employment
_______________________ ________________________________________
John M. Pruitt. . . . . Vice President and Director of Sales Services,
The Franklin
James M. Quigley. . . . Vice President, The Franklin, since August 24,
1995.
Gary D. Reddick . . . . Director and Executive Vice President, The
Franklin since February 22, 1995; Senior
Vice President, American General
Corporation, Houston, Texas prior to
February, 1995.
Dale W. Sachtleben. . . Vice President, The Franklin
John E. Sartore . . . . Vice President, The Franklin
Robert G. Spencer . . . Vice President, The Franklin; prior to 1996,
also Treasurer, 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.
Peter V. Tuters . . . . Director, Vice President and Chief Investment
Officer, The Franklin since February 22,
1995; Senior Vice President since 1992 and
Chief Investment Officer since December,
1993, American General Corporation, 2929
Allen Parkway, Houston, Texas 77019
J. Alan Vala. . . . . . Vice President and Agency Secretary, The
Franklin
David G. Vanselow . . . Vice President, The Franklin
Cynthia P. Wieties. . . Director of Communications, The Franklin,
since March 19, 1997; Assistant Vice
President, The Franklin, prior to March,
1997.
Item 34. Principal Underwriters.
(a) Franklin Life Variable Annuity Fund A, 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 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.
(1) (2) (3)
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
- -------------------------------------------------------------------------------
Elizabeth E. Arthur Assistant Secretary Secretary to the
Board of Managers
Earl W. Baucom Treasurer and Director None
C-8
<PAGE>
(1) (2) (3)
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
- -------------------------------------------------------------------------------
Bruce R. Baker Assistant Vice President and None
665 North Newbridge Road Marketing Officer
Levittown, NY 11756
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 Road Marketing Officer
Levittown, NY 11756
Ross D. Friend Director, Vice President None
and Secretary
John E. Froberg Vice President None
Robert J. Gibbons Chairman of the Board and None
Chief Executive Officer
James L. Gleaves Assistant Treasurer None
2929 Allen Parkway
Houston, TX 77019
Deanna Osmonson Vice President None
and Assistant Secretary
Gary D. Osmonson President and Director None
Gary D. Reddick Executive Vice President None
James C. Rundblom Chief Financial Officer None
Dan E. Trudan Vice President and Assistant Secretary None
(c) Information regarding commissions and other compensation received by
each principal underwriter, directly or indirectly, from Registrant during
1996, Registrant's last fiscal year, is set forth below:
(1) (2) (3) (4) (5)
Name of Net Underwriting Compensation
Principal Discounts and on Redemption Brokerage Other
Underwriters Commissions or Annuitization Commissions Compensation
- -------------------------------------------------------------------------------
Franklin Financial
Services Corporation $370 -0- -0- -0-
C-9
<PAGE>
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. 15 on Form N-1
(File No. 2-38502) 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 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-10
<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 B 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 24th day of April, 1997.
FRANKLIN LIFE VARIABLE ANNUITY FUND B
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.
Signature Title Date
/s/ Elizabeth E. Arthur Secretary, Board April 24, 1997
- ------------------------------- of Managers
(Elizabeth E. Arthur)
/s/ Clifford L. Greenwalt* Member, Board April 24, 1997
- ------------------------------ of Managers
(Clifford L. Greenwalt)
/s/ Robert C. Spencer* Member, Board April 24, 1997
- ------------------------------ of Managers
(Robert C. Spencer)
/s/ Robert G. Spencer* Chairman, Board April 24, 1997
- ------------------------------ of Managers
(Robert G. Spencer)
/s/ James W. Voth* Member, Board April 24, 1997
- ------------------------------ of Managers
(James W. Voth)
/s/ Elizabeth E. Arthur
- ------------------------------
*By Elizabeth E. Arthur,
Attorney-in-Fact
C-11
<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 24th day of April, 1997.
