-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Swxj/sK44r+1IyYwRrI7FTm+yZMjEanfOvSxFy5vynv5u4vcexV6MxV40H7xWxZa HJ5P+gkHASpkQZjSwz7PVg== 0000912057-96-008173.txt : 19960518 0000912057-96-008173.hdr.sgml : 19960518 ACCESSION NUMBER: 0000912057-96-008173 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 10 FILED AS OF DATE: 19960430 DATE AS OF CHANGE: 19960515 EFFECTIVENESS DATE: 19960506 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRANKLIN LIFE VARIABLE ANNUITY FUND A CENTRAL INDEX KEY: 0000038748 STANDARD INDUSTRIAL CLASSIFICATION: IRS NUMBER: 370281650 STATE OF INCORPORATION: IL FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 002-36394 FILM NUMBER: 96556830 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1940 Act SEC FILE NUMBER: 811-01990 FILM NUMBER: 96556831 BUSINESS ADDRESS: STREET 1: FRANKLIN SQ CITY: SPRINGFIELD STATE: IL ZIP: 62713 BUSINESS PHONE: 2175282011 MAIL ADDRESS: STREET 1: FRANKLIN SQUARE CITY: SPRINGFIELD STATE: IL ZIP: 62713-0001 485BPOS 1 485B24F 1933 Act Registration No.2-36394 1940 Act Registration No. 811-1990 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- 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. 42 REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 Amendment No. 18 FRANKLIN LIFE VARIABLE ANNUITY FUND A (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: (217) 528-2011 STEPHEN P. HORVAT, JR., ESQ. Senior Vice President, Secretary and General Counsel THE FRANKLIN LIFE INSURANCE COMPANY #1 Franklin Square Springfield, Illinois 62713 (Name and Address of Agent for Service) Copy to: PETER K. INGERMAN, ESQ. CHADBOURNE & PARKE LLP 30 Rockefeller Plaza New York, New York 10112 It is proposed that this filing will become effective (check appropriate box) / / immediately upon filing pursuant to paragraph (b) /x/ on April 30, 1996 pursuant to paragraph (b) / / 60 days after filing pursuant to paragraph (a) (i) / / on April 30, 1996 pursuant to paragraph (a) (i) / / 75 days after filing pursuant to paragraph (a) (ii) / / on April 30, 1996 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. Pursuant to Rule 24f-2 of the Investment Company Act of 1940, the Registrant has registered an indefinite number of units of interest in Franklin Life Variable Annuity Fund A under variable annuity contracts. The Registrant filed a Rule 24f-2 Notice for the year ended December 31, 1995 on February 28, 1996. - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- FRANKLIN LIFE VARIABLE ANNUITY FUND A Post-Effective Amendment No. 42 Cross Reference Sheet Required by Rule 495(a) Registration Item Location in Prospectus ("P") or Statement of Additional Information ("SAI") Part A INFORMATION REQUIRED IN PROSPECTUS Item 1. Cover Page . . . . . . . . Cover Page (P) Item 2. Definitions. . . . . . . . Special Terms Item 3. Synopsis or Highlights . . Table of Deductions and Charges; Summary Item 4. Condensed Financial Information Per-Unit Income and Changes in Accumulation Unit Value Item 5. General Description of Registrant and Insurance Company. . . . . . . . . . Cover Page (P); Summary; Introduction; Description of the Separate Account; Investment Policies and Restrictions of the Fund Item 6. Management . . . . . . . . Management (P) Item 7. Deductions and Expenses. . Summary; Deductions and Charges under the Contracts Item 8. General Description of Variable Annuity Contracts Summary; Introduction; Deductions and Charges under the Contracts-Transfers to and from Other Contracts; The Contracts; Voting Rights; Fundamental Changes Item 9. Annuity Period . . . . . . Summary; Introduction; The Contracts-Deferred Variable Annuity Accumulation Period-Annuity Period Item 10. Death Benefit . . . . . . The Contracts-Deferred Variable Annuity Accumulation Period Item 11. Purchases and Contract Value Summary; Deductions and Charges Under The Contracts; The Contracts-General-Deferred Variable Annuity Accumulation Period; Distribution of the Contracts Item 12. Redemptions . . . . . . . Summary; The Contracts-General-Deferred Variable Annuity Accumulation Period Item 13. Taxes . . . . . . . . . . Cover Page (P); Summary; Introduction; Deductions and Charges Under the Contracts-Premium Taxes; The Contracts; Federal Income Tax Status; Other Variable Annuity Contracts; Effect of Non-Qualification; Limitations on Settlement Options (SAI) 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) EXPLANATORY STATEMENT The Prospectus Supplement set forth on the next page will be attached to the Prospectus when it is used to offer contracts to participants in the Texas Optional Retirement Program, as codified in Chapter 830 of Title 8 of the Government Code of the State of Texas, and is authorized by an order of the Commission pursuant to Section 6(c) of the Investment Company Act, dated February 3, 1977 (Investment Company Act Release No. 9629). SUPPLEMENT DATED APRIL 30, 1996 TO PROSPECTUS OF FRANKLIN LIFE VARIABLE ANNUITY FUND A DATED APRIL 30, 1996 The contracts offered by this Prospectus to participants in the Texas Optional Retirement Program, as codified in Chapter 830 of Title 8 of the Government Code of the State of Texas, contain restrictions on redemption in addition to those set forth in the Prospectus under the heading captioned "Deferred Variable Annuity Accumulation Period-5. Redemption.'' In accordance with such Chapter, redemption of contracts required by a participant in the Texas Optional Retirement Program will not be permitted prior to such participant's termination of employment in the Texas public institutions of higher education, retirement, death or attainment of age 70-1/2. FRANKLIN LIFE VARIABLE ANNUITY FUND A PROSPECTUS INDIVIDUAL VARIABLE ANNUITY CONTRACTS (USED IN CONNECTION WITH QUALIFIED TRUSTS OR PLANS OR AS INDIVIDUAL RETIREMENT ANNUITIES) ISSUED BY #1 Franklin Square Springfield, Illinois 62713 Telephone (217) 528-2011 THIS PROSPECTUS OFFERS INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE IN CONNECTION WITH CERTAIN QUALIFIED PLANS AND TRUSTS ACCORDED SPECIAL TAX TREATMENT OR AS INDIVIDUAL RETIREMENT ANNUITIES UNDER THE INTERNAL REVENUE CODE (SEE "FEDERAL INCOME TAX STATUS" ON PAGES 26 TO 30 FOR MORE INFORMATION). 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 A (THE "FUND"). 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, 1996, 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 EQUITY ADMINISTRATION DEPARTMENT OF THE FRANKLIN BY WRITING TO THE ADDRESS OR CALLING THE TELEPHONE NUMBER 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 33 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, 1996. TABLE OF CONTENTS Page Special Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 Table of Deductions and Charges. . . . . . . . . . . . . . . . . . . 5 Summary. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6 Per-Unit Income and Changes in Accumulation Unit Value . . . . . . . 8 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 Description of the Separate Account. . . . . . . . . . . . . . . . . 11 Deductions and Charges Under the Contracts . . . . . . . . . . . . . 13 A. Sales and Administration Deductions. . . . . . . . . . . . . 13 B. Premium Taxes. . . . . . . . . . . . . . . . . . . . . . . . 13 C. Mortality and Expense Risk Charge. . . . . . . . . . . . . . 13 D. Investment Management Service Charge . . . . . . . . . . . . 14 E. Transfers to and from Other Contracts. . . . . . . . . . . . 14 F. Miscellaneous. . . . . . . . . . . . . . . . . . . . . . . . 15 The Contracts. . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 A. General. . . . . . . . . . . . . . . . . . . . . . . . . . . 16 B. Deferred Variable Annuity Accumulation Period. . . . . . . . 18 C. Annuity Period . . . . . . . . . . . . . . . . . . . . . . . 24 Investment Policies and Restrictions of the Fund . . . . . . . . . . 26 Federal Income Tax Status. . . . . . . . . . . . . . . . . . . . . . 29 Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . 29 The Franklin . . . . . . . . . . . . . . . . . . . . . . . . . . 29 The Contracts: Qualified Plans . . . . . . . . . . . . . . . . . 29 A. Qualified Pension, Profit-Sharing and Annuity Plans. . . . 30 B. H. R. 10 Plans (Self-Employed Individuals) . . . . . . . . 30 C. Section 403(b) Annuities . . . . . . . . . . . . . . . . . 31 D. Individual Retirement Annuities. . . . . . . . . . . . . . 31 Income Tax Withholding . . . . . . . . . . . . . . . . . . . . . 32 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Voting Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 Distribution of the Contracts. . . . . . . . . . . . . . . . . . . . 34 State Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . 35 Reports to Owners. . . . . . . . . . . . . . . . . . . . . . . . . . 35 Fundamental Changes. . . . . . . . . . . . . . . . . . . . . . . . . 35 Registration Statement . . . . . . . . . . . . . . . . . . . . . . . 35 Other Variable Annuity Contracts; Effect of Non-Qualification. . . . 35 Table of Contents of Statement of Additional Information . . . . . . 36 - - -------------------------------------------------------------------------------- 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 A TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND IN ANY AUTHORIZED SUPPLEMENTAL SALES MATERIAL. 2 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. 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 A that is offered by this Prospectus. CONTRACT ANNIVERSARY--An anniversary of the Effective Date of the Contract. CONTRACT OWNER--Except in cases where the Contract is issued to a trustee of a qualified employees' trust or pursuant to a qualified annuity plan, the Contract Owner is the individual Variable Annuitant to whom the Contract is issued. In cases where the Contract is issued to a trustee of a qualified employees' trust or pursuant to a qualified annuity plan, the Contract Owner will be respectively the trustee or the employer establishing such trust or plan, and the employee named as the Variable Annuitant of such Contract is referred to herein as the employee. 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. Individual Retirement Annuities may also qualify as Simplified Employee Pensions. 3 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. QUALIFIED CONTRACTS--Contracts issued under Qualified Plans. QUALIFIED PLANS--Retirement plans which receive favorable tax treatment under the Code and which are described on page 9, below. ROLLOVER CONTRIBUTION--A transfer pursuant to Sections 402(c)(1), 402(c)(9), 403(a)(4), 403(b)(8) or 408(d)(3) of the Code. SETTLEMENT OPTION OR OPTIONS--Alternative terms under which payment of the amounts due in settlement of the Contracts may be received. SIMPLIFIED EMPLOYEE PENSION--An Individual Retirement Annuity which meets the additional requirements of Section 408(k) of the Code. 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
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 6.00% Administration Fee (as a percentage of purchase payments) Single Stipulated Payment Contract 4.00% ($100 maximum) Periodic Stipulated Payment Contract 3.00% Annual Expenses (as a percentage of average net assets) Management Fees 0.44% Mortality and Expense Risk Fees Mortality Fees 0.90% Expense Risk Fees 0.10% ----- Total Annual Expenses 1.44% Example
If you surrender your contract at the end of the applicable time period:
1 year 3 years 5 years 10 years You would pay the following expenses on a $1,000 investment, assuming 5% annual return on assets: Single Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247 Periodic Stipulated Payment Contract $ 103 $ 131 $ 162 $ 247
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," p. 11, below. For a more detailed description of such fees and expenses, see "Deductions and Charges under the Contracts," pp. 10-13, 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. 5 SUMMARY THE CONTRACTS The individual variable annuity contracts (the "Contracts") being offered by this Prospectus are for use in connection with certain qualified plans and trusts accorded special tax treatment under the Code or as Individual Retirement Annuities. See "Federal Income Tax Status," pp. 26-30, below. The basic purpose of the Contracts is to provide Annuity Payments which will vary with the investment performance of Franklin Life Variable Annuity Fund A (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. See "Introduction," pp. 9-10, and The "Contracts," pp. 13-23, 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. See "Right to Revocation of Contract," p. 15, 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, pp. 24-26, 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," p. 12, and "Distribution of the Contracts," p. 32, 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 equal to 6% of each periodic payment is made for sales expenses and a deduction equal to 3% of each such payment is made for administrative expenses. The combined deductions amount to 9.89% of the net amount invested assuming no premium taxes are applicable (6.59% for sales expenses and 3.30% for administrative expenses). 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 equal to 4% (with a maximum of $100) of such payment is made for administrative expenses (for a combined total of 9%). In the case of the 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," p. 11, "Transfers to Other Contracts," pp. 12-13, and Premium Taxes," p. 11, below. 6 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 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," pp. 11-12, and "Investment Management Service Charge," p. 12, below. MINIMUM PERMITTED INVESTMENT Subject to limited exceptions, the minimum single Stipulated Payment is $2,500. The minimum Periodic Stipulated Payment Contract sold is one under which the annual payments are $120 and each monthly Stipulated Payment is $10. See "Purchase Limits," p. 14, 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, subject to any limitations on early settlement contained in an applicable Qualified Plan and subject to limitations on early withdrawals imposed in connection with Section 403(b) annuity purchase plans (see "Federal Income Tax Status," pp. 26-30, below), 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," pp. 15-16, 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," pp. 16-17, "Transfers to and from Other Contracts," pp. 12-13, "Settlement Options," pp. 18-21, and "Federal Income Tax Status," pp. 26-30, below. TERMINATION BY THE FRANKLIN The Franklin reserves the right to terminate Contracts if Stipulated Payments are less than $120 in each of three consecutive Contract Years (excluding the first Contract Year) and if the Cash Value is less than $500 at the end of such three-year period. Different termination provisions apply in the case of Individual Retirement Annuities. See "Termination by The Franklin," p. 14, below. 7 FRANKLIN LIFE VARIABLE ANNUITY FUND A SUPPLEMENTARY INFORMATION PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE (SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR) The financial information in this table for the year ended December 31, 1995 has been audited by Ernst & Young LLP, independent auditors. The financial information in this table for each of the seven years in the period ended December 31, 1994 was audited by Coopers & Lybrand L.L.P., independent accountants. The financial information in this table for each of the two years in the period ended December 31, 1987 was audited by Ernst & Young LLP, independent auditors. This table should be read in conjunction with the financial statements and notes thereto included in the Statement of Additional Information.
--------------------------------------------------------------------------------------------------- YEAR ENDED DECEMBER 31 --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- 1995 1994 1993 1992 1991 1990 1989 1988 1987 1986 --------------------------------------------------------------------------------------------------- Investment Income $ 1.948 $ 1.408 $ 1.231 $ 1.064 $ 1.194 $ 1.326 $ 1.343 $ 1.235 $ 1.100 $ .734 Expenses .875 .773 .773 .723 .654 .569 .528 .454 .458 .389 --------------------------------------------------------------------------------------------------- Net Investment income 1.073 .635 .458 .341 .540 .757 .815 .781 .642 .345 Net realized and unrealized gain (loss) on securities 14.139 (.240) .112 .770 14.238 (3.287) 7.021 .043 3.144 2.525 --------------------------------------------------------------------------------------------------- Net change in accumulation unit value 15.212 .395 .570 1.111 14.778 (2.530) 7.836 .824 3.786 2.870 Accumulation unit value: Beginning of year 53.988 53.593 53.023 51.912 37.134 39.664 31.828 31.004 27.218 24.348 --------------------------------------------------------------------------------------------------- End of year $ 69.200 $ 53.988 $ 53.593 $ 53.023 $ 51.912 $ 37.134 $ 39.664 $ 31.828 $ 31.004 $ 27.218 --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- 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 1.76% 1.18% .85% .68% 1.19% 1.91% 2.22% 2.47% 2.02% 1.28% Portfolio turnover rate 14.66% 88.99% 68.62% 59.84% 28.47% 24.01% 64.55% 104.96% 75.96% 45.01% Number of --------------------------------------------------------------------------------------------------- --------------------------------------------------------------------------------------------------- 8 accumulation units outstanding at end of year 150,474 172,507 198,763 217,948 229,368 256,831 277,735 305,265 312,966 284,005
-------------------------------------- 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 INTRODUCTION FRANKLIN LIFE VARIABLE ANNUITY FUND A 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. 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 under Illinois insurance law. For the primary investment objective of the Fund, see "Investment Policies and Restrictions of the Fund," pp. 24-26, below. The Qualified Contracts described in this Prospectus will not knowingly be sold other than for use: (1) in connection with qualified employee pension and profit-sharing trusts described in Section 401(a) and tax-exempt under Section 501(a) of the Code, and qualified annuity plans described in Section 403(a) of the Code; (2) in connection with qualified pension, profit-sharing and annuity plans established by self-employed persons ("H.R. 10 Plans"); (3) in connection with annuity purchase plans adopted by public school systems and certain tax-exempt organizations pursuant to Section 403(b) of the Code; or (4) as Individual Retirement Annuities described in Section 408(b) of the Code, including Simplified Employee Pensions described in Section 408(k) of the Code. 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 and health 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. On January 31, 1995, American General Corporation ("American General") through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"), acquired American Franklin Company ("AFC"), the holding company of The Franklin, from American Brands, Inc. The address of AFC is #1 Franklin Square, Springfield, Illinois 62713. 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 the parent company of one of the nation's largest diversified financial services organizations. American General's operating subsidiaries are leading providers of retirement annuities, consumer loans, and life insurance. The company was incorporated as a general business corporation in Texas 10 in 1980 and is the successor to American General Insurance Company, an insurance company incorporated in Texas in 1926. Subject to the terms of any plan pursuant to which a Contract is issued, 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 attributable thereto obtained or other Settlement Option elected by the Contract Owner, at any time prior to commencement of Annuity Payments 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 which purchases the Variable Annuity be at least $10. See generally "Redemption," pp. 16-17, "Settlement Options," pp. 18-21, and "Federal Income Tax Status--Individual Retirement Annuities," p. 30, 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 operation. 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. The exercise of certain of the Contract rights herein described may be subject to the terms and conditions of any Qualified Plan under which such Contract may be purchased. This Prospectus contains no information concerning any such Qualified Plan. Further information relating to some Qualified Plans may be obtained from the disclosure documents required to be distributed to employees under the Employee Retirement Income Security Act of 1974. DESCRIPTION OF THE SEPARATE ACCOUNT The Fund was established as a separate account on November 5, 1969 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," p. 30, below. The Fund meets the definition of a "Separate Account" under the federal securities laws. Under the provisions of the Illinois Insurance Code, 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. 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 11 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," pp. 26-30, below. 12 DEDUCTIONS AND CHARGES UNDER THE CONTRACTS A. SALES AND ADMINISTRATION DEDUCTIONS Deductions will be made as follows for sales expenses with respect to the Contracts and for administrative expenses with respect to Contracts and the Fund: (1) Under Single Stipulated Payment Contracts, a deduction of 4% (with a maximum 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 payment. In the case of the minimum Single Stipulated Payment Contract sold, the combined deductions for administrative expenses and sales expenses amount to 9.89% of the net amount invested (5.49% for sales expenses and 4.40% for administrative expenses) assuming no premium taxes are applicable. (2) Under Periodic Payment Contracts, a deduction of 6% is made from each payment for sales expenses and 3% for administrative expenses. The combined deductions for sales and administrative expenses amount to 9.89% of the net amount invested (6.59% for sales expenses and 3.30% for administrative expenses) assuming no premium taxes are applicable. Deductions for sales expenses are made pursuant to a Sales Agreement with Franklin Financial Services Corporation ("Franklin Financial"), a wholly-owned subsidiary of The Franklin and the principal underwriter of the Fund. See "Distribution of the Contracts," p. 32, below, and in the Statement of Additional Information. The above deductions for administrative expenses, and charges for mortality and expense risk assurances discussed under "Mortality and Expense Risk Charge," pp. 11-12, below, are made pursuant to an Administration Agreement dated June 30, 1971 between the Fund and The Franklin. The Administration Agreement is described under "Investment Advisory and Other Services" in the Statement of Additional Information. The total deductions made in respect of sales expenses of Franklin Financial in 1993, 1994 and 1995 were $36,552, $28,833 and $20,566, 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, and The Franklin does not expect to realize a profit by virtue of these deductions. The aggregate dollar amounts of the administration deductions for the fiscal years ended December 31, 1993, 1994 and 1995 were $17,802, $14,164 and $10,279, respectively. B. PREMIUM TAXES At the time any premium taxes are payable by The Franklin on the consideration received from the sale of the Contracts, the amount thereof will be deducted from the Stipulated Payments. Premium taxes ranging up to 5% as of February 7, 1996 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," p. 12, 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 regardless of the actual 13 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," pp. 15-21 and pp. 21-23, respectively, below.) These charges are at the current combined annual rate of 1.002% (.002745% on a daily basis), of which .900% is for annuity rate and mortality assurances and .102% is for expense assurances. During 1993, 1994 and 1995, The Franklin earned and was paid $112,746, $98,321 and $97,809, respectively, by reason of these charges. Such charges during 1995 were equal to 1.002% of average net assets. D. INVESTMENT MANAGEMENT SERVICE CHARGE The Franklin acts as investment manager of the Fund. For acting as such, The Franklin makes a charge against the Fund at the annual rate of 0.438% of the Fund's assets, computed by imposing a daily charge of 0.0012% against the value of the Accumulation Unit and of the Annuity Unit, in determining those values. The investment management services are rendered and the charge is made pursuant to an Investment Management Agreement executed and dated January 31, 1995, pursuant to approval by the Contract Owners at their annual meeting held on April 17, 1995, and to be annually renewed by a vote of the Board of Managers of the Fund commencing in 1997. The Investment Management Agreement is described under "Investment Advisory and Other Services" in the Statement of Additional Information. During 1993, 1994 and 1995, The Franklin earned and was paid $49,288, $42,982 and $42,758, respectively, under the Investment Management Agreement then in effect. E. TRANSFERS TO OTHER CONTRACTS Subject to any limitations in a Qualified Plan, 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 Money Market Variable Annuity Fund C and Franklin Life Variable Annuity Fund B, other separate accounts of The Franklin funding Variable Annuity contracts, no longer issue new contracts. In addition, in all instances of permitted transfers set forth above, any administration deductions otherwise imposed by the Fund will be waived with respect to such transferred funds. However, any new periodic Stipulated Payments made on a Contract offered by this Prospectus will be subject to the normal sales and administration deductions applicable to periodic Stipulated Payments under such Contract. 14 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 a 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 is advised to consult a qualified tax advisor prior to the time of redemption. F. MISCELLANEOUS The Fund's total expenses for 1995 were $140,567, or 1.440% of average net assets during 1995. 15 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, and (ii) the investment performance of the Fund. In the case of Deferred Variable Annuity Contracts, the annuity rate table is (subject to the following two paragraphs) set forth in the Contract. In the case of Immediate Variable Annuities, the table is that used by The Franklin on the date of issue of the Contract. The amount of the Annuity Payments will not be affected by mortality experience adverse to The Franklin or by an increase in The Franklin's expenses related to the Fund or the Contracts in excess of the expense deductions provided for in the Contracts. The Variable Annuitant under an annuity with a life contingency or one providing for a number of Annuity Payments certain will receive the value of a fixed number of Annuity Units each month, determined as of the initial Annuity Payment Date on the basis of the applicable annuity rate table and the then value of his or her account. The value of Annuity Units, and thus the amounts of the monthly Annuity Payments, will, however, reflect investment gains and losses and investment income occurring after the initial Annuity Payment Date, and thus the amount of the Annuity Payments will vary with the investment experience of the Fund. See "Annuity Period," pp. 21-23, below. Court decisions, particularly ARIZONA GOVERNING COMMITTEE v. NORRIS, have held that the use of gender-based mortality tables to determine benefits under an employer-related retirement or benefit plan may violate Title VII of the Civil Rights Act of 1964 ("Title VII"). These cases indicate that plans sponsored by employers subject to Title VII generally may not provide different benefits for similarly-situated men and women. The Contracts described in this Prospectus incorporate annuity rate tables which reflect the age and sex of the Variable Annuitant and the Settlement Option selected. Such sex-distinct tables continue to be appropriate for use, for example, under Contracts which are not purchased in connection with an "employer-related" plan subject to NORRIS (such as individual retirement annuities not sponsored by an employer). However, in order to enable subject employers to comply with NORRIS, The Franklin will provide "unisex" annuity rate tables for use under Contracts purchased in connection with "employer- related" plans. Persons contemplating purchase of a Contract, as well as current Contract Owners, should consult a legal advisor regarding the applicability and implications of NORRIS in connection with their purchase and ownership of a Contract. 2. INCREASE OR DECREASE BY CONTRACT OWNER IN AMOUNT OR NUMBER OF PERIODIC STIPULATED PAYMENTS The Contract Owner may increase the periodic Stipulated Payments under a Periodic Stipulated Payment Contract (except in the case of an Individual Retirement Annuity, which cannot be increased above the amounts described under "Purchase Limits," immediately below) up to an amount on an annual basis equal to twice the amount of the first Stipulated Payment on an annual basis. Similarly, subject to the limitations described under "Purchase Limits," immediately, below, the amount of a Periodic Stipulated Payment may be decreased by the Contract Owner on any date a Stipulated Payment is due. The Contract Owner may continue making Stipulated Payments after the agreed number of Stipulated Payments has been made, but The Franklin will not accept Stipulated Payments after age 75. Submission of a Stipulated Payment in an amount different from that of the previous payment, subject to the aforesaid limits, will constitute notice of the election of the Contract Owner to make such change. 