<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. 41
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
Amendment No. 21
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, Assistant
Secretary and General Counsel
THE FRANKLIN LIFE INSURANCE COMPANY
#1 Franklin Square
Springfield, Illinois 62713
(Name and Address of Agent for Service)
Copy to:
STEPHEN E. ROTH, ESQ.
SUTHERLAND, ASBILL & BRENNAN LLP
1275 Pennsylvania Avenue, N.W.
Washington D.C. 20004-2415
Title of Securities Being Registered: individual immediate and deferred
variable annuity contracts.
It is proposed that this filing will become effective (check appropriate box)
/ / immediately upon filing pursuant to paragraph (b)
/X/ on April 30, 1998 pursuant to paragraph (b)
/ / 60 days after filing pursuant to paragraph (a) (I)
/ / on April 30, 1998 pursuant to paragraph (a) (i)
/ / 75 days after filing pursuant to paragraph (a) (ii)
/ / on April 30, 1998 pursuant to paragraph (a) (ii) of Rule 485.
If appropriate, check the following box:
/ / this post-effective amendment designates a new effective date for
a previously filed post-effective amendment
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
Post-Effective Amendment No. 41
Cross Reference Sheet Required by Rule 495(a)
<TABLE>
<CAPTION>
Registration Item Location in Prospectus ("P") or Statement
of Additional Information ("SAI")
Part A INFORMATION REQUIRED IN PROSPECTUS
<S> <C>
Item 1. Cover Page . . . . . . . . . . . . . . . . . . . . . . . . Cover Page (P)
Item 2. Definitions. . . . . . . . . . . . . . . . . . . . . . . . Special Terms
Item 3. Synopsis or Highlights . . . . . . . . . . . . . . . . . . Table of Deductions and Charges; Summary
Item 4. Condensed Financial Information. . . . . . . . . . . . . . Per-Unit Income and Changes in Accumulation Unit Value
Item 5. General Description of Registrant and Insurance
Company. . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page (P); Summary; Introduction; Description of the
Separate Account; Investment Policies and Restrictions of the
Fund
Item 6. Management . . . . . . . . . . . . . . . . . . . . . . . . Management (P)
Item 7. Deductions and Expenses. . . . . . . . . . . . . . . . . . Summary; Deductions and Charges under the Contracts
Item 8. General Description of Variable Annuity Contracts. . . . . Summary; Introduction; Deductions and Charges under the
Contracts-Transfers to and from Other Contracts; The
Contracts; Voting Rights; Fundamental Changes
Item 9. Annuity Period . . . . . . . . . . . . . . . . . . . . . . Summary; Introduction; The Contracts-Deferred Variable Annuity
Accumulation Period-Annuity Period
Item 10. Death Benefit . . . . . . . . . . . . . . . . . . . . . . The Contracts-Deferred Variable Annuity Accumulation Period
Item 11. Purchases and Contract Value. . . . . . . . . . . . . . . Summary; Deductions and Charges Under The Contracts; The
Contracts-General-Deferred Variable Annuity Accumulation
Period; Distribution of the Contracts
Item 12. Redemptions . . . . . . . . . . . . . . . . . . . . . . . Summary; The Contracts-General-Deferred Variable Annuity
Accumulation Period
Item 13. Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . Cover Page (P); Summary; Introduction; Deductions and Charges
Under the Contracts-Premium Taxes; The Contracts; Federal
Income Tax Status; Other Variable Annuity Contracts
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, 1998, WHICH HAS BEEN FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION AND IS AVAILABLE WITHOUT CHARGE UPON
WRITTEN OR ORAL REQUEST. A STATEMENT OF ADDITIONAL INFORMATION MAY BE OBTAINED
FROM THE FRANKLIN BY WRITING TO THE ADDRESS (ATTENTION: BOX 1018) OR CALLING
THE TELEPHONE NUMBER (EXTENSION 2591) SET FORTH ABOVE OR BY RETURNING THE
REQUEST FORM ON THE BACK COVER OF THIS PROSPECTUS. CERTAIN INFORMATION CONTAINED
IN THE STATEMENT OF ADDITIONAL INFORMATION IS INCORPORATED HEREIN BY REFERENCE.
THE TABLE OF CONTENTS OF THE STATEMENT OF ADDITIONAL INFORMATION IS SET FORTH ON
PAGE 37 OF THIS PROSPECTUS.
-----------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
-----------------------------------
THE DATE OF THIS PROSPECTUS IS APRIL 30, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Special Terms.............................................................. 3
Table of Deductions and Charges............................................ 5
Summary.................................................................... 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............................ 15
E. Transfers to 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................................................................. 33
Voting Rights.............................................................. 33
Distribution of the Contracts.............................................. 34
State Regulation........................................................... 34
Reports to Owners.......................................................... 34
Fundamental Changes........................................................ 34
Year 2000 Transition....................................................... 35
Legal Proceedings.......................................................... 35
Registration Statement..................................................... 36
Other Variable Annuity Contracts........................................... 36
Table of Contents of Statement of Additional Information................... 37
</TABLE>
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THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN
WHICH SUCH AN OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON HAS BEEN AUTHORIZED
BY THE FRANKLIN LIFE INSURANCE COMPANY, FRANKLIN FINANCIAL SERVICES CORPORATION
OR FRANKLIN LIFE VARIABLE ANNUITY FUND 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
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)
<TABLE>
<S> <C>
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 periodic Stipulated
Payment (after an initial $20 payment) is currently $10 ($120 on an annual
basis). See "Purchase Limits," below.
NEW CONTRACTS NO LONGER BEING ISSUED
The Fund no longer issues new Contracts.
REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the Contract's initial Annuity
Payment Date, may 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 each of the three years in the
period ended December 31, 1997 has been audited by Ernst & Young LLP,
independent auditors. The financial information in this table for each of the
two years in the period ended December 31, 1994 was audited by Coopers & Lybrand
L.L.P., independent accountants. This table should be read in conjunction with
the financial statements and notes thereto included in the Statement of
Additional Information.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990 1989 1988
----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Income $2.025 $1.777 $2.043 $1.569 $1.305 $1.120 $1.197 $1.303 $1.271 $1.102
Expenses 1.447 1.169 .935 .850 .841 .766 .691 .595 .541 .463
----------------------------------------------------------------------------------------------------
Net Investment income .578 .608 1.108 .719 .464 .354 .506 .708 .730 .639
Net realized and unrealized
gain (loss) on securities 23.136 13.251 14.278 (.943) 1.697 1.236 13.776 (1.871) 7.822 .016
----------------------------------------------------------------------------------------------------
Net change in accumulation
unit value 23.714 13.859 15.386 (.224) 2.161 1.590 14.282 (1.163) 8.552 .655
Accumulation unit value:
Beginning of year 86.875 73.016 57.630 57.854 55.693 54.103 39.821 40.984 32.432 31.777
----------------------------------------------------------------------------------------------------
End of year $110.589 $86.875 $73.016 $57.630 $57.854 $55.693 $54.103 $39.821 $40.984 $32.432
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
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 .58% .75% 1.71% 1.22% .80% .67% 1.05% 1.71% 1.94% 1.99%
Portfolio turnover rate .67% 3.35% 22.26% 82.18% 61.50% 60.64% 24.18% 28.41% 64.08% 81.20%
Number of accumulation units
outstanding at end of year 16,323 18,648 21,059 23,165 26,542 29,973 31,205 48,192 53,877 61,038
----------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------
</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.
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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.
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
The Franklin deducts the charges described below to cover costs and
expenses, services provided, and risks assumed under the Contracts. The amount
of a charge may not necessarily correspond to the costs associated with
providing the services or benefits indicated by the designation of the charge or
associated with the particular Contract. For example, the sales deductions may
not fully cover all of the sales and distribution expenses actually incurred by
The Franklin, and proceeds from other charges, including the mortality and
expense risk charge, may be used in part to cover such expenses.
A. SALES AND ADMINISTRATION DEDUCTIONS
Deductions will be made as follows for sales expenses with respect to the
Contracts and 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.
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(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:
<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%
</TABLE>
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<TABLE>
<CAPTION>
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
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
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>
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%
ADMINISTRATION 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%
</TABLE>
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15 YEAR CONTRACT
<TABLE>
<CAPTION>
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>
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 1995, 1996 and 1997 were $825, $370 and $402, respectively, and all
such amounts were retained on behalf of Franklin Financial.
The administration deductions are designed to cover the actual expenses of
administering the Contracts and the Fund. The aggregate dollar amounts of the
administration deductions for the fiscal years ended December 31, 1995, 1996 and
1997 were $1,316, $632 and $689, 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% 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. If the money collected from this charge is not needed, it will be
to The Franklin's gain and may be used to cover contract distribution expenses.
During 1995, 1996 and 1997, The Franklin earned and was paid $14,273,
$15,752 and $17,759, respectively, by reason of these charges. Such charges
during 1997 were equal to 1.002% of average net assets.
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D. INVESTMENT MANAGEMENT SERVICE CHARGE
The Franklin acts as investment manager of the Fund. For acting as such,
The Franklin makes a charge against the Fund at the annual rate of 0.438% of
the Fund's assets, computed by imposing a daily charge of 0.0012% against the
value of the Accumulation Unit and of the Annuity Unit in determining those
values. The investment management services are rendered and the charge is made
pursuant to an Investment Management Agreement executed and dated January 31,
1995, pursuant to approval by the Contract Owners at their annual meeting held
on April 17, 1995, and renewal to January 31, 1999 by the Board of Managers of
the Fund at its meeting on January 19, 1998. The Investment Management
Agreement is described under "Investment Advisory and Other Services" in the
Statement of Additional Information.
During 1995, 1996 and 1997, The Franklin earned and was paid $6,240, $6,886
and $7,765, respectively, under the Investment Management Agreement then in
effect.
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 1997 were $25,524, or 1.440% of average
net assets during 1997.
THE CONTRACTS
A. GENERAL
Certain significant provisions of the Contracts and administrative
practices of The Franklin with respect thereto are discussed in the following
paragraphs.
Contract Owner inquiries may be directed to the Equity Administration
Department of The Franklin at the address or telephone number set forth on
the cover of this Prospectus.
1. ANNUITY PAYMENTS
Variable Annuity Payments are determined on the basis of (i) an annuity
rate table specified in the Contract, 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
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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.
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
periodic Stipulated Payment may be less than $120 on an annual basis, $60 on a
semiannual basis, and $30 on a quarterly basis; and, in the case of monthly
Stipulated Payment contracts, the initial payment must be at least $20 and each
subsequent periodic payment at least $10. Under the terms of the Contract, The
Franklin may increase the minimum periodic Stipulated Payment to $20 ($240 on an
annual basis).
5. TERMINATION BY THE FRANKLIN
The Franklin currently reserves the right to terminate any Contract if
total Stipulated Payments paid are less
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than $120 in each of three consecutive Contract Years (excluding the first
Contract Year) and if the Cash Valueis 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.
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
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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.
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
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<PAGE>
valued at the last reported sale price on the Valuation Date. If there has been
no sale on such day, then thevalue of such security is taken to be the current
bid price at the time as of which the value is being ascertained. Any security
not traded on a securities exchange but traded in the over-the-counter market
is valued at the current bid price on the Valuation Date. Any securities or
other assets for which market quotations are not readily available are valued
at fair value as determined in good faith by the Board of Managers.
5. REDEMPTION
A Contract Owner under a Deferred Variable Annuity Contract, prior to the
death of the Variable Annuitant and prior to the initial Annuity Payment Date,
may 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
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<PAGE>
Owner nor the Beneficiary elects payment of death proceeds under an available
Settlement Option, payment will be made to the Beneficiary in a single sum.
Death proceeds may be applied to provide variable payments, fixed-dollar
payments or a combination of both.
The payment of death proceeds may be subject to federal income tax
withholding. See "Income Tax Withholding," below.
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.
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<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.
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<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> <C> <C> <C> <C> <C> <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>
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<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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(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. However, if changes in the federal tax laws or interpretations
thereof result in The Franklin being taxed on income or gains attributable to
the Fund, then The Franklin may impose a charge against the Fund (with respect
to some or all Contracts) in order to set aside provisions to pay such taxes.
THE CONTRACTS
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, 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 attributableto such Contract
are not, in accordance with Code Section 817(h) and the Treasury regulations
thereunder, 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.
In certain circumstances, owners of variable annuity contracts may be
considered the owners, for federal income tax purposes, of the assets of the
separate accounts used to support their contracts. In those circumstances,
income and gains from the separate account assets would be includible in the
variable contract owner's gross income. The Internal Revenue Service has stated
in published rulings that a variable contract owner will be considered the owner
of separate account assets if the contract owner possesses incidents of
ownership in those assets, such as the ability to exercise investment control
over the assets. The Treasury Department has also announced, in connection with
the issuance of regulations concerning diversification, that those regulations
"do not provide guidance concerning the circumstances in which investor control
for the investments of a segregated asset account may cause the investor [i.e.,
the Owner], rather than the insurance company, to be treated as the owner of the
assets in the account." This announcement also stated that guidance would be
issued by way of regulations or rulings on the "extent to which policyholders
may direct their investments to particular Sub-Accounts without being treated as
owners of the underlying assets." As of the date of this prospectus, no
guidance has been issued.
The ownership rights under the Contract are similar to, but different in
certain respects from those described by the Internal Revenue Service in rulings
in which it was determined that contract owners were not owners of separate
account assets. For example, a Contract Owner has additional flexibility in
allocating premium payments and account values. These differences could result
in a Contract Owner being treated as the owner of a pro rata portion of the
assets of the Fund. In addition, The Franklin does not know what standards will
be set forth, if any, in the regulations or rulings which the Treasury
Department has stated it expects to issue. The Franklin therefore reserves the
right to modify the Contract as necessary to attempt to prevent a Contract Owner
from being considered the owner of a pro rata share of the assets of the Fund.