THE FRANKLIN LIFE INSURANCE COMPANY
By:/s/ Ross D. Friend
-------------------------------------
(Ross D. Friend, Senior Vice President,
General Counsel and Secretary)
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 24, 1997
- ------------------------------ Financial Officer (principal
(Earl W. Baucom) financial officer and principal
accounting officer) and Director
/s/ Robert M. Beuerlein* Senior Vice President- April 24 , 1997
- ------------------------------ Actuarial and Director
(Robert M. Beuerlein)
/s/ Brady W. Creel* Senior Vice President, April 24 , 1997
- ------------------------------ Chief Marketing Officer
(Brady W. Creel) and Director
- ------------------------------ Chairman of the Board , 1997
(Robert M. Devlin)
/s/ Ross D. Friend Senior Vice President, April 24, 1997
- ------------------------------ General Counsel, Secretary
(Ross D. Friend) and Director
/s/ Robert J. Gibbons* President, Chief Executive April 24, 1997
- ------------------------------ Officer and Director
(Robert J. Gibbons) (principal executive officer)
- ------------------------------ Director and Vice Chairman , 1997
(Jon P. Newton)
/s/ Gary D. Reddick* Executive Vice President and April 24 , 1997
- ------------------------------ Director
(Gary D. Reddick)
- ------------------------------ Vice President, Chief Investment , 1997
(Peter V.Tuters) Officer and Director
/s/ Elizabeth E. Arthur
- ------------------------------
* By Elizabeth E. Arthur,
Attorney-in-Fact
</TABLE>
C-12
<PAGE>
EXHIBIT INDEX
Exhibit Page
1 - Resolution of The Franklin Life Insurance Company's Board of
Directors creating Franklin Life Variable Annuity Fund B is
incorporated herein by reference to Exhibit 1.1 of Registrant's
Registration Statement on Form S-5, filed September 29, 1970 (File
No. 2-38502).
2 - Rules and Regulations adopted by Registrant are incorporated herein
by reference to Exhibit 1.2 of Registrant's Registration Statement
Amendment No. 1 on Form S-5, filed September 23, 1971 (File No.
2-38502).
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. 38 to Registrant's Registration Statement on Form N-3,
filed April 30, 1996.
4 - Investment Management Agreement dated January 31, 1995 between
Registrant and The Franklin Life Insurance Company is incorporated
herein by reference to Exhibit 4 of Registrant's Post-Effective
Amendment No. 37 on Form N-3, filed March 2, 1995.
5(a)- Sales Agreement among Franklin Financial Services Corporation, The
Franklin Life Insurance Company and Registrant dated January 31,
1995 is incorporated herein by reference to Exhibit 5(a) of
Registrant's Post-Effective Amendment No. 37 on Form N-3, filed
March 2, 1995.
(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 Registrant's Registration
Statement Amendment No. 2 on Form S-5, filed March 23, 1972 (File
No. 2-38502).
6(a)- Revised specimen copy of Form 1180, deferred periodic payment
variable annuity contract, is incorporated herein by reference to
Exhibit 1.4(a)(i) of Registrant's Registration Statement Amendment
No. 2 on Form S-5, filed March 23, 1972 (File No. 2-38502).
(b)- Waiver of minimum payment provision of Form 1180 is incorporated
herein by reference to Exhibit 1.4(a)(i) of Registrant's
Registration Statement Post-Effective Amendment No. 2 on Form S-5,
filed March 29, 1973 (File No. 2-38502).
(c)- Revised specimen copy of Form 1181, single payment deferred variable
annuity contract, is incorporated herein by reference to Exhibit
1.4(a)(ii) of Registrant's Registration Statement Amendment No. 2 on
Form S-5, filed March 23, 1972 (File No. 2-38502).
(d)- Revised specimen copy of Form 1182, single payment immediate life
variable annuity contract, is incorporated herein by reference to
Exhibit 1.4(a)(iii) of Registrant's Registration Statement Amendment
No. 1 on Form S-5, filed September 23, 1971 (File No. 2-38502).
(e)- Revised specimen copy of Form 1183, single payment immediate life
variable annuity contract with guaranteed period, is incorporated
herein by reference to Exhibit 1.4(a)(iv) of Registrant's
Registration Statement Amendment No. 1 on Form S-5, filed September
23, 1971 (File No. 2-38502).
(f)- Revised specimen copy of Form 1184, single payment immediate joint
and last survivor life variable annuity contract, is incorporated
herein by reference to Exhibit 1.4(a)(v) of Registrant's
Registration Statement Amendment No.1 on Form S-5, filed September
23, 1971 (File No. 2-38502).