16 3. ASSIGNMENT OR PLEDGE A Contract may not be assigned by the Contract Owner except when issued to a trustee in connection with certain types of plans designed to qualify under Section 401 of the Code or when made pursuant to a qualified domestic relations order rendered by a state court in satisfaction of family support obligations. In general, a pledge or assignment made with respect to certain Contracts may, depending on such factors as the amount pledged or assigned, be treated as a taxable distribution. See "Individual Retirement Annuities," pp. 28-29, below, for special rules applicable thereto. Moreover, in certain instances, pledges or assignments of a Qualified Contract may result in the imposition of certain tax penalties. See generally "The Contracts: Qualified Plans," pp. 27-29, 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 periodic Stipulated Payment may be less than $10 per month ($120 per year). No single Stipulated Payment may be less than $2,500, except that in the case of a deferred Single Stipulated Payment Contract to be used as an Individual Retirement Annuity funded with a Rollover Contribution, the total Stipulated Payment applicable to the Variable Annuity, prior to administration and sales deductions, must be at least $1,000 unless, with consent of The Franklin, a smaller single Stipulated Payment is permitted. In the case of a Contract issued for use as an Individual Retirement Annuity, annual premium payments may not, in general, exceed $2,000. However, if the Individual Retirement Annuity is a Simplified Employee Pension, annual premium payments may not exceed $24,500. Single Stipulated Payment Contracts are not available as Individual Retirement Annuities except for those funded with Rollover Contributions and except for those to be used as Simplified Employee Pensions. 5. TERMINATION BY THE FRANKLIN The Franklin reserves the right to terminate any Contract, other than a Contract issued for use as an Individual Retirement Annuity, if total Stipulated Payments paid are less than $120 in each of three consecutive Contract Years (excluding the first Contract Year) and if the Cash Value is less than $500 at the end of such three-year period. 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. The Franklin reserves the right to terminate any Contract issued for use as an Individual Retirement Annuity if no Stipulated Payments have been received for any two Contract Years and if the first monthly Annuity Payment, determined at the initial Annuity Payment Date, arising from the Stipulated Payments received prior to such two-year period would be less than $20. Upon termination as described above, The Franklin will pay to the Contract Owner the Cash Value of the Contract, less federal income tax withholding, if applicable. For certain tax consequences upon such payment, see "Federal Income Tax Status," pp. 26-30, below. 6. RIGHT TO REVOCATION OF CONTRACT 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. The request for revocation must be made by mailing or hand-delivering the Contract and a written request for its revocation within such 10-day 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. 17 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," pp. 11-13, 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 on the day on which the Stipulated Payment is received, except that, in the case of the original application for a Variable Annuity Contract, the value of an Accumulation Unit within two business days after receipt of the application will be used if the application and all information necessary to process the application are complete upon receipt. If the application and such information are not complete upon receipt, The Franklin, within five days after the receipt of an original application and initial payment at the Home Office of The Franklin, will attempt to complete the application and will either accept the application or reject the application and return the initial payment. The number of Accumulation Units so determined will not be changed by any subsequent change in the 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. 18 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," pp. 11-13, above. The net investment factor for the Valuation Period is the sum of 1.00000000 plus the net investment rate for the Valuation Period ("Net Investment Factor"). The net investment rate may be negative if the combined capital losses, Valuation Period deductions and increase in the tax reserve exceed investment income and capital gains. Thus, the Net Investment Factor may be less than 1.00000000, and the value of an Accumulation Unit at the end of a Valuation Period may be less than the value for the previous Valuation Period. 4. VALUATION OF FUND ASSETS In determining the value of the assets of the Fund, each security traded on a national securities exchange is valued at the last reported sale price on the Valuation Date. If there has been no sale on such day, then the value of such security is taken to be the current bid price at the time as of which the value is being ascertained. Any security not traded on a securities exchange but traded in the over-the-counter market is valued at the current bid price on the Valuation Date. Any securities or other assets for which market quotations are not readily available are valued at fair value as determined in good faith by the Board of Managers. 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, subject to any limitations on early settlement contained in an applicable Qualified Plan, 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. Early withdrawal of certain amounts attributable to Contracts issued pursuant to an annuity purchase plan meeting the requirements of Code Section 403(b) may be prohibited. See "Federal Income Tax Status," pp. 26-30, below. 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 limited circumstances discussed 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," pp. 18-21, below. However, no Settlement Option may be elected upon redemption without surrender of the entire Contract. 19 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," pp. 26-30, 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 payment of death proceeds in the event no Beneficiary is surviving at the death of the Variable Annuitant, see "Change of Beneficiary or Mode of Payment of Proceeds; Death of Beneficiaries," p. 18, below. The Code imposes certain requirements concerning payment of death benefits payable before the initial Annuity Payment Date in the case of Qualified Contracts issued in connection with qualified pension and profit- sharing plans under Section 401(a) of the Code. Under those Contracts, death benefits will be paid as specified in the governing plan documents. The terms of such documents should be consulted to determine the death benefits and any limitations the plan may impose. Subject to the foregoing, 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. See "Settlement Options," pp. 18-21, below. If the Contract Owner has not made such an election, the Beneficiary may do so after the death of the Variable Annuitant. The Contract Owner or the Beneficiary, whichever selects the method of settlement, may designate contingent Beneficiaries to receive any other amounts due should the first Beneficiary die before completion of the specified payments. If neither the Contract Owner nor the Beneficiary elects payment of death proceeds under an available Settlement Option, payment will be made to the Beneficiary in a single sum. 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," pp. 29-30, below. In the event of the death of the Variable Annuitant after the initial Annuity Payment Date, payments under a Contract will be made as described in "Settlement Options," pp. 18-21, 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," p. 14, 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," pp. 18-21, below, or redeem the Contract as described under "Redemption," pp. 16-17, 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. 20 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. 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, subject to applicable limitations under the Code and any governing Qualified Plan. 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. 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," p. 19, below, and "Deferred Variable Annuity Contracts," p. 21, 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," pp. 16-17, above, and "Payment of Accumulated Value at Time of Death," p. 17, above. Available Settlement Options may be selected on a fixed or variable basis or a combination thereof, except that Settlement Options may be selected only on a fixed basis under a Contract issued for use as an Individual Retirement Annuity. 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, except in 21 the case of a deferred Single Stipulated Payment Contract funded with a Rollover Contribution not in excess of $2,000. See "Purchase Limits," p. 14, above. 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," pp. 19-20, below, and "Immediate Variable Annuity Contracts," p. 21, below. The distribution rules which Qualified Plans must satisfy in order to be tax- qualified under the Code may limit the utilization of certain Settlement Options, or may make certain Settlement Options unavailable, in the case of Contracts issued in connection therewith. These distribution rules could affect such factors as the commencement of distributions and the period of time over which distributions may be made. All Settlement Options are offered subject to the limitations of the distribution rules. The Statement of Additional Information describes certain limitations on Settlement Options based on The Franklin's current understanding of the distribution rules generally applicable to Contracts purchased under this Prospectus for use as Individual Retirement Annuities or issued in connection with Section 403(b) annuity purchase plans. See "Limitations on Settlement Options" in the Statement of Additional Information. Persons considering the purchase of a Contract and Contract Owners contemplating election of a Settlement Option are urged to obtain and read the Statement of Additional Information. Various questions exist, however, about the application of the distribution rules to distributions from the Contracts and their effect on Settlement Option availability thereunder. Persons contemplating the purchase of a Contract are advised to consult a qualified tax advisor concerning the effect of the distribution rules on the Settlement Option or Options he or she is contemplating. Neither this Prospectus nor the Statement of Additional Information, however, describes limitations on Settlement Options based on applicable distribution rules in the case of Contracts issued in connection with qualified pension and profit-sharing plans under Section 401(a) of the Code and annuity plans under Section 403(a) of the Code. Under those Contracts, available Settlement Options are limited to those Options specified in the governing plan documents. The terms of such documents should be consulted to determine Settlement Option availability and any other limitations the plan may impose on early redemption of the Contract, payment in settlement thereof, or similar matters. Generally, limitations comparable to those described in the Statement of Additional Information for Individual Retirement Annuities and Section 403(b) annuity purchase plans also apply with respect to such qualified pension, profit-sharing and annuity plans (including H.R. 10 Plans). Persons contemplating election of the Fifth or Sixth 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. 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. 22 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: ($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
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," pp. 16-17, 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, above, which applies in its entirety to the Sixth Option as well. 23 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 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.) 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, except that Contracts issued in connection with qualified pension and profit-sharing plans (including H.R. 10 Plans) under Section 401(a) of the Code and annuity plans (including H.R. 10 Plans) under Section 403(a) of the Code provide for Annuity Payments to commence at the date and under the Settlement Option specified in the plan. 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 unless the provisions of the Code or any governing Qualified Plan require Annuity Payments to commence at an earlier date. See "Limitations on Settlement Options" in the Statement of Additional Information. 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," pp. 18-21, 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. See "Determination of Amount of First Monthly Annuity Payment (Deferred Variable Annuity Contracts Only)," this page and page 23, below, and "Assumed Net Investment Rate," p. 23, below. 24 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," pp. 18-21, 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," p. 13, 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.) For Contracts utilizing sex-distinct annuity tables, the tables 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 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," immediately, 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)," p. 23, 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) 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. 25 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 Effective Date of the Contract, pursuant to the procedure discussed under "The Annuity Unit," pp. 21-22, 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 Effective Date 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 Effective Date in excess of 70 years for male Variable Annuitants and in excess of 75 years for female Variable Annuitants). However, in lieu of such table, The Franklin will provide "unisex" annuity rate tables for use under Contracts purchased in connection with employer-related plans subject to the decision of the Supreme Court in ARIZONA GOVERNING COMMITTEE v. NORRIS. See "Annuity Payments," p. 13, above. 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 investments 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. 26 (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 stock 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 (4), 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 Payment 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. 27 (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 28 under the Illinois Insurance Code is thereby exempted from the other investment restrictions specified under this caption. (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 use by individuals in connection with Qualified Plans under the Code. 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, the type of retirement plan or program in connection with which the Contracts are used and the form in which payments are received. The discussion of federal income taxes contained in this Prospectus, which focuses on rules applicable to Contracts purchased under this Prospectus, is general in nature and is based on existing federal income tax law, which is subject to change. The tax discussion is not intended as tax advice. The applicable federal income tax law is complex and contains many special rules and exceptions in addition to the general rules summarized herein. For these reasons, various questions about the applicable rules exist. Accordingly, each person contemplating the purchase of a Contract is advised to consult with a qualified tax advisor concerning federal income taxes and any other federal, state or local taxes that may be applicable. THE FRANKLIN The Franklin is taxed as a "life insurance company" under the Code. Since the operations of the Fund are part of the overall operations of The Franklin, the Fund is subject to tax as part of The Franklin for federal income tax purposes. Thus, the Fund is not taxed separately as a "regulated investment company" under the Code. Under the Code a life insurance company like The Franklin is generally taxed at regular corporate rates, under a single-phase system, on its specially- computed life insurance company taxable income. Some special rules continue to apply, however, in the case of segregated asset accounts like the Fund. Investment income and realized capital gains on the assets of the Fund are reinvested by The Franklin for the benefit of the Fund and are taken into account in determining the value of Accumulation Units and Annuity Units. As a result, such income and gains are applied to increase reserves applicable to the Fund. Under the Code, no federal income tax is payable by The Franklin on such investment income or on realized capital gains of the Fund on assets held in the Fund. THE CONTRACTS: QUALIFIED PLANS The manner in which payments received under a Contract are taxed for federal income tax purposes depends on the form of payment. If payments are received in the form of an annuity, then, in general, under Section 72 of the Code, such payment is taxable to the recipient as ordinary income to the extent that such payment exceeds the portion, if any, of the cost basis of the Contract that is allocable to that payment. A 29 payment received on account of partial redemption of an annuity contract generally is taxable in whole or part. The taxation of a partial redemption is governed by complex rules and a qualified tax advisor should be consulted prior to a proposed partial redemption. 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 Qualified Contract will generally be allowed as a deduction to the Variable Annuitant for his or her last taxable year. Generally, payment of the proceeds of a Qualified Contract in a lump sum instead of in the form of an annuity, either at or before maturity, also is taxable as ordinary income to the extent the lump sum exceeds the cost basis of the Qualified Contract. Taxation may be deferred, however, to the extent, if any, that "rollover" treatment is available and elected for a particular distribution. Under a provision of federal income tax law effective for Contracts entered into after October 21, 1988, distributions from a Contract are generally not subject to aggregation with distributions from other annuity contracts issued by The Franklin (or its affiliates) for the purpose of determining the taxability of distributions not in the form of an annuity. The Qualified Contracts are designed for use in connection with several types of Qualifed Plans, as described generally below. A. QUALIFIED PENSION, PROFIT-SHARING AND ANNUITY PLANS Under pension and profit-sharing plans that qualify under Section 401(a) of the Code and annuity purchase plans that qualify under Section 403(a) of the Code (collectively "Corporate Qualified Plans"), amounts contributed by an employer to the Corporate Qualified Plan on behalf of an employee and any gains thereon are not, in general, taxable to the employee until distribution. Generally, the cost basis of an employee under a Corporate Qualified Plan will equal the amount of non-deductible contributions, if any, that the employee made to the Corporate Qualified Plan. The Code imposes an additional tax of 10% on the taxable portion of any early withdrawal from a Corporate Qualified Plan made by a Variable Annuitant before age 59-1/2, death, or disability. The additional income tax on early withdrawals will not apply however to certain distributions including (a) distributions beginning after separation from service that are part of a series of substantially equal periodic payments made at least annually for the life of the Variable Annuitant or the joint lives of the Variable Annuitant and his or her Beneficiary, and (b) distributions made to Variable Annuitants after attaining age 55 and after separating from service. Further, additional penalties may apply to distributions made on behalf of a "5-percent owner" (as defined by Section 416(i)(1)(B) of the Code). If a lump sum payment of the proceeds of a Contract qualifies as a "lump sum distribution" under the Code, special tax rules (including limited capital gain and income averaging treatment in some circumstances) may apply. B. H.R. 10 PLANS (SELF-EMPLOYED INDIVIDUALS) Self-employed persons (including members of partnerships) are permitted to establish and participate in Corporate Qualified Plans under Sections 401(a) and 403(a) of the Code. Corporate Qualified Plans in which self-employed persons participate are commonly referred to as "H.R. 10 Plans." The tax treatment of annuity payments and lump sum payments received in connection with an H.R. 10 Plan is, in general, subject to the same rules described in "Qualified Pension, Profit-Sharing and Annuity Plans," immediately above. Some special rules apply, however, in the case of self-employed persons which, for example, affect certain "lump sum distribution" and "rollover" rules. 30 C. SECTION 403(B) ANNUITIES Section 403(b) of the Code permits public schools and other tax-exempt organizations described in Section 501(c) (3) of the Code to purchase annuity contracts for their employees subject to special tax rules. If the requirements of Section 403(b) are satisfied, amounts contributed by the employer to purchase an annuity contract for an employee, and any gains thereon, are not, subject to certain limitations, taxable to the employee until distributed to the employee. Generally, the cost basis of an employee under a Section 403(b) annuity contract will equal the amount of any non-deductible contributions the employee made toward the contract plus any employer contributions that were taxable to the employee because they exceeded excludable amounts. Federal tax law imposes limitations on distributions from Section 403(b) annuity contracts. Withdrawals of amounts attributable to contributions made pursuant to a salary reduction agreement in connection with a Section 403(b) annuity contract will be permitted only (1) when an employee attains age 59-1/2, separates from service, dies or becomes totally and permanently disabled or (2) in the case of hardship. A withdrawal made in the case of hardship may not include income attributable to the contributions. However, these limitations generally do not apply to distributions which are attributable to assets held as of December 31, 1988. In general, therefore, contributions made prior to January 1, 1989, and earnings on such contributions through December 31, 1988, are not subject to these limitations. In addition, these limitations do not apply to contributions made other than by a salary reduction agreement. A number of questions exist concerning the application of these rules. Anyone considering a withdrawal from a Contract issued in connection with a Section 403(b) annuity plan should consult a qualified tax advisor. The 10% penalty tax on early withdrawals described under "Qualified Pension, Profit-Sharing and Annuity Plans," p. 27, above, also applies to Section 403(b) annuity contracts. D. INDIVIDUAL RETIREMENT ANNUITIES 1. SECTION 408(B) INDIVIDUAL RETIREMENT ANNUITIES Under Sections 408(b) and 219 of the Code, special tax rules apply to Individual Retirement Annuities. As described below, certain contributions to such annuities (other than Rollover Contributions) are deductible within certain limits and the gains on contributions (including Rollover Contributions) are not taxable until distributed. Generally, the cost basis in an Individual Retirement Annuity will equal the amount of non-deductible contributions, if any, made to the Individual Retirement Annuity. Under special rules, all individual retirement plans will be treated as one plan for purposes of these rules. Section 408(b) sets forth various requirements that an annuity contract must satisfy before it will be treated as an Individual Retirement Annuity. Although final regulations that interpret some of these requirements have been adopted, other regulations have been proposed that interpret the additional requirement that, under a Section 408(b) Individual Retirement Annuity, the premiums may not be fixed. These proposed regulations, which contain certain ambiguities, may, of course, be changed before they are issued in final form. ACCORDINGLY, WHILE THE FRANKLIN BELIEVES THAT THE CONTRACTS OFFERED BY THIS PROSPECTUS MEET THE REQUIREMENTS OF SECTION 408(b), THE FINAL REGULATIONS AND THE CURRENTLY PROPOSED REGULATIONS THEREUNDER, THERE CAN BE NO ASSURANCE THAT THE CONTRACTS QUALIFY AS INDIVIDUAL RETIREMENT ANNUITIES UNDER SECTION 408(b) PENDING THE ISSUANCE OF COMPLETE FINAL REGULATIONS UNDER THAT CODE SECTION. Individuals who are not "active participants" in an employer-related retirement plan described in Section 219(g) of the Code will, in general, be allowed to contribute to an Individual Retirement Annuity and to deduct a maximum of $2,000 annually (or 100% of the individual's compensation if less). In addition, this deduction will be allowed for individuals who are active participants in Qualified Plans with annual adjusted gross income that is not above $25,000 ($40,000 for married individuals filing a joint return). This deduction will be phased out for individuals who are active participants in Qualified Plans with annual adjusted gross income between $25,000 and $35,000 ($40,000 and $50,000 for married individuals filing a joint return), and will not be allowed for such 31 active participants with annual adjusted gross income above $35,000 ($50,000 for married individuals filing a joint return). The active participant status of both spouses is taken into account in determining the deductible limit. In addition, an individual will not be considered married for a year in which the individual and the individual's spouse (1) file separate returns and (2) did not live together at any time during the year. Individuals who may not make deductible contributions to an Individual Retirement Annuity may, instead, make non-deductible contributions (up to the applicable maximum described above) on which earnings will accumulate on a tax-deferred basis. If the Individual Retirement Annuity includes non-deductible contributions, distributions will be divided on a pro rata basis between taxable and non-taxable amounts. Special rules apply if, for example, an individual contributes to an Individual Retirement Annuity for his or her own benefit and to another Individual Retirement Annuity for the benefit of his or her spouse. The 10% penalty tax on early withdrawals described under "Qualified Pension, Profit-Sharing and Annuity Plans," p. 27, above, also applies to Individual Retirement Annuities, except that the circumstances in which the penalty tax will not apply are different in certain respects. Further, for any year in which a Contract Owner borrows any money under or by use of the Individual Retirement Annuity, the Contract ceases to qualify under Section 408(b), and an amount equal to the fair market value of the Contract as of the first day of such year is includible in the Contract Owner's gross income for such year. 2. SECTION 408(k) SIMPLIFIED EMPLOYEE PENSIONS An Individual Retirement Annuity described in Section 408(b) of the Code that also meets the special requirements of Section 408(k) qualifies as a Simplified Employee Pension. Under a Simplified Employee Pension, employers may contribute to the Individual Retirement Annuities of their employees. An employee may exclude the employer's contribution on his or her behalf to a Simplified Employee Pension from gross income subject to certain limitations. Elective deferrals under a Simplified Employee Pension are to be treated like elective deferrals under a cash or deferred arrangement under Section 401(k) of the Code and are subject to a $7,000 limitation, adjusted for inflation. In general, the employee may also contribute and deduct an additional amount not in excess of the lesser of (a) $2,000 or (b) 100% of compensation if the employee meets the qualifications for an Individual Retirement Annuity. In general, except as stated in this section, the rules discussed in "Section 408(b) Individual Retirement Annuities," immediately above, apply to a Simplified Employee Pension. INCOME TAX WITHHOLDING Withholding of federal income tax is generally required from distributions from Qualified Plans or Contracts issued in connection therewith, to the extent the distributions are taxable and are not otherwise subject to withholding as wages ("Distributions"). See "The Contracts: Qualified Plans," pp. 27-29, above, regarding the taxation of Distributions. Federal income tax is generally required to be withheld from all or any portion of a Distribution made on or after January 1, 1993 that constitutes an "eligible rollover distribution." An "eligible rollover distribution" generally includes any distribution from a qualified trust described in Section 401(a) of the Code, a qualified annuity plan described in Section 403(a) of the Code or a qualified annuity contract described in Section 403(b) of the Code except for (i) a distribution which is one of a series of substantially equal periodic instalments payable at least annually for the life (or over the life expectancy) of the Variable Annuitant or for the joint lives (or over the joint life expectancies) of the Variable Annuitant and his or her Beneficiary, or for a specified period of 10 years or more or (ii) a minimum distribution required pursuant to Section 401(a)(9) of the Code and (iii) an amount which is not includible in gross income (for example, the return of non-deductible contributions). Any eligible rollover distribution which is not rolled over directly from a Section 401(a) qualified trust, a Section 403(a) qualified annuity plan or a Section 403(b) qualified annuity contract to an "eligible retirement plan" is subject to mandatory federal income tax withholding in an amount equal to 20% of the eligible rollover distribution. An "eligible retirement plan" generally includes a qualified trust described in Section 401(a) of the Code, a qualified annuity plan described in Section 403(a) of the Code, an individual retirement account described in Section 408(a) of the 32 Code or an Individual Retirement Annuity described in Section 408(b) of the Code. Mandatory federal income tax withholding is required even if the Variable Annuitant receives an eligible rollover distribution and rolls it over within 60 days to an eligible retirement plan. Federal income tax is not required to be withheld from any eligible rollover distribution which is rolled over directly from a qualified trust described in Section 401(a) of the Code, a qualified annuity plan described in Section 403(a) of the Code or a qualified annuity contract described in Section 403(b) of the Code to an eligible retirement plan. Except with respect to certain payments delivered outside the United States or any possession of the United States, federal income tax is not required to be withheld from any Distribution which does not constitute an eligible rollover distribution, if the Variable Annuitant or Beneficiary properly elects in accordance with the 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 which is not an eligible rollover distribution depends upon the type of payment being made. Generally, in the case of a periodic payment which is not an eligible rollover distribution, the amount to be withheld from such 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 a nonperiodic payment which is not an eligible rollover distribution, the amount to be withheld is generally equal to 10% of the amount of the Distribution. The applicable federal law pertaining to income tax withholding from Distributions is complex and contains many special rules and exceptions in addition to the general rules summarized above. Special rules apply, for example, if the Distribution is made to the surviving spouse of a Variable Annuitant or if the Distribution is an eligible rollover distribution from a qualified annuity contract under Section 403(b) of the Code. Any Variable Annuitant or Beneficiary considering a Distribution should consult a qualified tax advisor. 