In order to be treated as an annuity contract for federal income tax
purposes, section 72(s) of the Code requires the Contracts to provide that (a)
if any Contract Owner dies on or after the annuity date but prior to the time
the entire interest in the Contract has been distributed, the remaining portion
of such interest will be distributed at least as rapidly as under the method of
distribution being used as of the date of such owner's death; and (b) if any
Contract Owner dies prior to the annuity date, the entire interest in the
Contract will be distributed within five years after the date of such owner's
death. These requirements will be considered satisfied as to any portion of an
owner's interest which is payable to or for the benefit of a "designated
beneficiary" and which is distributed over the life of such "designated
beneficiary" or over a period not extending beyond the life expectancy of that
beneficiary, provided that such distributions begin within one year of the
Contract Owner's death. The "designated beneficiary" refers to a natural
person designated by the owner as a Beneficiary and to whom ownership of the
Contract passes by reason of death. However, if the "designated beneficiary"
is the surviving spouse of the deceased Contract Owner, the Contract may be
continued with the surviving spouse as the new Contract Owner.
The Contracts contain provisions which are intended to comply with the
requirements of section 72(s) of the Code, although no regulations interpreting
these requirements have yet been issued. The Franklin intends to review such
provisions and modify them if necessary to assure that they comply with the
requirements of Code section 72(s) when clarified by regulation or otherwise.
FUTURE LEGISLATION
Although the likelihood of legislative change is uncertain, there is
always the possiblity that the tax treatment of the Contracts could change by
legislation or other means. For instance, the President's 1999 Budget Proposal
recommended legislation that, if enacted, would adversely modify the federal
taxation of the Contracts. It is also possible that any change could be
retroactive (that is, effective prior to the date of the change). A tax
adviser should be consulted with respect to legislative developments and their
effect on the Contract.
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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.
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
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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.
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
34
<PAGE>
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.
The Board of Managers of the Fund, and the respective Board of Managers of
each of Franklin Life Variable Annuity Fund A ("Fund A") and Franklin Life
Money Market Variable Annuity Fund C ("Fund C"), have approved resolutions
whereby Contract Owners will be asked during 1998 to approve or to disapprove
an Agreement and Plan of Reorganization (the "Agreement") and related
transactions (together, the Agreement and related transactions are the
"Reorganization") whereby: (i) the Fund will be restructured into a single unit
investment trust consisting of three subaccounts; (ii) the assets of each of
the Fund, Fund A and Fund C will be liquidated and the proceeds transferred to
one of the three subaccounts in the restructured Fund (so that the interests of
Contract Owners and of Fund A and Fund C contract owners will continue as
interests in the restructured Fund); and (iii) each subaccount will invest
exclusively in shares of a specified mutual fund portfolio.
Contract Owners will be provided with a proxy statement describing the
Reorganization in detail. If the Reorganization is approved, then immediately
following the consummation of the Reorganization, each Contract Owner will have
an interest in a number of units in a subaccount of the restructured Fund
having a value equal to the value of that Contract Owner's interest in a Fund
immediately prior to the Reorganization.
YEAR 2000 TRANSITION
Like all financial services providers, The Franklin utilizes systems that
may be affected by Year 2000 transition issues and it relies on service
providers, including banks, custodians, and investment managers that also may
be affected. The Franklin and its affiliates have developed, and are in the
process of implementing, a Year 2000 transition plan, and are confirming that
their service providers are also so engaged. The resources that are being
devoted to this effort are substantial. It is difficult to predict with
precision whether the amount of resources ultimately devoted, or the outcome of
these efforts, will have any negative impact on The Franklin. However, as of
the date of this prospectus, it is not anticipated that Contract Owners will
experience negative effects on their investment, or on the services provided in
connection therewith, as a result of Year 2000 transition implementation. The
Franklin currently anticipates that its systems will be Year 2000 compliant on
or about December 31, 1998, but there can be no assurance that The Franklin
will be successful, or that interaction with other service providers will not
impair The Franklin's services at that time.
LEGAL PROCEEDINGS
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in substantial
settlements. The Franklin is a defendant in certain purported class action
lawsuits. These claims are being defended vigorously by The Franklin. Given
the uncertain nature of litigation and the early stages of this litigation, the
outcome of these actions cannot be predicted at this time. The Franklin
nevertheless believes that the ultimate outcome of all such pending litigation
should not have a material adverse effect on the Fund or on The Franklin's
financial position; however, it is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings
could have a material adverse effect on The Franklin's results of operations
for a given period. No provision has been made in the consolidated financial
statements related to this pending litigation because the amount of loss, if
any, from these actions cannot be reasonably estimated at this time.
The Franklin is a party to various other lawsuits and proceedings arising
in the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, The Franklin believes that the total amounts
that will ultimately be paid, if any, arising from these lawsuits and
35
<PAGE>
proceedings will not have a material adverse effect on the Fund or on The
Franklin's results of operations and financial position. However, it should be
noted that the frequency of large damage awards, including large punitive
damage awards, that bear little or no relation to actual economic damages
incurred by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any given suit.
REGISTRATION STATEMENT
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.
36
<PAGE>
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<CAPTION>
PAGE IN STATEMENT OF
ADDITIONAL INFORMATION
- -----------------------------------------------------------------------------
<S> <C>
General Information................................... 2
Investment Objectives................................. 2
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
</TABLE>
37
<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 Information dated April 30, 1998 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, 1998 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, 1998.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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
</TABLE>
1
<PAGE>
GENERAL INFORMATION
The individual variable annuity contracts offered by the Prospectus dated
April 30, 1998 (the "Prospectus") are designed primarily to provide annuity
payments which will vary with the investment performance of Franklin Life
Variable Annuity Fund 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 March 5, 1998.
INVESTMENT OBJECTIVES
The investment objectives and policies of the Fund are described under
"Investment Policies and Restrictions of the Fund" in the Prospectus.
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>
NAME AND ADDRESS PRINCIPAL OCCUPATIONS POSITIONS HELD
DURING PAST 5 YEARS WITH THE FUND
<S> <C> <C>
ROBERT G. SPENCER* Officer of The Franklin; currently, Vice Chairman and Member,
#1 Franklin Square President of The Franklin; prior to 1996, Board of Managers
Springfield, Illinois 62713 also Treasurer of The Franklin and
Treasurer and Assistant Secretary of
Franklin Financial Services Corporation.
ELIZABETH E. ARTHUR* Officer of The Franklin; currently, Director, Secretary, Board of
#1 Franklin Square Assistant Secretary and Associate General Managers
Springfield, Illinois 62713 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 State Member, Board of
2303 South Third Avenue University, since 1992; Professor of Managers
Bozeman, Montana 59715 Government and Public Affairs, Sangamon
State University, prior thereto.
JAMES W. VOTH Chairman, Resource International Corp., South Member, Board of
50738 Meadow Green Court Bend, Indiana (marketing, manufacturing and Managers
Granger, Indiana 46530 engineering service to industry); prior to
1993, also President of Resource
International Corp.
CLIFFORD L. GREENWALT Director, President and Chief Executive Officer, Member, Board of
607 East Adams Street CIPSCO Incorporated, since October, 1990 Managers
Springfield, Illinois 62739 (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, 1997.
Pursuant to the terms of its agreement to assume certain of the Fund's
administrative expenses, The Franklin pays all compensation received by the
members of the Board of Managers and the officers of the Fund. Members of the
Board of Managers or officers of the Fund who are also officers, directors or
employees of The Franklin do not receive any remuneration for their services as
members of the Board of Managers or officers of the Fund. Other members of the
Board of Managers received a fee of $1,400 for the year and, thus, the aggregate
direct remuneration of all such members of the Board of Managers was $4,200
during 1997. It is currently anticipated that the annual aggregate remuneration
of such members of the Board of Managers to be paid during 1998 will not exceed
$4,200.
<TABLE>
<CAPTION>
Name of Person, Position Aggregate Compensation Total Compensation
Relating to Fund Relating to Fund and
Fund Complex Paid to
Each Member
<S> <C> <C>
Each member of the Board
of Managers (except $1,400(1) $4,200(1)(2)
Robert G. Spencer)
</TABLE>
-------------------------------------------------------------------
(1) Paid by The Franklin pursuant to an agreement to assume certain Fund
administrative expenses.
(2) Includes amounts paid to members of the Board of Managers who are not
officers, directors or employees of The Franklin for service on the Boards
of Managers of Franklin Life Variable Annuity Fund 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 20, 1998, 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, 1999 by the Board of Managers of the Fund
at its meeting on January 19, 1998. The method of determining the advisory
charge is described in the Prospectus under "Investment Management Service
Charge."
The Investment Management Agreement:
(1) May not be terminated by The Franklin without the prior approval of
a new investment management agreement by a "majority" (as that term is
defined in the Investment Company Act of 1940) of the votes available to the
Contract Owners, and may be terminated without the payment of any penalty on
60 days' written notice by a vote of the Board of Managers of the Fund or by
a vote of a majority of the votes available to the Contract Owners.
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 19, 1998. Franklin Financial's employment will
continue thereunder if specifically approved at least annually by the Board of
Managers of the Fund, or by a majority of votes available to Contract Owners,
provided that in either case the continuance of the Sales Agreement is also
approved by a majority of the members of the Board of Managers of the Fund who
are not "interested persons" (as that term is defined in the Investment Company
Act of 1940) of the Fund or Franklin Financial. The employment of Franklin
Financial as principal underwriter automatically terminates upon "assignment"
(as that term is defined in the Investment Company Act of 1940) of the Sales
Agreement and is terminable by either party on not more than 60 days' and not
less than 30 days' notice.
The Fund no longer issues new Contracts. To the extent that Stipulated
Payments continue to be made on Contracts, the Fund may nevertheless be deemed
to be offering interests in Contracts on a continuous basis. Contracts are sold
primarily by persons who are insurance agents or brokers for The Franklin
authorized by applicable law to sell life and other forms of personal insurance
and who are similarly authorized to sell Variable Annuities. Pursuant to an
Agreement, dated June 30, 1971 and amended on May 15, 1975, between The Franklin
and Franklin Financial, Franklin Financial agreed to employ and supervise agents
chosen by The Franklin to sell the Contracts and to use its best efforts to
qualify such persons as registered representatives of Franklin Financial, which
is a broker-dealer registered with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 and a member of the National Association of
Securities Dealers, Inc. Franklin Financial also may enter into agreements with
The Franklin and each such agent with respect to the supervision of such agent.
Franklin Financial incurs certain sales expenses, such as sales literature
preparation and related costs, in connection with the sale of the Contracts
pursuant to a Sales Agreement with the Fund. Sales deductions from Stipulated
Payments are paid to Franklin Financial as a means to recover sales expenses.
Sales deductions are not necessarily related to Franklin Financial's actual
sales expenses in any particular year. To the extent sales expenses are not
covered by sales deductions, Franklin Financial will cover them from other
assets.
Pursuant to an Agreement between The Franklin and Franklin Financial, The
Franklin has agreed to pay commissions earned by registered representatives of
Franklin Financial on the sale of the Contracts and to bear the cost of
preparation of prospectuses and other disclosure materials. Commissions and
other remuneration and the cost of disclosure materials will be paid by The
Franklin from its General Account.
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 1996, the portfolio turnover rate was 3.35%; for 1997 the rate was .67%.
B. BROKERAGE
Decisions to buy and sell securities for the Fund will be made by The
Franklin, as the Fund's investment manager, subject to the control of the Fund's
Board of Managers. The Franklin, as investment manager, also is responsible for
placing the brokerage business of the Fund and, where applicable, negotiating
the amount of the commission rate paid, subject to the control of the Fund's
Board of Managers. The Fund has no formula for the distribution of brokerage
business in connection with the placing of orders for the purchase and sale of
investments for the Fund. It is The Franklin's intention to place such orders,
consistent with the best execution, to secure the highest possible price on
sales and the lowest possible price on purchases of securities. Portfolio
transactions executed in the over-the-counter market will be placed directly
with the primary market makers unless better executions are available elsewhere.
Subject to the foregoing, The Franklin may give consideration in the allocation
of brokerage business to services performed by a broker or dealer in furnishing
statistical data and research to it. The Franklin may thus be able to supplement
its own information and to consider the views and information of other research
organizations in arriving at its investment decisions. Any such services would
also be available to The Franklin in the management of its own assets and those
of any other separate account. To the extent that such services are used by The
Franklin in performing its investment management functions with respect to the
Fund, they may tend to reduce The Franklin's expenses. However, the dollar value
of any information which might be received is indeterminable and may, in fact,
be negligible. The Franklin does not consider the value of any research services
provided by brokers in negotiating commissions. During 1995, 1996 and 1997, a
total of $759, $139 and $231, 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. 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 LLP of Washington, D.C. has provided advice on
certain matters relating to the federal securities laws.
EXPERTS
The statement of assets and liabilities, including the portfolio of
investments, as of December 31, 1997 and the related statement of operations for
the year then ended and the statements of changes in contract owners' equity for
each of the two years in the period then ended and the table of per-unit income
and changes in accumulation unit value for each of the three years in the period
then ended of the Fund, appearing herein, have been audited by Ernst & Young
LLP, independent auditors, as set forth in their report thereon appearing
elsewhere herein. The consolidated financial statements of The Franklin at
December 31, 1997 and 1996 and for each of the two years in the period ended
December 31, 1997, the eleven months ended December 31, 1995 and the one month
ended January 31, 1995, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their report thereon appearing elsewhere herein. The
table of per-unit income and changes in accumulation unit value for each of the
two years in the period ended December 31, 1994 of the Fund, appearing herein,
have been audited by Coopers & Lybrand L.L.P., independent accountants, as set
forth in their report thereon appearing elsewhere herein. Such financial
statements and tables of per-unit income and changes in accumulation unit value
referred to above are included in reliance upon such reports given upon the
authority of such firms as experts in accounting and auditing.