<PAGE>
Page
(g) - Specimen copy of endorsement to Forms 1180, 1181, 1182, 1183 and
1184 when such contracts are issued to variable annuitants in the
State of Texas is incorporated herein by reference to Exhibit 6 (g)
to Post-Effective Amendment No. 32 to Registrant's Registration
Statement on Form N-3, filed March 1, 1990 (File No. 2-38502).
7 - The applications for Forms 1180, 1181, 1182, 1183 and 1184 set forth
in Exhibit 6 are included as parts of the respective
contract forms.
8(b)- By-Laws of The Franklin Life Insurance Company.
9 - Not applicable.
10 - Not applicable.
11(a)- Administration Agreement between Registrant and The Franklin Life
Insurance Company, dated March 23, 1972, is incorporated herein by
reference to Exhibit 9(a) of Registrant's Registration Statement
Amendment No. 1 on Form N-8B-1, filed May 18, 1972 (File No.
811-2110).
(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) of Registrant's Registration
Statement Amendment No. 1 on Form N-8B-1, filed July 15, 1971 (File
No. 811-2110).
(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) of
Registrant's Registration Statement Amendment No. 7 on Form S-5,
filed November 5, 1975 (File No. 2-38502).
12 - Opinion and consent dated April 2, 1986 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 10(b) of Registrant's Post-Effective Amendment
No. 27 on Form N-1, filed April 29, 1986 (File No. 2-38502).
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, L.L.P.
14 - Not applicable.
<PAGE>
15 - Not applicable.
16 - Not applicable.
17 - Power of Attorney.
27 - Financial Data Schedule meeting the requirements of Rule 483.
<PAGE>
EXHIBIT 8(b)
B Y L A W S
O F
THE FRANKLIN LIFE INSURANCE COMPANY
SPRINGFIELD, ILLINOIS
(AMENDED NOVEMBER 21, 1996)
A R T I C L E I
MEETING OF STOCKHOLDERS
SECTION 1. The regular annual meeting of the stockholders of the Company
shall be held at the Home Office of the Company, in the City of Springfield,
Illinois, on the second Tuesday in January of each year at the hour of
nine-thirty a.m.
SECTION 2. Special meetings of the stockholders may be called at any time
by the President and Secretary or by the holders of not less than a majority of
the then outstanding stock by mailing to each stockholder a written notice
(stating the time, place and object of the meeting) at least five (5) days prior
to the date fixed therefor.
SECTION 3. At any meeting of stockholders the holders of the majority of
the capital stock issued and outstanding present in person or represented by
proxy, shall constitute a quorum for all purposes. If the holders of the amount
of stock necessary to constitute a quorum shall fail to attend in person or by
proxy at the time and place fixed by these Bylaws for an annual meeting, or
fixed by notice as provided for a special meeting, a majority in interest
(although less than a quorum) of the stockholders present in person or by proxy
may adjourn, from time to time, without notice other than by announcement at the
meeting. At any such adjourned meeting at which a quorum shall be present any
business may be transacted which might have been transacted at the meeting as
originally fixed or modified.
A R T I C L E I I
DIRECTORS
<PAGE>
SECTION 1. The Board of Directors of the Company shall consist of not less
than seven (7) and not more than twelve (12) members. They shall be elected by
the stockholders at their regular annual meeting for the term of one year each
or until their successors are elected.
SECTION 2. Vacancies in the Board of Directors may be filled by the
stockholders at any regular meeting of stockholders, or at any special meeting
called for that purpose.
SECTION 3. A regular meeting of the board of Directors shall be held on
the second Tuesday in the months of January, April, July and October at 9:30
a.m. Notice of each meeting shall be given to each member of the Board by the
President or Secretary at least three days prior to the meeting date. A
majority of all of the Directors shall constitute a quorum for the transaction
of business but when a quorum is not present, one or more Directors present may
adjourn and continue to adjourn such meeting from time to time, but not to a
time beyond the date of the next regular meeting.
SECTION 4. Special meetings of the Board of Directors may be called by the
Chairman or President and Secretary , or by a majority of the Directors, by
mailing to each Director a written notice (stating the time, place, and object
of the meeting) at least three days prior to the date fixed therefor. A
majority of all Directors shall constitute a quorum.