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 B, a separate account of The Franklin having investment objectives similar to the Fund but the assets of which are not held with respect to Variable Annuity Contracts accorded special tax treatment, 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 approval of any investment management agreement and any amendment thereto. 33 (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 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. An employee covered by an H.R. 10 Plan, if not the Contract Owner, will have the right to instruct the Contract Owner with respect to all votes attributable to the Contract. An employee covered by a Contract issued in connection with a qualified pension or profit-sharing plan described in Section 401 of the Code will have the right to instruct the Contract Owner with respect to votes attributable to his or her payments to the plan, if any, and, to the extent authorized by the terms of the plan, with respect to any additional votes under the Contract. If Annuity Payments are being made under an annuity to a person who is not a Contract Owner, that person will have the right to instruct the Contract Owner with respect to votes attributable to the amount of the assets in the Fund to meet the Annuity Payments related to the Contract. Contract Owners will cast votes with respect to which instructions have been received in accordance with such instructions. Votes with respect to which employees, Variable Annuitants or other persons to whom payments are being made under a Contract are entitled to instruct the Contract Owner, but for which the Contract Owner has received no instructions, shall be cast by the Contract Owner for or against each proposal to be voted on in the same proportion as votes for which instructions have been received by such Contract Owner. If no one is entitled to instruct the Contract Owner, or if the Contract Owner receives no instructions, all votes which the Contract Owner is entitled to cast may be cast at his or her sole discretion. Neither the Fund nor The Franklin has any duty to inquire as to the instructions received or the authority of the Contract Owner to cast such votes; except to the extent that the Fund or The Franklin has actual knowledge to the contrary, the votes cast by Contract Owners will be considered valid and effective as among the Fund, The Franklin and other persons having voting rights with respect to the Fund. 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 34 Franklin Financial Services 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. 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," pp. 24-26, 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 The Franklin has no present intention of effecting any of the following fundamental modifications in the operations or status of the Fund. However, upon compliance with applicable law, including obtaining any necessary affirmative vote of Contract Owners in each case: (a) the Fund may be operated in a form other than as a "management company" under the Investment Company Act of 1940 (including operation as a "unit investment trust"); (b) the Fund may be deregistered under the Investment Company Act of 1940 in the event such registration is no longer required; or (c) the provisions of the Contracts may be modified to assure qualification under the pertinent provisions of the Code or to comply with other applicable federal or state laws. In the event of any such fundamental change, The Franklin may make appropriate amendments to the Contracts to give effect to such change or take such other action as may be necessary in this respect. REGISTRATION STATEMENT A Registration Statement has been filed with the Securities and Exchange Commission under the Securities Act of 1933, as amended, with respect to the Contracts offered hereby. This Prospectus does not contain all the information set forth in the Registration Statement and amendments thereto and exhibits filed as a part thereof, to all of which reference is hereby made for further information concerning the Fund, The Franklin and the Contracts offered hereby. Statements contained in this Prospectus as to the content of Contracts and other legal instruments are summaries. For a complete statement of the terms thereof, reference is made to such instruments as filed. OTHER VARIABLE ANNUITY CONTRACTS; EFFECT OF NON-QUALIFICATION 35 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. All such other contracts, however, will be designed for use in connection with certain Qualified Plans or as Individual Retirement Annuities. The Franklin will not knowingly permit moneys which are not "tax-benefited" to be allocated to the Fund. The Franklin will transfer any portion of a Contract allocated to the Fund to the general account of The Franklin, less a deduction for federal income taxes payable on the portion so transferred, if, at any time, the plan or arrangement with respect to which the Contract was sold fails to meet the requirements of the Code. The Franklin will promptly notify the Contract Owner of such transfer. The Contract Owner may elect to (1) leave the funds so transferred in the general account, (2) redeem his Contract, or (3) apply the funds so transferred to the purchase of a variable annuity contract offered by Franklin Life Variable Annuity Fund B. See "Redemption," pp. 16-17, and "Transfers to and from Other Contracts," pp. 12-13, above. TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION PAGE IN STATEMENT OF ADDITIONAL INFORMATION - - -------------------------------------------------------------------- General Information . . . . . . . . . . . . . 2 Investment Objectives. . . . . . . . . . . . . 2 Limitations on Settlement Options. . . . . . . 2 Management . . . . . . . . . . . . . . . . . . 4 Investment Advisory and Other Services . . . . 5 Distribution of The Contracts. . . . . . . . . 7 Portfolio Turnover and Brokerage . . . . . . . 8 Safekeeper of Securities . . . . . . . . . . . 8 Legal Opinions . . . . . . . . . . . . . . . . 9 Experts. . . . . . . . . . . . . . . . . . . . 9 Index to Financial Statements. . . . . . . . . F-1 36 PROSPECTUS FRANKLIN LIFE VARIABLE ANNUITY FUND A INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE WITH CERTAIN QUALIFIED PLANS AND TRUSTS ACCORDED SPECIAL TAX TREATMENT AND AS INDIVIDUAL RETIREMENT ANNUITIES ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY #1 FRANKLIN SQUARE SPRINGFIELD, ILLINOIS 62713 - - -------------------------------------------------------------------------------- Complete and return this form to: Supply Department The Franklin Life Insurance Company #1 Franklin Square Springfield, Illinois 62713 (217) 528-2011 Please send me the Statement of Additional Information dated April 30, 1996 for Franklin Life Variable Annuity Fund A. - - -------------------------------------------------------------------------------- (Name) - - -------------------------------------------------------------------------------- (Street) - - -------------------------------------------------------------------------------- (City) (State) (Zip Code) - - -------------------------------------------------------------------------------- 37 INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE WITH CERTAIN QUALIFIED PLANS AND TRUSTS ACCORDED SPECIAL TAX TREATMENT AND AS INDIVIDUAL RETIREMENT ANNUITIES FRANKLIN LIFE VARIABLE ANNUITY FUND A ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY #1 FRANKLIN SQUARE SPRINGFIELD, ILLINOIS 62713 TELEPHONE (217) 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, 1996 relating to the offering of individual variable annuities for use in connection with certain qualified plans and trusts accorded special tax treatment or as individual retirement annuities. A copy of the Prospectus may be obtained by writing to the Equity Administration Department of The Franklin Life Insurance Company at the address set forth above or by calling (217) 528-2011. ----------------------------------- THIS STATEMENT OF ADDITIONAL INFORMATION SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. ----------------------------------- THE DATE OF THIS STATEMENT OF ADDITIONAL INFORMATION IS APRIL 30, 1996. TABLE OF CONTENTS PAGE General Information . . . . . . . . . . . . . . . . . 2 Investment Objectives. . . . . . . . . . . . . . . . . 2 Limitations on Settlement Options. . . . . . . . . . . 2 Management . . . . . . . . . . . . . . . . . . . . . . 5 Investment Advisory and Other Services . . . . . . . . 6 Distribution of The Contracts. . . . . . . . . . . . . 9 Portfolio Turnover and Brokerage . . . . . . . . . . . 10 Safekeeper of Securities . . . . . . . . . . . . . . . 10 Legal Opinions . . . . . . . . . . . . . . . . . . . . 11 Experts. . . . . . . . . . . . . . . . . . . . . . . . 11 Index to Financial Statements. . . . . . . . . . . . . F-1 1 GENERAL INFORMATION The individual variable annuity contracts offered by the Prospectus dated April 30, 1996 (the "Prospectus") are designed primarily to provide annuity payments which will vary with the investment performance of Franklin Life Variable Annuity Fund A (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. On January 31, 1995, American General Corporation ("American General") through its wholly-owned subsidiary, AGC Life Insurance Company ("AGC Life"), acquired American Franklin Company ("AFC"), the holding company of The Franklin, from American Brands, Inc. The address of AFC is #1 Franklin Square, Springfield, Illinois 62713. 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 the parent company of one of the nation's largest diversified financial services organizations. American General's operating subsidiaries are leading providers of retirement annuities, 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 February 15, 1996. INVESTMENT OBJECTIVES The investment objectives of the Fund are described under "Investment Policies and Restrictions of the Fund" in the Prospectus. LIMITATIONS ON SETTLEMENT OPTIONS A. LIMITATIONS ON CHOICE OF SETTLEMENT OPTION Described below are certain limitations on Settlement Options based on The Franklin's current understanding of the distribution rules generally applicable to Contracts purchased for use as Individual Retirement Annuities or issued in connection with Section 403(b) annuity purchase plans. Various questions exist, however, about the application of the distribution rules to distributions from the Contracts and their effect on Settlement Option availability thereunder. The Internal Revenue Service has proposed regulations relating to required distributions from qualified plans, individual retirement plans, and annuity contracts under Section 403(b) of the Code. These proposed regulations may limit the availability of the Settlement Options in Contracts purchased for use as Individual Retirement Annuities or issued in connection with Section 403(b) annuity purchase plans. The proposed regulations are generally effective for calendar years after 1984; persons contemplating the purchase of a Contract should consult a qualified tax advisor concerning the effect of the proposed regulations on the Settlement Option or Options he or she is contemplating. 2 FIRST OPTION-LIFE ANNUITY. Under Contracts issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans, if the Variable Annuitant dies before Annuity Payments have commenced, this Option is not available to a Beneficiary unless distributions to the Beneficiary begin not later than one year after the date of the Variable Annuitant's death (except that distributions to a Beneficiary who is the surviving spouse of the Variable Annuitant need not commence earlier than the date on which the Variable Annuitant would have attained age 70-1/2). If the surviving spouse of the Variable Annuitant is the Beneficiary 3 and such surviving spouse dies before Annuity Payments to such spouse have commenced, the surviving spouse will be treated as the Variable Annuitant for purposes of the preceding rule. SECOND OPTION-LIFE ANNUITY WITH 120, 180 OR 240 MONTHLY PAYMENTS CERTAIN. Under Contracts issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans, this Option is not available unless the selected period does not extend beyond the life expectancy of the Variable Annuitant (or the life expectancy of the Variable Annuitant and his or her Beneficiary). Further, if the Variable Annuitant dies before Annuity Payments have commenced, this Option is not available to a Beneficiary unless (i) the selected period does not extend beyond the life expectancy of the Beneficiary and (ii) the distribution to the Beneficiary commences not later than one year after the date of the Variable Annuitant's death (except that distributions to a Beneficiary who is the surviving spouse of the Variable Annuitant need not commence earlier than the date on which the Variable Annuitant would have attained age 70-1/2). If the surviving spouse of the Variable Annuitant is the Beneficiary and the surviving spouse dies before Annuity Payments to such spouse have commenced, the surviving spouse will be treated as the Variable Annuitant for purposes of the preceding sentence. This Option is also not available under Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans unless certain minimum distribution incidental benefit requirements of the proposed regulations are met. THIRD OPTION-UNIT REFUND LIFE ANNUITY. This Option is not available under Contracts issued for use as Individual Retirement Annuities. Also, under Qualified Contracts issued in connection with Section 403(b) annuity purchase plans, if the Variable Annuitant dies before Annuity Payments have commenced, this Option is not available to a Beneficiary unless distributions to the Beneficiary begin not later than one year after the date of the Variable Annuitant's death (except that distributions to a Beneficiary who is the surviving spouse of the Variable Annuitant need not commence earlier than the date on which the Variable Annuitant would have attained age 70-1/2). If the surviving spouse of the Variable Annuitant is the Beneficiary and such surviving spouse dies before Annuity Payments to such spouse have commenced, the surviving spouse will be treated as the Variable Annuitant for purposes of the preceding rule. This Option is also not available in connection with Section 403(b) annuity purchase plans unless certain minimum distribution incidental benefit requirements of the proposed regulations are met. FOURTH OPTION-JOINT AND LAST SURVIVOR LIFE ANNUITY. Under Contracts issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans, this Option is not available unless the secondary variable annuitant is the spouse of the Variable Annuitant or unless certain minimum distribution incidental benefit requirements of the proposed regulations are met. Further, if the Variable Annuitant dies before Annuity Payments have commenced, this Option is not available to a Beneficiary under a Contract issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans. FIFTH OPTION-PAYMENTS FOR A DESIGNATED PERIOD. Under Contracts issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans, this Option is not available unless the limitations described in the Second Option, above, applicable to such Qualified Contracts, are satisfied, except that this Option is otherwise available to a Beneficiary where the Variable Annuitant dies before Annuity Payments have commenced if the designated period does not exceed a period that terminates five years after the death of the Variable Annuitant or the substituted surviving spouse, as the case may be. In addition, this Option is not available if the number of years in the selected period over which Annuity Payments would otherwise be paid plus the attained age of the Variable Annuitant at the initial Annuity Payment Date would exceed 95. SIXTH OPTION-PAYMENTS OF A SPECIFIED DOLLAR AMOUNT. This Option is not available under Contracts issued for use as Individual Retirement Annuities or in connection with Section 403(b) annuity purchase plans. B. LIMITATIONS ON COMMENCEMENT OF ANNUITY PAYMENTS 4 The Contract Owner may defer the initial Annuity Payment Date and continue the Contract to a date not later than age 75 unless the provisions of the Code or any governing Qualified Plan require Annuity Payments to commence at an earlier date. For example, under Qualified Contracts, the Contract Owner may not defer the initial Annuity Payment Date beyond April 1 of the calendar year following the calendar year in which the Variable Annuitant attains age 70-1/2. The Franklin will require satisfactory proof of age of the Variable Annuitant prior to the initial Annuity Payment Date. 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," p. 6, below.) NAME AND ADDRESS PRINCIPAL OCCUPATIONS DURING PAST POSITIONS HELD WITH THE 5 YEARS FUND ROBERT G. SPENCER* Officer of The Franklin; Chairman and Member, #1 Franklin Square currently, Vice President Board of Managers Springfield, Illinois of The Franklin; prior to 62713 1996, also Treasurer of The Franklin and Treasurer and Assistant Secretary of Franklin Financial Services Corporation. STEPHEN P. HORVAT, JR.*+ Officer of The Franklin; Secretary, Board of #1 Franklin Square currently, Senior Vice Managers Springfield, Illinois President, Secretary and 62713 General Counsel and a director of The Franklin. Mr. Horvat also serves as Vice President, Secretary and a director of Franklin Financial Services Corporation. DR. ROBERT C. SPENCER Visiting Professor of Member, Board of 2303 South 3rd Avenue Government, Montana State Managers Bozeman, Montana 59715 University, since 1992; Professor of Government and Public Affairs, Sangamon State University, prior thereto. JAMES W. VOTH Chairman, Resource Member, Board of 50738 Meadow Green International Corp., South Managers Court, Bend, Indiana (marketing, Granger, Indiana 46530 manufacturing and engineering service to industry); prior to 1993, also President of Resource International Corp. CLIFFORD L. GREENWALT Director, President and Chief Member, Board of 607 East Adams Street Executive Officer, CIPSCO Managers Springfield, Illinois Incorporated, since October, 62739 1990 (utility holding company); Director, President and Chief Executive Officer, Central Illinois Public Service Company, Springfield, Illinois (a subsidiary of CIPSCO Incorporated); Director, Electric Energy, Inc., Joppa, Illinois; 5 Director, First of America Bank, Kalamazoo, Michigan; Director, First of America Bank - Illinois, N.A. (a subsidiary of First of America Bank). -------------------- *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 AND, WITH RESPECT TO MR. HORVAT, BY VIRTUE OF HIS POSITION AS A DIRECTOR OF AMERICAN FRANKLIN COMPANY AS DESCRIBED IN THE FOLLOWING FOOTNOTE. +MR. HORVAT SERVES AS AN ASSISTANT SECRETARY AND DIRECTOR OF AMERICAN FRANKLIN COMPANY, WHICH OWNS ALL THE CAPITAL STOCK OF THE FRANKLIN AND WHICH IS A WHOLLY- OWNED SUBSIDIARY OF AMERICAN GENERAL CORPORATION. SEE "GENERAL INFORMATION," P. 2, ABOVE. 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 during the year ended December 31, 1995. 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 ($1,050 where the member did not serve for the entire year) for the year and, thus, the aggregate direct remuneration of all such members of the Board of Managers was $3,850 during 1995. It is currently anticipated that the annual aggregate remuneration of such members of the Board of Managers to be paid during 1996 will not exceed $4,200.
NAME OF PERSON, AGGREGATE PENSION OR ESTIMATED ANNUAL TOTAL POSITION COMPENSATION RETIREMENT BENEFITS UPON COMPENSATION FROM FUND BENEFITS ACCRUED RETIREMENT FROM FUND AND AS PART OF FUND FUND COMPLEX EXPENSES PAID TO DIRECTORS All members of the Board of Managers $3,850(1) -0- -0- $11,550(1)(2) as a group (4 persons)
- - ---------------- (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 B 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 15, 1996, 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. The method of determining the advisory charge is described in the Prospectus under "Investment Management Service Charge." 6 7 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. (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. Messrs. Robert G. Spencer and Stephen P. Horvat, Jr. 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," pp. 4-5, 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. 8 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 renewed by the Board of Managers on January 15, 1996. 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 has 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. The Contracts also may be sold by persons who are registered representatives of other registered broker-dealers who are members of the National Association of Securities Dealers, Inc., and with whom Franklin Financial may enter into a selling agreement. If Contracts are sold by other dealers, the maximum allowance which will be made to them by Franklin Financial will be 5% in the case of Periodic Stipulated Payment Contracts and 4% in the case of Single Stipulated Payment Contracts. 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. Stephen P. Horvat, Jr. 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 him with Franklin Financial and the Fund as set forth in the table under "Management," pp. 4-5, above. 9 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," this page, below. For 1994, the portfolio turnover rate was 88.99%; for 1995 the rate was 14.66%. 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 1993, 1994 and 1995, a total of $18,515, $20,612 and $4,260, 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," p. 7, 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 in Boston, Massachusetts, under a Custodian Agreement dated April 17, 10 1995 to which The Franklin and State Street are parties. The Franklin has requested that the Illinois Insurance Department approve an arrangement under which State Street would hold the securities of the Fund as sub-custodian under an agreement that would be entered into by The Franklin, State Street Bank and Trust Company of Connecticut, as custodian, and State Street, as sub-custodian. Representatives of the Securities and Exchange Commission, the Illinois Insurance Department and the NAIC zonal examination committee have access to such securities in the performance of their official duties. LEGAL OPINIONS Legal matters concerning federal securities laws applicable to the issue and sale of the variable annuity contracts offered hereby have been passed upon by Messrs. Chadbourne & Parke LLP, 30 Rockefeller Plaza, New York, New York 10112. All matters of Illinois law, including The Franklin's right and power to issue such contracts, have been passed upon by Stephen P. Horvat, Jr., Esq., Senior Vice President, General Counsel, Secretary and a director of The Franklin, a director and Secretary of Franklin Financial, and Secretary to the Board of Managers of the Fund. EXPERTS The statement of assets and liabilities, including the portfolio of investments, as of December 31, 1995 and the related statements of operations and changes in contract owners' equity and the table of per-unit income and changes in accumulation unit value for the year then ended of the Fund, appearing herein, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein. The consolidated balance sheet as of December 31, 1995 of The Franklin, and the related consolidated statements of income, shareholder's equity and cash flows for the eleven months ended December 31, 1995 and the one month ended January 31, 1995, appearing herein, have been audited by Ernst & Young LLP, independent auditors, as set forth in their report thereon appearing elsewhere herein. The statement of changes in contract owners' equity for the year ended December 31, 1994 and the table of per-unit income and changes in accumulation unit value for each of the four years in the period then ended of the Fund, appearing herein, have been audited by Coopers & Lybrand L.L.P., independent accountants, as set forth in their report thereon appearing elsewhere herein. The consolidated balance sheet of The Franklin as of December 31, 1994 and the consolidated statements of income, shareholder's equity and cash flows of The Franklin for each of the two years in the period then ended, 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. 11 12 INDEX TO FINANCIAL STATEMENTS PAGE Franklin Life Variable Annuity Fund A: Reports of Independent Auditors and Accountants F-2 - F-3 Financial Statements: Statement of Assets and Liabilities, December 31, 1995 F-4 Statement of Operations for the year ended December 31, 1995 F-4 Statements of Changes in Contract Owners' Equity for the years ended December 31, 1995 and 1994 F-4 Portfolio of Investments, December 31, 1995 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, 1995 F-7 The Franklin Life Insurance Company and Subsidiaries:* Reports of Independent Auditors and Accountants F-8 - F-9 Financial Statements: Consolidated Balance Sheet, December 31, 1995 and 1994 F-10 - F-11 Consolidated Statement of Income for the eleven months ended December 31, 1995, one month ended January 31, 1995 and years ended December 31, 1994 and 1993 F-12 Consolidated Statement of Shareholder's Equity for the eleven months ended December 31, 1995, one month ended January 31, 1995 and years ended December 31, 1994 and 1993 F-13 Consolidated Statement of Cash Flows for the eleven months ended December 31, 1995, one month ended January 31, 1995 and years ended December 31, 1994 and 1993 F-14 Notes to Consolidated Financial Statements F-15 - F-44 *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 REPORT OF INDEPENDENT AUDITORS Board of Managers and Contract Owners Franklin Life Variable Annuity Fund A We have audited the accompanying statement of assets and liabilities of Franklin Life Variable Annuity Fund A, including the portfolio of investments, as of December 31, 1995, and the related statements of operations, changes in contract owners' equity, and the table of per-unit income and changes in accumulation unit value for the year 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements 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, 1995. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the 1995 financial statements and the 1995 table of per-unit income and changes in accumulation unit value referred to above present fairly, in all material respects, the financial position of Franklin Life Variable Annuity Fund A as of December 31, 1995, and the results of its operations, changes in its contract owners' equity, and per-unit income and changes in accumulation unit value for the year then ended in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP ERNST & YOUNG LLP Chicago, Illinois February 2, 1996 F-2 REPORT OF INDEPENDENT ACCOUNTANTS Board of Managers and Contract Owners Franklin Life Variable Annuity Fund A Springfield, Illinois We have audited the accompanying statement of changes in contract owners' equity of Franklin Life Variable Annuity Fund A for the year ended December 31, 1994 and the table of per-unit income and changes in accumulation unit value for each of the four years in the period then ended. This financial statement 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 this financial statement and the table of per-unit income and changes in accumulation unit value based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statement 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 statement. Our procedures included confirmation of investments and cash held by the custodian as of December 31, 1994. 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 statement and the table of per-unit income and changes in accumulation unit value referred to above present fairly, in all material respects, the changes in contract owners' equity of Franklin Life Variable Annuity Fund A for the year ended December 31, 1994 and per-unit income and changes in accumulation unit value for each of the four years in the period then ended, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Chicago, Illinois February 1, 1995 F-3 FRANKLIN LIFE VARIABLE ANNUITY FUND A STATEMENT OF ASSETS AND LIABILITIES DECEMBER 31, 1995