8
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
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, 1997 F-4
Statement of Operations for the year ended
December 31, 1997 F-4
Statements of Changes in Contract Owners' Equity for the
two years ended December 31, 1997 and 1996 F-4
Portfolio of Investments, December 31, 1997 F-5
Notes to Financial Statements F-6
Supplementary Information - Per-Unit Income and Changes in Accumulation
Unit Value for the five years ended December 31, 1997 F-7
The Franklin Life Insurance Company and Subsidiaries:*
Report of Independent Auditors F-8
Financial Statements:
Consolidated Statement of Income for the years ended December 31, 1997
and 1996, the eleven months ended December 31, 1995, and the one month
ended January 31, 1995 F-9
Consolidated Balance Sheet, December 31, 1997 and 1996 F-10 - F-11
Consolidated Statement of Shareholder's Equity for the years ended
December 31, 1997 and 1996, the eleven months ended December 31, 1995,
and the one month ended January 31, 1995 F-12
Consolidated Statement of Cash Flows for the years ended December 31, 1997
and 1996, the eleven months ended December 31, 1995, and the one month
ended January 31, 1995 F-13
Notes to Consolidated Financial Statements F-14 - F-38
</TABLE>
*The consolidated financial statements of The Franklin contained herein should
be considered only as bearing upon the ability of The Franklin to meet its
obligations under the Contracts.
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund 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, 1997, the related statement of operations for the year then ended,
the statements of changes in contract owners' equity for each of the two years
then ended, and the table of per-unit income and changes in accumulation unit
value for each of the three years then ended. These financial statements and the
table of per-unit income and changes in accumulation unit value are the
responsibility of the Fund's management. Our responsibility is to express an
opinion on these financial statements and the table of per-unit income and
changes in accumulation unit value based on our audits. The table of per-unit
income and changes in accumulation unit value for each of the two years in the
period ended December 31, 1994 was audited by other auditors whose report dated
February 1, 1995, expressed an unqualified opinion on that table.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and the table of
per-unit income and changes in accumulation unit value are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures
included confirmation of investments held by the custodian as of December 31,
1997. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements and the 1997, 1996 and 1995 table of
per-unit income and changes in accumulation unit value referred to above present
fairly, in all material respects, the financial position of Franklin Life
Variable Annuity Fund B at December 31, 1997, and the results of its operations
for the year then ended, and the changes in its contract owners' equity for each
of the two years then ended, and per-unit income and changes in accumulation
unit value for each of the three years then ended in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
Chicago, Illinois
January 30, 1998
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund 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 two years in the period ended December 31, 1994. This table of per-unit
income and changes in accumulation unit value is the responsibility of the
Fund's management. Our responsibility is to express an opinion on this table
of per-unit income and changes in accumulation unit value based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the table of per-unit income and
changes in accumulation unit value is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the table of per-unit income and changes in accumulation
unit value. An audit also includes assessing the accounting principles used
by management as well as evaluating the overall presentation of the table of
per-unit income and changes in accumulation unit value. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the table of per-unit income and changes in accumulation unit
value referred to above presents fairly, in all material respects, the per-unit
income and changes in accumulation unit value for each of the two years in the
period ended December 31, 1994, in conformity with generally accepted accounting
principles.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
February 1, 1995
F-3
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C>
Assets
Investments-at fair value (cost-$889,926):
Common stocks $1,560,244
Short-term notes 198,546
---------
1,758,790
Cash on deposit 43,659
Dividends and interest receivable 2,985
---------
Total Assets 1,805,434
Liability - due to The Franklin Life Insurance Company 256
---------
Contract owners' equity
Value of 16,323.347 accumulation units outstanding,
equivalent to $110.58873119 per unit $1,805,178
---------
---------
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
<S> <C> <C>
Investment income:
Dividends $ 24,882
Interest 10,844
--------
Total income $35,726
Expenses:
Investment management services $ 17,759
Mortality and expense charges 7,765
--------
Total expenses 25,524
---------
Net investment income 10,202
Realized and unrealized gain on investments:
Net realized gain from investment transactions
(excluding short-term investments):
Proceeds from sales $217,183
Cost of investments sold (identified cost method) 132,545
--------
Net realized gain 84,638
Net unrealized appreciation of investments:
Beginning of year $537,316
End of year 868,864
--------
Net unrealized appreciation 331,548
Net gain on investments 416,186
Net increase in contract owners'
equity resulting from operations $426,388
--------
--------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
-------------------------
<S> <C> <C>
Net investment income $ 10,202 $ 11,760
Net realized gain from investment transactions 84,638 38,924
Net unrealized appreciation of investments 331,548 219,574
-------------------------
Net increase in contract owners equity
resulting from operations 426,388 270,258
Net contract purchase payments 15,336 15,931
Payment for contract guarantees (10,114) (6,017)
Withdrawals (246,502) (197,732)
-------------------------
Net increase in contract owners equity 185,108 82,440
Contract owners' equity at beginning of year 1,620,070 1,537,630
-------------------------
Contract owners' equity at end of year $1,805,178 $1,620,070
-------------------------
-------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
F-4
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
---------- ------------
<S> <C>
COMMON STOCKS (86.43%)
AEROSPACE/AVIATION (4.61%)
900 Boeing Company $ 44,044
700 Raytheon Company 39,156
------------
83,200
BANKING (5.39%)
700 SLM Holding Corporation 97,388
BEVERAGES (1.20%)
600 PepsiCo, Incorporated 21,750
BUSINESS SERVICES (1.77%)
900 Equifax Inc. 31,894
CHEMICALS (2.25%)
400 Dow Chemical 40,600
COMPUTER SERVICES (3.30%)
1,300 Ceridian Corporation* 59,556
COSMETICS & HOUSEHOLD PRODUCTS (3.89%)
700 Gillette Company 70,306
DRUG & HEALTH CARE (24.52%)
2,000 Eli Lilly and Company 139,250
675 Merck & Company, Inc. 71,550
600 Pfizer, Incorporated 44,738
1,800 Schering-Plough Corporation 111,825
2,400 Walgreen Company 75,300
------------
442,663
ELECTRONICS & INSTRUMENTATIONS (3.11%)
900 Hewlett-Packard Company 56,137
FOOD - RETAIL (4.06%)
1,550 Albertson's, Inc. 73,237
FOOD - WHOLESALE (1.77%)
700 Sysco Corporation 31,894
MACHINERY - INDUSTRIAL & CONSTRUCTION (.83%)
400 Fluor Corporation 14,950
OFFICE EQUIPMENT & SERVICES (10.09%)
750 Compaq Computers Corporation* 42,375
International Business Machines
700 Corporation 73,238
900 Xerox Corporation 66,487
------------
182,100
OILS & OIL RELATED PRODUCTS (2.56%)
250 Amoco Corporation $ 21,281
600 Enron Corporation 24,938
------------
46,219
PACKAGING - CONTAINERS (1.98%)
800 Avery-Dennison Corporation 35,800
PHOTOGRAPHY (.84%)
250 Eastman Kodak Company 15,141
RESTAURANTS/LODGING (4.89%)
1,000 Marriott International, Inc. 69,250
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
400 McDonald's Corporation 19,100
------------
88,350
TECHNOLOGY (6.25%)
700 AMP, Incorporated 29,400
675 Diebold, Incorporated 34,172
700 Intel Corporation 49,175
------------
112,747
UTILITIES - TELEPHONE (3.12%)
1,000 BellSouth Corporation 56,312
------------
TOTAL COMMON STOCKS
(COST-$691,380) 1,560,244
------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C>
PRINCIPAL
AMOUNT SHORT-TERM NOTES (11.00%)
---------
$100,000 United States Treasury Bill
4.93%, due 2/5/98 (cost-$99,233) 99,233
100,000 United States Treasury Bill
5.05%, due 2/5/98 (cost-$99,313) 99,313
-----------
TOTAL SHORT-TERM NOTES 198,546
-----------
TOTAL INVESTMENTS (97.43%)
(cost -$889,926) 1,758,790
CASH AND RECEIVABLES, LESS
LIABILITY (2.57%) 46,388
-----------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $1,805,178
-----------
-----------
</TABLE>
*Non-income producing investment in 1997.
SEE NOTES TO FINANCIAL STATEMENTS
- -----------------------------------------------------------------------------
THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE
ANNUITY FUND B CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
F-5
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Variable Annuity Fund B (the Fund) is a segregated investment
account of The Franklin Life Insurance Company (The Franklin) and is registered
as an open-end diversified management investment company under the Investment
Company Act of 1940, as amended. The Fund no longer issues new contracts.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS: Investments in common stocks listed on national stock
exchanges are valued at closing sales prices. Unlisted common stocks are valued
at the most recent bid prices, as supplied by broker-dealers. Short-term notes
are valued at cost, which approximates fair value.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment
transactions are accounted for on the trade date. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the
accrual basis.
FEDERAL INCOME TAXES: Operations of the Fund will form a part of, and be taxed
with those of, The Franklin which is taxed as a "life insurance company" under
the Internal Revenue Code. Under current law, no federal income taxes are
payable with respect to the Fund.
NOTE B-INVESTMENTS
Exclusive of short-term investments, the cost of investments purchased and the
proceeds from investments sold during 1997 aggregated $10,048 and $217,183,
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 $1,091 and $1,002 were deducted
from the proceeds of the sales of accumulation units and retained by Franklin
Financial Services Corporation and The Franklin during 1997 and 1996,
respectively. Franklin Financial Services Corporation is a wholly-owned
subsidiary of The Franklin and principal underwriter for the Fund.
NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1997 December 31, 1996
-------------------------------------------------------
UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ------
<S> <C> <C> <C> <C>
Balance at
beginning of
year 18,648 $1,620,070 21,059 $1,537,630
Purchases 157 15,336 200 15,931
Net investment
income - 10,202 - 11,760
Net realized gain
from investment
transactions - 84,638 - 38,924
Net unrealized
appreciation
of investments - 331,548 - 219,574
Withdrawals (2,482) (246,502) (2,611) (197,732)
Payment for
contract
guarantees - (10,114) - (6,017)
-------------------------------------------------------
Balance at end of
year 16,323 $1,805,178 18,648 $1,620,070
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
NOTE F-REMUNERATION OF MANAGEMENT
No person receives any remuneration from the Fund because The Franklin pays the
fees of members of the Board of Managers and officers and employees of the Fund
pursuant to expense assurances. Certain members of the Board of Managers and
officers of the Fund are also directors, officers or employees of The Franklin
or Franklin Financial Services Corporation. Amounts paid by the Fund to The
Franklin and to Franklin Financial Services Corporation are disclosed in this
report.
NOTE G-NET UNREALIZED APPRECIATION OF INVESTMENTS
Net unrealized appreciation of investments at December 31, 1997 and 1996 was as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1997 1996
--------------------------------
<S> <C> <C>
Gross unrealized appreciation $874,684 $539,392
Gross unrealized depreciation 5,820 2,076
--------------------------------
Net unrealized appreciation
of investments $868,864 $537,316
--------------------------------
--------------------------------
</TABLE>
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
1997 1996 1995 1994 1993
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $2.025 $1.777 $2.043 $1.569 $1.305
Expenses 1.447 1.169 .935 .850 .841
-------------------------------------------------------------------
Net investment income .578 .608 1.108 .719 .464
Net realized and unrealized gain (loss) on investments 23.136 13.251 14.278 (.943) 1.697
-------------------------------------------------------------------
Net increase (decrease) in accumulation unit value 23.714 13.859 15.386 (.224) 2.161
Accumulation unit value:
Beginning of year 86.875 73.016 57.630 57.854 55.693
-------------------------------------------------------------------
End of year $110.589 $86.875 $73.016 $57.630 $57.854
-------------------------------------------------------------------
-------------------------------------------------------------------
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 .58% .75% 1.71% 1.22% .80%
Portfolio turnover rate .67% 3.35% 22.26% 82.18% 61.50%
Number of accumulation units outstanding at end of year 16,323 18,648 21,059 23,165 26,542
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
---------------------------------------------
Board of Directors
and Shareholder
The Franklin Life Insurance Company
We have audited the accompanying consolidated balance sheet of The Franklin
Life Insurance Company (an indirect wholly-owned subsidiary of American
General Corporation) (the Company) as of December 31, 1997 and 1996, and the
related consolidated statements of income, shareholder's equity and cash
flows for the years ended December 31, 1997 and 1996, the eleven months ended
December 31, 1995 and the one month ended January 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Franklin
Life Insurance Company at December 31, 1997 and 1996 and the consolidated
results of its operations and its cash flows for the years ended December 31,
1997 and 1996, the eleven months ended December 31, 1995 and the one month
ended January 31, 1995, in conformity with generally accepted accounting
principles.