SECTION 5. The Board of Directors, at its first meeting following the
regular annual meeting of stockholders in each year, shall elect one of its
members as Chairman of the Board to serve for one year or until his successor is
elected and shall elect one of its members as Vice Chairman of the Board to
serve for one year or until his successor is elected. The Chairman shall
preside at all meetings of the stockholders and of the Board of Directors and
shall perform such other duties as may be required of him by the Board or by the
Executive Committee. In case of a vacancy in the office of Chairman, the same
may be filled for the unexpired term by the Board of Directors at any regular
meeting or at any special meeting called for that purpose. In the event of the
absence or inability of the Chairman, his duties shall be performed by the Vice
Chairman, and the Vice Chairman shall perform such other duties as may be
required of him by the Board or by the Executive committee. In the event of the
absence or inability of the Chairman and the Vice Chairman, the duties of the
Chairman shall be performed by the President.
SECTION 6. The Board of Directors shall have the power to elect or
appoint, and to remove at pleasure, all officers, committees and members of
committees, and shall fix the salaries of all officers and committee members and
prescribe their duties.
2
<PAGE>
A R T I C L E I I I
STANDING COMMITTEES
SECTION 1. The Board of Directors shall, at its first meeting following
the regular annual meeting of the stockholders in each year, appoint the
following standing committees: an Executive Committee of not less than three
members or more than eight members; an Investment Committee of not less than
four members or more than nine members; a Claims Committee of not less than
three members or more than ten members, a Marketing Committee of not less than
five members or more than twelve members; an Underwriting Committee of not less
than three members or more than ten members; a Benefits Committee of not less
than three members or more than five members; and Consumer Affairs Committee of
not less than four members and not more than twelve members. All members shall
serve for a term of one year or until their successors may be appointed.
Vacancies may be filled by the Board of Directors at any regular meeting, or at
any special meeting called for that purpose. Said Committees shall make written
reports of their transactions to the Board, and their acts shall be subject to
review by the Board of Directors. A majority of the members of any committee
shall be a quorum for the transactions of business, except that it will not be
necessary for the Underwriting Committee to have a quorum to pass on the
insurability of any applicant for insurance.
SECTION 2. The Executive Committee shall have the custody of all books,
papers, and records of the Company, and shall have general control and direction
of all the affairs and business of the Company not delegated in these Bylaws to
other persons, officers, or committees or reserved to the Board of Directors.
SECTION 3. The Investment Committee shall have authority to make all
investments of the Company (except loans to policyholders when provided for by
their policies) and all such investments shall be made in the name of the
Company. Said Committee shall have control of all real estate belonging to the
Company, and when in their judgment it is expedient to do so, may authorize any
proper officer or employee to sell and/or transfer any of the Company's
properties, securities, or investments and to manage any of the Company's
properties. No investments shall be made or any assets sold unless the
investment or sale is authorized or ratified by all members of said committee
present at the meeting when such investment or sale is considered.
SECTION 4. The Claims Committee shall supervise the administration of all
claims arising from the death or disability of policyholders of the Company and
formulate such rules and regulations covering the administration of claims as it
deems necessary.
3
<PAGE>
SECTION 5. The Marketing Committee shall have general supervision of the
agency activities of the Company.
SECTION 6. The Underwriting Committee shall (a) supervise the underwriting
of applications for new insurance and reinstatement of lapsed policies and
promulgate such rules and regulations regarding the eligibility for insurance of
such applicants as it deems necessary, and (b) perform such other duties as may
be required of them by the Board of Directors.
SECTION 7. The Benefits Committee shall administer any Retirement and
Welfare Plan of the Company.
SECTION 8. The Consumer Affairs Committee shall have general supervision
of the Company's relations with the insuring public.
A R T I C L E I V
EXECUTIVE OFFICERS
SECTION 1. The Executive Officers of the Company shall consist of a Chief
Executive Officer, a President, one or more Vice Presidents, a Secretary, one or
more Assistant Secretaries, Treasurer, and one or more Assistant Treasurers,
who shall be elected by the Board of Directors at their first meeting after the
annual meeting of the stockholders, and they shall, subject to these Bylaws,
serve for a term of one year each or until their successors are duly elected.
In case of a vacancy in any of the offices named in this Section, the same may
be filled for the unexpired term by the Board of Directors at any regular
meeting, or at a special meeting called for that purpose.