Assets Investments-at fair value (cost-$8,118,227): Common stocks $ 8,634,319 Short-term note 1,661,216 ----------- 10,295,535 Cash on deposit 114,797 Dividends and interest receivable 31,435 ----------- Total Assets 10,441,767 Liability - Due to The Franklin Life Insurance Company 12,854 ----------- Contract Owners' Equity Annuity reserves $ 16,105 Value of 150,474 Accumulation Units outstanding, equivalent to $69.199949 per unit 10,412,808 $ 10,428,913 ------------ ------------ ------------ STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1995 Investment Income Dividends $ 167,553 Interest 145,370 ----------- Total Income $ 312,923 Expenses Mortality and expense charges $ 97,809 Investment management services 42,758 ----------- Total Expenses 140,567 ----------- Net Investment Income 172,356 Realized and Unrealized Gain (Loss) on Investments Net realized gain from investment transactions Proceeds from sales $ 1,044,876 Cost of investments sold (identified cost method) 1,028,020 ----------- Net Realized Gain 16,856 Net unrealized appreciation (depreciation) of investments Beginning of year $ ( 77,823) End of year 2,177,308 ----------- Net Unrealized Appreciation 2,255,131 ----------- Net Gain On Investments 2,271,987 ----------- Net Increase In Contract Owners' Equity Resulting From Operations $ 2,444,343 ----------- -----------
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
YEAR ENDED DECEMBER 31 1995 1994 ------------------------------- Net investment income $ 172,356 $ 116,171 Net realized gain from investment transactions 16,856 708,267 Net unrealized appreciation (depreciation) of investments 2,255,131 (749,740) ------------------------------- Net Increase In Contract Owners' Equity Resulting From Operations 2,444,343 74,698 Net contract purchase payments 354,276 521,549 Reimbursement for contract guarantees 407 3,436 Annuity payments (3,262) (3,002) Withdrawals (1,694,308) (1,936,673) ------------------------------- Net Increase (Decrease) in Contract Owners' Equity 1,101,456 (1,339,992) Contract Owners' Equity at Beginning of Year 9,327,457 10,667,449 ------------------------------- Contract Owners' Equity At End of Year $10,428,913 $ 9,327,457 ------------------------------- -------------------------------
SEE NOTES TO FINANCIAL STATEMENTS F-4 FRANKLIN LIFE VARIABLE ANNUITY FUND A PORTFOLIO OF INVESTMENTS DECEMBER 31, 1995
NUMBER OF FAIR SHARES VALUE - - ------ -------- COMMON STOCKS (82.8%) BANKING (2.3%) 3,675 Student Loan Marketing Association $242,550 BEVERAGES (3.2%) 3,200 Anheuser-Busch Companies, Inc. 214,000 2,200 PepsiCo, Incorporated 122,925 ----------- 336,925 BUSINESS SERVICES (1.2%) 5,600 Equifax Inc. 119,700 CHEMICALS (1.8%) 2,700 Dow Chemical 189,675 COMPUTER SERVICES (3.2%) 8,100 Ceridian Corporation* 334,125 COSMETICS & HOUSEHOLD PRODUCTS (3.5%) 3,200 Dial Corp. 94,800 5,200 Gillette Company 271,050 ----------- 365,850 DRUGS & HEALTH CARE (16.9%) 6,100 Eckerd Corporation* 272,213 4,000 Eli Lilly and Company 225,000 4,300 Merck & Company, Inc. 282,187 2,100 Pfizer, Incorporated 132,300 6,450 St. Jude Medical, Inc. 277,350 3,300 Schering-Plough Corporation 180,675 3,000 Stryker Corporation 157,500 8,000 Walgreen Company 239,000 ----------- 1,766,225 ELECTRONICS & INSTRUMENTATIONS (2.3%) 2,900 Hewlett-Packard Company 242,875 FOOD PROCESSING (2.1%) 5,300 ConAgra, Inc. 218,625 FOOD - RETAIL (1.8%) 5,700 Albertson's, Inc. 187,387 HOUSEHOLD PRODUCTS (.9%) 3,700 Newell Co. 95,738 MACHINERY - INDUSTRIAL & CONSTRUCTION (1.9%) 1,500 Fluor Corporation 99,000 3000 Trinity Industry 94,500 ----------- 193,500 MINING & MINERALS (.8%) 2,000 Cleveland-Cliffs Inc. 82,000 OFFICE EQUIPMENT & SERVICES (9.0%) 2,000 Compaq Computers Corporation* 96,000 5,350 Digital Equipment Corporation* 343,069 2,400 International Business Machines Corporation 219,300 5,900 Policy Management Systems Corporation* 280,987 ----------- 939,356 OIL SERVICES & DRILLING (1.5%) 3,100 Halliburton Company 156,938 OILS & OIL RELATED PRODUCTS (9.2%) 2,700 Amoco Corporation 193,050 1,300 Atlantic Richfield Company 143,975 2,500 British Petroleum Company, p.l.c. 255,312 3,700 Diamond Shamrock, Inc. 95,738 2,600 Kerr-McGee Corporation 165,100 3,700 Unocal Corporation 107,763 ----------- 960,938 PHOTOGRAPHY (2.6%) 4,100 Eastman Kodak Company 274,700 RESTAURANTS/LODGING (1.3%) 3,400 Marriott International, Inc. 130,050 RETAIL-SPECIALTY (2.4%) 3,600 NIKE, Inc. 250,650 TECHNOLOGY (6.7%) 5,000 AMP, Incorporated 191,250 2,200 Diebold, Incorporated 121,825 2,400 Intel Corporation 136,200 3,100 Marshall, Incorporated* 99,587 3,600 Millipore Corporation 148,050 ----------- 696,912 UTILITIES-ELECTRIC (6.1%) 6,500 American Electric Power Company, Inc. 263,250 6,900 Baltimore Gas and Electric Company 196,650 4,200 Texas Utilities Company 172,200 ----------- 632,100 UTILITIES - TELEPHONE (2.1%) 5,000 BellSouth Corporation 217,500 ----------- TOTAL COMMON STOCKS (COST-$6,457,011) 8,634,319 PRINCIPAL AMOUNT - - --------- SHORT-TERM NOTE (15.9%) $1,675,000 United States Treasury Bill due 1/4/96 (cost-$1,661,216) 1,661,216 ----------- TOTAL INVESTMENTS (98.7%) (COST -$8,118,227) 10,295,535 CASH AND RECEIVABLES, LESS LIABILITY (1.3%) 133,378 ----------- TOTAL CONTRACT OWNERS' EQUITY (100.0%) $10,428,913 ----------- -----------
*NON-INCOME PRODUCING INVESTMENT IN 1995. SEE NOTES TO FINANCIAL STATEMENTS - - -------------------------------------------------------------------------------- F-5 NOTES TO FINANCIAL STATEMENTS NOTE A-SIGNIFICANT ACCOUNTING POLICIES Franklin Life Variable Annuity Fund A (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. ANNUITY RESERVES: Reserves on contracts, all involving life contingencies, are calculated using the Progressive Annuity Table with an assumed investment rate of 3-1/2%. NOTE B-INVESTMENTS Exclusive of short-term investments, the cost of investments purchased and the proceeds from investments sold during 1995 aggregated $1,578,489 and $1,044,876, 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 During the year ended December 31, 1995, sales and administrative charges aggregating $30,845 were deducted from the proceeds of the sales of accumulation units and retained by Franklin Financial Services Corporation and The Franklin. Franklin Financial Services Corporation is a wholly-owned subsidiary of The Franklin and principal underwriter for the Fund. NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS
YEAR ENDED YEAR ENDED DECEMBER 31, 1995 DECEMBER 31, 1994 ---------------------------------------------- UNITS AMOUNT UNITS AMOUNT ----- ------ ----- ------ Balance at beginning of year 172,507 $9,313,322 198,763 $10,652,285 Purchases 5,872 354,276 9,726 521,549 Net investment income* - 171,988 - 113,239 Net realized gain from investment transactions* - 16,819 - 690,391 Net unrealized appreciation (depreciation) of investments* - 2,250,305 - (730,818) Withdrawals (27,905) (1,694,308) (35,982) (1,936,673) Reimbursement for contract guarantees* - 406 - 3,349 ---------------------------------------------- Balance at end of year 150,474 $10,412,808 172,507 $9,313,322 ---------------------------------------------- ----------------------------------------------
*Excludes portion allocated to annuity reserves on a pro rata basis. NOTE F-REMUNERATION OF MANAGEMENT No person receives any remuneration from the Fund because The Franklin pays the fees of members of the Board of Managers and officers and employees of the Fund pursuant to expense assurances. Certain members of the Board of Managers and officers of the Fund are also directors, officers or employees of The Franklin or Franklin Financial Services Corporation. Amounts paid by the Fund to The Franklin and to ranklin Financial Services Corporation are disclosed in this report. NOTE G-NET UNREALIZED APPRECIATION/DEPRECIATION OF INVESTMENTS Net unrealized appreciation/depreciation of investments at December 31, 1995 and 1994 was as follows:
DECEMBER 31 DECEMBER 31 1995 1994 ----------------------------- Gross unrealized $2,225,359 $351,869 appreciation Gross unrealized 48,051 429,692 depreciation ----------------------------- Net unrealized appreciation (depreciation) $2,177,308 $(77,823) of investments ----------------------------- -----------------------------
F-6 SUPPLEMENTARY INFORMATION PER-UNIT INCOME AND CHANGES IN ACCUMULATION UNIT VALUE (SELECTED DATA AND RATIOS FOR AN ACCUMULATION UNIT OUTSTANDING THROUGHOUT EACH YEAR)
YEAR ENDED DECEMBER 31 1995 1994 1993 1992 1991 ------------------------------------------------------------------------ Investment income $1.948 $1.408 $1.231 $1.064 $1.194 Expenses .875 .773 .773 .723 .654 ------------------------------------------------------------------------ Net investment income 1.073 .635 .458 .341 .540 Net realized and unrealized gain (loss) on investments 14.139 (.240) .112 .770 14.238 ----------------------------------------------------------------------- Net increase in accumulation unit value 15.212 .395 .570 1.111 14.778 Accumulation unit value: Beginning of year 53.988 53.593 53.023 51.912 37.134 ------------------------------------------------------------------------ End of year $69.200 $53.988 $53.593 $53.023 $51.912 ------------------------------------------------------------------------ ------------------------------------------------------------------------ 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 1.76% 1.18% .85% .68% 1.19% Portfolio turnover rate 14.66% 88.99% 68.62% 59.84% 28.47% Number of accumulation units outstanding at end of year 150,474 172,507 198,763 217,948 229,368 - - -------------------------------------------------------------------------------------------------------------------------------
F-7 REPORT OF INDEPENDENT AUDITORS --------------- Board of Directors and Shareholder of The Franklin Life Insurance Company We have audited the consolidated balance sheet of The Franklin Life Insurance Company (a wholly-owned subsidiary of American Franklin Company, which is an indirect wholly-owned subsidiary of American General Corporation) and subsidiaries (the Company) as of December 31, 1995, and the related consolidated statements of income, shareholder's equity and cash flows for the eleven months ended December 31, 1995 and the one month ended January 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Franklin Life Insurance Company and subsidiaries at December 31, 1995 and the consolidated results of their operations and their cash flows for the eleven months ended December 31, 1995 and the one month ended January 31, 1995, in conformity with generally accepted accounting principles. As discussed in the notes to the consolidated financial statements, in January 1995, the Company changed its method of accounting for mortgage loans. /s/ Ernst & Young LLP ERNST & YOUNG LLP Chicago, Illinois February 12, 1996 F-8 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholder of The Franklin Life Insurance Company We have audited the consolidated balance sheet of The Franklin Life Insurance Company (a wholly-owned subsidiary of American Franklin Company which, through January 31, 1995 was a wholly owned subsidiary of American Brands, Inc.) and Subsidiaries as of December 31, 1994, and the related consolidated statements of income, shareholder's equity and cash flows for each of the two years in the period then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. As discussed in Note 1 to the Consolidated Financial Statements, on January 31, 1995, American Brands, Inc. completed the sale of American Franklin Company and Subsidiaries (including The Franklin Life Insurance Company) to American General Corporation. These financial statements have been prepared on a basis consistent with prior years and have not been adjusted to reflect the effects of this sale. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Franklin Life Insurance Company and Subsidiaries as of December 31, 1994, and the consolidated results of their operations and their cash flows for each of the two years in the period then ended, in conformity with generally accepted accounting principles. As discussed in the Notes to Consolidated Financial Statements in 1993, the Company changed its methods of accounting for post retirement benefits other than pensions, certain investments in debt and equity securities, and reinsurance contracts. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. 203 North LaSalle Street Chicago, Illinois February 1, 1995 F-9 THE FRANKLIN LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (In millions, except share data)
Predecessor Basis ------------ December 31 ----------------------- ASSETS 1995 1994 ----------------------- Investments Fixed maturity securities Fair value (amortized cost: $5,109.5; $180.0) $ 5681.8 $ 164.4 Amortized cost (fair value: $4,612.5) - 4896.8 Mortgage loans on real estate 595.3 636.2 Equity securities (cost: $2.4; $177.7) 3.7 176.5 Policy loans 322.8 334.2 Other long-term investments 51.0 60.6 ----------------------- Total investments 6654.6 6268.7 ----------------------- Cash and cash equivalents 13.8 149.8 Accrued investment income 103.4 106.8 Note receivable from parent 116.0 - Preferred stock of affiliates (amortized cost: $8.5) 8.5 - Receivable from brokers 34.4 - Receivables from agents, less allowance (1995 - $0.4) 18.3 17.9 Amounts recoverable from reinsurers 19.0 23.2 Deferred policy acquisition costs 47.5 510.6 Cost of insurance purchased 353.0 174.7 Property and equipment, at cost, less accumulated depreciation ($3.4; $36.1) 20.1 20.2 Acquisition - related goodwill - 79.8 Other assets 30.7 18.8 Assets held in separate accounts 118.3 104.3 ----------------------- Total assets $ 7537.6 $ 7474.8 ----------------------- -----------------------
See Notes to Consolidated Financial Statements. F-10 THE FRANKLIN LIFE INSURANCE COMPANY CONSOLIDATED BALANCE SHEET (In millions, except share data)
Predecessor Basis ------------ December 31 ----------------------- LIABILITIES 1995 1994 ----------------------- Insurance liabilities Life, annuity and accident and health reserves $ 2791.4 $ 2733.3 Policy and contract claims 41.2 39.1 Investment-type contract deposits and dividend accumulations 2993.0 2897.3 Participating policyholders' interests 199.2 190.7 Other 48.4 55.8 Income taxes Current (12.0) 6.0 Deferred 49.8 (22.0) Intercompany payables 0.6 - Accrued expenses and other liabilities 145.5 110.7 Liabilities related to separate accounts 118.3 104.3 ----------------------- Total liabilities 6375.4 6115.2 ----------------------- SHAREHOLDER'S EQUITY Common stock ($2 par value; 30,000,000 shares authorized, 21,002,000 shares issued and outstanding) 42.0 42.0 Paid-in capital 884.3 803.0 Net unrealized gains (losses) on securities 187.5 (8.1) Retained earnings 48.4 522.7 ----------------------- Total shareholder's equity 1162.2 1359.6 ----------------------- Total liabilities and shareholder's equity $ 7537.6 $ 7474.8 ----------------------- -----------------------
See Notes to Consolidated Financial Statements. F-11 THE FRANKLIN LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF INCOME (In millions)
Predecessor Basis ---------------------------------------- ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 ---------------------------------------------------------- 1995 1995 1994 1993 ---------------------------------------------------------- Revenues Premiums and other considerations $ 449.6 $ 34.5 $ 502.7 $ 462.2 Net investment income 468.8 41.3 478.7 465.4 Investment gains (losses) 7.2 (7.6) (14.4) 92.6 Other 55.9 4.1 68.5 50.8 ---------------------------------------------------------- Total revenues 981.5 72.3 1035.5 1071.0 ---------------------------------------------------------- Benefits and expenses Benefits paid or provided Death claims and other policy benefits 236.3 21.5 233.0 259.5 Investment-type contracts 168.3 14.0 170.5 169.1 Dividends to policyholders 85.6 7.5 87.0 92.3 Change in policy reserves 148.5 11.0 218.1 122.2 Increase in participating policy- holders' interests 11.0 1.0 12.0 12.2 ---------------------------------------------------------- 649.7 55.0 720.6 655.3 Operating costs and expenses 125.3 10.2 119.8 120.3 Amortization of deferred policy acquisition costs 8.3 5.8 71.3 68.0 Amortization of cost of insurance purchased 29.0 0.8 9.0 7.9 Amortization of acquisition-related goodwill - 0.2 3.3 3.3 ---------------------------------------------------------- Total benefits and expenses 812.3 72.0 924.0 854.8 ---------------------------------------------------------- Income before income tax expense and cumulative effect of accounting changes 169.2 0.3 111.5 216.2 ---------------------------------------------------------- Income tax expense (benefit) Current 39.7 4.9 75.6 97.8 Deferred 21.1 (4.7) (31.9) (18.7) ---------------------------------------------------------- Total income tax expense 60.8 0.2 43.7 79.1 ---------------------------------------------------------- Income before cumulative effect of accounting changes 108.4 0.1 67.8 137.1 Cumulative effect of accounting changes - - - 17.9 ---------------------------------------------------------- Net income $ 108.4 $ 0.1 $ 67.8 $ 119.2 ---------------------------------------------------------- ----------------------------------------------------------
See Notes to Consolidated Financial Statements. F-12 THE FRANKLIN LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (In millions)
Predecessor Basis ---------------------------------------- ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 ---------------------------------------------------------- 1995 1995 1994 1993 ---------------------------------------------------------- Common stock $ 42.0 $ 42.0 $ 42.0 $ 42.0 ---------------------------------------------------------- Paid-in capital Balance at beginning of period 884.3 803.0 803.0 803.0 Adjustment for the acquisition - 81.3 - - ---------------------------------------------------------- Balance at end of period 884.3 884.3 803.0 803.0 ---------------------------------------------------------- Net unrealized gains (losses) on available-for-sale securities Balance at beginning of period - (8.1) 5.3 10.5 Change during the period 187.5 1.4 (13.4) (5.2) Adjustment for the acquisition - 6.7 - - ---------------------------------------------------------- Balance at end of period 187.5 - (8.1) 5.3 ---------------------------------------------------------- Retained earnings Balance at beginning of period - 522.7 492.7 418.7 Net income 108.4 0.1 67.8 119.2 Dividends paid to parent (60.0) (250.0) (37.8) (45.2) Adjustment for the acquisition - (272.8) - - ---------------------------------------------------------- Balance at end of period 48.4 - 522.7 492.7 ---------------------------------------------------------- Total shareholder's equity at end of period $ 1162.2 $ 926.3 $ 1359.6 $ 1343.0 ---------------------------------------------------------- ----------------------------------------------------------
See Notes to Consolidated Financial Statements. F-13 THE FRANKLIN LIFE INSURANCE COMPANY CONSOLIDATED STATEMENT OF CASH FLOWS (In millions)
Predecessor Basis ---------------------------------------- ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 ---------------------------------------------------------- 1995 1995 1994 1993 ---------------------------------------------------------- Operating activities Net income before cumulative effect of accounting changes $ 108.4 $ 0.1 $ 67.8 $ 137.1 Reconciling adjustments to net cash provided by operating activities Insurance liabilities 155.4 19.9 232.8 141.1 Deferred policy acquisition costs (59.4) (2.7) (40.1) (32.6) Investment (gains) losses (11.4) (0.9) 14.4 (92.6) Investment write-downs and reserves 4.2 8.5 - - Cost of insurance purchased and intangibles 29.0 1.0 12.3 11.2 Interest credited, net of charges on investment contract deposits 153.7 12.0 153.0 155.1 Purchase of trading securities - (1.5) (183.3) - Proceeds from sale of trading securities - 85.5 247.0 - Other, net 8.5 (7.1) (37.3) (20.0) ---------------------------------------------------------- Net cash provided by operating activities 388.4 114.8 466.6 299.3 ---------------------------------------------------------- Investing activities Investments purchases Held-to-maturity - (0.8) (621.8) - Available-for-sale (1055.8) - (57.3) - Other investments (95.7) (27.2) (224.3) (2079.6) Affiliated (124.5) - - - Investment calls, maturities and sales Held-to-maturity - 24.9 470.0 - Available-for-sale 832.0 0.2 8.1 - Other investments 127.1 6.3 72.6 1708.2 Additions to property and equipment (3.5) (0.5) (5.0) (6.5) ---------------------------------------------------------- Net cash provided by (used for) investing activities (320.4) 2.9 (357.7) (377.9) ---------------------------------------------------------- Financing activities Policyholder account deposits 357.8 29.2 336.6 386.0 Policyholder account withdrawals (366.2) (32.6) (337.0) (268.5) Proceeds from intercompany borrowings 105.2 - - - Repayments of intercompany borrowings (105.1) - - - Dividend payments (60.0) (250.0) (37.8) (45.2) ---------------------------------------------------------- Net cash provided by (used for) financing activities (68.3) (253.4) (38.2) 72.3 ---------------------------------------------------------- Net increase (decrease) in cash and cash equivalents (0.3) (135.7) 70.7 (6.3) Cash and cash equivalents at beginning of period 14.1 149.8 79.1 85.4 ---------------------------------------------------------- Cash and cash equivalents at end of period $ 13.8 $ 14.1 $ 149.8 $ 79.1 ---------------------------------------------------------- ----------------------------------------------------------
See Notes to Consolidated Financial Statements. F-14 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 3,500 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, a wholly-owned subsidiary of American Franklin Company (AFC), and its significant subsidiaries, The American Franklin Life Insurance Company (AMFLIC) and The Franklin United Life Insurance Company (FULIC). All material intercompany transactions have been eliminated in consolidation. To conform with the 1995 presentation, certain items in the prior years' financial statements and notes have been reclassified. 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 with no gain or loss recognized on the transaction. The preparation of financial statements requires management to make estimates and assumptions that affect (1) the reported amounts of assets and liabilities, (2) disclosures of contingent assets and liabilities, and (3) the reported amounts of revenues and expenses during the reporting periods. Ultimate results could differ from those estimates. 1.3 ACQUISITION On January 31, 1995, AGC Life Insurance Company (AGCL), a subsidiary of American General Corporation (AGC), acquired AFC for a purchase price of $1.17 billion. F-15 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.3 ACQUISITION (CONTINUED) The purchase price consisted of $920 million paid in cash at closing and a $250 million extraordinary cash dividend paid by AFC to Franklin's former parent prior to closing. In addition, $6.3 million of acquisition costs were capitalized as part of the acquisition. These transactions received the required regulatory approvals from the Illinois and New York Insurance Departments. 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 balance sheet at December 31, 1995, and the consolidated statements of income, shareholder's equity and cash flows for the eleven months then ended, are reported under the purchase method of accounting and, accordingly, are not consistent with the basis of presentation of the previous periods' financial statements (Predecessor Basis). The fair values of Franklin's consolidated assets and liabilities at January 31, 1995 were as follows (in millions): Fixed maturity securities $ 4862.3 Other investments 1126.0 Other assets 300.7 Cost of insurance purchased 656.6 Federal income taxes 76.5 Insurance liabilities (5891.5) Other liabilities (204.3) ----------- Net assets $ 926.3 ----------- ----------- F-16 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.4 ACCOUNTING CHANGES CURRENT YEAR. Effective January 1, 1995, Franklin adopted Statement of Financial Accounting Standards (SFAS 114), "Accounting by Creditors for Impairment of a Loan." SFAS 114 requires that certain impaired loans be reported at the present value of expected future cash flows discounted using the loan's initial effective interest rate, the loan's observable market price, or the fair value of underlying collateral. The initial effect of adopting this statement was recorded as part of realized investment losses and resulted in a one-time reduction of net income of $5.5 million ($8.5 million pretax) for the one month ended January 31, 1995. Effective January 31, 1995, Franklin adopted SFAS 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of". The adoption of this statement did not have a material impact on Franklin's consolidated financial statements. Effective January 31, 1995, Franklin adopted SFAS 120, "Accounting and Reporting by Mutual Life Insurance Enterprises and by Insurance Enterprises for Certain Long-Duration Participating Contracts". SFAS 120 requires that benefit reserves for participating life insurance contracts be computed on a net level premium basis using nonforfeiture interest and mortality rates. The interest assumption used to compute estimated gross profits was 8.5% at December 31, 1995. The initial effect of adopting this statement was recorded as part of purchase accounting. PRIOR YEARS. Effective January 1, 1993, Franklin adopted SFAS 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions," which requires accrual of a liability for postretirement benefits other than pensions, and SFAS 112, "Employers' Accounting for Postemployment Benefits," which requires accrual of a liability for benefits provided to employees after employment but before retirement. Franklin elected to recognize the one-time transition obligation charge resulting from the adoption of SFAS 106 on the immediate recognition basis. The transition obligation at January 1, 1993 was $31.5 million. The cumulative change in accounting principle for the adoption of SFAS 106 and SFAS 112, net of $11.0 million of deferred income taxes, was a $20.5 million increase to net income in 1993. F-17 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.4 ACCOUNTING CHANGES (CONTINUED) Effective December 31, 1993, Franklin adopted SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." This standard requires that fixed maturity and equity securities be classified into one of three categories: (1) held-to-maturity, (2) available-for-sale, or (3) trading. Securities classified as held-to-maturity are carried at amortized cost while those classified as available-for-sale or trading are carried at fair value. The unrealized gain (loss) on those securities classified as available-for-sale is recorded as an adjustment to shareholder's equity, while the unrealized gain (loss) on those securities classified as trading is recorded as an adjustment to income. At December 31, 1994 and 1993, Franklin classified all equity securities as trading and a portion of its fixed maturity securities as available-for-sale, with the remainder classified as held-to-maturity. The cumulative change in accounting principle, net of $1.5 million of deferred income taxes, was a $2.6 million increase to net income in 1993. Effective January 1, 1993, Franklin adopted SFAS 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts". The adoption of this statement did not have a material impact on Franklin's consolidated financial statements. 1.5 INVESTMENTS FIXED MATURITY AND EQUITY SECURITIES. Concurrent with the sale of Franklin, and in conjunction with purchase accounting, effective January 31, 1995, Franklin has classified all fixed maturity securities and all equity securities as available-for-sale and recorded them at fair value. After adjusting related balance sheet accounts as if the unrealized gains (losses) had been realized, the net fair value adjustment is recorded in net unrealized gains (losses) on securities within shareholder's equity. If the fair value of a security classified as available-for-sale declines below its cost and this decline is considered to be other than temporary, the security is reduced to its fair value, and the reduction is recorded as a realized loss. MORTGAGE LOANS. Mortgage loans are reported at amortized cost, net of an allowance for losses. The allowance for losses covers all non-performing loans, consisting of loans delinquent 60 days or more. The allowance also covers loans for which there is a concern based on management's assessment of risk factors, such as potential non-payment or non-monetary default. The allowance is based on a loan-specific review and a formula that reflects past results and current trends. Impaired loans, those for which Franklin determines that it is probable that all amounts due under the contractual terms will not be collected, are reported at the lower of amortized cost or fair value of the underlying collateral less estimated costs to sell. F-18 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.5 INVESTMENTS (CONTINUED) POLICY LOANS. Policy loans are reported at unpaid principal balance and are adjusted periodically for any differences between face value and unpaid principal balance, and for possible uncollectible amounts. INVESTMENT INCOME. Interest on fixed maturity securities and performing mortgage loans is recorded as income when earned and is adjusted for any amortization of premium or discount. Interest on restructured mortgage loans is recorded as income when earned based on the new contractual rate. Interest on delinquent mortgage loans is recorded as income on a cash basis. Dividends are recorded as income on ex-dividend dates. REALIZED INVESTMENT GAINS (LOSSES). Realized investment gains (losses) are recognized using the specific identification method and include declines in the fair value of investments below cost that are considered other than temporary and the net unrealized holding gain or loss on trading securities. 