/S/ ERNST & YOUNG LLP
Chicago, Illinois
February 23, 1998
F-8
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF INCOME
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Premiums and other considerations $370.2 $418.6 $449.6 $34.5
Net investment income 518.6 521.5 468.8 41.3
Realized investment gains
(losses) 12.8 2.5 7.2 (7.6)
Other 75.8 68.3 55.9 4.1
---------------------------------------
Total revenues 977.4 1,010.9 981.5 72.3
Benefits and expenses
Benefits paid or provided
Death claims and other policy
benefits 250.6 240.6 236.3 21.5
Investment-type contracts 169.4 173.3 168.3 14.0
Dividends to policyholders 86.3 81.9 85.6 7.5
Change in policy reserves 54.6 95.9 148.5 11.0
Increase in participating policy-
holders' interests 4.7 12.0 11.0 1.0
Commissions 106.5 110.2 108.0 7.6
Operating costs and expenses 33.5 35.7 17.3 2.8
Amortization of deferred policy
acquisition costs 11.5 10.7 8.3 5.8
Amortization of cost of insurance
purchased, net of deferrals 45.3 51.1 29.0 0.8
---------------------------------------
Total benefits and expenses 762.4 811.4 812.3 72.0
---------------------------------------
Income before income tax expense 215.0 199.5 169.2 0.3
Income tax expense
Current 74.8 94.7 39.7 4.9
Deferred (benefit) (0.4) (25.3) 21.1 (4.7)
---------------------------------------
Total income tax expense 74.4 69.4 60.8 0.2
---------------------------------------
Net income $140.6 $130.1 $108.4 $0.1
---------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-9
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET
(In millions)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
ASSETS 1997 1996
-------------------------------
<S> <C> <C>
Investments
Fixed maturity securities
(amortized cost: $5,157.7;
$5,152.3) $5,615.2 $5,476.5
Mortgage loans on real estate 621.6 607.0
Equity securities (cost: $1.1; $2.0) 4.4 5.0
Policy loans 332.7 327.4
Other long-term investments 46.3 47.6
-------------------------------
Total investments 6,620.2 6,463.5
Cash and cash equivalents 39.5 24.6
Accrued investment income 100.3 99.7
Note receivable from parent 116.4 116.4
Preferred stock of affiliates, at cost 8.5 8.5
Receivable from brokers 26.5 17.7
Receivable from agents, less allowance
($4.3; $0.4) 14.4 18.3
Amounts recoverable from reinsurers 41.5 84.0
Deferred policy acquisition costs 111.7 82.0
Cost of insurance purchased 303.9 407.8
Property and equipment, at cost, less
accumulated depreciation ($10.2; $7.2) 23.4 20.6
Other assets 27.4 29.6
Assets held in Separate Accounts 239.6 134.9
-------------------------------
Total assets $7,673.3 $7,507.6
-------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-10
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED BALANCE SHEET (CONTINUED)
(In millions, except share data)
<TABLE>
<CAPTION>
DECEMBER 31
-------------------------------
LIABILITIES 1997 1996
-------------------------------
<S> <C> <C>
Insurance liabilities
Life, annuity and accident and health
reserves $2,882.8 $2,864.7
Policy and contract claims 34.4 38.1
Investment-type contract deposits
and dividend accumulations 2,907.6 2,992.7
Participating policyholders' interests 211.4 209.7
Other 50.7 49.5
Income taxes
Current 2.2 6.4
Deferred 4.5 (19.0)
Intercompany payables 0.5 0.8
Accrued expenses and other liabilities 109.6 116.6
Liabilities related to Separate Accounts 239.6 134.9
-------------------------------
Total liabilities 6,443.3 6,394.4
SHAREHOLDER'S EQUITY
Common stock ($2 par value;
30,000,000 shares authorized,
21,002,000 shares issued and
outstanding) 42.0 42.0
Paid-in capital 886.1 886.1
Net unrealized gains on securities 150.8 106.6
Retained earnings 151.1 78.5
-------------------------------
Total shareholder's equity 1,230.0 1,113.2
-------------------------------
Total liabilities and
shareholder's equity $7,673.3 $7,507.6
-------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-11
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common stock $42.0 $42.0 $42.0 $42.0
----------------------------------------------
Paid-in capital
Balance at beginning of period 886.1 884.3 884.3 803.0
Paid in during the period - 1.8 - -
Adjustment for the
acquisition - - - 81.3
----------------------------------------------
Balance at end of period 886.1 886.1 884.3 884.3
----------------------------------------------
Net unrealized gains (losses)
on securities
Balance at beginning of
period 106.6 187.5 - (8.1)
Change during the period 44.2 (80.9) 187.5 1.4
Adjustment for the
acquisition - - - 6.7
----------------------------------------------
Balance at end of period 150.8 106.6 187.5 -
----------------------------------------------
Retained earnings
Balance at beginning of period 78.5 48.4 - 522.7
Net income 140.6 130.1 108.4 0.1
Dividends paid to parent (68.0) (100.0) (60.0) (250.0)
Adjustment for the acquisition - - - (272.8)
----------------------------------------------
Balance at end of period 151.1 78.5 48.4 -
----------------------------------------------
Total shareholder's equity
at end of period $1,230.0 $1,113.2 $1,162.2 $926.3
----------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-12
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
CONSOLIDATED STATEMENT OF CASH FLOWS
(In millions)
<TABLE>
<CAPTION>
Predecessor Basis
-----------------
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income $140.6 $130.1 $108.4 $0.1
Reconciling adjustments
Insurance liabilities 33.4 121.5 155.4 19.9
Deferred policy acquisition costs (40.4) (45.5) (59.4) (2.7)
Investment (gains) losses (6.1) (4.7) (11.4) (0.9)
Investment write-downs and reserves (6.7) 2.2 4.2 8.5
Cost of insurance purchased and
intangibles 45.3 51.1 29.0 1.0
Interest credited, net of charges
on investment contract deposits 92.5 103.2 153.7 12.0
Purchase of trading securities - - - (1.5)
Proceeds from sale of trading
securities - - - 85.5
Other, net (5.4) (107.9) 14.3 (7.1)
----------------------------------------------
Net cash provided by operating
activities 253.2 250.0 394.2 114.8
----------------------------------------------
INVESTING ACTIVITIES
Investment purchases
Available-for-sale (891.8) (5,479.1) (1,055.8) -
Held-to-maturity - - - (0.8)
Other investments (125.2) (122.6) (95.7) (27.2)
Affiliated - - (124.5) -
Investment calls, maturities and sales
Available-for-sale 978.0 5,526.3 832.0 0.2
Held-to-maturity - - - 24.9
Other investments 70.7 65.1 127.1 6.3
Additions to property and equipment (6.7) (4.6) (3.5) (0.5)
----------------------------------------------
Net cash provided by (used for)
investing activities 25.0 (14.9) (320.4) 2.9
----------------------------------------------
FINANCING ACTIVITIES
Policyholder account deposits 194.5 165.3 357.8 29.2
Policyholder account withdrawals (389.8) (297.1) (366.2) (32.6)
Additional capital contribution - 1.8 - -
Proceeds from intercompany borrowings 230.4 62.0 105.2 -
Repayments of intercompany borrowings (230.4) (62.1) (105.1) -
Dividend payments (68.0) (100.0) (60.0) (250.0)
----------------------------------------------
Net cash used for financing
activities (263.3) (230.1) (68.3) (253.4)
----------------------------------------------
Net increase (decrease) in cash
and cash equivalents 14.9 5.0 5.5 (135.7)
Cash and cash equivalents at beginning
of period 24.6 19.6 14.1 149.8
----------------------------------------------
Cash and cash equivalents at end of
period $39.5 $24.6 $19.6 $14.1
----------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-13
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies
1.1 NATURE OF OPERATIONS
The Franklin Life Insurance Company (Franklin) and its subsidiaries,
headquartered in Springfield, Illinois, provide life insurance and annuity
products to middle-income customers throughout the United States. Franklin
serves this customer base through 3,200 agents.
1.2 PREPARATION OF FINANCIAL STATEMENTS
The consolidated financial statements have been prepared in accordance with
generally accepted accounting principles (GAAP) and include the accounts of
Franklin, and its subsidiaries, The American Franklin Life Insurance
Company (AMFLIC), Franklin Financial Services Corporation (FFSC) and prior
to December 31, 1995, The Franklin United Life Insurance Company (FULIC).
Franklin was formerly a wholly-owned subsidiary of American Franklin
Company (AFC), and is now an indirect, wholly-owned subsidiary of American
General Corporation (AGC) following the dissolution of AFC in June of 1996.
All material intercompany transactions have been eliminated in
consolidation.
On December 31, 1995, Franklin completed the sale of FULIC to American
General Life Insurance Company of New York (AGNY), an affiliated entity.
Franklin received $8.5 million of preferred stock of American General Life
Insurance Company, the parent of AGNY, as consideration. No gain or loss
was recognized on the transaction.
The preparation of financial statements requires management to make
estimates and assumptions that affect amounts reported in the financial
statements and disclosures of contingent assets and liabilities. Ultimate
results could differ from these estimates.
1.3 ACQUISITION
On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of
AGC, acquired AFC for $1.17 billion. The purchase price consisted of $920
million in cash and a $250 million extraordinary cash dividend paid by AFC
to its former parent prior to closing. In addition, $6.3 million of
acquisition costs were capitalized as part of the acquisition.
F-14
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.3 ACQUISITION (CONTINUED)
The acquisition was accounted for using the purchase method of accounting
in accordance with the provisions of Accounting Principles Board Opinion
16, "Business Combinations", and other existing accounting literature
pertaining to purchase accounting. Under purchase accounting, the total
purchase cost was allocated to the assets and liabilities acquired based on
a determination of their fair value. Franklin's consolidated statements of
income, shareholder's equity and cash flows for the years ended December
31, 1997 and 1996, and the eleven months ended December 31, 1995, are
reported under the purchase method of accounting and, accordingly, are not
consistent with the basis of presentation of the "Predecessor Basis"
consolidated statements of income, shareholder's equity and cash flows for
the one month ended January 31, 1995.
1.4 INVESTMENTS
FIXED MATURITY AND EQUITY SECURITIES. All fixed maturity securities and
equity securities are classified as available-for-sale and recorded at fair
value. After adjusting related balance sheet accounts as if unrealized
gains (losses) had been realized, the net adjustment is recorded in net
unrealized gains (losses) on securities within shareholder's equity. If
the fair value of a security classified as available-for-sale declines
below its cost and this decline is considered to be other than temporary,
the security is reduced to its fair value, and the reduction is recorded as
a realized loss.
MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of an
allowance for losses. The allowance for losses covers all non-performing
loans and loans for which management has a concern based on management's
assessment of risk factors, such as potential non-payment or non-monetary
default. The allowance is based on a loan-specific review and a formula
that reflects past results and current trends.
Loans for which Franklin determines that collection of all amounts due
under the contractual terms is not probable are considered to be impaired.
Franklin generally looks to the underlying collateral for repayment of
impaired loans. Therefore, impaired loans are considered to be collateral
dependent and are reported at the lower of amortized cost or fair value of
the underlying collateral, less estimated cost to sell.
POLICY LOANS. Policy loans are reported at unpaid principal balance.
INVESTMENT INCOME. Interest on fixed maturity securities, policy loans and
performing and restructured mortgage loans is recorded as income when
earned and is adjusted for any amortization of premium or discount.
Interest on delinquent mortgage loans is recorded as income when received.
Dividends are recorded as income on ex-dividend dates.
F-15
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.4 INVESTMENTS (CONTINUED)
OTHER LONG TERM INVESTMENTS. Other long term investments represent
investments in joint ventures and limited partnerships and are reported on
the equity method.
REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are
recognized using the specific identification method.
1.5 CASH AND CASH EQUIVALENTS
Highly liquid investments with an original maturity of three months or less
are included in cash and cash equivalents. The carrying amount
approximates fair value.
1.6 DEFERRED POLICY ACQUISITION COSTS (DPAC)
Certain costs of writing an insurance policy, including commissions,
underwriting, and marketing expenses, are deferred and reported as DPAC.
DPAC associated with interest-sensitive life contracts, insurance
investment contracts, and participating life insurance contracts is charged
to expense in relation to the estimated gross profits of those contracts.
The interest assumptions used to compute estimated gross profits with
respect to participating life insurance contracts were 7.75% at December
31, 1997 and 1996, and 8.5% at December 31, 1995. DPAC associated with all
other insurance contracts is charged to expense over the premium-paying
period or as the premiums are earned over the life of the contract.
DPAC is adjusted for the impact on estimated future gross profits as if net
unrealized gains (losses) on securities had been realized at the balance
sheet date. The impact of this adjustment is included in net unrealized
gains (losses) on securities within shareholder's equity.
Franklin reviews the carrying amount of DPAC on at least an annual basis.
Management considers estimated future gross profits or future premiums,
expected mortality, interest earned and credited rates, persistency, and
expenses in determining whether the carrying amount is recoverable.
1.7 COST OF INSURANCE PURCHASED (CIP)
The cost assigned to certain insurance contracts in force at January 31,
1995 is reported as CIP. Interest is accreted on the unamortized balance
of CIP at rates of 7.0% to 8.5%. CIP is charged to expense and adjusted
for the impact of net unrealized gains (losses) on securities in the same
manner as DPAC. Franklin reviews the carrying amount of CIP on at least an
annual basis using the same methods used to evaluate DPAC.
F-16
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.8 SEPARATE ACCOUNTS
Separate Accounts are assets and liabilities associated with certain
contracts for which the investment risk lies solely with the contract
holder. Therefore, Franklin's liability for these accounts equals the
value of the account assets. Investment income, realized investment gains
(losses), and policyholder account deposits and withdrawals related to
Separate Accounts are excluded from the consolidated statements of income.
Assets held in Separate Accounts are carried at fair value.
1.9 INSURANCE LIABILITIES
Substantially all of Franklin's insurance liabilities relate to
long-duration contracts, which generally require performance over a period
of more than one year. The contract provisions normally cannot be changed
or canceled by Franklin during the contract period.
For interest-sensitive life insurance and insurance investment contracts,
reserves equal the sum of the policy account balances and deferred revenue
charges. Reserves for non-participating long-duration contracts are based
on estimates of the cost of future policy benefits to be paid as a result
of present and future claims due to death, disability, surrender of a
policy, or payment of an endowment. Reserves are determined using the net
level premium method. Interest assumptions used to compute reserves ranged
from 2.0% to 8.5% at December 31, 1997. The liability for future policy
benefits on participating life insurance contracts is a net level reserve
using the nonforfeiture interest rate and mortality table of the plan of
insurance.
1.10 PREMIUM RECOGNITION
Most receipts for annuities and interest-sensitive life insurance contracts
are classified as deposits instead of revenues. Revenues for these
contracts consist of mortality, expense, and surrender charges. Policy
charges that are designed to compensate Franklin for future services are
deferred and recognized in income over the period earned, using the same
assumptions used to amortize DPAC.
For limited-payment contracts, net premiums are recorded as revenue, and
the difference between the gross premium received and the net premium is
deferred and recognized in income in a constant relationship to insurance
in force. For all other long-duration contracts, premiums are recognized
when due.