SECTION 2. The Chief Executive Officer shall perform such duties as
usually pertain to his office or as may be required of him by the Board of
Directors or by the Executive Committee.
SECTION 3. The President shall perform such duties as usually pertain to
his office or as may be required of him by the Board of Directors or by the
Executive Committee.
SECTION 4. The Vice Presidents, in the order designated by the President,
shall perform the duties of the President in case of his absence or inability to
act. In event the President shall fail to make such designations, the order
shall be designated by the Board of Directors, and in event of the absence or
inability of the President and the Vice Presidents, the Board of Directors may
4
<PAGE>
select one of its members as President Pro Tem. The Vice Presidents shall
perform such other duties as may be required of them by the Board of Directors
or by the Executive Committee.
SECTION 5. The Secretary shall keep a record of the meetings of the
stockholders and of the Board of Directors, and shall perform such duties as
usually pertain to his office, or as may be required of him by the Board of
Directors or by the Executive Committee.
SECTION 6. The Assistant Secretaries, in the order designated by the
Secretary, shall perform the duties of the Secretary in case of his absence or
inability to act. In event the Secretary shall fail to make such designation,
the order shall be designated by the Board of Directors, and in the event of the
absence or inability of the Secretary and the Assistant Secretaries, the Board
of Directors may select one of its members as Secretary Pro Tem. The Assistant
Secretaries shall perform such other duties as may be required of them by the
Board of Directors or by the Executive Committee
SECTION 7. The Treasurer shall perform such duties as may be required of
him by the Board of Directors, or by the Executive Committee.
SECTION 8. The Assistant Treasurers, in the order designated by the
Treasurer, shall perform the duties of the Treasurer in case of his absence or
inability to act. In event the Treasurer shall fail to make such designation,
the order shall be designated by the Board of Directors and in the event of the
absence or inability of the Treasurer and the Assistant Treasurers the Board of
Directors may select one of its members as Treasurer Pro Tem. The Assistant
Treasurers shall perform such other duties as may be required of them by the
Board of Directors or by the Executive Committee.
A R T I C L E V
TRANSFERRING REAL ESTATE, SECURITIES, ETC.
SECTION 1. The President, or a Vice President, or an Assistant Vice
President, or the General Counsel, or the Treasurer, or the Assistant Treasurer
and the Secretary or an Assistant Secretary, are authorized for and on behalf of
the Company.
(a) To execute, acknowledge, and deliver deeds to real estate when such
real estate has been sold.
5
<PAGE>
(b) To assign, transfer, and cancel evidence of indebtedness and notes
secured by mortgage upon real estate when such notes have been paid or sold.
(c) To execute releases of mortgages upon real estate when the notes such
mortgages were given to secure have been paid, and to execute partial releases,
easements, and subordinations.
(d) To transfer bonds, stocks, and/or other securities held as collateral
security for loans when such loans have been paid or sold.
(e) To transfer bonds, stocks, and/or other assets or securities when such
bonds, stocks, and/or other assets or securities have been sold or called for
payments.
(f) To execute such other instruments from time to time as may be
necessary or expedient to carry on the business of the Company.
SECTION 2. For the purpose of deposit under the provisions of Section 1 of
"An Act to Provide for the Deposit of Reserve and the Registration of Policies
and Annuity Bonds by Life Insurance Companies of this State" (approved April 18,
1899, in force July 1, 1899, as amended), the President, or a Vice President, or
an Assistant Vice President, or the General Counsel and the Secretary, or an
Assistant Secretary, are hereby authorized to execute, acknowledge, and deliver
from time to time and for and on behalf of and in the name of this Company, a
deed or deeds conveying to the Director of Insurance of the State of Illinois,
his successor, or successors, in office, in trust for the purpose and objects
specified in said Act, such parcels of real estate as said officers may deem
advisable.
SECTION 3. The President, a Vice President, an Assistant Vice President,
the General Counsel, or the Secretary is authorized to negotiate and enter into
any leasing agreement for any real estate owned by the Company and to execute
the same for and on behalf of the Company, and to do and perform any and all
other acts that may be necessary to effectively accomplish the purposes
mentioned.
A R T I C L E V I
ACTUARIES, MEDICAL DIRECTORS, ETC.