1.6 CASH AND CASH EQUIVALENTS Highly liquid investments with an original maturity of three months or less are included in cash and cash equivalents. The carrying amount approximates fair value. 1.7 DEFERRED POLICY ACQUISITION COSTS (DPAC) The costs of writing an insurance policy, including agents' commissions and underwriting and marketing expenses, are deferred and included in the DPAC asset. DPAC associated with interest-sensitive life insurance, participating life insurance and investment contracts is charged to expense in relation to the estimated gross profits of those contracts. DPAC associated with all other insurance contracts is charged to expense over the premium-paying period or as the premiums are earned over the life of the contract. Gross profits include realized investment gains (losses). In addition, 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. F-19 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.7 DEFERRED POLICY ACQUISITION COSTS (DPAC) (CONTINUED) Franklin reviews the carrying amount of DPAC on at least an annual basis. In determining whether the carrying amount is appropriate, Franklin considers estimated future gross profits or future premiums, as applicable for the type of contract. In all cases, Franklin considers expected mortality, interest earned and credited rates, persistency, and expenses. 1.8 COST OF INSURANCE PURCHASED (CIP) The cost assigned to insurance contracts in force at the acquisition date is referred to as CIP. CIP is charged to expense using the same assumptions as DPAC. Interest is accreted on the unamortized balance of CIP at rates of 7% to 8.5%. CIP is also adjusted for the impact of net unrealized gains (losses) on securities in the same manner as DPAC. Franklin reviews the carrying amount of CIP on at least an annual basis using the same methods used to evaluate DPAC. 1.9 ACQUISITION-RELATED GOODWILL Prior to January 31, 1995, acquisition-related goodwill was charged to expense in equal amounts over 40 years. At December 31, 1994, accumulated amortization was $53.0 million. Acquisition-related goodwill was attributable to a previous acquisition of AFC and was eliminated in purchase accounting. 1.10 SEPARATE ACCOUNTS Separate accounts are assets and liabilities associated with certain contracts for which the investment risk lies solely with the holder of the contract rather than Franklin. Consequently, the insurer's liability for these accounts equals the value of the account assets. Investment income, realized investment gains (losses), and policyholder account deposits and withdrawals related to separate accounts are excluded from the consolidated statements of income and cash flows. Assets held in separate accounts are carried at fair value. 1.11 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. F-20 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.11 INSURANCE LIABILITIES (CONTINUED) For interest-sensitive life insurance and investment contracts, reserves equal the sum of the policy account balance and deferred revenue charges. Reserves for other 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, 1995. 1.12 PREMIUM RECOGNITION Most receipts for annuities and interest-sensitive life insurance contracts are classified as deposits instead of revenues. Revenues for these contracts consist of the mortality, expense, and surrender charges assessed against the account balance. Policy charges that are designed to compensate Franklin for future services are deferred and recognized in income over the period earned, using the same assumptions used to amortize DPAC. For limited-payment contracts, net premiums are recorded as revenue, and the difference between the gross premium received and the net premium is deferred and recognized in income in a constant relationship to insurance in force. For all other long-duration contracts, premiums are recognized when due. 1.13 INCOME TAXES Deferred tax assets and liabilities are established for temporary differences between the financial reporting basis and the tax basis of assets and liabilities, at the enacted tax rates expected to be in effect when the temporary differences reverse. The effect of a tax rate change is recognized in income in the period of enactment. State income taxes are included in income tax expense. A change in deferred taxes related to fluctuations in fair value of available-for-sale securities is included in net unrealized gains (losses) on securities in shareholder's equity. F-21 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1.14 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 48% and 49% of life insurance in force at December 31, 1995 and 1994, respectively, and 58%, 69%, 61%, and 65% of premiums and other considerations for the eleven months ended December 31, 1995, the one month ended January 31, 1995, and the years ended December 31, 1994 and 1993, respectively. The portion of earnings allocated to participating policyholders which cannot be expected to inure to Franklin's shareholder is excluded from net income and shareholder's equity. The amount of dividends to be paid on participating life insurance contracts is determined annually, based on estimates of amounts incurred for the contracts in effect during the period. 2. Investments 2.1 INVESTMENT INCOME Income by type of investment was as follows:
ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 ---------------------------------------------------------- IN MILLIONS 1995 1995 1994 1993 - - -------------------------------------------------------------------------------------------------------- Fixed maturity securities $ 394.3 $ 33.9 $ 400.8 $ 394.4 Mortgage loans on real estate 54.3 4.6 54.9 47.7 Policy loans 18.6 1.7 18.3 17.8 Other investments 9.1 1.2 12.2 11.9 ---------------------------------------------------------- Gross investment income 476.3 41.4 486.2 471.8 Investment expense 7.5 0.1 7.5 6.4 ---------------------------------------------------------- Net investment income $ 468.8 $ 41.3 $ 478.7 $ 465.4 ---------------------------------------------------------- ----------------------------------------------------------
The carrying value of investments that produced no investment income during 1995 totaled $30.3 million, or less than 0.5% of total invested assets. The ultimate disposition of these assets is not expected to have a material effect on Franklin's consolidated results of operations and financial position. F-22 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.2 REALIZED INVESTMENT GAINS (LOSSES) Realized investment gains (losses) for fixed maturity and equity securities, net of participating policyholders' interest, and DPAC and CIP amortization were as follows:
ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 ---------------------------------------------------------- IN MILLIONS 1995 1995 1994 1993 - - -------------------------------------------------------------------------------------------------------- Fixed maturity securities Gross gains $ 13.8 $ - $ 17.4 $ 79.1 Gross losses (1.9) - (0.9) (8.9) ---------------------------------------------------------- Total fixed maturity securities 11.9 - 16.5 70.2 ---------------------------------------------------------- Equity securities Gross gains 1.9 4.1 23.2 59.1 Gross losses (0.5) (5.4) (49.4) (32.5) ---------------------------------------------------------- Total equity securities 1.4 (1.3) (26.2) 26.6 ---------------------------------------------------------- Other - (6.3) (4.7) (4.2) Adjustment to DPAC and CIP (6.1) - - - ---------------------------------------------------------- Realized investment gains (losses) $ 7.2 $ (7.6) $ (14.4) $ 92.6 ---------------------------------------------------------- ----------------------------------------------------------
Voluntary sales of investments resulted in:
Realized -------------------------- In millions Proceeds Gains Losses - - ------------------------------------------------------------------------------------------------ ELEVEN MONTHS ENDED AVAILABLE-FOR-SALE $ 268.7 $ 8.5 $ (0.4) DECEMBER 31, 1995 - - ------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------ ONE MONTH ENDED HELD-TO-MATURITY $ - $ - $ - JANUARY 31, 1995 AVAILABLE-FOR-SALE $ - $ - $ - TRADING $ 84.7 $ 4.1 $ (5.4) - - ------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------ Year Ended December 31, 1994 Available-for-sale $ - $ - - Trading $ 236.7 $ 23.2 $ (49.4) - - ------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------ Year Ended December 31, 1993 Fixed maturity and equity securities $ 34.1 $ 1.0 $ (0.2) - - ------------------------------------------------------------------------------------------------ - - ------------------------------------------------------------------------------------------------
F-23 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 available-for-sale and held-to-maturity securities were as follows:
DECEMBER 31, 1995 ---------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR In millions COST GAINS LOSSES VALUE - - ---------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES Fixed maturity securities Corporate bonds Investment grade $ 2872.1 $ 304.2 $ (3.5) $ 3172.8 Below investment grade 188.1 11.9 (0.7) 199.3 Public utilities 1241.5 156.6 - 1398.1 Mortgage-backed 500.4 61.5 - 561.9 Foreign governments 101.5 17.7 - 119.2 U.S. Government 191.8 23.7 - 215.5 States/political subdivisions 13.6 0.9 - 14.5 Redeemable preferred stocks 0.5 - - 0.5 ---------------------------------------------------------- Total fixed maturity securities 5109.5 576.5 (4.2) 5681.8 ---------------------------------------------------------- EQUITY SECURITIES 2.4 1.3 - 3.7 ---------------------------------------------------------- Total available-for-sale securities $ 5111.9 $ 577.8 $ (4.2) $ 5685.5 ---------------------------------------------------------- ----------------------------------------------------------
F-24 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
DECEMBER 31, 1994 ---------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR IN MILLIONS COST GAINS LOSSES VALUE - - ---------------------------------------------------------------------------------------------------------- HELD-TO-MATURITY SECURITIES Fixed maturity securities Corporate securities Investment grade $ 2511.1 $ 41.8 $ (137.4) $ 2415.5 Below investment grade 189.0 0.6 (5.0) 184.6 Public utilities 1549.5 16.8 (128.9) 1437.4 Mortgage-backed 464.0 3.8 (68.4) 399.4 Foreign governments 113.7 1.8 (6.8) 108.7 U.S. Government 49.0 0.7 (2.8) 46.9 States/political subdivisions 18.0 0.2 (1.2) 17.0 Redeemable preferred stocks 2.5 0.6 (0.1) 3.0 ---------------------------------------------------------- Total held-to-maturity 4896.8 66.3 (350.6) 4612.5 ----------------------------------------------------------
F-25 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.3 FIXED MATURITY AND EQUITY SECURITIES (CONTINUED)
DECEMBER 31, 1994 ---------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR IN MILLIONS COST GAINS LOSSES VALUE - - --------------------------------------------------------------------------------------------------------- AVAILABLE-FOR-SALE SECURITIES Fixed maturity securities Foreign government 3.4 - (0.6) 2.8 U.S. Government 176.6 1.7 (16.7) 161.6 ---------------------------------------------------------- Total available-for-sale securities 180.0 1.7 (17.3) 164.4 ---------------------------------------------------------- Total fixed maturity securities $ 5,076.8 68.0 $ (367.9) $ 4,776.9 ---------------------------------------------------------- ----------------------------------------------------------
F-26 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, 1995 were as follows:
DECEMBER 31, 1995 --------------------------- AMORTIZED FAIR In millions COST VALUE - - ---------------------------------------------------------------------------- Due in one year or less $ 66.0 $ 66.8 Due after one year through five years 871.8 928.6 Due after five years through ten years 1932.1 2134.7 Due after ten years 1739.2 1989.8 Mortgage-backed securities 500.4 561.9 --------------------------- Totals $ 5109.5 $ 5681.8 --------------------------- ---------------------------
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. F-27 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.4 NET UNREALIZED GAINS (LOSSES) ON SECURITIES Net unrealized gains (losses) on available-for-sale securities included in shareholder's equity at December 31 were as follows:
In millions 1995 1994 ----------------------------------------------------------------- Gross unrealized gains $ 577.8 $ 1.7 Gross unrealized losses (4.2) (17.3) DPAC fair value adjustment (11.7) - CIP fair value adjustment (270.0) - Participating policyholders' interest (3.4) 1.8 Deferred federal income taxes (101.0) 5.7 Net unrealized gains (losses) ------------------------------- on securities $ 187.5 $ (8.1) ------------------------------- -------------------------------
The change in net unrealized holding gain or loss on trading securities which was included in earnings during the one month ended January 31, 1995 and for the year ended December 31, 1994 and recorded as part of the cumulative effect of a change in accounting principle for 1993 was as follows:
ONE MONTH Years ENDED Ended JANUARY 31 December 31 -------------------------------------- In millions 1995 1994 1993 ------------------------------------------------------------------ Change in unrealized holding gain or loss on trading securities $ 2.2 $ (5.3) $ 4.1 Deferred income taxes (0.8) 1.9 (1.5) ------------------------------------ Change in net unrealized holding gain or loss on trading securities $ 1.4 $ (3.4) $ 2.6 ------------------------------------ ------------------------------------
F-28 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 79% or less, based on management's credit assessment of the borrower. At December 31, the mortgage loan portfolio was distributed as follows:
In millions 1995 1994 ----------------------------------------------------------------- Geographic distribution East North Central $ 135.3 $ 148.5 East South Central 39.1 37.3 Mid Atlantic 17.9 19.0 Mountain 42.9 45.2 New England 20.6 22.4 Pacific 102.0 103.0 South Atlantic 153.8 162.7 West North Central 40.2 47.4 West South Central 56.2 50.7 Allowance for losses (12.7) - -------------------------------- Total $ 595.3 $ 636.2 -------------------------------- -------------------------------- Property type Retail $ 296.3 $ 295.5 Office 159.7 177.9 Industrial 99.9 109.9 Residential and other 52.1 52.9 Allowance for losses (12.7) - -------------------------------- Total $ 595.3 $ 636.2 -------------------------------- --------------------------------
F-29 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.5 MORTGAGE LOANS ON REAL ESTATE (CONTINUED) IMPAIRED LOANS. The carrying value of impaired mortgage loans on real estate and related interest income were as follows:
AS OF AND FOR THE ELEVEN MONTHS ENDED DECEMBER 31 ------------------ In millions 1995 ------------------------------------------------------- Impaired loans With allowance (a) $ 5.3 Without allowance 17.8 ------------------ Total impaired loans $ 23.1 ------------------ ------------------ Average investment $ 27.4 Interest income earned 1.3
(a) Represents gross amounts before allowance for mortgage loan losses of $1.6 million. Franklin had no impaired loans at December 31, 1994 and 1993. ALLOWANCE. The allowance for mortgage loan losses was as follows:
ELEVEN MONTHS ONE MONTH ENDED ENDED DECEMBER 31 JANUARY 31 -------------------------------- In millions 1995 1995 ----------------------------------------------------------------- Balance at beginning of period $ 8.5 $ - Net additions(a) 4.2 8.5 --------------------------------- Balance at end of period $ 12.7 $ 8.5 --------------------------------- ---------------------------------
(a) Charged to realized investment gains (losses). F-30 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2.6 INVESTMENTS ON DEPOSIT As of December 31, 1995 and 1994, bonds and other investments carried at $25.0 million and $24.8 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, 1995 and 1994, Franklin's largest investment in any one entity other than U.S. Government obligations and related party amounts was $66.1 million and $40.7 million, respectively. 3. Fair Value of Financial Instruments Carrying amounts and fair values for certain of Franklin's financial instruments at December 31 are presented below. Care should be exercised in drawing conclusions based on fair value, since (1) the fair values presented do not include the value associated with all of the Company's assets and liabilities, and (2) the reporting of investments at fair value without a corresponding revaluation of related policyholder liabilities can be misinterpreted.
December 31 ------------------------------------------------ 1995 1994 ------------------------------------------------ CARRYING FAIR Carrying Fair In millions AMOUNT VALUE Amount Value - - ------------------------------------------------------------------------------ Assets Available-for-sale fixed maturity securities $ 5681.8 $ 5681.8 $ 164.4 $ 164.4 Held-to-maturity fixed maturity securities - - 4896.8 4612.5 Mortgage loans on real estate 595.3 628.6 636.2 624.3 Equity securities 3.7 3.7 176.5 176.5 Liabilities Insurance investment contracts (1985.0) (1901.3) (1908.0) (1823.5)
F-31 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. Fair Value of Financial Instruments (continued) The methods and assumptions used to estimate fair value were as follows: FIXED MATURITY AND EQUITY SECURITIES. Fair values of fixed maturity and equity securities were based on quoted market prices, where available. For investments not actively traded, fair values were estimated using values obtained from independent pricing services or in the case of some private placements, by discounting expected future cash flows using current market rates applicable to the yield, credit quality, and the average life of the investments. MORTGAGE LOANS ON REAL ESTATE. Fair value of mortgage loans was estimated primarily using discounted cash flows, based on contractual maturities and discount rates that were based on U.S. Treasury rates for similar maturity ranges, adjusted for risk, based on property type. 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 1995 and 1994. INSURANCE INVESTMENT CONTRACTS. Fair value of insurance investment contracts, which do not subject Franklin to significant risks arising from policyholder mortality or morbidity, was estimated using cash flows discounted at market interest rates. Care should be exercised in drawing conclusions from the estimated fair value, since the estimates are based on assumptions regarding future economic activity. F-32 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. Deferred Policy Acquisition Costs (DPAC) Analysis of the changes in the DPAC asset is as follows:
ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 ------------------------------------------------- In millions 1995 1995 1994 1993 - - ------------------------------------------------------------------------------- Beginning of period balance $ - $ 510.6 $ 470.5 $ 437.9 Capitalization 67.7 8.5 111.4 100.6 Amortization (8.3) (5.8) (71.3) (68.0) Effect of unrealized gains on securities (11.7) - - - Effect of realized investment gains (0.2) - - - Adjustment for the acquisition (a) - (513.3) - - ------------------------------------------------- End of period balance $ 47.5 $ - $ 510.6 $ 470.5 ------------------------------------------------- -------------------------------------------------
(a) Represents the necessary elimination of the historical DPAC asset required by purchase accounting . F-33 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:
ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 ---------------------------------------------------- In millions 1995 1995 1994 1993 - - ------------------------------------------------------------------------------- Beginning of period balance $ 656.6 $ 174.7 $ 169.9 $ 175.6 Interest accretion 49.0 2.0 24.9 25.5 Additions 41.3 - 13.8 2.2 Amortization (118.0) (2.8) (33.9) (33.4) Effect of unrealized gains on securities (270.0) - - - Effect of realized investment gains (5.9) - - - Incremental adjustment for the acquisition (a) - 482.7 - - ---------------------------------------------------- End of period balance $ 353.0 $ 656.6 $ 174.7 $ 169.9 ---------------------------------------------------- ----------------------------------------------------
(a) Represents the incremental amount necessary to recognize the new CIP asset attributable to the January 31, 1995 acquisition. Accumulated CIP amortization at December 31, 1995 and 1994 was $29.0 million and $140.0 million, respectively. CIP amortization, net of accretion and additions, expected to be recorded in each of the next five years is $33.4 million, $32.1 million, $29.6 million, $25.6 million and $23.7 million. F-34 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. Separate Accounts Franklin administers four separate accounts. Three of these issue variable annuity contracts and the fourth has issued a group deposit administration contract for the Franklin employees' pension plan. AMFLIC administers two separate accounts in connection with the issue of its Variable Universal Life product. 7. Income Taxes Franklin and its life insurance company subsidiaries are subject to the life insurance company provisions of the federal tax law. Prior to February 1, 1995, Franklin and its subsidiaries filed a consolidated federal income tax return with their former parent company. The method of allocation of tax expense was based upon separate return calculations with current credit for net losses and tax credits. Consolidated Alternative Minimum Tax, if any, was allocated separately. Intercompany tax balances were to be settled no later than thirty (30) days after the date of filing the consolidated return. After January 31, 1995 Franklin will file a life/life consolidated return which includes Franklin, FULIC (prior to the date of sale) and AMFLIC. Franklin Financial Services Corporation, a broker-dealer and wholly-owned subsidiary of Franklin, will file a separate return. The tax allocation agreement is in the process of being drafted, executed and approved by the Board of Directors. 7.1 DEFERRED TAXES Components of deferred tax liabilities and assets at December 31, were as follows:
In millions 1995 1994 ----------------------------------------------------------------------- Deferred tax liabilities, applicable to: Basis differential of investments $ 151.9 $ 5.6 DPAC and CIP 99.5 204.1 Other 27.0 11.1 ---------------------------- Total deferred tax liabilities 278.4 220.8 ---------------------------- Deferred tax assets, applicable to: Policy reserves (115.6) (141.2) Participating policyholders' interests (69.9) (67.0) Postretirement benefits (4.0) (12.9) Basis differential of investments (14.4) (1.3) Other (24.7) (20.4) ---------------------------- Total deferred tax assets (228.6) (242.8) ---------------------------- Net deferred tax liabilities (assets) $ 49.8 $ (22.0) ---------------------------- ----------------------------
FLIC expects adequate future taxable income to realize the net deferred tax assets. Accordingly, no valuation allowance is considered necessary. F-35 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7.1 DEFERRED TAXES (CONTINUED) 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, 1995. At current corporate rates, the maximum amount of tax on such income is approximately $70 million. Deferred income taxes on these accumulations are not required because no distributions are expected. 7.2 TAX EXPENSE A reconciliation between the federal income tax rate and the effective income tax rate follows:
ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 -------------------------------------------- 1995 1995 1994 1993 -------------------------------------------- Federal income tax rate 35.0 % 35.0 % 35.0 % 35.0 % State taxes, net 0.9 36.3 1.1 1.0 Tax-exempt investment income (0.6) (39.3) 0.7 (0.7) Amortization of goodwill - 34.3 1.0 0.5 Other 0.6 0.4 1.4 0.8 -------------------------------------------- Effective tax rate 35.9 % 66.7 % 39.2 % 36.6 % -------------------------------------------- --------------------------------------------
7.3 TAXES PAID Federal income taxes paid for the eleven months ending December 31, 1995, and for the years ended December 31, 1994 and 1993 were $53 million, $65 million, and $84 million, respectively. State income taxes paid for the eleven months ended December 31, 1995, were $1 million, and $3 million for each of the years ended December 31, 1994 and 1993, respectively. There were no federal or state income taxes paid during January 1995. F-36 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7.4 TAX RETURN EXAMINATIONS The Internal Revenue Service (IRS) has completed examinations of Franklin's returns through 1989. All resolved issues have been settled within the amounts previously provided in the consolidated financial statements. Adequate provision has been made for unresolved issues. 8. Benefit Plans 8.1 PENSION PLANS Franklin and its subsidiaries have a defined benefit pension plan covering substantially all employees. On January 1, 1996, this plan was merged with the plan sponsored by American General Corporation. At that time, the benefits to employees were frozen and no future accrual or accretion of interest will occur. The plan provides 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 acquires a vested right to future benefits. Pension benefits are based on the participant's average monthly compensation and length of credited service. Annual contributions made to the plan are sufficient to satisfy legal funding requirements. Fixed maturity securities constitute the majority of the plan's assets at December 31, 1995. The pension plan has purchased annuity contracts from Franklin to provide benefits for its retirees. For the eleven months ended December 31, 1995, the one month ended January 31, 1995 and for the years ended December 31, 1994 and 1993, these contracts provided approximately $3.9, $0.3, $4.0, and $4.0 million annually for retiree benefits, respectively. During the fourth quarter of 1995, Franklin sponsored a program of special incentives to those employees age 55 and over who elected early retirement. The program concluded December 31, 1995. A withdrawal of $26.5 million was made from the plan in 1995 to provide full retirement benefits for these employees who elected by December 31, 1995 to retire under the program. F-37 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8.1 PENSION PLANS (CONTINUED) Net pension cost included the following components:
ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 -------------------------------------------- In millions 1995 1995 1994 1993 - - ------------------------------------------------------------------------------ Service cost (benefits earned) $ 0.9 $ 0.2 $ 2.8 $ 2.7 Interest cost 3.7 0.4 4.2 4.4 Actual return on plan assets (11.5) (0.4) 2.5 (5.9) Net amortization and deferral 6.3 - (6.7) 2.8 -------------------------------------------- Pension expense (income) $ (0.6) $ 0.2 $ 2.8 $ 4.0 -------------------------------------------- --------------------------------------------
F-38 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8.1 PENSION PLANS (CONTINUED) The funded status of the plan and the prepaid pension expense included in other assets at December 31 were as follows:
In millions 1995 1994 ------------------------------------------------------------------------- Accumulated benefit obligation, primarily vested $ 27.6 $ 35.9 Effect of increase in compensation levels - 16.1 --------------------------------- Projected benefit obligation 27.6 52.0 Plan assets at fair value 31.3 49.6 --------------------------------- Plan assets at fair value in excess of (less than) projected benefit obligation 3.7 (2.4) Unrecognized net loss 7.4 4.7 --------------------------------- Prepaid pension expense $ 11.1 $ 2.3 --------------------------------- --------------------------------- Weighted-average discount rate on benefit obligation 7.25 % 8.75 % Rate of increase in compensation levels 4.00 5.00 Expected long-term rate of return on plan assets 10.00 9.50
8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS Franklin has life, medical, supplemental major medical and dental plans for certain retired employees and agents. Most plans are contributory with retiree contributions adjusted annually to limit employer contributions to predetermined amounts. Franklin has reserved the right to change or eliminate these benefits at any time. F-39 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) The life plans are fully insured. The plan's funded status and the accrued postretirement benefit cost included in other liabilities at December 31 were as follows:
In millions 1995 1994 -------------------------------------------------------- Actuarial present value of benefit obligation Retirees $ 8.9 $ 18.1 Active plan participants Fully eligible 1.1 5.7 Other 2.5 15.5 --------------------- Accumulated postretirement benefit obligation (APBO) 12.5 39.3 Plan assets at fair value - - --------------------- APBO in excess of plan assets at fair value 12.5 39.3 Unrecognized net gain (1.4) - --------------------- Accrued benefit cost $ 11.1 $ 39.3 --------------------- --------------------- Weighted-average discount rate on benefit obligation 7.25 % 7.25 %
Effective January 31, 1995, as part of purchase accounting, the postretirement benefit obligation was revalued using AGC assumptions and anticipated plan revisions. As a result of this revaluation, the accumulated postretirement benefit obligation was reduced by $28.8 million. Postretirement benefit expense is as follows:
ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 ------------------------------------------------- In millions 1995 1995 1994 1993 --------------------------------------------------------------------------- Service cost (benefits earned) $ 0.1 $ - $ 1.1 $ 0.8 Interest cost 0.9 (0.2) 2.8 2.6 ------------------------------------------------- Postretirement benefit expense (income) $ 1.0 $ (0.2) $ 3.9 $ 3.4 ------------------------------------------------- -------------------------------------------------
F-40 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8.2 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS (CONTINUED) For measurement purposes, a 12% annual rate of increase in the per capita cost of covered health care benefits was assumed for 1996; the rate was assumed to decrease gradually to 6% by the year 2007 and remain at that level. A 1% increase in the assumed rate results in a $0.2 million increase in the accumulated postretirement benefit obligation and no increase in postretirement benefit expense. 9. Statutory Accounting State insurance laws prescribe accounting practices for calculating statutory net income and equity. In addition, state regulators may allow permitted statutory accounting practices that differ from prescribed practices. During 1995 Franklin, with the approval of the Illinois Insurance Department, reclassified $203 million of its statutory surplus from contributed to unassigned surplus. At December 31, 1995 and 1994 Franklin had statutory shareholder's equity of $386.0 million and $606.7 million, respectively. Statutory net income was $100.2 million, $28.7 million, and $87.2 million for 1995, 1994 and 1993, respectively. As determined on a statutory basis, the statutory shareholder's equity and net income of subsidiaries, in millions of dollars, were reported as follows:
STATUTORY ---------------------------------------- 1995 1994 1993 ---------------------------------------- Shareholder's Equity $ 9.9 $ 17.5 $ 20.1 ---------------------------------------- ---------------------------------------- Net Income $ (4.7) $ (4.8) $ (3.6) ---------------------------------------- ----------------------------------------
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. 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. During December 1995, Franklin received approval to pay an extraordinary dividend of $60 million to AGCL. Under these restrictions, loans or advances in excess of $96.5 million and dividends in any twelve-month period aggregating in excess of $100.2 million will require the approval of the Illinois Insurance Department. F-41 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. Consolidated Statement of Cash Flows In addition to the cash activities shown in the consolidated statement of cash flows, the following transactions, in millions of dollars, occurred:
ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 1995 1995 1994 1993 --------------------------------------------- Interest added to annuity and other financial products $ 168.3 $ 14.0 $ 170.5 $ 169.0 --------------------------------------------- --------------------------------------------- Fair value of assets acquired under certain assumed reinsurance treaties $ 14.7 $ - $ 18.3 $ 204.3 Unearned revenue - - - 9.3 --------------------------------------------- Insurance liabilities assumed $ 14.7 $ - $ 18.3 $ 195.0 --------------------------------------------- ---------------------------------------------
11. Reinsurance Franklin is routinely involved in reinsurance transactions. Ceded insurance becomes a liability of the reinsurer that assumes the risk. If the reinsurer could not meet its obligations, Franklin would reassume the liability. The likelihood of a material reinsurance liability being reassumed by Franklin is considered to be remote. Franklin and its insurance subsidiaries diversify their risk of exposure to reinsurance loss by using a number of life reinsurers that have strong claims-paying ability ratings. The maximum retention on one life for individual life insurance is $1.0 million. Amounts paid or deemed to have been paid in connection with ceded reinsurance contracts are recorded as reinsurance receivables. The cost of reinsurance related to long-duration contracts is recognized over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. F-42 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. Reinsurance (continued) Reinsurance premiums included in premiums and other considerations were as follows:
ELEVEN MONTHS ONE MONTH Years ENDED ENDED Ended DECEMBER 31 JANUARY 31 December 31 -------------------------------------------------- In millions 1995 1995 1994 1993 - - ------------------------------------------------------------------------------- Direct premiums and other considerations other considerations $ 500.1 $ 36.8 $ 507.1 $ 466.9 Reinsurance assumed 44.2 (0.8) 114.7 97.1 Reinsurance ceded (94.7) (1.5) (119.1) (101.8) -------------------------------------------------- Premiums and other considerations considerations $ 449.6 $ 34.5 $ 502.7 $ 462.2 -------------------------------------------------- --------------------------------------------------
Reinsurance recoveries on ceded reinsurance contracts were $63.3 million, $1.4 million, $69.6 million and $65.9 million for the eleven months ended December 31, 1995, the one month ended January 31, 1995 and the years ended December 31, 1994 and 1993, respectively. The amount of reinsurance recoverable (payable) on paid and unpaid losses was $0.4 million and $(1.0) million at December 31, 1995 and 1994, respectively. 12. Related Party Transactions During 1995, the following transactions occurred with related parties: + Franklin purchased a 6.75% promissory note from AGCL for $116.0 million to mature in 2005. + Franklin borrowed $105.2 million and repaid $105.1 million through its participation in the AGC short-term borrowing program. The remaining balance was paid in January 1996. Interest was paid on the outstanding balances based on the Federal Reserve Board's monthly average H.15 rate for 30-day commercial paper. + Franklin received $8.5 million of 8% non-voting preferred stock of American General Life Insurance Company as consideration for the sale of FULIC. Additionally, Franklin has entered into indefinite contracts for the performance of all investment management services as well as cost allocation agreements with its ultimate parent. Total expenses under these agreements were $2.3 million in the eleven months ended December 31, 1995. F-43 THE FRANKLIN LIFE INSURANCE COMPANY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. Legal Proceedings Franklin and certain of its subsidiaries are defendants in various lawsuits and proceedings arising in the normal course of business. Although no assurances can be given and no determination can be made at this time as to the outcome of any particular lawsuit or proceeding, Franklin and its subsidiaries believe that there are meritorious defenses for all of these claims and are defending them vigorously. The Company also believes that the total amounts that would ultimately be paid, if any, arising from these claims would have no material effect on the Company's consolidated results of operations and financial position. 14. State Guaranty Associations State guaranty fund expense included in operating costs and expenses was $0.2 million, $0.6 million, $2.3 million and $2.1 million for the eleven months ended December 31, 1995, one month ended January 31, 1995, and the years ended December 31, 1994 and 1993, respectively. Amounts assessed Franklin by state life and health insurance guaranty funds resulting from paid industry insolvencies were $0.1 million, $0.6 million, $2.3 million and $2.1 million for the eleven months ended December 31, 1995, one month ended January 31, 1995, and the two years ended December 31, 1994 and 1993. These assessments are expected to be partially recovered against the payment of future premium taxes. The accrued liability for anticipated assessments was $8.5 million at December 31, 1995. Franklin has recorded a receivable of $11.2 million for expected recoveries against the payment of future premium taxes. In prior periods, no accrual was recorded for anticipated assessments. The 1995 liability was estimated by Franklin using the latest information available from the National Organization of Life and Health Insurance Guaranty Associations. Although the amount accrued represents Franklin's best estimate of its liability, this estimate may change in the future. Additionally, changes in state laws could decrease the amount recoverable against future premium taxes. F-44 STATEMENT OF ADDITIONAL INFORMATION FRANKLIN LIFE VARIABLE ANNUITY FUND A INDIVIDUAL VARIABLE ANNUITY CONTRACTS FOR USE WITH CERTAIN QUALIFIED PLANS AND TRUSTS ACCORDED SPECIAL TAX TREATMENT AND AS INDIVIDUAL RETIREMENT ANNUITIES ISSUED BY THE FRANKLIN LIFE INSURANCE COMPANY #1 FRANKLIN SQUARE SPRINGFIELD, ILLINOIS 62713 PART C OTHER INFORMATION Item 28. Financial Statements and Exhibits (a) Financial Statements: Included in the Prospectus: Franklin Life Variable Annuity Fund A: Per-Unit Income and Changes in Accumulation Unit Value for the ten years ended December 31, 1995 Included in the Statement of Additional Information: Franklin Life Variable Annuity Fund A: Reports of Independent Auditors and Accountants Financial Statements: Statement of Assets and Liabilities, December 31, 1995 Statement of Operations for the year ended December 31, 1995 Statements of Changes in Contract Owners' Equity for the two years ended December 31, 1995 Portfolio of Investments, December 31, 1995 Notes to Financial Statements Supplementary Information - Per-Unit Income and Changes in Accumulation Unit Value for the five years ended December 31, 1995 The Franklin Life Insurance Company and Subsidiaries: Reports of Independent Auditors and Accountants Financial Statements: Consolidated Balance Sheet, December 31, 1995 and 1994 Consolidated Statement of Income for the eleven months ended December 31, 1995, one month ended January 31, 1995, and years ended December 31, 1994 and 1993 Consolidated Statement of Shareholder's Equity for the eleven months ended December 31, 1995, one C-1 month ended January 31, 1995, and years ended December 31, 1994 and 1993 Consolidated Statement of Cash Flows for the eleven months ended December 31, 1995, one month ended January 31, 1995, and years ended December 31, 1994 and 1993 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 A is incorporated herein by reference to Exhibit 1 to Registrant's Registration Statement on Form N-8B-1, filed February 25, 1970 (File No. 811-1990). 2 - Rules and Regulations of Registrant as amended to date are incorporated herein by reference to Exhibit 1.2 to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-36394). 3 - Custodian Agreement dated April 17, 1995 between The Franklin Life Insurance Company and State Street Bank and Trust Company. 4 - Investment Management Agreement between Registrant and The Franklin Life Insurance Company dated January 31, 1995 is incorporated herein by reference to Exhibit 4 to Registrant's Post-Effective Amendment No. 41 on Form N-3, filed March 2, 1995. 5(a)- Sales Agreement among The Franklin Life Insurance Company, Registrant and Franklin Financial Services Corporation dated January 31, 1995 is incorporated herein by reference to Exhibit No. 5(a) to Registrant's Post-Effective Amendment No. 41 on Form N-3, filed March 2, 1995. 5(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 Amendment No. 2 to Registrant's Registration Statement on Form S-5, filed April 1, 1971 (File No. 2- 36394). 6(a)- Specimen copy of Form 1170, deferred periodic payment variable annuity contract, is incorporated herein by reference to Exhibit 1.4(a)(i) to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-36394). (b)- Specimen copy of Form 1171, single payment deferred variable annuity contract, is incorporated herein by reference to Exhibit 1.4(a)(ii) to Amendment No. 3 to Registrant's Registration Statement on Form S- 5, filed July 1, 1971 (File No. 2-36394). (c)- Specimen copy of Form 1172, single payment immediate life variable annuity contract, is incorporated herein by reference to Exhibit 1.4(a)(iii) to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-36394). (d)- Specimen copy of Form 1173, single payment immediate life variable annuity contract with guaranteed period, is incorporated herein by reference to Exhibit 1.4(a)(iv) to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2- 36394). (e)- Specimen copy of Form 1174, single payment immediate joint and last survivor life variable annuity contract, is incorporated herein by reference to Exhibit 1.4(a)(v) to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2- 36394). (f)- Specimen copy of endorsement to Forms 1170, 1171, 1172, 1173 and 1174 when such contracts are issued to variable annuitants in the State of Texas is incorporated herein by reference to Exhibit 6 (f) to Post- Effective Amendment No. 36 to Registrant's Registration Statement on Form N-3, filed March 1, 1990 (File No. 2-36394). 7 - The applications for the various forms of variable annuity contracts 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. 36 to Registrant's Registration Statement on Form N-3, filed March 1, 1990 (File No. 2-36394). C-2 (b)- By-Laws of The Franklin Life Insurance Company. 9 - Not applicable. 10 - Not applicable. 11(a)- Administration Agreement between Registrant and The Franklin Life Insurance Company dated June 30, 1971 is incorporated herein by reference to Exhibit 9(a) to Amendment No. 1 to Registrant's Registration Statement on Form N-8B-1, filed July 15, 1971 (File No. 811-1990). (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) to Amendment No. 1 to Registrant's Registration Statement on Form N-8B-1, filed July 15, 1971 (File No. 811-1990). (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) to Post- Effective Amendment No. 9 to Registrant's Registration Statement on Form S-5, filed November 6, 1975 (File No. 2-36394). 12 - Opinion and consent dated October 24, 1988 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 13(e) to Post-Effective Amendment No. 33 to Registration Statement on Form N-3, filed October 27, 1988 (File No. 2-36394). C-3 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 Messrs. Chadbourne & Parke LLP. (e)- Consent of Stephen P. Horvat, Jr. 14(a)- Not applicable. (b)- Not applicable. 15 - Not applicable. 16 - Not applicable. 17 - Power of Attorney. 27 - Financial Data Schedule meeting the requirements of Rule 483. Item 29. Directors and Officers of Insurance Company Information concerning the name, principal business address and positions and offices with The Franklin of each officer and director of The Franklin is hereby incorporated herein by reference to Item 33. Information concerning the positions and offices with the Fund of Messrs. Robert G. Spencer and Horvat, 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, AGC and all affiliated persons within the holding company system. The following is a list of American General Corporation's subsidiaries as of February 29, 1996(1). Subsidiaries of subsidiaries are indicated by indentations and unless otherwise indicated, all subsidiaries are wholly-owned. Inactive subsidiaries are denoted by an asterisk(*). Jurisdiction of Name Incorporation Insurer - - ---- ------------- ------- AGC Life Insurance Company (2) MO Yes American Franklin Company DE No The Franklin Life Insurance Company IL Yes The American Franklin Life Insurance Company IL Yes Franklin Financial Services Corporation DE No American General Life and Accident Insurance Company TN Yes American General Exchange, Inc. TN No American General Life Insurance Company TX Yes American General Annuity Service Corporation TX No American General Life Insurance Company of New York NY Yes The Winchester Agency Ltd. NY No C-4 American General Securities Incorporated (3) TX No American General Insurance Agency, Inc. MO No American General Insurance Agency of Hawaii, Inc. HI No American General Insurance Agency of Massachusetts, Inc. MA No The Variable Annuity Life Insurance Company TX Yes The Variable Annuity Marketing Company TX No Independent Investment Advisory Services, Inc. FL No The Independent Life and Accident Insurance Company FL Yes Independent Fire Insurance Company FL Yes Herald Underwriters, Inc. FL No Independent Fire Insurance Company of Florida FL Yes Independent Service Company FL No Old Faithful General Agency, Inc. TX No Thomas Jefferson Insurance Company FL Yes Independent Property & Casualty Insurance Company FL Yes Independent Real Estate Management Corporation FL No Allen Property Company DE No Florida Westchase Corporation DE No Greatwood Development, Inc. DE No Greatwood Golf Club, Inc. TX No Highland Creek Golf Club, Inc. NC No Hunter's Creek Communications Corporation FL No Pebble Creek Corporation DE No Pebble Creek Development Corporation FL No Westchase Development Corporation DE No Westchase Golf Corporation FL No American General Capital Services, Inc. DE No American General Delaware Management Corporation ("AGDMC")(1) DE No American General Finance, Inc. IN No AGF Investment Corp. IN No American General Auto Finance, Inc. DE No American General Finance Corporation (4) IN No American General Finance Group, Inc. DE No American General Financial Services, Inc. (5) DE No The National Life and Accident Insurance Company TX Yes Merit Life Insurance Company IN Yes Yosemite Insurance Company CA Yes American General Finance, Inc. AL No American General Financial Center UT No American General Financial Center, Inc.* IN No American General Financial Center, Incorporated* IN No C-5 American General Financial Center Thrift Company* CA No Thrift, Incorporated* IN No American General Investment Corporation DE No American General Mortgage Company DE No American General Realty Investment Corporation TX No American Athletic Club, Inc. TX No Hope Valley Farms Recreation Association, Inc. NC No INFL Corporation DE No Ontario Vineyard Corporation DE No Pebble Creek Country Club Corporation FL No Pebble Creek Service Corporation FL No SR/HP/CM Corporation TX No American General Mortgage and Land Development, Inc. DE No American General Land Development, Inc. DE No American General Realty Advisors, Inc. DE No American General Property Insurance Company TN Yes Bayou Property Company DE No AGLL Corporation ("AGLL")(6) DE No American General Land Holding Company ("AGLH") DE No AG Land Associates, LLC(6) CA No Hunter's Creek Realty, Inc.* FL No Summit Realty Company, Inc. SC No Financial Life Assurance Company of Canada Canada Yes Florida GL Corporation DE No GPC Property Company DE No Cinco Ranch Development Corporation TX No Cinco Ranch East Development, Inc. DE No Cinco Ranch West Development, Inc. DE No The Colonies Development, Inc. DE No Fieldstone Farms Development, Inc. DE No C-6 Hickory Downs Development, Inc. DE No Lake Houston Development, Inc. DE No South Padre Development, Inc. DE No Green Hills Corporation DE No Knickerbocker Corporation TX No Lincoln American Corporation DE No Pavilions Corporation DE No American General Finance Foundation, Inc. is not included on this list. It is a non-profit corporation. (1) The following limited liability companies were formed in the State of Delaware on March 28, 1995. The limited liability interests of each are jointly owned by AGC and AGDMC and the business and affairs of each are managed by AGDMC: American General Capital, L.L.C. American General Delaware, L.L.C. (2) The following companies became approximately 40% owned by AGC Life Insurance Company ("AGCL") on December 23, 1994: Western National Corporation ("WNC") (DE) WNL Holding Corporation Western National Life Insurance Company (TX) Western Save (401K Plan) Independent Advantage Financial & Insurance Services, Inc. WNL Investment Advisory Services, Inc. Conseco Annuity Guarantee Corp. WNL Brokerage Services, Inc. WNL Insurance Services, Inc. Accordingly, these companies became AGCL affiliates under insurance holding company laws. However, the WNC stock is held for investment purposes by AGCL and there are no plans for AGCL to direct the operations of any of these companies. (3) The following companies are controlled indirectly by American General Securities Incorporated: American General Insurance Agency of Ohio, Inc. American General Insurance Agency of Texas, Inc. American General Insurance Agency of Oklahoma, Inc. (4) American General Finance Corporation is the parent of an additional 41 wholly owned subsidiaries incorporated in 26 states for the pupose of conducting its consumer finance operations. (5) 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. (6) 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 15, 1996, the number of record holders of the sole class of securities of Registrant was as indicated below: C-7 (1) (2) Title of Class Number of Record Holders -------------- ------------------------ Accumulation Units Under 5,690 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. 22 on Form N-1 (File No. 2-36394) 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 B and Franklin Life Money Market Variable Annuity Fund C. The business, profession, vocation or employment of a substantial nature in which the directors and officers of The Franklin are or have been, at any time during the past two fiscal years, engaged for their own account or in the capacity of director, officer, employee, partner or trustee are described below: (1) (2) Name Business or Employment ----------------------- -------------------------------------------------- Vickie J. Alton . . . . . . . Vice President, The Franklin Elizabeth E. Arthur . . . . . Vice President, Associate General Counsel and Assistant Secretary, The Franklin Robert M. Beuerlein . . . . . Senior Vice President-Actuarial and Director, The Franklin Barbara S. Butler . . . . . . Vice President, The Franklin Mark R. Butler. . . . . . . . Vice President - Management Development Director, The Franklin Thomas J. Byerly . . . . . . Executive Vice President, Chief Marketing Officer and Director, The Franklin; prior to February 22, 1995, also Chief Operating Officer, The Franklin C-8 (1) (2) Name Business or Employment ----------------------- -------------------------------------------------- Philip D. Calderwood. . . . . Vice President and Actuary, The Franklin Eldon R. Canary . . . . . . . Division Vice President - Actuarial, The Franklin Robert M. Devlin. . . . . . . Director and Senior Chairman, The Franklin since February 22, 1995; President and a Director, American General Corporation, 2929 Allen Parkway, Houston, Texas 77019; Vice Chairman, American General Corporation, prior to October 26, 1995 Steve A. Dmytrack . . . . . . Vice President, The Franklin, since August 24, 1995; Assistant Vice President, The Franklin, prior thereto Paul C. Ely . . . . . . . . . Vice President, The Franklin Stephen H. Field. . . . . . . Vice President, The Franklin, since December 22, 1995; President and Chief Executive Officer, American General Mortgage and Land Development, Inc., 2929 Allen Parkway, Houston, Texas 77019 Barbara Fossum. . . . . . . . Vice President, The Franklin, since June, 1995; Vice President, American General Life Insurance Company, prior thereto Robert J. Gibbons . . . . . . Chief Executive Officer, The Franklin, since November 30, 1995; Director and President, The Franklin since February 22, 1995; President and Chief Executive Officer, American General Life Insurance Company of New York prior to February 22, 1995; Senior Vice President and Chief Marketing Officer, American General Life Insurance Company of New York, prior to June, 1994 Harold S. Hook. . . . . . . . Director and Senior Chairman, The Franklin since February 22, 1995; Chairman, Chief Executive Officer and a director, American General Corporation, 2929 Allen Parkway, Houston, Texas 77019 Stephen P. Horvat, Jr. . . . Senior Vice President, Secretary, General Counsel and Director, The Franklin Howard C. Humphrey. . . . . . Chairman of the Board, The Franklin; prior to November 30, 1995, also Chief Executive Officer, The Franklin; prior to C-9 February 22, 1995, also President, The Franklin; prior to January 31, 1995 Vice President - Life Insurance of American Brands, Inc., 1700 East Putnam Avenue, P.O. Box 811, Old Greenwich, CT 06870-0811; Director, BANC One Corp. (IL.) (bank holding company), E. Old State Capital Plaza, Springfield, IL. 62701 Jerry P. Jourdan. . . . . . . Director of Information Services - Technical Support, The Franklin, since January 31, 1996; Assistant Vice President, The Franklin, prior thereto Darrell J. Malano . . . . . . Division Vice President, The Franklin Margaret L. Manola. . . . . . Vice President, The Franklin (1) (2) Name Business or Employment Thomas K. McCracken . . . . . Vice President, The Franklin Sylvia A. Miller. . . . . . . Vice President, The Franklin; Assistant Vice President, The Franklin, prior to July, 1994 Cheryl E. Morton. . . . . . . Division 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 C-10 October 26, 1995; Senior Vice President and General Counsel, American General Corporation, prior thereto Randall E. O'Brien. . . . . . Division Vice President, The Franklin James R. Philpott . . . . . . Vice President, The Franklin Jeffrey D. Pirmann. . . . . . Vice President, Controller and Treasurer, The Franklin John M. Pruitt. . . . . . . . Vice President and Director of Sales Services, The Franklin James M. Quigley. . . . . . . Division Vice President, The Franklin, since August 24, 1995; Vice President, The Franklin, prior thereto Gary D. Reddick . . . . . . . Director and Executive Vice President, The Franklin since February 22, 1995; Senior Vice President, American General Corporation, Houston, Texas prior to February, 1995; Senior Vice President, American General Life Insurance Company, prior to October 28, 1994 Dale W. Sachtleben. . . . . . Division Vice President, The Franklin John E. Sartore . . . . . . . Vice President, The Franklin Robert G. Spencer . . . . . . Vice President, The Franklin; prior to 1996, also Treasurer, The Franklin Peter V. Tuters . . . . . . . Director, Vice President and Chief Investment Officer, The Franklin since February 22, 1995; Senior Vice President since 1992 and Chief Investment Officer since December, 1993, American General Corporation, 2929 Allen Parkway, Houston, Texas 77019 J. Alan Vala. . . . . . . . . Vice President and Agency Secretary, The Franklin C-11 David G. Vanselow . . . . . . Division Vice President, The Franklin Raymond P. Weber. . . . . . . Vice President and Associate General Counsel, The Franklin C-12 Item 34. Principal Underwriters. (a) Franklin Life Variable Annuity Fund B, Franklin Life Money Market Variable Annuity Fund C and 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 (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. The principal business address of each individual is c/o The Franklin Life Insurance Company, #1 Franklin Square, Springfield, Illinois 62713. (1) (2) (3) Name Positions and Offices Positions and Offices with Underwriter with Registrant - - -------------------------------------------------------------------------------- Robert M. Beuerlein Director None Thomas J. Byerly Director and Senior Vice President None Robert J. Gibbons Chairman of the Board, President and None Chief Executive Officer Stephen P. Horvat, Jr. Director, Vice President Secretary to the and Secretary Board of Managers Randall E. O'Brien Vice President - Marketing None Deanna Osmonson Vice President-Administration None and Assistant Secretary Gary D. Osmonson Senior Vice President - Sales and None Compliance Officer Jeffrey D. Pirmann Vice President, Treasurer and None Chief Financial Officer Gary D. Reddick Director and Executive None Vice President J. Alan Vala Vice President and Assistant Secretary None (c) Information regarding commissions and other compensation received by each principal underwriter, directly or indirectly, from Registrant during 1995, Registrant's last fiscal year, is set forth below: (1) (2) (3) (4) (5) Name of Net Underwriting Compensation Principal Discounts and on Redemption Brokerage Other Underwriters Commissions or Annuitization Commissions Compensation - - -------------------------------------------------------------------------------- Franklin Financial Services Corporation $20,566 -0- -0- -0- Item 35. Location of Accounts and Records. C-13 The information called for by this item has not changed from that provided in Registrant's Post-Effective Amendment No. 17 on Form N-1 (File No. 2-36394) 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. (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 Registrant is relying upon the "no-action" letter of the Securities and Exchange Commission dated November 28, 1988 in response to the American Council of Life Insurance with respect to restrictions on withdrawal of amounts from Contracts issued in connection with annuity purchase plans meeting the requirements of Internal Revenue Code Section 403(b), which amounts are attributable to contributions made on or after January 1, 1989 pursuant to a salary reduction agreement or to income earned on or after January 1, 1989 with respect to contributions made pursuant to a salary reduction agreement. The Registrant represents that it has complied with the requirement of numbered paragraphs (1) through (4) of such "no-action" letter. C-14 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 A 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 18th day of April, 1996. FRANKLIN LIFE VARIABLE ANNUITY FUND A By: /s/ S.P. Horvat, Jr. ------------------------------------- (S. P. Horvat, Jr., Secretary, Board of Managers) Pursuant to the requirements of the Securities Act of 1933, this Post- Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date /s/Clifford L. Greenwalt* Member, Board April 18, 1996 - - ------------------------- (Clifford L. Greenwalt) of Managers /s/ R. C. Spencer* Member, Board April 18, 1996 - - ------------------------- (R.C. Spencer) of Managers /s/ R. G. Spencer* Chairman, Board April 18, 1996 - - ------------------------- (R.G. Spencer) of Managers /s/ J. W. Voth* Member, Board April 18, 1996 - - ------------------------- (J.W. Voth) of Managers /s/ S. P. Horvat, Jr. Secretary, Board April 18, 1996 - - ------------------------- (S.P. Horvat, Jr.) of Managers /s/ Stephen P. Horvat, Jr. - - ------------------------- * By Stephen P. Horvat, Jr., Attorney-in-Fact C-15 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 18th day of April, 1996. THE FRANKLIN LIFE INSURANCE COMPANY By /s/ S. P. Horvat, Jr. ------------------------------------ (S.P. Horvat, Jr., Senior Vice President, General Counsel and Secretary) Pursuant to the requirements of the Securities Act of 1933, this Post- Effective Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated. Signature Title Date /s/ R. M. Beuerlein* Senior Vice President- April 18, 1996 - - ------------------------- (R. M. Beuerlein) Actuarial and Director /s/ T. J. Byerly* Executive Vice President April 18, 1996 - - ------------------------- (T.J. Byerly) and Director (R.M. Devlin) Senior Chairman and Director , 1996 ------ /s/ R. J. Gibbons* President , Chief Exective April 18, 1996 - - ------------------------- (R.J. Gibbons) Officer and Director (principal executive officer) (H.S. Hook) Senior Chairman and Director , 1996 ------ /s/ S. P. Horvat, Jr. Senior Vice President April 18, 1996 - - ------------------------- (S.P. Horvat, Jr.) General Counsel, Secretary and Director /s/ H. C. Humphrey* Chairman of the Board April 18, 1996 - - ------------------------- (H.C. Humphrey) (J.P. Newton) Director and Vice Chairman , 1996 ------- /s/ J. D. Pirmann* Vice President, Controller April 18, 1996 - - ------------------------- (J.D.Pirmann) and Treasurer (principal financial officer and principal accounting officer) /s/ G. D. Reddick* Executive Vice President and April 18, 1996 - - ------------------------- C-16 (G.D. Reddick) Director Vice President, Chief Investment , 1996 ------ (P.V.Tuters) Officer and Director /s/ Stephen P. Horvat, Jr. - - ------------------------- * By Stephen P. Horvat, Jr., Attorney-in-Fact C-17 EXHIBIT INDEX Exhibit Page - - ------- 1 - Resolution of The Franklin Life Insurance Company's Board of Directors creating Franklin Life Variable Annuity Fund A is incorporated herein by reference to Exhibit 1 to Registrant's Registration Statement on Form N-8B-1, filed February 25, 1970 (File No. 811-1990). 