F-17
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1.11 PARTICIPATING LIFE INSURANCE
Participating life insurance contracts contain dividend payment provisions
that entitle the policyholders to participate in the earnings of the
contracts. Participating life insurance accounted for 46% and 47% of life
insurance in force at December 31, 1997 and 1996 respectively, and 70%,
62%, 58%, and 69% of premiums and other considerations for the years ended
December 31, 1997 and 1996, the eleven months ended December 31, 1995, and
the one month ended January 31, 1995, respectively.
The portion of earnings allocated to participating policyholders that
cannot be expected to inure to Franklin's shareholder is excluded from net
income and shareholder's equity. Dividends to be paid on participating
life insurance contracts are determined annually based on estimates of the
contracts' earnings.
1.12 INCOME TAXES
Deferred tax assets and liabilities are established for temporary
differences between the financial reporting basis and the tax basis of
assets and liabilities, at the enacted tax rates expected to be in effect
when the temporary differences reverse. The effect of a tax rate change is
recognized in income in the period of enactment. State income taxes are
included in income tax expense.
A change in deferred taxes related to fluctuations in fair value of
available-for-sale securities is included in net unrealized gains (losses)
on securities in shareholder's equity.
1.13 RECLASSIFICATION
Certain amounts in the 1996 and 1995 financial statements have been
reclassified to conform to the 1997 presentation.
1.14 NEW ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," which establishes standards for reporting and
displaying comprehensive income and its components in the financial
statements. Beginning in 1998, Franklin must adopt this statement for all
periods presented. Application of this statement will not change
recognition or measurement of net income and, therefore, will not impact
Franklin's consolidated results of operations or financial position.
F-18
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. Investments
2.1 INVESTMENT INCOME
Income by type of investment was as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities $435.5 $434.6 $394.3 $33.9
Mortgage loans on real estate 58.3 58.8 54.3 4.6
Policy loans 19.3 18.9 18.6 1.7
Other investments 9.5 13.5 9.1 1.2
----------------------------------------------
Gross investment income 522.6 525.8 476.3 41.4
Investment expense 4.0 4.3 7.5 0.1
----------------------------------------------
Net investment income $518.6 $521.5 $468.8 $41.3
----------------------------------------------
</TABLE>
The carrying value of investments that produced no investment income during
1997 totaled $12.4 million, or less than .19% of total invested assets at
December 31, 1997. The ultimate disposition of these assets is not
expected to have a material effect on Franklin's consolidated results of
operations or financial position.
F-19
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.2 REALIZED INVESTMENT GAINS (LOSSES)
Realized investment gains (losses) for fixed maturity and equity
securities, net of DPAC and CIP amortization were as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Gross gains $15.4 $25.0 $13.8 $ -
Gross losses (6.2) (17.6) (1.9) -
----------------------------------------------
Total fixed maturity securities 9.2 7.4 11.9 -
----------------------------------------------
Equity securities
Gross gains 1.0 1.8 1.9 4.1
Gross losses - - (0.5) (5.4)
----------------------------------------------
Total equity securities 1.0 1.8 1.4 (1.3)
----------------------------------------------
Other 2.6 (6.7) (6.1) (6.3)
----------------------------------------------
Realized investment gains
(losses) $12.8 $2.5 $7.2 $(7.6)
----------------------------------------------
</TABLE>
Voluntary sales of investments resulted in the following realized gains
(losses):
<TABLE>
<CAPTION>
Realized
-------------------------
In millions Category Proceeds Gains Losses
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED
DECEMBER 31, 1997 AVAILABLE-FOR-SALE $577.6 $10.5 $ 3.1
- --------------------------------------------------------------------------------
Year Ended
December 31, 1996 Available-for-sale $807.0 $21.8 $15.4
- --------------------------------------------------------------------------------
Eleven Months Ended
December 31, 1995 Available-for-sale $268.7 $ 8.5 $ 0.4
- --------------------------------------------------------------------------------
One Month Ended
January 31, 1995 Trading $ 84.7 $ 4.1 $ 5.4
- --------------------------------------------------------------------------------
</TABLE>
F-20
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES
VALUATION. Amortized cost and fair value of fixed maturity and equity
securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In millions COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $2,845.2 $228.9 $0.3 $3,073.8
Below investment grade 307.8 13.7 1.1 320.4
Public utilities 972.3 116.1 - 1,088.4
Mortgage-backed 750.7 67.4 0.1 818.0
Foreign governments 90.0 15.4 0.4 105.0
U.S. government 186.7 17.7 - 204.4
States/political subdivisions 4.8 0.2 - 5.0
Redeemable preferred stocks 0.2 - - 0.2
--------------------------------------------------
Total fixed maturity
securities $5,157.7 $459.4 $1.9 $5,615.2
--------------------------------------------------
Equity securities $ 1.1 $ 3.3 $ - $ 4.4
--------------------------------------------------
</TABLE>
F-21
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
--------------------------------------------------
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
In millions COST GAINS LOSSES VALUE
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
Corporate bonds
Investment grade $2,747.7 $170.2 $6.3 $2,911.6
Below investment grade 239.7 9.0 1.4 247.3
Public utilities 1,064.7 86.9 - 1,151.6
Mortgage-backed 802.1 41.9 1.4 842.6
Foreign governments 96.2 11.0 - 107.2
U.S. government 190.1 13.9 0.1 203.9
States/political subdivisions 11.5 0.5 - 12.0
Redeemable preferred stocks 0.3 - - 0.3
--------------------------------------------------
Total fixed maturity
securities $5,152.3 $333.4 $9.2 $5,476.5
--------------------------------------------------
Equity securities $ 2.0 $ 3.0 $ - $ 5.0
--------------------------------------------------
</TABLE>
F-22
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
MATURITIES. The contractual maturities of fixed maturity securities at
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
AMORTIZED FAIR
In millions COST VALUE
- --------------------------------------------------------------------------------
<S> <C> <C>
FIXED MATURITY SECURITIES, EXCLUDING
MORTGAGE-BACKED SECURITIES, DUE
In one year or less $ 55.0 $ 55.4
In years two through five 785.0 825.8
In years six through ten 1,993.5 2,140.3
After ten years 1,573.5 1,775.7
Mortgage-backed securities 750.7 818.0
----------------------------------------
Total fixed maturity securities $5,157.7 $5,615.2
----------------------------------------
</TABLE>
Actual maturities may differ from contractual maturities since borrowers
may have the right to call or prepay obligations. Corporate requirements
and investment strategies may result in the sale of investments before
maturity.
2.4 NET UNREALIZED GAINS ON SECURITIES
Net unrealized gains on available-for-sale securities included in
shareholder's equity at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- ------------------------------------------------------
<S> <C> <C>
Gross unrealized gains $ 462.7 $ 336.4
Gross unrealized losses (1.9) (9.2)
DPAC fair value adjustment (10.4) (0.4)
CIP fair value adjustment (215.7) (160.9)
Participating policyholders'
interest (2.5) (1.8)
Deferred federal income taxes (81.4) (57.5)
------------------------
Net unrealized gains
on securities $ 150.8 $ 106.6
------------------------
</TABLE>
F-23
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE
DIVERSIFICATION. Diversification of the geographic location and type of
property collateralizing mortgage loans reduces the concentration of credit
risk. For new loans, Franklin requires loan-to-value ratios of 75% or
less, based on management's credit assessment of the borrower. At December
31, the mortgage loan portfolio was distributed as follows:
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------
In millions 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Geographic distribution
East North Central $119.6 $120.0
East South Central 36.2 37.8
Mid Atlantic 35.5 21.5
Mountain 53.5 58.1
New England 22.5 19.2
Pacific 99.5 104.3
South Atlantic 175.2 167.7
West North Central 34.3 35.4
West South Central 53.5 57.9
Allowance for losses (8.2) (14.9)
- ----------------------------------------------------------------------
Total $621.6 $607.0
- ----------------------------------------------------------------------
Property type
Retail $333.5 $312.3
Office 131.9 147.5
Industrial 96.7 89.4
Residential and other 67.7 72.7
Allowance for losses (8.2) (14.9)
- ----------------------------------------------------------------------
Total $621.6 $607.0
- ----------------------------------------------------------------------
</TABLE>
F-24
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.5 MORTGAGE LOANS ON REAL ESTATE (CONTINUED)
IMPAIRED LOANS. The carrying value of impaired mortgage loans on real
estate and related interest income were as follows as of and for the year
ended December 31:
<TABLE>
<CAPTION>
In millions 1997 1996 1995
---------------------------------------------------------------------------
<S> <C> <C> <C>
Impaired loans
With allowance * $ 8.0 $21.4 5.3
Without allowance 8.1 - 17.8
----------------------------------------------
Total impaired loans $16.1 $21.4 23.1
----------------------------------------------
Average investment $18.8 $22.3 27.4
----------------------------------------------
Interest income earned $ 0.8 $ 1.5 1.3
----------------------------------------------
</TABLE>
* Represents gross amounts before allowance for mortgage loan losses of
$3.0 million, $4.9 million, and $1.6 million at December 31, 1997,
1996, and 1995, respectively. There were no impaired loans as of
January 31, 1995.
ALLOWANCE. Activity in the allowance for mortgage loan losses was as
follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of period $14.9 $12.7 8.5 -
Net change in allowance * (6.7) 2.2 4.2 8.5
---------------------------------------------
Balance at end of period $ 8.2 $14.9 12.7 8.5
</TABLE>
* Charged to realized investment gains (losses).
F-25
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2.6 INVESTMENTS ON DEPOSIT
At December 31, 1997 and 1996, bonds and other investments carried at $19.3
million and $22.6 million, respectively, were on deposit with regulatory
authorities to comply with state insurance laws.
2.7 INVESTMENT RESTRICTIONS
Franklin is restricted by the insurance laws of its domiciliary state as to
the amount which it can invest in any entity. At December 31, 1997 and
1996, Franklin's largest investment in any one entity other than U.S.
government obligations and related party amounts was $62.8 million and
$64.6 million, respectively.
3. Fair Value of Financial Instruments
Carrying amounts and fair values for certain of Franklin's financial
instruments at December 31 are presented below. Care should be exercised
in drawing conclusions based on fair value, since (1) the fair values
presented do not include the value associated with all of Franklin's assets
and liabilities, and (2) the reporting of investments at fair value without
a corresponding revaluation of related policyholder liabilities can be
misinterpreted.
<TABLE>
<CAPTION>
DECEMBER 31
---------------------------------------------
1997 1996
---------------------------------------------
CARRYING FAIR Carrying Fair
In millions AMOUNT VALUE Amount Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Fixed maturity securities $5,615.2 $5,615.2 $5,476.5 $5,476.5
Mortgage loans on real estate 621.6 659.4 607.0 637.7
Equity securities 4.4 4.4 5.0 5.0
Liabilities
Insurance investment contracts $1,881.4 $1,813.3 $1,967.9 $1,892.9
Dividend accumulations $ 780.1 $ 780.1 $ 755.9 $ 755.9
</TABLE>
F-26
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. Fair Value of Financial Instruments (continued)
The following methods and assumptions were used to estimate the fair value
of financial instruments.
FIXED MATURITY AND EQUITY SECURITIES. Fair values of fixed maturity and
equity securities were based on quoted market prices, where available. For
investments not actively traded, fair values were estimated using values
obtained from independent pricing services or, in the case of some private
placements, by discounting expected future cash flows using a current
market rate applicable to yield, credit quality, and average life of the
investments.
MORTGAGE LOANS ON REAL ESTATE. Fair value of mortgage loans was estimated
primarily using discounted cash flows, based on contractual maturities and
risk-adjusted discount rates.
POLICY LOANS. Policy loans have no stated maturity dates and are an
integral part of the related insurance contract. Accordingly, it is not
practicable to estimate a fair value. The weighted average interest rate
on policy loans was 6% in 1997 and 1996.
INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment
contracts was estimated using cash flows discounted at market interest
rates.
DIVIDEND ACCUMULATIONS. Fair value disclosed for dividend accumulations
equals the amount of dividends payable on demand at the reporting date.
F-27
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. Deferred Policy Acquisition Costs (DPAC)
An analysis of the changes in the DPAC asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $ 82.0 $ 47.5 $ - $ 510.6
Capitalization 51.9 56.2 67.7 8.5
Amortization (11.5) (10.7) (8.3) (5.8)
Effect of unrealized gains on
securities (10.0) 11.3 (11.7) -
Effect of realized investment gains (0.7) (0.4) (0.2) -
Adjustment for the
acquisition (a) - - - (513.3)
Other - (21.9) - -
--------------------------------------------
End of period balance $111.7 $ 82.0 $ 47.5 $ -
--------------------------------------------
</TABLE>
(a) Represents the necessary elimination of the historical DPAC asset
required by purchase accounting.
F-28
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. Cost of Insurance Purchased (CIP)
An analysis of the changes in the CIP asset is as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Beginning of period balance $407.8 $353.0 $656.6 $174.7
Interest accretion 47.3 51.8 49.0 2.0
Additions 15.1 13.6 41.3 -
Amortization (107.7) (116.5) (118.0) (2.8)
Effect of unrealized gains
on securities (54.8) 109.1 (270.0) -
Effect of realized investment
gains (3.8) (3.2) (5.9) -
Incremental adjustment for
the acquisition (a) - - - 482.7
----------------------------------------------
End of period balance $303.9 $407.8 $353.0 $656.6
----------------------------------------------
</TABLE>
(a) Represents the incremental amount necessary to recognize the new CIP
asset attributable to the January 31, 1995 acquisition.
CIP amortization, net of interest accretion and additions, expected to be
recorded in each of the next five years is $41.7 million, $38.4 million,
$35.3 million, $32.4 million, and $29.8 million.