SECTION 1. The Board of Directors may appoint one or more Actuaries, one
or more Associate Actuaries, and one or more Assistant Actuaries, one or more
Medical Directors, one or more Associate Medical Directors and one or more
Assistant Medical Directors, and such other officers and department heads
6
<PAGE>
as it may deem necessary and expedient, who shall perform such duties as may be
required of them by the Board of Directors or by the Executive Committee.
A R T I C L E V I I
INDEMNIFICATION FOR OFFICERS AND DIRECTORS
SECTION 1. The Company shall indemnify and hold harmless each person who
shall serve at any time hereafter as a director or officer of the Company or who
is serving at the request of the Company as a director or officer of any other
corporation, partnership, joint venture, trust, employee benefit plan, or other
enterprise from and against any and all claims and liabilities to which such
person shall become subject by reason of his having heretofore or hereafter been
a director or officer of the Company, or such other organization with respect to
which such director or officer serves at the request of the Company, or by
reason of any action alleged to have been heretofore or hereafter taken or
omitted by him as such director or officer, and shall reimburse each such person
for all legal and other expenses reasonably incurred by him in connection with
any such claim or liability; provided, however, that no such person shall be
indemnified against, or be reimbursed for, any expense incurred in connection
with any claim or liability arising out of his own willful misconduct.
A R T I C L E V I I I
SALARIES
SECTION 1. All salaries, compensations, or emolument to be paid to any
officer or director of the Company, and all salaries, compensations or emolument
amounting in any year to more than forty thousand dollar ($40,000.00) to any
person, firm, or corporation, shall be first authorized by a vote of the Board
of Directors, which vote shall be by roll call at a regular meeting of said
Board, and which vote shall be duly recorded in the records of the Company.
A R T I C L E I X
SEAL
SECTION 1. The Corporate Seal of the Company shall be that now in use,
consisting of two concentric circles between which shall be the words "The
Franklin Life Insurance Company, Springfield, Ill." and in the center shall be
7
<PAGE>
inserted the words "Corporate Seal" and such seal is impressed on the margin
hereof.
A R T I C L E X
AMENDMENTS
Section 1. These Bylaws may be amended, repealed, or altered in whole or
in part by the Board of Directors at any regular meeting, or at any special
meeting called for that purpose.
8
<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, L.L.P. 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 31, 1997, with respect to the statement of assets
and liabilities, including the portfolio of investments, as of December 31,
1996 and the related statement of operations for the year then ended and the
statements of changes in contract owners' equity and table of per-unit income
and changes in accumulation unit value for each of the two years then ended
of Franklin Life Variable Annuity Fund B, and our report dated February 14,
1997, with respect to the consolidated balance sheets of The Franklin Life
Insurance Company and subsidiaries as of December 31, 1996 and 1995 and the
related consolidated statements of income, shareholder's equity and cash
flows for the year ended December 31, 1996, the eleven months ended December
31, 1995 and the one month ended January 31, 1995, in this Post-Effective
Amendment to the Registration Statement on Form N-3 (No. 2-38502) under the
Securities Act of 1933 and Registration Statement (No. 811-2110) under the
Investment Company Act of 1940 and related Prospectus and Statement of
Additional Information of Franklin Life Variable Annuity Fund B.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
April 28, 1997
<PAGE>
Exhibit 13(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form N-3
(File No. 2-38502) and related Prospectus and Statement of Additional
Information of Franklin Life Variable Annuity Fund B of:
(1) 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 B for each of the three years in the period ended
December 31, 1994; and
(2) Our report dated February 1, 1995, accompanying the consolidated
statements of income, shareholder's equity and cash flows of The
Franklin Life Insurance Company and Subsidiaries for the year 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, 1997
<PAGE>
Exhibit 13(d)
We consent to the reference to our firm under the caption "Legal Matters"
in the Prospectus constituting a part of this Post-Effective Amendment No. 39
to the Registration Statement under the Securities Act of 1933. 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, L.L.P.
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
Washington, D.C.
April 23, 1997
<PAGE>
Exhibit 17
POWER OF ATTORNEY
The undersigned, acting in the capacity or capacities stated opposite their
respective names below, hereby constitute and appoint ROSS D. FRIEND and
ELIZABETH E. ARTHUR, and each of them, singularly, attorneys-in-fact of the
undersigned with full power to each of them to sign for and in the name of the
undersigned in the capacities indicated below (a) Post-Effective Amendment No.