2 - Rules and Regulations of Registrant as amended to date are incorporated herein by reference to Exhibit 1.2 to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-36394). 3 - Custodian Agreement dated April 17, 1995 between The Franklin Life Insurance Company and State Street Bank and Trust Company. 4 - Investment Management Agreement between Registrant and The Franklin Life Insurance Company dated January 31, 1995 is incorporated herein by reference to Exhibit 4 of Registrant's Post-Effective Amendment No. 41 on Form N-3, filed March 2, 1995. 5 (a) - Sales Agreement among The Franklin Life Insurance Company, Registrant and Franklin Financial Services Corporation dated January 31, 1995 is incorporated herein by reference to Exhibit 5(a) of Registrant's Post-Effective Amendment No. 41 on Form N- 3, filed March 2, 1995. (b) - Form of Agreement among The Franklin Life Insurance Company, Franklin Financial Services Corporation and agents is incorporated herein by reference to Exhibit 1.6(b) to Amendment No. 2 to Registrant's Registration Statement on Form S-5, filed April 1, 1971 (File No. 2-36394). 6 (a) - Specimen copy of Form 1170, deferred periodic payment variable annuity contract, is incorporated herein by reference to Exhibit 1.4(a)(i) to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-36394). (b) - Specimen copy of Form 1171, single payment deferred variable annuity contract, is incorporated herein by reference to Exhibit 1.4(a)(ii) to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-36394). (c) - Specimen copy of Form 1172, single payment immediate life variable annuity contract, is incorporated herein by reference to Exhibit 1.4(a)(iii) to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-36394). (d) - Specimen copy of Form 1173, single payment immediate life variable annuity contract with guaranteed period, is incorporated herein by reference to Exhibit 1.4(a)(iv) to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-36394). (e) - Specimen copy of Form 1174, single payment immediate joint and last survivor life variable annuity contract, is incorporated herein by reference to Exhibit 1.4(a)(v) to Amendment No. 3 to Registrant's Registration Statement on Form S-5, filed July 1, 1971 (File No. 2-36394). (f) - Specimen copy of endorsement to Forms 1170, 1171, 1172, 1173 and 1174 when such contracts are issued to variable annuitants in the State of Texas is incorporated herein by reference to Exhibit 6 (f) to Post-Effective Amendment No. 36 to Registrant's Registration Statement on Form N-3, filed March 1, 1990 (File No. 2-36394). 7 - The applications for the various forms of variable annuity contracts 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. 36 to Registrant's Registration Statement on Form N-3, filed March 1, 1990 (File No. 2-36394). (b) - By-Laws of The Franklin Life Insurance Company. 9 - Not applicable. 10 - Not applicable. 11 (a) - Administration Agreement between Registrant and The Franklin Life Insurance Company dated June 30, 1971 is incorporated herein by reference to Exhibit 9(a) to Amendment No. 1 to Registrant's Registration Statement on Form N-8B-1, filed July 15, 1971 (File No. 811-1990). (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) to Amendment No. 1 to Registrant's Registration Statement on Form N-8B-1, filed July 15, 1971 (File No. 811- 1990). (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) to Post- Effective Amendment No. 9 to Registrant's Registration Statement on Form S-5, filed November 6, 1975 (File No. 2-36394). 12 - Opinion and consent dated October 24, 1988 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 13(e) to Post- Effective Amendment No. 33 to Registration Statement on Form N-3, filed October 27, 1988 (File No. 2-36394). 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 Messrs. Chadbourne & Parke LLP. (e) - Consent of Stephen P. Horvat, Jr. 14 (a) - Not applicable. (b) - Not applicable. 15 - Not applicable. 16 - Not applicable. 17 - Power of Attorney. 27 - Financial Data Schedule meeting the requirements of Rule 483. EX-3 2 EXHIBIT 3 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- CUSTODIAN AGREEMENT between THE FRANKLIN LIFE INSURANCE COMPANY and STATE STREET BANK AND TRUST COMPANY dated as of April 17, 1995 - - -------------------------------------------------------------------------------- - - -------------------------------------------------------------------------------- TABLE OF CONTENTS 1. CUSTODIAN............................................................... 2 1.1 Appointment of Custodian........................................... 2 1.2 Form of Securities Delivered to State Street....................... 3 1.3 Powers and Duties of Custodian..................................... 3 1.3-1 Safekeeping.............................................. 3 1.3-1.1 Insurance Boards, Commissions or Departments............. 4 1.3-2 Use of a System for the Central Handling of Securities... 6 1.3-3 Registered Name, Nominee................................. 9 1.3-4 Purchases................................................ 9 1.3-5 Liability for Payment in Advance of Receipt of the Securities Purchased..................................... 10 1.3-6 Exchanges................................................ 11 1.3-7 Sales and Delivery of Securities......................... 12 1.3-8 Communications Relating to Securities.................... 14 1.3-9 Proxies, Notices, Etc.................................... 15 1.3-10 Incurrence of Expenses................................... 15 2. ADDITIONAL POWERS AND DUTIES OF CUSTODIAN............................... 15 2.1 Bank Account....................................................... 15 2.2 Collections........................................................ 16 2.3 Stock Dividends, Rights, Etc....................................... 18 2.4 Other Proper Purposes.............................................. 18 2.5 Recordkeeping and Reports.......................................... 18 2.6 Transaction Information............................................ 20 2.7 Segregated Accounts................................................ 21 3. INSTRUCTIONS............................................................ 21 3.1 Proper Instructions................................................ 21 4. ADDITIONAL AGREEMENTS................................................... 22 4.1 Indemnification.................................................... 22 4.2 Appointment of Agents.............................................. 25 4.3 Appointment of Sub-Custodians...................................... 25 4.4 Fee Schedule....................................................... 26 4.5 Effective Period, Termination and Amendment, and Interpretive and Additional Provisions.............................................. 26 4.6 Compliance With Law................................................ 27 4.7 Successor Custodian................................................ 28 4.8 Disclosure of Information.......................................... 29 4.9 Assignment......................................................... 29 5. MASSACHUSETTS LAW TO APPLY.............................................. 30 6. NOTICE.................................................................. 30 7. EXECUTED ORIGINALS...................................................... 30 Exhibit A- Custodian Affidavit (on deposit with State Street) Exhibit B- Custodian Affidavit (on deposit with DTC) Exhibit C- Custodian Affidavit (book-entry account) Exhibit D- Daily Activity and Investory Reports Exhibit E- State Street Bank Insurance Program Exhibit F- Delegation of Authority (non-variable annuity fund matters) Exhibit G- Delegation of Authority (variable annuity fund matters) CUSTODIAN AGREEMENT THIS AGREEMENT made as of the 17th day of April, 1995, between THE FRANKLIN LIFE INSURANCE COMPANY, an Illinois corporation, having its principal address at No. 1 Franklin Square, Springfield, Illinois 62713 (hereinafter called "the Corporation"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking corporation regulated by state banking laws, having corporate trust powers and being duly authorized to act as a custodian with its principal place of business at 225 Franklin Street, Boston, Massachusetts 02110 (hereinafter called "State Street") shall serve to set forth certain custodial arrangements between State Street and the Corporation with respect to (i) the establishment of a custody account (the "Custody Account") in the name of the Corporation with State Street as custodian, which Custody Account is established for the deposit by the Corporation of any or all of its Securities and/or Moneys, as such terms are hereinafter defined, and (ii) the participation by the Corporation, through State Street, in the book-entry programs or systems of any "Securities System," as defined in Section 1.3-2, with respect to the Securities held hereunder which are eligible for deposit with any such "Securities System." The term "Securities," as used herein, shall mean and include all investments held for the Corporation, including but not limited to the following: futures, options, repurchase agreements, common stocks, preferred or preference stocks, notes, bonds, debentures, or other evidences of indebtedness of private, corporate or public issuers and any certificates, receipts, warrants or other instruments representing rights to receive, purchase, or subscribe for the same, or evidencing or representing any other rights or interest therein, or in any property or assets, owned by the Corporation (whether ownership by the Corporation thereof is evidenced, or to be evidenced, by (i) a physical certificate registered as provided in Section 1.3-3, or (ii) a credit, to the account of State Street, entered on the books of account and records of any Securities System, as defined in Section 1.3-2). The terms "held" and "hold," when applied to Securities referred to herein, shall mean Securities of the Corporation deposited by the Corporation with or in the custody of State Street, any agent of State Street appointed pursuant to Section 4.2 hereof, any sub-custodian appointed pursuant to Section 4.3 hereof, or any duly authorized third person, including but not limited to Securities held in any "Securities System," as defined in Section 1.3-2, to which State Street may give custody of such Securities. WITNESSETH THAT: WHEREAS, State Street is a member of the Federal Reserve System; and WHEREAS, the Corporation has the power and authority to enter into and perform under this Agreement; and WHEREAS, this form of Agreement and its terms and conditions do not require the prior approval of any regulatory body or authority having jurisdiction over the Corporation; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained, the parties hereto, intending to be legally bound, hereby agree as follows: - 2 - 1. CUSTODIAN 1.1 APPOINTMENT OF CUSTODIAN. The Corporation hereby appoints and employs State Street as its custodian for the purposes of this Agreement and State Street hereby accepts such appointment. As said custodian, State Street agrees to hold the Securities as the Corporation may from time to time deliver to it, subject to the terms and conditions herein set forth, as custodian for the Corporation, in the Custody Account. Notwithstanding anything to the contrary herein, pursuant to Illinois insurance laws and regulations, the Custody Account shall be the undivided responsibility of State Street. State Street further agrees to hold, subject to the terms and conditions herein set forth, as said custodian for the Corporation all moneys of the Corporation delivered to State Street ("Moneys") in the Bank Account, as such term is defined in Section 2.1. Securities and Moneys shall be held by State Street subject to the instructions of the Corporation and shall be withdrawable at any time upon the demand of the Corporation, except that Securities designated in writing to be used to meet deposit requirements set forth in applicable insurance laws shall be under control of the appropriate insurance regulatory authority as specified in such writing and shall not be withdrawn by the Corporation without the approval of the appropriate insurance regulatory authority. 1.2 FORM OF SECURITIES DELIVERED TO STATE STREET. Unless otherwise directed by Proper Instructions, all Securities accepted by State Street on behalf of the Corporation under the terms of this Agreement shall be in "street delivery" or other good delivery form. The Corporation shall from time to time furnish State Street appropriate - 3 - instruments to enable State Street to register in the name of the nominee of State Street any Securities (other than bearer Securities) held by State Street hereunder which may be registered in the name of the Corporation. 1.3 POWERS AND DUTIES OF CUSTODIAN. As Custodian, State Street shall have and perform the following powers and duties: 1.3-1 SAFEKEEPING. To hold in the Custody Account for the account of the Corporation and segregate both physically and on its official records from its own securities and from those of any and all of its other customers all non-cash property, including all Securities held hereunder and owned by the Corporation, other than Securities which are maintained pursuant to Section 1.3-2 hereof in a "Securities System" as defined in such section. State Street shall receive delivery of certificates for safekeeping and maintain records of all receipts, deliveries and locations of such Securities, together with a current inventory thereof and shall conduct periodic physical inspection of certificates representing Securities held by it under this Agreement in such manner as State Street shall determine from time to time to be advisable in order to verify the accuracy of such inventory. State Street will promptly report to the Corporation the results of such inspections, indicating any shortages or discrepancies uncovered thereby, and take appropriate action to remedy any such shortages or discrepancies. 1.3-1.1 INSURANCE BOARDS, COMMISSIONS OR DEPARTMENTS. The parties acknowledge that the Corporation is subject to the laws, rules and regulations of various state insurance - 4 - codes, boards, commissions, or departments and that as a result, certain activities of the Corporation may, among other things, require the approval of or review by the various state insurance boards, commissions, or departments. Except for Securities which are maintained pursuant to Section 1.3-2 in a Securities System, State Street shall not commingle certificates representing Securities owned by the Corporation, but shall keep said certificates separate and physically apart from all other securities held under custodial or trust agreements by State Street and State Street shall not merge certificates representing Securities owned by the Corporation into or with one or more certificates of a larger denomination representing certificates of the same class of the same issuer constituting assets owned by the Corporation and other companies. State Street shall on request by the Corporation or the representative of the appropriate regulatory body, certify in writing that the Securities are held by State Street as a fiduciary for the Corporation for which State Street serves as a custodian. Such certification shall include the name of the issuer of each Security, the class of Security, the "Cusip" number of each Security, the number of shares or units or face amount in which the Corporation has vested ownership, and specific uses or purposes for which such shares, units or face amount of any part thereof have been segregated as required by any statute, law or rule - 5 - promulgated by any state insurance board, commission or department. In addition, State Street shall also furnish any additional information requested pursuant to this paragraph. The Corporation consents to any disclosure required pursuant to this section. State Street shall provide, upon Proper Instructions, as defined in Section 3.1 hereof, or upon request by the representative of the appropriate regulatory body, the appropriate affidavits, substantially in the forms attached hereto as Exhibits A, B and C with respect to Securities of the Custody Account. The representative of the appropriate regulatory body shall have the right to make direct inquiry to State Street concerning Securities or Moneys held hereunder, including, but not limited to, detailed inventories of Securities or Moneys and to examine and audit all Securities or Moneys held hereunder, but only upon furnishing State Street with advance written notification to such effect signed by an appropriate officer of the Corporation. The Corporation consents to any and all disclosures given by State Street to the representative of the appropriate regulatory body pursuant to this section. - 6 - In the event the representative of the appropriate regulatory body determines that this Agreement does not comply with the rules and regulations of the board, commission or department of insurance or that the customs or practices of the parties hereto do not comply with the rules and regulations of the board, commission or department of insurance, then this Agreement shall immediately be modified in a manner acceptable to the appropriate regulatory body and State Street and the Corporation will cooperate with the appropriate regulatory body in complying with the rules and regulations of the board, commission or department of insurance. 1.3-2 USE OF A SYSTEM FOR THE CENTRAL HANDLING OF SECURITIES. To deposit and/or maintain the Securities pursuant to this Agreement (i) in the "book-entry" program of The Depository Trust Company or of any clearing corporation; or (ii) in any "book-entry" system authorized by the United States Department of the Treasury and certain federal agencies including the Federal Reserve Book-Entry System (collectively, the "Securities System"), and subject to the following provisions: (1) State Street may keep the Securities in a Securities System, provided that the Securities are represented in an account ("Account") of State Street in the Securities System which shall not include any assets of State Street other than assets held as a fiduciary, custodian or otherwise for customers; - 7 - (2) The official records of State Street with respect to the Securities which are maintained in a Securities System shall identify (i) the Securities as belonging to the Corporation and (ii) the name of any clearing agency maintaining the Securities; (3) Such Securities System may be used to hold, receive, exchange, release, deliver and otherwise deal with eligible Securities and to remit to State Street all income and other payments thereon and to take all steps necessary and proper in connection with the collection thereof; (4) Payment for eligible Securities purchased and sold may be through the clearing medium employed by the Securities System for transactions of participants acting through them; (5) State Street shall pay for the Securities purchased for the Account of the Corporation upon (i) receipt of an electronic advice from the Securities System that such Securities have been transferred to the Account, and (ii) the making of an entry on the official records of State Street to reflect such payment and transfer for the Account of the Corporation. State Street shall transfer the Securities sold for the Account of the Corporation upon (i) receipt of an electronic advice from the Securities System that payment for such Securities has been transferred to the Account, and (ii) the making of an entry on the official records of State Street to reflect such transfer and payment for the Account of the Corporation. Copies of all such advices from the Securities System regarding transfers of the Securities for - 8 - the Account of the Corporation shall identify the Corporation, be maintained for the Corporation by State Street and the information contained in such advices shall be promptly provided to the Corporation at its request. State Street shall (a) furnish the Corporation with a report of all transfers to or from the Account of the Corporation; (b) furnish to the Corporation, electronically, copies of daily transaction sheets reflecting each day's transactions in the Securities System for the Account of the Corporation; and (c) furnish the Corporation any other information required pursuant to Section 2.6 hereof; (6) State Street shall provide the Corporation with any material report, including but not limited to all reports received from a clearing corporation or the Federal Reserve book-entry system on their respective systems of internal accounting control and any reports prepared by outside auditors on State Street's or its agents' internal accounting control of custodied Securities; and (7) Anything to the contrary in this Agreement notwithstanding, the use of a Securities System will not affect any of State Street's responsibilities under this Agreement and State Street shall be liable to the Corporation for any loss or damage to the Corporation resulting from use of the Securities System by reason of any negligence, misfeasance or misconduct of State Street or any Agent appointed pursuant to Section 4.2 hereof or any Sub-Custodian appointed pursuant to Section 4.3 hereof, or of any of its or - 9 - their employees or from failure of State Street or any such Agent or Sub-Custodian to enforce effectively such rights as it or the Corporation may have against the Securities System or any participant of the Securities System; at the election of the Corporation, it shall be entitled to be subrogated to the rights of State Street with respect to any claim against the Securities System or any participant of the Securities System or any other person which State Street may have as a consequence of any such loss or damage if and to the extent that the Corporation has not been made whole for any such loss or damage. 1.3-3 REGISTERED NAME, NOMINEE. To register Securities of the Custody Account held by State Street (other than bearer securities) in the name of a nominee of State Street or in the name of any Agent or any nominee of such Agent appointed pursuant to Section 4.2 hereof or in the name of any Sub-Custodian or any nominee of any such Sub- Custodian appointed pursuant to Section 4.3 hereof; provided that any nominee shall be used exclusively for the Securities of the Corporation; and provided further that all Securities relating to private placements shall be kept in full company name. 1.3-4 PURCHASES. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties to this Agreement, and insofar as Moneys are available for the purpose, to accept and pay for specified Securities for the account of the Custody Account and otherwise pay out Moneys as directed by Proper Instructions; provided, however, that except - 10 - upon receipt of Proper Instructions to the contrary, State Street shall pay out Moneys upon the purchase of such Securities only: (a) against delivery of such Securities to State Street (or any bank, banking firm, responsible commercial agent or trust company doing business in the United States and/or any foreign country and appointed by State Street pursuant to Section 4.2 hereof as State Street's Agent for this purpose or appointed as Sub-Custodian pursuant to Section 4.3 hereof), registered as provided in Section 1.2 hereof or in the proper form for transfer; (b) in the case of a purchase effected through a Securities System, in accordance with the conditions set forth in Section 1.3-2; or (c) in the case of repurchase agreements, against delivery of such Securities as provided in (a) or (b) above. All Securities accepted by State Street shall be accompanied by payment of, or a "due bill" for, any dividends, interests or other distributions of the issuer, due the purchaser. 1.3-5 LIABILITY FOR PAYMENT IN ADVANCE OF RECEIPT OF THE SECURITIES PURCHASED. In any and every case where payment for purchase of Securities for the account of the Custody Account is made by State Street in advance of receipt of the Securities purchased (i.e., in advance of the time specified in Section 1.3-4), in the absence of Proper Instructions to so pay in advance, State Street shall be absolutely liable to the Corporation for such Securities to the same extent as if the Securities had been received by State Street, except that in the case of repurchase agreements entered into by the Corporation with a bank which is a member of the Federal Reserve System, State Street may - 11 - transfer funds to the account of such bank prior to the receipt of (i) written evidence that the Securities subject to such repurchase agreement have been transferred by book-entry into a segregated non-proprietary account of State Street with the Federal Reserve Bank of Boston or (ii) the safe-keeping receipt, provided that in the event of clause (i) or (ii) hereof, such Securities have in fact been so transferred by book-entry. 