6. Separate Accounts
Franklin administers three Separate Accounts for variable annuity
contracts. AMFLIC administers three Separate Accounts in connection with
the issuance of its Variable Universal Life and Variable Annuity products.
F-29
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. Income Taxes
Franklin files a life/life consolidated return which includes Franklin and
AMFLIC. FFSC, a broker-dealer and wholly-owned subsidiary of Franklin,
files a separate return.
The method of allocation of tax expense is subject to a written agreement.
Allocation is based upon separate return calculations with current credit
for net losses and tax credits. Consolidated alternative minimum tax,
excise tax or surtax, if any, is allocated separately. The tax liability
of each subsidiary under this agreement shall not exceed the amount such
subsidiary would have paid if it had filed on a separate return basis.
Intercompany tax balances are to be settled no later than thirty (30) days
after the date of filing the consolidated return.
7.1 DEFERRED TAXES
Components of deferred tax liabilities and assets at December 31, were as
follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- ---------------------------------------------------------------------
<S> <C> <C>
Deferred tax liabilities, applicable to:
Basis differential of
investments $122.8 $ 63.1
DPAC and CIP 98.6 124.6
Other 10.2 15.7
----------------------
Total deferred tax
liabilities 231.6 203.4
----------------------
Deferred tax assets, applicable to:
Policy reserves (124.5) (128.3)
Participating policyholders'
interests (74.0) (73.6)
Postretirement benefits (3.4) (4.0)
Basis differential of investments (7.5) (7.7)
Other (17.7) (8.8)
----------------------
Total deferred tax assets (227.1) (222.4)
----------------------
Net deferred tax liability (asset) $ 4.5 $ (19.0)
----------------------
</TABLE>
Franklin expects adequate future taxable income to realize the deferred tax
assets. Accordingly, no valuation allowance is considered necessary.
A portion of life insurance income earned prior to 1984 is not taxable
unless it exceeds certain statutory limitations or is distributed as
dividends. Such income, accumulated in policyholders' surplus accounts,
totaled $200 million at December 31, 1997. At current corporate income tax
rates, the maximum amount of tax on such income is approximately $70
million. Deferred income taxes on these accumulations are not required
because no distributions are expected.
F-30
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7.2 TAX EXPENSE
A reconciliation between the federal income tax rate and the effective tax
rate follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax rate 35.0% 35.0% 35.0% 35.0%
State taxes, net 0.9 0.3 0.9 36.3
Tax-exempt investment income (0.5) (0.7) (0.6) (39.3)
Amortization of goodwill - - - 34.3
Other (0.8) 0.2 0.6 0.4
---------------------------------------------
Effective tax rate 34.6% 34.8% 35.9% 66.7%
---------------------------------------------
</TABLE>
7.3 TAXES PAID
Federal income taxes paid for the years ended December 31, 1997 and 1996,
and the eleven months ended December 31, 1995, were $77 million, $74
million, and $53 million, respectively. State income taxes paid for the
years ended December 31, 1997 and 1996, and the eleven months ended
December 31, 1995, were $2 million, $2 million, and $1 million,
respectively. There were no federal or state income taxes paid during
January 1995.
8. Benefit Plans
8.1 PENSION PLANS
On January 1, 1996, Franklin's existing defined benefit pension plan (The
Franklin Plan) was merged with the plan sponsored by AGC (the AGC Plan).
The AGC Plan is a non-contributory defined benefit plan covering most
Franklin employees. Under the AGC Plan, pension benefits are based on the
participant's compensation and length of credited service. AGC's funding
policy is to contribute annually no more than the maximum deductible for
federal income tax purposes.
Equity and fixed maturity securities were 63% and 28%, respectively, of the
AGC Plan's assets at the Plan's most recent balance sheet date.
Additionally, 5% of the Plan's assets were invested in general investment
accounts of AGC's subsidiaries through deposit administration insurance
contracts.
F-31
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (continued)
The net pension (income)/expense and the computation of the projected
benefit obligation for years prior to January 1, 1996 were based on the
provisions of the Franklin Plan. The Franklin Plan provided for the
payment of retirement benefits; normally commencing at age 65, and also for
the payment of certain disability benefits. After meeting certain
qualifications, an employee acquired a vested right to future benefits.
Pension benefits were based on the participant's average monthly
compensation and length of credited service. Annual contributions made to
the plan were sufficient to satisfy legal funding requirements.
At December 31, 1995, fixed maturity securities constituted the majority of
The Franklin Plan's assets.
Prior to January 1, 1996, The Franklin Plan purchased annuity contracts
from Franklin to provide benefits for its retirees. For the eleven months
ended December 31, 1995, and the one month ended January 31, 1995, these
contracts provided approximately $3.9 million and $0.3 million annually for
retiree benefits, respectively.
During the fourth quarter of 1995, Franklin sponsored a program of special
incentives to those employees age 55 and over who elected early retirement.
The program concluded December 31, 1995. A withdrawal of $26.5 million was
made from the Franklin Plan in 1995 to provide full retirement benefits for
these employees who elected to retire under the program.
Net pension (income)/expense included the following components:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned) $ 0.7 $ 0.8 $ 0.9 $ 0.2
Interest cost 1.9 2.0 3.7 0.4
Actual return on plan assets (8.4) (7.8) (11.5) (0.4)
Net amortization and deferral 5.0 4.6 6.3 -
---------------------------------------------
Pension (income) expense $(0.8) $(0.4) $ (0.6) $ 0.2
---------------------------------------------
</TABLE>
F-32
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.1 PENSION PLANS (continued)
The funded status and the prepaid pension expense (included in other
assets) at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation, primarily vested $ 27.7 $ 27.0
Effect of increase in compensation levels 0.5 0.2
----------------------------
Projected benefit obligation 28.2 27.2
Plan assets at fair value 43.8 35.5
----------------------------
Plan assets at fair value in excess of projected
benefit obligation 15.6 8.3
Other unrecognized items, net (3.5) 3.0
----------------------------
Prepaid pension expense $ 12.1 $ 11.3
----------------------------
Weighted-average discount rate on benefit obligation 7.25% 7.50%
Rate of increase in compensation levels 4.00 4.00
Expected long-term rate of return on plan assets 10.00 10.00
</TABLE>
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
On January 1, 1996, the assets in Franklin's voluntary employees'
beneficiary association (Franklin VEBA) for the retiree health and welfare
plan were transferred to the AGC VEBA Plan. No changes in assumptions or
plan provisions were made as a result of the transfer.
Under the AGC VEBA Plan, Franklin has life, medical, supplemental major
medical and dental plans for certain retired employees and agents. Most
plans are contributory, with retiree contributions adjusted annually to
limit employer contributions to predetermined amounts. Franklin has
reserved the right to change or eliminate these benefits at any time.
The life plans are fully insured for a two-year period. A portion of the
retiree medical and dental plans is funded through the AGC VEBA Plan; the
remainder is unfunded and self-insured. All of the retiree medical and
dental plans' assets held in the AGC VEBA Plan were invested in readily
marketable securities.
F-33
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (continued)
The funded status and the accrued postretirement benefit cost (included in
other liabilities) at December 31 were as follows:
<TABLE>
<CAPTION>
In millions 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C>
Actuarial present value of
benefit obligation
Retirees $7.2 $7.3
Active plan participants
Fully eligible 0.3 0.2
Other 2.0 1.8
-------------------------------
Accumulated postretirement
benefit obligation (APBO) 9.5 9.3
Plan assets at fair value 0.2 -
-------------------------------
APBO in excess of plan assets
at fair value 9.3 9.3
Unrecognized net gain 0.5 2.2
-------------------------------
Accrued benefit cost $9.8 $11.5
-------------------------------
Weighted-average discount
rate on benefit obligation 7.25% 7.50%
</TABLE>
Postretirement benefit expense (income) was as follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Service cost (benefits earned) $0.1 $0.1 $0.1 $ -
Interest cost 0.7 0.7 0.9 (0.2)
--------------------------------------------
Postretirement benefit expense
(income) $0.8 $0.8 $1.0 $(0.2)
--------------------------------------------
</TABLE>
For measurement purposes, an 8.5% annual rate of increase in the per capita
cost of covered health care benefits was assumed for 1998; the rate was
assumed to decrease gradually to 5% by the year 2005 and remain at that
level. A 1% increase in the assumed rate results in a $0.1 million
increase in the accumulated postretirement benefit obligation and no
increase in postretirement benefit expense.
F-34
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. Statutory Accounting
State insurance laws and regulations prescribe accounting practices for
calculating statutory net income and equity. In addition, state regulators
may permit statutory accounting practices that differ from prescribed
practices.
During 1995, Franklin received approval to loan $116.0 million to AGCL.
Franklin also received approval to pay an extraordinary dividend of $250
million to its former parent as part of the 1995 acquisition, and also
received approval to pay an extraordinary dividend of $60 million to AGCL.
At December 31, 1997 and 1996, Franklin had statutory shareholder's equity
of $521.0 million and $431.0 million, respectively. Statutory net income
was $129.7 million, $123.2 million, and $100.2 million for the years ended
December 31, 1997, 1996, and 1995, respectively.
As determined on a statutory basis, the statutory shareholder's equity and
net income of subsidiaries, were reported as follows:
<TABLE>
<CAPTION>
STATUTORY
-----------------------------
In millions 1997 1996 1995
----------------------------------------------------------
<S> <C> <C> <C>
Shareholder's Equity $17.7 $18.1 $ 9.9
-----------------------------
Net Income $(0.6) $(1.9) $(4.7)
-----------------------------
</TABLE>
Generally, Franklin is restricted by the insurance laws of its domiciliary
state as to amounts that can be transferred in the form of dividends,
loans, or advances without the approval of the Illinois Insurance
Department. Under these restrictions, during 1998, loans or advances in
excess of $130.3 million and dividends in any twelve-month period
aggregating in excess of $129.7 million will require the approval of the
Illinois Insurance Department.
10. Consolidated Statement of Cash Flows
In addition to the cash activities shown in the consolidated statement of
cash flows, the following transactions, occurred:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest added to annuity and other
financial products $169.4 $173.3 $168.3 $14.0
</TABLE>
F-35
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. Reinsurance
Franklin limits its exposure to loss on any single insured to $2.1 million
by ceding additional risks through reinsurance contracts with other
insurers. Franklin diversifies its risk of reinsurance loss by using a
number of reinsurers that have strong claims-paying ability ratings. If
the reinsurer could not meet its obligations, Franklin would reassume the
liability. The likelihood of a material reinsurance liability being
reassumed by Franklin is considered to be remote.
A receivable is recorded for the portion of benefits paid and insurance
liabilities that have been reinsured. Reinsurance recoveries on ceded
reinsurance contracts were $41.5 million, $67.3 million, $63.3 million and
$1.4 million for the years ended December 31, 1997 and 1996, the eleven
months ended December 31, 1995, and the one month ended January 31, 1995,
respectively. The amount of reinsurance recoverable (payable) on paid and
unpaid losses was $(0.5) million and $1.8 million at December 31, 1997 and
1996, respectively. The cost of reinsurance is recognized over the life of
the reinsured policies using assumptions consistent with those used to
account for the underlying policies.
Reinsurance premiums included in premiums and other considerations were as
follows:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Direct premiums and other
considerations $415.3 $491.5 $500.1 $36.8
Reinsurance assumed 8.3 15.9 44.2 (0.8)
Reinsurance ceded (53.4) (88.8) (94.7) (1.5)
---------------------------------------------
Premiums and other considerations $370.2 $418.6 $449.6 $34.5
- --------------------------------------------------------------------------------
</TABLE>
12. Related Party Transactions
Franklin participates in a program of short-term borrowing with AGC to
maintain its long-term commitments. Franklin borrowed $230.4 million and
$62.0 million, and repaid $230.4 million and $62.1 million in 1997 and
1996, respectively. Interest was paid on the outstanding balances based on
the rate as stipulated in the program.
During 1995, Franklin purchased a 6.75% promissory note from AGCL for
$116.0 million to mature in 2005 (see Note 9).
During 1995, Franklin received $8.5 million of 8% non-voting preferred
stock of American General Life Insurance Company as consideration for the
sale of FULIC.
F-36
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. Related Party Transactions (continued)
Franklin has entered into indefinite contracts for the performance of all
investment management services as well as cost allocation agreements with
its ultimate parent. Total expenses under these agreements were $2.5
million and $2.3 million for the years ended December 31, 1997 and 1996,
respectively, and $1.1 million for the eleven months ended December 31,
1995.
13. Legal Proceedings
In recent years, various life insurance companies have been named as
defendants in class action lawsuits relating to life insurance pricing and
sales practices, and a number of these lawsuits have resulted in
substantial settlements. Franklin is a defendant in such purported class
action lawsuits filed in 1997, asserting claims related to pricing and
sales practices. These claims are being defended vigorously by Franklin.
Given the uncertain nature of litigation and the early stages of this
litigation, the outcome of these actions cannot be predicted at this time.
Franklin management nevertheless believes the ultimate outcome of all such
pending litigation should not have a material adverse effect on Franklin's
financial position. It is possible that settlements or adverse
determinations in one or more of these actions or other future proceedings
could have a material adverse effect on results of operations for a given
period. No provision for any adverse determinations in this pending
litigation has been made in the consolidated financial statements because
the amount of loss, if any, from these actions cannot be reasonably
estimated at this time.
Franklin is a party to various other lawsuits and proceedings arising in
the ordinary course of business. Many of these lawsuits and proceedings
arise in jurisdictions, such as Alabama, that permit damage awards
disproportionate to the actual economic damages incurred. Based upon
information presently available, Franklin management believes the total
amounts that will ultimately be paid, if any, arising from these lawsuits
and proceedings will not have a material adverse effect on Franklin's
results of operations and financial position. However, it should be noted
that the frequency of large damage awards, including large punitive damage
awards, that bear little or no relation to actual economic damages incurred
by plaintiffs in jurisdictions like Alabama continues to increase and
creates the potential for an unpredictable judgment in any given suit.