39 to the Registration Statement under the Securities Act of 1933, as amended
(the "1933 Act"), and Amendment No. 19 to the Registration Statement under the
Investment Company Act of 1940, as amended (the "1940 Act"), on Form N-3 (1933
Act File No. 2-38502 and 1940 Act File No. 811-2110) of Franklin Life Variable
Annuity Fund B of The Franklin Life Insurance Company ("The Franklin") and (b)
any and all amendments (including further Post-Effective Amendments and
Amendments) thereto, and to give any certification which may be required in
connection therewith pursuant to Rule 485 under the 1933 Act.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Elizabeth E. Arthur Secretary, Board of Managers of the Fund April 15, 1997
- -----------------------
Elizabeth E. Arthur
/s/ Earl W. Baucom Senior Vice President, Chief Financial April 10, 1997
- ----------------------- Officer (principal financial officer and
Earl W. Baucom principal accounting officer) and Director
of The Franklin
/s/ Robert M. Beuerlein Senior Vice President - Actuarial and March 31, 1997
- ----------------------- Director of The Franklin
Robert M. Beuerlein
/s/ Brady W. Creel Senior Vice President and Chief April 1, 1997
- ----------------------- Marketing Officer and Director of The
Brady W. Creel Franklin
Chairman of the Board of The Franklin _________, 1997
- -----------------------
Robert M. Devlin
/s/ Ross D. Friend Senior Vice President, General Counsel, April 10, 1997
- ----------------------- Secretary and Director of The Franklin
Ross D. Friend
/s/ Robert J. Gibbons President, Chief Executive Officer April 10, 1997
- ----------------------- (principal executive officer) and Director
Robert J. Gibbons of The Franklin
1
<PAGE>
Signature Title Date
--------- ----- ----
/s/ Clifford L. Greenwalt Member, Board of Managers of the Fund January 20, 1997
- -------------------------
Clifford L. Greenwalt
Vice Chairman and Director of The Franklin _________, 1997
- -------------------------
Jon P. Newton
/s/ Gary D. Reddick Executive Vice President - Administration April 14, 1997
- ------------------------- and Director of The Franklin
Gary D. Reddick
/s/ Robert C. Spencer Member, Board of Managers of the Fund January 20, 1997
- -------------------------
Robert C. Spencer
/s/ Robert G. Spencer Member, Board of Managers of the Fund January 20, 1997
- -------------------------
Robert G. Spencer
Vice President, Chief Investment Officer _________, 1997
- ------------------------- and Director of The Franklin
Peter V. Tuters
/s/ James W. Voth Member, Board of Managers of the Fund January 20, 1997
- -------------------------
James W. Voth
</TABLE>
2
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
REGISTRANT'S FINANCIAL STATEMENTS FOR THE YEAR ENDING 12-31-96 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<INVESTMENTS-AT-COST> 1,012,333
<INVESTMENTS-AT-VALUE> 1,549,649
<RECEIVABLES> 3,256
<ASSETS-OTHER> 69,438
<OTHER-ITEMS-ASSETS> 0
<TOTAL-ASSETS> 1,622,343
<PAYABLE-FOR-SECURITIES> 0
<SENIOR-LONG-TERM-DEBT> 0
<OTHER-ITEMS-LIABILITIES> 2,273
<TOTAL-LIABILITIES> 2,273
<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> 1,620,070
<DIVIDEND-INCOME> 23,341
<INTEREST-INCOME> 11,058
<OTHER-INCOME> 0
<EXPENSES-NET> 22,639
<NET-INVESTMENT-INCOME> 11,760
<REALIZED-GAINS-CURRENT> 38,924
<APPREC-INCREASE-CURRENT> 219,574
<NET-CHANGE-FROM-OPS> 270,258
<EQUALIZATION> 0
<DISTRIBUTIONS-OF-INCOME> 0
<DISTRIBUTIONS-OF-GAINS> 0
<DISTRIBUTIONS-OTHER> 0
<NUMBER-OF-SHARES-SOLD> 200
<NUMBER-OF-SHARES-REDEEMED> 2,611
<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>