F-37
<PAGE>
THE FRANKLIN LIFE INSURANCE COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. Guaranty Fund Assessments
Information about state guaranty fund assessments was as follows as of and
for the:
<TABLE>
<CAPTION>
Eleven Months One Month
YEAR ENDED Year Ended Ended Ended
DECEMBER 31 December 31 December 31 January 31
----------------------------------------------
In millions 1997 1996 1995 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Expense, included in operating
costs and expenses $1.2 $ 0.7 $ 0.2 $0.6
Liability for anticipated
assessments 3.6 7.5 8.5 -
Receivable for expected recoveries
against future premium taxes 7.4 11.2 11.2 -
- --------------------------------------------------------------------------------
</TABLE>
Changes in state laws could decrease the amount recoverable against future
premium taxes.
F-38
<PAGE>
STATEMENT OF ADDITIONAL INFORMATION
FRANKLIN LIFE VARIABLE ANNUITY FUND 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, 1997
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, 1997
Statement of Operations for the year ended December 31, 1997
Statements of Changes in Contract Owners' Equity for the two
years ended December 31, 1997
Portfolio of Investments, December 31, 1997
Notes to Financial Statements
Supplementary Information - Per-Unit Income and Changes in
Accumulation Unit Value for the five years ended December
31, 1997
The Franklin Life Insurance Company and Subsidiaries:
Report of Independent Auditors
Financial Statements:
Consolidated Statement of Income for the years ended December
31, 1997 and 1996, the eleven months ended December 31, 1995,
and the one month ended January 31, 1995
Consolidated Balance Sheet, December 31, 1997 and 1996
Consolidated Statement of Shareholder's Equity for the years
ended December 31, 1997 and 1996, the eleven months ended
December 31, 1995, and the one month ended January 31, 1995
Consolidated Statement of Cash Flows for the years ended
December 31, 1997 and 1996, the eleven months ended December
31, 1995, and the one month ended January 31, 1995
Notes to Consolidated Financial Statements
Schedules to the financial statements have been omitted because
they are not required under the related instructions or are not
applicable, or the information has been shown elsewhere.
(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 (File No. 2-38502).
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 (File No. 2-38502).
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 (File No. 2-38502).
(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 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).
(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 are incorporated
herein by reference to Exhibit 8(b) to Post-Effective Amendment
No. 39 to Registrant's Registration Statement on Form N-3, filed
April 30, 1997 (File No. 2-38502).
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 LLP.
14 - Not applicable.
15 - Not applicable.
16 - Not applicable.
C-2
<PAGE>
17 - Power of Attorney is incorporated herein by reference to Exhibit 17
to Post-Effective Amendment No. 40 to Registrant's Registration
Statement on Form N-3, filed February 26, 1998 (File No. 2-38502).
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(1,2,3,4) as of December 31, 1997. All subsidiaries listed are
corporations, unless otherwise indicated. Subsidiaries of subsidiaries are
indicated by indentations and unless otherwise indicated, all subsidiaries
are wholly owned. Inactive subsidiaries are denoted by an asterisk (*).
<TABLE>
<CAPTION>
Jurisdiction of
Name Incorporation Insurer
- ---- --------------- -------
<S> <C> <C>
AGC Life Insurance Company(5) Missouri Yes
American General Life and Accident Insurance Company(6) Tennessee Yes
American General Exchange, Inc. Tennessee No
Independent Fire Insurance Company Florida Yes
American General Property Insurance Company of Florida Florida Yes
Old Faithful General Agency, Inc. Texas No
Independent Life Insurance Company Georgia Yes
American General Life Insurance Company(7) Texas Yes
American General Annuity Service Corporation Texas No
American General Life Insurance Company of New York New York Yes
The Winchester Agency Ltd. New York No
The Variable Annuity Life Insurance Company Texas Yes
The Variable Annuity Marketing Company Texas No
VALIC Investment Services Company Texas No
VALIC Retirement Services Company Texas No
C-3
<PAGE>
<CAPTION>
Jurisdiction of
Name Incorporation Insurer
- ---- --------------- -------
<S> <C> <C>
VALIC Trust Company Texas No
Astro Acquisition Corp. Delaware No
The Franklin Life Insurance Company Illinois Yes
The American Franklin Life Insurance Company Illinois Yes
Franklin Financial Services Corporation Delaware No
HBC Development Corporation Virginia No
Allen Property Company Delaware No
Florida Westchase Corporation Delaware No
Hunter's Creek Communications Corporation Florida No
Westchase Development Corporation Delaware No
American General Capital Services, Inc. Delaware No
American General Corporation* Delaware No
American General Delaware Management Corporation(1) Delaware No
American General Finance, Inc. Indiana No
AGF Investment Corp. Indiana No
American General Auto Finance, Inc. Delaware No
American General Finance Corporation(8) Indiana No
American General Finance Group, Inc. Delaware No
American General Financial Services, Inc.(9) Delaware No
The National Life and Accident Insurance Company Texas Yes
Merit Life Insurance Co. Indiana Yes
Yosemite Insurance Company California Yes
American General Finance, Inc. Alabama No
American General Financial Center Utah No
American General Financial Center, Inc.* Indiana No
American General Financial Center, Incorporated* Indiana No
American General Financial Center Thrift Company* California No
Thrift, Incorporated* Indiana No
American General Independent Producer Division Co. Delaware No
American General Investment Advisory Services, Inc.* Texas No
C-4
<PAGE>
<CAPTION>
Jurisdiction of
Name Incorporation Insurer
- ---- --------------- -------
<S> <C> <C>
American General Investment Holding Corporation(10) Delaware No
American General Investment Management Corporation(10) Delaware No
American General Realty Advisors, Inc. Delaware No
American General Realty Investment Corporation Texas No
American General Mortgage Company Delaware No
GDI Holding, Inc.*(11) California No
Ontario Vineyard Corporation Delaware No
Pebble Creek Country Club Corporation Florida No
Pebble Creek Service Corporation Florida No
SR/HP/CM Corporation Texas No
American General Property Insurance Company Tennessee Yes
Bayou Property Company Delaware No
AGLL Corporation(12) Delaware No
American General Land Holding Company Delaware No
AG Land Associates, LLC(12) California No
Hunter's Creek Realty, Inc.* Florida No
Summit Realty Company, Inc. So. Carolina No
Florida GL Corporation Delaware No
GPC Property Company Delaware No
Cinco Ranch East Development, Inc. Delaware No
Cinco Ranch West Development, Inc. Delaware No
Hickory Downs Development, Inc. Delaware No
Lake Houston Development, Inc. Delaware No
South Padre Development, Inc. Delaware No
Green Hills Corporation Delaware No
Knickerbocker Corporation Texas No
American Athletic Club, Inc. Texas No
Pavilions Corporation Delaware No
USLIFE Corporation New York No
All American Life Insurance Company Illinois Yes
C-5
<PAGE>
<CAPTION>
Jurisdiction of
Name Incorporation Insurer
- ---- --------------- -------
<S> <C> <C>
1149 Investment Corp. Delaware No
American General Life Insurance Company of
Pennsylvania Pennsylvania Yes
New D Corporation* Iowa No
The Old Line Life Insurance Company of America Wisconsin Yes
The United States Life Insurance Company in the
City of New York New York Yes
USLIFE Advisers, Inc. New York No
USLIFE Agency Services, Inc. Illinois No
USLIFE Credit Life Insurance Company Illinois Yes
USLIFE Credit Life Insurance Company of Arizona Arizona Yes
USLIFE Indemnity Company Nebraska Yes
USLIFE Financial Corporation of Delaware* Delaware No
Midwest Holding Corporation Delaware No
I.C. Cal* Nebraska No
Midwest Property Management Co. Nebraska No
USLIFE Financial Institution Marketing Group, Inc. California No
USLIFE Insurance Services Corporation Texas No
USLIFE Realty Corporation Texas No
405 Leasehold Operating Corporation New York No
405 Properties Corporation* New York No
USLIFE Real Estate Services Corporation Texas No
USLIFE Realty Corporation of Florida Florida No
USLIFE Systems Corporation Delaware No
</TABLE>
American General Finance Foundation, Inc. is not included on this list. It
is a non-profit corporation.
NOTES
(1) The following limited liability companies were formed in the State of
Delaware on March 28, 1995. The limited liability interests of each are
jointly owned by AGC and AGDMC and the business and affairs of each are
managed by AGDMC:
American General Capital, L.L.C.
American General Delaware, L.L.C.
(2) On November 26, 1996, American General Institutional Capital A ("AG Cap
Trust A"), a Delaware business trust, was created. On March 10, 1997,
American General Institutional Capital B ("AG Cap Trust B"), also a
Delaware business
C-6
<PAGE>
trust, was created. Both AG Cap Trust A's and AG Cap Trust B's business
and affairs are conducted through their trustees: Bankers Trust Company
and Bankers Trust (Delaware). Capital securities of each are held by
non-affiliated third party investors and common securities of AG Cap
Trust A and AG Cap Trust B are held by AGC.
(3) On November 14, 1997, American General Capital I, American General
Capital II, American General Capital III, and American General Capital
IV (collectively, the "Trusts"), all Delaware business trusts, were
created. Each of the Trusts' business and affairs are conducted through
its trustees: Bankers Trust (Delaware) and James L. Gleaves (not in his
individual capacity but solely as Trustee).
(4) On July 10, 1997, the following insurance subsidiaries of AGC became the
direct owners of the parenthetically indicated percentages of membership
units of SBIL B, L.L.C. ("SBIL B"), a U.S. limited liability company:
VALIC (22.6%), FL (8.1%), AGLA (4.8%) and AGL (4.8%).
Through its aggregate 40.3% interest in SBIL B, VALIC, FL, AGLA and AGL
indirectly own approximately 28% of the securities of SBI, an English
company, and 14% of the securities of ESBL, an English company, SBP, an
English company, and SBFL, a Cayman Islands company. These interests are
held for investment purposes only.
(5) On December 23, 1994, AGCL purchased approximately 40% of the shares of
common stock of Western National Corporation ("WNC"), Western National
Life Insurance Company's ("WNL") indirect intermediate parent. Therefore,
WNL became approximately 40% indirectly controlled by AGC. On September
30, 1996, AGC purchased 7,254,464 shares of WNC's Series A Participating
Convertible Preferred Stock (the "Convertible Preferred Stock"). On
November 30, 1996, AGC contributed the Convertible Preferred Stock to AGCL.
On May 14, 1997, WNC's shareholders approved the conversion of 7,254,464
shares of WNC's Series A Participating Convertible Preferred Stock held by
AGCL into an equal number of WNC common stock. Thus, at present, the
percentage of WNC common stock owned directly by AGCL (and indirectly by
AGC) is 46.2%. WNC, a Delaware corporation, owns the following companies:
WNL Holding Corporation
Western National Life Insurance Company (TX)
Independent Advantage Financial & Insurance Services, Inc.
WNL Investment Advisory Services, Inc.
Conseco Annuity Guarantee Corp.
WNL Brokerage Services, Inc.
WNL Insurance Services, Inc.
However, AGCL (1) holds the direct interest in WNC (and the indirect
interests in WNC's subsidiaries) for investment purposes; (2) does
not direct the operations of WNC or WNL; (3) has no representatives
on the Board of Directors of WNC; and (4) is restricted, pursuant
to a Shareholder's Agreement between WNC and AGCL, in its right to vote
its shares against the slate of directors proposed by WNC's Board
of Directors. Accordingly, although WNC and its subsidiaries
technically are members of the American General insurance holding
company system under insurance holding company laws, AGCL does not
direct the operations of WNC or its subsidiaries.
(6) AGLA owns approximately 11% of Whirlpool Financial Corp. ("Whirlpool") on
a fully diluted basis. The total investment of AGLA in Whirlpool
represents approximately 3% of the voting power of the capital stock of
Whirlpool, but approximately 11% of the Whirlpool stock which has voting
rights. The interests in Whirlpool (which is a corporations that is not
associated with AGC) are held for investment purposes only.
(7) AGL owns 100% of the common stock of American General Securities
Incorporated ("AGSI"), a full-service NASD broker-dealer. AGSI, in turn,
owns 100% of the stock of the following insurance agencies:
American General Insurance Agency, Inc. (Missouri)
American General Insurance Agency of Hawaii, Inc. (Hawaii)
American General Insurance Agency of Massachusetts, Inc.
(Massachusetts)
In addition, the following agencies are indirectly related to AGSI, but
not owned or controlled by AGSI:
C-7
<PAGE>
American General Insurance Agency of Ohio, Inc. (Ohio)
American General Insurance Agency of Texas, Inc. (Texas)
American General Insurance Agency of Oklahoma, Inc. (Oklahoma)
Insurance Masters Agency, Inc. (Texas)
AGSI and the foregoing agencies are not affiliates or subsidiaries of AGL
under applicable holding company laws, but they are part of the AGC group
of companies under other laws.
(8) American General Finance Corporation is the parent of an additional 48
wholly owned subsidiaries incorporated in 30 states and Puerto Rico for the
purpose of conducting its consumer finance operations, INCLUDING those
noted in footnote 7 below.
(9) American General Financial Services, Inc. is the parent of an additional 7
wholly owned subsidiaries incorporated in 4 states and Puerto Rico for the
purpose of conducting its consumer finance operations.
(10) American General Investment Management, L.P. is jointly owned by AGIHC and
AGIMC. AGIHC holds a 99% limited partnership interest, and AGIMC owns a 1%
general partnership interest.
(11) AGRI owns only a 75% interest in GDI Holding, Inc.
(12) AG Land Associates, LLC is jointly owned by AGLH and AGLL. AGLH holds a
98.75% managing interest and AGLL owns a 1.25% managing interest.
Item 31. Number of Holders of Securities.
As of February 20, 1998, the number of record holders of the sole class of
securities of Registrant was as indicated below:
(1) (2)
Title of Class Number of Record Holders
-------------- ------------------------
Accumulation Units Under 335
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:
<TABLE>
<CAPTION>
(1) (2)
Name Business or Employment
-------------------------------- ----------------------------------------
<S> <C>
Vickie J. Alton................. Director - Marketing Training, The Franklin
</TABLE>
C-8
<PAGE>
<TABLE>
<CAPTION>
(1) (2)
Name Business or Employment
- -------------------------------- ----------------------------------------------------------------
<S> <C>
Elizabeth E. Arthur. . . . . . . Director, Associate General Counsel and Assistant Secretary, The
Franklin
B. Shelby Baetz. . . . . . . . . Secretary, The Franklin, since November, 1997; General Counsel,
American General Independent Producer Division, Houston, Texas,
since January, 1998; Associate General Counsel, American General
Corporation, Houston, Texas, prior to January, 1998.
Earl W. Baucom . . . . . . . . . Treasurer, The Franklin, since June 30, 1997; Senior Vice
President and Chief Financial Officer, The Franklin, since June
10, 1996; Director, The Franklin, since August 21, 1996.
Robert M. Beuerlein. . . . . . . Senior Vice President-Actuarial and Director, The Franklin
Mark R. Butler . . . . . . . . . Director - Special Projects, Marketing, The Franklin
Philip D. Calderwood . . . . . . Director - Actuary, The Franklin
Eldon R. Canary. . . . . . . . . Vice President - Actuarial, The Franklin
Brady W. Creel . . . . . . . . . Senior Vice President, Chief Marketing Officer and Director, The
Franklin, since September 3, 1996; Regional Manager, The Franklin,
prior to September, 1996.
James S. D'Agostino, Jr. . . . . Vice Chairman and Director, The Franklin, since May 27, 1997;
President, American General Corporation, Houston, Texas, since
April 24, 1997; Chief Executive Officer, American General Life and
Accident Insurance Company, Nashville, Tennessee, from July 1,
1995 to March 5, 1997.
Steve A. Dmytrack. . . . . . . . Vice President, The Franklin, since August 24, 1995
Paul C. Ely. . . . . . . . . . . Director - Group Insurance, The Franklin
Barbara Fossum . . . . . . . . . Senior Vice President, The Franklin, since March 20, 1998; Vice
President, The Franklin, from June, 1995 to March 20, 1998.
Ross D. Friend . . . . . . . . . Senior Vice President and General Counsel, The Franklin, since
September 3, 1996; Assistant Secretary, The Franklin, since
November 13, 1997; Secretary, The Franklin, from September 3, 1996
to November 13, 1997; Attorney-in-Charge, Prudential Life
Insurance Company, Jacksonville, Florida, from July, 1995 to
September, 1996.
Jerry P. Jourdan . . . . . . . . Director of Information Services, The Franklin, since January 31,
1996; Assistant Vice President, The Franklin, prior thereto.
Darrell J. Malano. . . . . . . . Vice President, The Franklin
Margaret L. Manola . . . . . . . Director - Marketing, The Franklin
C-9
<PAGE>
<CAPTION>
(1) (2)
Name Business or Employment
- -------------------------------- ----------------------------------------------------------------
<S> <C>
Rodney O. Martin, Jr. . . . . . Director and Senior Chairman, The Franklin; President and Chief
Executive Officer, American General Life Insurance Company,
Houston, Texas, since August, 1996; President, American General
Life Insurance Company of New York, Syracuse, New York, from
November, 1995 to August 1996.
Thomas K. McCracken . . . . . . Director - Marketing, The Franklin
Mark R. McGuire . . . . . . . . Vice President, The Franklin, since January 6, 1997;
Consultant/Manager, American General Life Insurance Company,
Houston, Texas, prior to January, 1997.
Sylvia A. Miller. . . . . . . . Vice President, The Franklin
Cheryl E. Morton. . . . . . . . Vice President - Actuarial, The Franklin
Jon P. Newton . . . . . . . . . Director and Vice Chairman, The Franklin, since January 31, 1996;
Vice Chairman and General Counsel, American General Corporation,
2929 Allen Parkway, Houston, Texas 77019 since October 26, 1995.
James M. Quigley. . . . . . . . Vice President, The Franklin, since August 24, 1995.
Gary D. Reddick . . . . . . . . Director, The Franklin since February 22, 1995; Vice Chairman, The
Franklin, since July 1, 1997; Executive Vice President, The
Franklin, from February 22, 1995 to July 1, 1997.
Dale W. Sachtleben. . . . . . . Vice President, The Franklin
Richard W. Scott. . . . . . . . Vice President and Chief Investment Officer, The Franklin, since
April, 1998; Executive Vice President and Chief Investment
Officer, American General Corporation, Houston, Texas, since
February, 1998; Vice Chairman and Chief Investment Officer,
Western National Corporation, Houston, Texas, from February, 1997
to February, 1998; Vice Chairman, Chief Investment Officer and
General Counsel, Western National Corporation, from July, 1996 to
February, 1997; Executive Vice President, General Counsel and Chief
Investment Officer, Western National Corporation, from May, 1995 to
July, 1996.
Willliam A. Simpson . . . . . . Chairman, Chief Executive Officer and President, The Franklin,
since September 5, 1997; President and Chief Executive Officer,
The Old Line Life Insurance Company of America, Milwaukee,
Wisconsin, from May 1, 1990 to September 8, 1997; President-Life
Insurance Division, USLIFE Corporation, New York, New York, from
February, 1996 to May, 1996; President and Chief Executive
Officer, USLIFE Corporation from January, 1995 to February, 1996.
Robert G. Spencer . . . . . . . Vice President, The Franklin
T. Clayton Spires . . . . . . . Director, Corporate Tax, The Franklin, since February 3, 1997;
Assistant Vice President and Tax Manager, First Colony Life,
Lynchburg, Virginia, prior to February, 1997.
J. Alan Vala. . . . . . . . . . Director - Agency Secretary, The Franklin
David G. Vanselow . . . . . . . Director - Communications, The Franklin
C-10
<PAGE>
<CAPTION>
(1) (2)
Name Business or Employment
- -------------------------------- ----------------------------------------------------------------
<S> <C>
Cynthia P. Wieties . . . . . . . Director of Communications, The Franklin, since March 19, 1997;
Assistant Vice President, The Franklin, prior to March, 1997.
</TABLE>
Item 34. Principal Underwriters.
(a) Franklin Life Variable Annuity Fund 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.
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Elizabeth E. Arthur Assistant Secretary Secretary to the Board of Managers
Earl W. Baucom Treasurer and Director None
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
James L. Gleaves Assistant Treasurer None
2929 Allen Parkway
Houston, TX 77019
Karen Kunz Chief Financial Officer and Director None
of Compliance & Administration
</TABLE>
C-11
<PAGE>
<TABLE>
<CAPTION>
(1) (2) (3)
Positions and Offices Positions and Offices
Name with Underwriter with Registrant
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Deanna Osmonson Vice President None
and Assistant Secretary
Gary D. Osmonson President and Director None
Gary D. Reddick Vice Chairman and Director None
William A. Simpson Chairman of the Board None
Dan E. Trudan Vice President and Assistant Secretary None
</TABLE>
(c) Information regarding commissions and other compensation received by
each principal underwriter, directly or indirectly, from Registrant during
1997, Registrant's last fiscal year, is set forth below:
<TABLE>
<CAPTION>
(1) (2) (3) (4) (5)
Name of Net Underwriting Compensation
Principal Discounts and on Redemption Brokerage Other
Underwriters Commissions or Annuitization Commissions Compensation
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Franklin Financial
Services Corporation $402 -0- -0- -0-
</TABLE>
Item 35. Location of Accounts and Records.
The information called for by this item has not changed from that provided
in Registrant's Post-Effective Amendment No. 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-12
<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 28th day of April, 1998.
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.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Elizabeth E. Arthur Secretary, Board April 28, 1998
- -------------------------- of Managers
(Elizabeth E. Arthur)
/s/ Clifford L. Greenwalt* Member, Board April 28, 1998
- -------------------------- of Managers
(Clifford L. Greenwalt)
/s/ Robert C. Spencer* Member, Board April 28, 1998
- -------------------------- of Managers
(Robert C. Spencer)
/s/ Robert G. Spencer* Chairman, Board April 28, 1998
- -------------------------- of Managers
(Robert G. Spencer)
/s/ James W. Voth* Member, Board April 28, 1998
- -------------------------- of Managers
(James W. Voth)
/s/ Elizabeth E. Arthur
- -----------------------------------------
*By Elizabeth E. Arthur, Attorney-in-Fact
</TABLE>
C-13
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 ("1933 Act")
and the Investment Company Act of 1940 ("1940 Act"), The Franklin Life
Insurance Company certifies that it meets the requirements of 1933 Act Rule
485(b) for effectiveness of this Registration Statement and has duly caused
this Post-Effective Amendment to the Registration Statement under the 1933
Act and this Amendment to the Registration Statement under the 1940 Act to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Springfield, and State of Illinois, on the 28th day of April, 1998.
THE FRANKLIN LIFE INSURANCE COMPANY
By: /s/ William A. Simpson
-----------------------------------------
(William A. Simpson, Chairman, Chief Executive
Officer and President)
Pursuant to the requirements of the Securities Act of 1933, this
Post-Effective Amendment to the Registration Statement has been signed below
by the following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Earl W. Baucom* Senior Vice President, Chief April 28, 1998
- ------------------------- Financial Officer and Treasurer
(Earl W. Baucom) (principal financial officer and
principal accounting officer)
and Director
/s/ Robert M. Beuerlein* Senior Vice President- April 28, 1998
- ------------------------- Actuarial and Director
(Robert M. Beuerlein)
/s/ Brady W. Creel* Senior Vice President, April 28, 1998
- ------------------------- Chief Marketing Officer and
(Brady W. Creel) Director
Director , 1998
- -------------------------
(James S. D'Agostino, Jr.)
Director , 1998
- -------------------------
(Rodney O. Martin, Jr.)
Director , 1998
- -------------------------
(Jon P. Newton)
/s/ Gary D. Reddick* Vice Chairman April 28, 1998
- ------------------------- and Director
(Gary D. Reddick)
/s/ William A. Simpson Chief Executive Officer, April 28, 1998
- ------------------------- President and Director
(William A. Simpson) (principal executive officer)
/s/ Elizabeth E. Arthur
- -------------------------
* By Elizabeth E. Arthur,
Attorney-in-Fact
</TABLE>
C-14
<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 (File No. 2-38502).
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 (File No. 2-38502).
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 (File No. 2-38502).
(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(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).
8(b) - By-Laws of The Franklin Life Insurance Company are
incorporated herein by reference to Exhibit 8(b) to
Post-Effective Amendment No. 39 to Registrant's
Registration Statement on Form N-3, filed April 30, 1997
(File No. 2-38502).
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 LLP.
14 - Not applicable.
<PAGE>
15 - Not applicable.
16 - Not applicable.
17 - Power of Attorney is incorporated herein by reference to
Exhibit 17 to Post-Effective Amendment No. 40 to
Registrant's Registration Statement on Form N-3, filed
February 26, 1998 (File No. 2-38502)..
27 - Financial Data Schedule meeting the requirements of Rule 483.
<PAGE>
Exhibit 13(a)
LIST OF CONSENTS PURSUANT TO RULE 483(c)
Consent of Ernst & Young LLP, independent auditors, appears as Exhibit 13(b)
hereto.
Consent of Coopers & Lybrand L.L.P., independent accountants, appears as
Exhibit 13(c) hereto.
Consent of Sutherland, Asbill & Brennan LLP appears as Exhibit 13(d) hereto.
<PAGE>
Exhibit 13(b)
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the captions
"Per-Unit Income and Changes in Accumulation Unit Value" and "Experts" and to
the use of our report dated January 30, 1998, with respect to the statement of
assets and liabilities, including the portfolio of investments, as of December
31, 1997 and the related statement of operations for the year then ended and
the statements of changes in contract owners' equity for each of the two years
in the period then ended and the table of per-unit income and changes in
accumulation unit value for each of the three years in the period then ended of
Franklin Life Variable Annuity Fund B, and our report dated February 23, 1998,
with respect to the consolidated financial statements of The Franklin Life
Insurance Company as of December 31, 1997 and 1996 and for each of the two
years in the period ended December 31, 1997, the eleven months ended December
31, 1995 and the one month ended January 31, 1995, in this Post-Effective
Amendment No. 41 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, 1998
<PAGE>
Exhibit 13(c)
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement on Form N-3 (File
No. 2-38502) and related Prospectus and Statement of Additional Information of
Franklin Life Variable Annuity Fund B of our report dated February 1, 1995,
accompanying the table of per-unit income and changes in accumulation unit value
of Franklin Life Variable Annuity Fund B for each of the two years in the period
ended December 31, 1994.
We also consent to the references to our firm under the captions "Per-Unit
Income and Changes in Accumulation Unit Value" and "Experts".
/S/ Coopers & Lybrand L.L.P.
COOPERS & LYBRAND L.L.P.
Chicago, Illinois
April 28, 1998
<PAGE>
Exhibit 13(d)
We consent to the reference to our firm under the caption "Legal Matters"
in the statement of additional information included in Post-Effective Amendment
No. 41 to the Registration Statement on Form N-3 for Franklin Life Variable
Annuity Fund B (File No. 2-38502). In giving this consent, we do not admit that
we are in the category of persons whose consent is required under Section 7 of
the Securities Act of 1933.
/S/ Sutherland, Asbill & Brennan LLP
SUTHERLAND, ASBILL & BRENNAN LLP
Washington, D.C.
April 28, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 6
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S
FINANCIAL STATEMENTS FOR THE YEAR ENDING 12-31-97 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-START> JAN-01-1997
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<INVESTMENTS-AT-VALUE> 1,758,790
<RECEIVABLES> 2,985
<ASSETS-OTHER> 43,659
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