1.3-6 EXCHANGES. Upon receipt of Proper Instructions, to exchange Securities or interim receipts or temporary Securities held by it or by any Agent appointed by it pursuant to Section 4.2 hereof or by any Sub-Custodian appointed pursuant to Section 4.3 hereof or held in any Securities System for the account of the Custody Account for other Securities alone or for other Securities and Moneys, and to expend Moneys insofar as Moneys are available, in connection with any merger, consolidation, reorganization, recapitalization, split-up of shares, changes of par value, conversion or in connection with the exercise of warrants, subscription or purchase rights, or otherwise; to deposit any such Securities and Moneys in accordance with the terms of any reorganization or protective plan or otherwise, and to deliver Securities to the designated depository or other receiving agent in response to tender offers or similar offers to purchase received in writing. Except as instructed by Proper Instructions received in timely enough fashion for State Street to act thereon prior to any expiration date (which shall be presumed to be three (3) business days prior to such date unless State Street has advised the Corporation of a different period) and giving full details of the - 12 - time and method of submitting Securities in response to any tender or similar offer, exercising any subscription or purchase right or making any exchange pursuant to this Section and subject to State Street having fulfilled its obligations under Section 1.3-8 hereof, State Street shall be under no obligation regarding any tender or similar offer, subscription or purchase right or exchange except to exercise its best efforts. When such Securities are in the possession of an Agent appointed by State Street pursuant to Section 4.2 hereof, the Proper Instructions referred to in the preceding sentence must be received by State Street in timely enough fashion (which shall be presumed to be four (4) business days unless State Street has advised the Corporation of a different period) for State Street to notify the Agent in sufficient time to permit such Agent to act prior to any expiration date. When the Securities are in the possession of a Sub-Custodian appointed pursuant to Section 4.3 hereof, the Proper Instructions must be received by the Sub-Custodian in a timely enough fashion, as advised to the Corporation by State Street or the Sub-Custodian, to permit the Sub-Custodian to act prior to any expiration date. 1.3-7 SALES AND DELIVERY OF SECURITIES. Only upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, to release and deliver Securities owned by the Corporation held by State Street or in an Account of State Street, and only in the following cases: (1) Upon sale of such Securities for the account of the Corporation and receipt of payment therefor; - 13 - (2) Upon the receipt of payment in connection with any repurchase agreement related to such Securities entered into by the Corporation; (3) In the case of a sale effected through a Securities System, in accordance with the provisions of Section 1.3-2 hereof; (4) To the depository agent in connection with tender or other similar offers for such Securities; (5) To the issuer thereof or its agent when such Securities are called, redeemed, retired or otherwise become payable; provided that in any such case, cash or other consideration is to be delivered to State Street; (6) To the issuer thereof, or its agent, for transfer into the name of a nominee, in accordance with the conditions specified in Section 1.3-3; or for exchange for a different number of bonds, certificates or other evidence representing the same aggregate face amount or number of units; or for exchange of interim receipts or temporary Securities for definitive Securities; provided that, in any such case, the new Securities are to be delivered to State Street; (7) Upon the sale of such securities for the account of the Corporation, to the broker or its clearing agent, against a receipt, for examination in accordance with "street delivery" custom; provided that in any such case, State Street shall have no responsibility or liability for any loss arising from the delivery of such securities prior to - 14 - receiving payment for such securities except as may arise from State Street's own negligence or willful misconduct; (8) For exchange or conversion pursuant to Section 1.3-6 hereof; provided that, in any such case, the new Securities and Moneys, if any, are to be delivered to State Street; (9) In the case of warrants, rights or similar Securities, the surrender thereof upon the exercise of such warrants, rights or similar Securities or the surrender of interim receipts or temporary Securities for definitive Securities; provided that, in any such case, the new Securities and Moneys, if any, are to be delivered to State Street; (10) For delivery in connection with any loans of Securities made by the Corporation, but only against receipt of adequate collateral as specified from time to time by the Corporation, which may be in the form of cash or obligations issued by the United States government, its agencies or instrumentalities, except that in connection with any loans for which collateral is to be credited to State Street's account in the book-entry system authorized by the U.S. Department of the Treasury, State Street will not be held liable or responsible for the delivery of Securities owned by the Corporation prior to the receipt of such collateral; or - 15 - (11) For any other proper purpose, but only upon receipt of Proper Instructions from an Authorized Person, as defined in Section 3.1, to be specified in the Delegation of Authority from time to time in effect, the form of which is attached hereto as Exhibit F. In delivering any Securities pursuant to this Section 1.3-7, State Street shall credit the Moneys or other property received therefor to the Bank Account of the Corporation except to the extent that State Street may be instructed otherwise by Proper Instructions. 1.3-8 COMMUNICATIONS RELATING TO SECURITIES. To transmit promptly to the Corporation all written information (including, without limitation, pendency of calls and maturities of Securities and expirations of rights in connection therewith) received by State Street from issuers of the Securities being held for the Corporation. With respect to tender or exchange offers, State Street shall transmit promptly to the Corporation all written information received by State Street from issuers of the Securities held hereunder whose tender or exchange is sought and from the party (or his agents) making the tender or exchange offer. 1.3-9 PROXIES, NOTICES, ETC. Upon receipt of Proper Instructions, which may be continuing instructions when deemed appropriate by the parties, to cause to be promptly executed by the registered holder of such Securities, if such Securities are registered otherwise than in the name of the Corporation or a nominee of the Corporation, all proxies, without indication of the manner in which such proxies are to be voted, and to promptly deliver to the Corporation such proxies, all proxy soliciting - 16 - materials and all notices relating to such Securities. Neither State Street nor any Agent or Sub-Custodian, nor any nominee thereof shall vote upon any of the Securities. 1.3-10 INCURRENCE OF EXPENSES. Except as directed by the Corporation, at no time may State Street make payments to itself or others out of Securities, Moneys or other funds of the Corporation for expenses relating to its duties under this Agreement. Expenses include the expenses and fees incurred in the custody account, bank account, cash dividend account, sweep account, and any other accounts. 2. ADDITIONAL POWERS AND DUTIES OF CUSTODIAN. As custodian, State Street shall have and perform the following additional powers and duties: 2.1 BANK ACCOUNT. To retain all Moneys, subject to receipt of Proper Instructions to the contrary, in the banking department of State Street in a separate demand deposit account or accounts in the name of the Corporation (the "Bank Account"), subject only to draft or order by State Street acting pursuant to the terms of this Agreement. If and when authorized by Proper Instructions, State Street may open and maintain an additional demand deposit account or accounts in such other bank or trust companies as may be designated by such instructions, such account or accounts, however, to be in the name of the Corporation and subject only to State Street's draft or order in accordance with the terms of this Agreement. If as a result of this Agreement, State Street incurs any cost for daylight overdrafts, the Corporation will compensate State Street in a manner reasonable and customary in the banking industry. If and when authorized by Proper Instructions, State Street may take any appropriate actions to establish and maintain "sweep" accounts for the Corporation or - 17 - to effect repurchase agreement transactions initiated by the Corporation. The Bank may not invade the Bank Account for expenses without express written authority for each specific instance. 2.2 COLLECTIONS. Unless otherwise instructed by receipt of Proper Instructions, to collect and receive all income, other payments and distributions with respect to registered Securities held hereunder to which the Corporation shall be entitled either by law or pursuant to custom in the securities business, and to collect all income, other payments and distributions with respect to bearer Securities if, on the date of payment by the issuer, such Securities are held by State Street or an Agent or Sub-Custodian thereof or are maintained pursuant to Section 1.3-2 in a Securities System on such date of payment and to credit such income into the Corporation's Bank Account maintained pursuant to Section 2.1 hereof. Income due the Corporation on securities loaned pursuant to the provisions of Section 1.3-7 (10) shall be the responsibility of the Corporation. State Street will have no duty or responsibility in connection therewith, other than to provide the Corporation with such information or data as may be necessary to assist the Corporation in arranging for the timely delivery to State Street of the income to which the Corporation is properly entitled. In the event the purchase of a Security in the amount of $10 million or less fails to settle on the contractual settlement date not as a result of any act or failure to act on the part of State Street, State Street shall retain any Moneys made available by the Corporation for such purchase for five (5) business days thereafter (during which time the Corporation will forego interest on such amounts) and then immediately return such Moneys to the Corporation. In the event a purchase exceeding - 18 - $10 million fails to settle on the contractual settlement date, State Street shall return on such date any Moneys made available by the Corporation for such purchase. In either case, if such Moneys are not so returned to the Corporation, State Street will pay interest in an amount to be agreed upon from time to time on such Moneys until such time as State Street has returned such Moneys to the Corporation. In the event the sale of a Security fails on the contractual settlement date relating to that Security due to the failure of the Corporation to deliver such Security, and State Street has credited the Corporation's Bank Account for such sale, State Street is hereby authorized to collect interest from the Corporation on such amount so credited in an amount to be agreed upon from time to time until the actual settlement date. State Street shall execute and cause to be executed by any Agent or Sub-Custodian ownership and other certificates and affidavits for all federal and state tax purposes in connection with the collection of bond and note coupons, the receipt of income or other payments with respect to Securities of the Custody Account held by it, and the transfers of Securities, and to do all other things necessary or proper in connection with the collection of such income, and without limiting the generality of the foregoing, to: (1) Detach and present for payment on the date of payment all coupons and other income items requiring presentation as and when they become due and collect interest when due on Securities held hereunder; - 19 - (2) Present for payment all Securities which may mature or be called, redeemed, retired or otherwise become payable on the date such Securities become payable; and (3) Endorse and deposit for collection only, in the name of the Corporation, checks, drafts, or other negotiable instruments on the same day as received. 2.3 STOCK DIVIDENDS, RIGHTS, ETC. To receive and collect all stock dividends, rights and other items of like nature, and to deal with the same pursuant to Proper Instructions relative thereto. 2.4 OTHER PROPER PURPOSES. Upon receipt of Proper Instructions, to make or cause to be made, insofar as Moneys are available, disbursements for any other purpose (in addition to the purposes specified in Sections 1.3-4, 1.3-5 and 1.3-6 of this Agreement) which the Corporation declares is a proper purpose pursuant to the Proper Instructions described in Section 3.1 below. 2.5 RECORDKEEPING AND REPORTS. State Street shall create and maintain all records relating to its activities and obligations under this Agreement in such manner as is reasonably satisfactory to the Corporation and as will meet the obligations of the Custody Account, if any, under applicable federal and state tax laws, state insurance laws and regulations and any other law or administrative rules or procedures which may be applicable to the Corporation. All such records shall remain the property of the Corporation, and shall be open to the inspection and audit at reasonable times by duly authorized officers, employees or agents of the Corporation, independent certified public accountants designated by the Corporation, and any representatives of an appropriate regulatory body as hereafter described. State Street shall maintain records sufficient to - 20 - dete mine and verify information relating to Securities and property held by State Street subject to this Agreement. During the course of State Street's regular banking hours, any representative of an appropriate regulatory body (including, without limitation, representatives of one or more state insurance boards, commissions or departments or the National Association of Insurance Commissioners or employees or agents of the Securities and Exchange Commission) shall be entitled to examine State Street's premises and securities and records related to the Custody Account, but only upon furnishing State Street with written instructions to that effect from the Treasurer, the Controller, any Assistant Treasurer or any Vice-President in the Treasury Department of the Corporation and a certificate of incumbency as to such officer executed by an Authorized Person, Secretary or Assistant Secretary of the Corporation. State Street and each Agent and each Sub-Custodian shall provide the Corporation at least annually and, at such other times as the Corporation may reasonably require, with reports by State Street and each Agent and each Sub-Custodian and by independent certified public accountants regarding the accounting system, internal accounting controls and procedures for safeguarding Securities including the Securities deposited and/or maintained in a Securities System, relating to the services provided by State Street and each Agent and each Sub-Custodian under this Agreement; such reports shall be of sufficient scope and in sufficient detail as may reasonably be required by the Corporation and shall provide reasonable assurance that any material inadequacies would be disclosed by such examination and shall state in detail any material inadequacies disclosed by such examination, and, if there are no such - 21 - inadequacies, shall so state. Such examination is to be conducted in accordance with generally accepted auditing standards. State Street presently maintains the forms of insurance as set forth in Exhibit E attached hereto and intends to continue to maintain such insurance in substantially the same form and amount. State Street hereby agrees to provide the Corporation with at least thirty (30) days written notice prior to any reduction or cancellation of such insurance and will use its best efforts to replace the form and amount reflected on Exhibit E as the same may be modified from time to time. State Street will provide the Corporation with a certificate or other evidence of such insurance within thirty (30) days of the end of each calendar year. 2.6 TRANSACTION INFORMATION. State Street shall provide to the Corporation a daily accounting of all activity concerning transactions described in Sections 1.3-4, 1.3-6, 1.3-7, 2.2, 2.3 and 2.4. Corresponding debits and credits to the Bank Account will be provided on all transactions within two (2) business days. Such daily activity reports shall include, without limitation, all settled transactions and all transactions pending future settlement of which State Street has been notified. State Street shall, within seven (7) business days after the last calendar day of each month, furnish to the Corporation, a monthly accounting of all activity concerning transactions described in Sections 1.3-4, 1.3-6, 1.3-7, 2.2, 2.3 and 2.4 hereof, inventory reports, reflecting the balance of all Securities held by State Street, as custodian for the Corporation (whether ownership by the Corporation thereof is evidenced by (i) a physical certificate registered as provided in Section 1.3-3, or (ii) a credit, to the account of State Street, entered on the books of account and records of DTC, The Federal Reserve - 22 - Book-Entry System or any Securities System). The daily activity report (Blotter) shall reflect receipts, deliveries and any other Security movement affecting the position of the Custody Account and interest, dividends and similar distributions with respect to Securities including total number of shares for each Security acquired or disposed of and distributions credited to the Bank Account, for the Custody Account. State Street shall, promptly upon request, furnish all other such information or documentation the Corporation may reasonably request. Daily activity and inventory reports available to the Corporation to be supplied by State Street pursuant to Section 2.6 of this Agreement are listed in Exhibit D attached hereto. 2.7 SEGREGATED ACCOUNTS. To maintain the assets of variable annuity funds, pensions and reinsurance programs each in segregated accounts. 3. INSTRUCTIONS. 3.1 PROPER INSTRUCTIONS. "Proper Instructions" as used throughout this Agreement, the method of instruction, the number of signatures required and a list of persons as shall be authorized from time to time to act pursuant to this Agreement (an "Authorized Person") and their specimen signatures are to be specified in the Delegations of Authority from time to time in effect, the forms of which are attached hereto as Exhibits F and G. Persons authorzied to act with respect to matters related solely to variable annuity fund assets are identified on Exhibit G. Persons authorized to act for all other purposes of this Agreement are identified on Exhibit G. All Proper Instructions shall be in writing signed by two (2) Authorized Persons (except as may otherwise be provided on Exhibit G). Each such writing shall set forth the specific transaction or type of - 23 - transaction involved. Oral instructions will be considered Proper Instructions if State Street reasonably believes them to have been given by two (2) Authorized Persons (except as may otherwise be provided on Exhibit G). The Corporation shall cause all oral instructions to be confirmed in writing on the same day. Any oral instructions not confirmed in writing shall be reported immediately to the Corporation, Attention: Corporate Audit. Proper Instructions may include communications effected directly between electro-mechanical or electronic devices, provided that the Corporation and State Street are satisfied that such procedures afford adequate safeguards for the Corporation's assets. In the event of a conflict between instructions effected directly between electro-mechanical or electronic devices and written instructions signed in accordance with the appropriate Delegation of Authority, such written instructions shall control, provided that actions taken by State Street in reliance upon such electro-mechanical or electronic devices shall not be voided by subsequent written instructions. All requests, designations, notices, agreements, execution of documents and other actions which may be taken by the Corporation hereunder shall be deemed to have been effected by the Corporation when such actions have been taken by two (2) Authorized Persons. 4. ADDITIONAL AGREEMENTS. State Street and the Corporation further agree as follows: - 24 - 4.1 INDEMNIFICATION. So long as and to the extent that it is in the exercise of reasonable care, State Street shall not be responsible for the title, validity or genuineness of any property or evidence of title thereto delivered to it or by it pursuant to this Agreement and shall be held harmless in acting upon any notice, request, consent, certificate or other instrument reasonably believed by it to be genuine and to be signed by the proper party or parties or to have been properly executed in accordance with Section 3.1 hereof. Notwithstanding the foregoing, State Street, as custodian, shall indemnify the Corporation for any losses, damages and expenses as a result of any actions taken or not taken or things done or not done by it in carrying out the terms and provisions of this Agreement as set forth below: (1) State Street shall be held to the exercise of reasonable care in carrying out the provisions of this Agreement. State Street shall indemnify and hold harmless the Corporation for all damages and expenses reasonably incurred as a result of the negligent action, negligent failure to act, bad faith or willful misconduct of State Street or any of its officers, nominees, employees, or any Agent or Sub-Custodian appointed hereunder, in the performance of any of their responsibilities hereunder; but State Street shall be indemnified by and shall be without liability to the Corporation for any other action taken or omitted by State Street or any of its officers or employees or any Agent or Sub-Custodian in good faith in the performance of any of their responsibilities hereunder. It shall be entitled to rely on and may act upon advise of counsel (who may be counsel for the - 25 - Corporation) on all matters, and shall be without liability for any action reasonably taken or omitted pursuant to such advice. (2) Subject to the standard of care and liability specified in paragraph (1) of this Section 4.1, and without in any way modifying the responsibility of State Street provided for therein, the losses referred to in said paragraph (1) shall include losses occasioned by computer or other mechanical failure, the dishonesty of State Street's officers or employees, burglary, robbery, holdup, theft, or mysterious disappearance, and loss by damage or destruction. However, in the case of computer or mechanical failure liability for such losses shall be limited to the restoration of all customer records and data and the correction of all errors resulting from the performance of State Street; however, in any event, State Street shall implement such restoration and correction in compliance with all regulatory law and authority and consistent with any State Street internal policy and provided further that State Street shall use its reasonable best efforts to implement such restoration and correction within 48 hours of the event causing such failure. State Street will not be liable to the Corporation, and the Corporation will not be liable to State Street, for consequential damages arising from computer or mechanical failure. In no case shall computer or mechanical failure excuse State Street from maintaining records as specified in Section 2.5. (3) In the event of the loss of Securities held by State Street, as custodian for the Corporation, for which loss State Street is liable under paragraphs (1) or (2) of this Section 4.1, - 26 - Securities in replacement thereof, or, at the option of State Street, funds in an amount equal to the market value of the Securities and brokerage commissions which would be incurred in replacing such Securities at the date of discovery of such loss, shall be remitted promptly to the Corporation, together with funds in an amount equal to any lost interest payments, dividends, or other distributions, as the case may be, with respect to such Securities, and, so far as may be lawful, interest upon such lost interest payments, dividends, or other distributions, at a rate equal to the rate as announced by State Street in Massachusetts from time to time as its prime commercial lending rate. (4) Without limiting the generality of the foregoing, State Street shall be under no duty or obligation to inquire into, and shall not be liable for (i) the validity of the issue of any Securities purchased by or for the account of, the Corporation, the legality of the purchase thereof, or the propriety of the amount paid therefor, or (ii) the legality of the sale by or on behalf of the Corporation of any Securities, or the propriety of the amount for which such Securities may be sold. If in any case a party may be asked to indemnify the other hereunder, the party seeking indemnification shall fully and promptly advise the other party of all pertinent facts concerning the situation in question, and identify and notify the other party promptly concerning any situation which presents or appears likely to present the probability of such a claim for indemnification against the other party. The party against whom indemnification is sought shall have the option to defend against any claim which may - 27 - be the subject of the request for indemnification, and in the event that the party against whom indemnification is sought so elects, it will so notify the other party, and thereupon the party against whom indemnification is sought shall take over complete defense of the claim, and the other party shall sustain no further legal or other expenses in such situation for which it shall seek indemnification. Neither party shall confess any claim or make any compromise in any case in which the indemnifying party will be asked to indemnify the other party except with the other party's consent. 4.2 APPOINTMENT OF AGENTS. State Street, as custodian, may at any time or times appoint (and may at any time remove) any other bank, trust company or responsible commercial agent, including, but not limited to subsidiaries and affiliates of State Street, to act as its agent to carry out such of the provisions of this Agreement as State Street may from time to time direct; provided, however, that (i) the appointment of such agent ("Agent") shall not relieve State Street of any of its responsibilities under this Agreement and there is an agreement between State Street and the Agent to this effect, and (ii) the Agent is duly authorized to act as a custodian or trustee and is organized under the laws of the United States of America or any state thereof and (a) is a member of the Federal Reserve System, (b) is a member of or is eligible to receive deposits which are insured by the Federal Deposit Insurance Corporation or (c) maintains an account with a Federal Reserve Bank and is subject to supervision and examination by the Board of Governors of the Federal Reserve System. - 28 - 4.3 APPOINTMENT OF SUB-CUSTODIANS. Upon receipt of Proper Instructions, State Street, as custodian, may from time to time employ one or more sub-custodian agents ("Sub-Custodians"), provided that (i) the appointment of such Sub-Custodian shall not relieve State Street of any of its responsibilities under this Agreement and there is an agreement between State Street and the Sub-Custodian to this effect; and (ii) the Sub-Custodian (a) is a member of the Federal Reserve System, (b) is a member of or is eligible to receive deposits which are insured by the Federal Deposit Insurance Corporation or (c) maintains an account with a Federal Reserve Bank and is subject to supervision and examination by the Board of Governors of the Federal Reserve System. 4.4 FEE SCHEDULE. State Street shall be entitled to receive fees provided for in a schedule agreed upon from time to time between the Corporation and State Street; once agreed upon, the schedule shall remain effective until a different schedule is agreed upon. - 29 - 4.5 EFFECTIVE PERIOD, TERMINATION AND AMENDMENT, AND INTERPRETIVE AND ADDITIONAL PROVISIONS. This Agreement shall become effective as of the date of its execution, shall continue in full force and effect until terminated as hereinafter provided, may be amended at any time by mutual written agreement of the parties hereto and may be terminated by either party by an instrument in writing delivered or mailed by registered mail, postage prepaid, to the other party, such termination to take effect in accordance with the provisions of this Section 4.5. Either party may terminate this Agreement for any reason within thirty (30) days from the date of its execution. After such time, unless otherwise provided by this Agreement, this Agreement may be terminated (a) by the Corporation no sooner than ninety (90) days after the date of delivery or mailing of such notice of termination or (b) by State Street no sooner than six (6) months after the date of delivery or mailing of such notice of termination. Notwithstanding the above, neither State Street nor the Corporation shall amend or terminate this Agreement in contravention of any applicable Federal or State laws or regulations; and further provided, that the Corporation may at any time (i) substitute another bank or trust company for State Street by giving notice as described above to State Street or (ii) immediately terminate this Agreement in the event State Street shall have a material adverse change in its financial condition, assets, liabilities, earnings or business prospects, or become bankrupt or insolvent or shall invoke the benefit of, or be subjected to, any laws for the protection, rehabilitation or liquidation of insolvent debtors, or in the event of the appointment of a conservator or receiver for State Street by the Comptroller of the Currency or upon the happening of a like event at the direction of an appropriate regulatory agency or court of competent - 30 - jurisdiction. In the event of such immediate termination, the Corporation shall be entitled to the immediate return of all Securities then held in the Custody Account inclusive of any other accounts established with State Street pursuant to this Agreement (whether ownership by the Corporation of such Securities is evidenced by (i) a physical certificate registered as provided in Section 1.3-3, or (ii) a credit, to the account of State Street, entered on the books of account and records of any Securities System). 4.6 COMPLIANCE WITH LAW. It is the intention of the parties hereto that the terms of this Agreement comply with insurance laws, rules and regulations and the requirements of insurance regulatory bodies ("Insurance Requirements") as in effect from time to time and applicable to the Corporation's performance under the Agreement and the rules of bank regulatory authorities ("Banking Requirements") as in effect from time to time applicable to State Street's performance under this Agreement. In the event that any provision hereof is capable of a number of interpretations, such provision shall be interpreted in such fashion as to be consistent with the Insurance Requirements and Banking Requirements as in effect from time to time. It is also the intention of the parties hereto that the terms of this Agreement and the performance of the parties hereunder comply with the Internal Revenue Code of 1986 as amended from time to time and all rules and regulations promulgated thereunder (the "Code"), including but not limited to the satisfaction of all conditions set forth in Treasury Regulation Section 1.165-12(c) and (d), which relate to Securities which are referred to therein as "registration-required obligations" in bearer form. State Street agrees to satisfy all applicable conditions contained - 31 - therein, including the making of returns of information to the Internal Revenue Service, if required, and hereby covenants with the Corporation that it will deliver all Securities which are "registration-required obligations" in bearer form (as that term is used in applicable regulations) in accordance with the requirements set forth in Treasury Regulation Section 1.165-12(c)(1)(ii) or (iv). State Street and the Corporation shall agree on a written memorandum setting forth the material terms for State Street's compliance with the requirements of the Code referred to in this paragraph. State Street shall rely on such written memorandum until it is withdrawn or modified in writing by mutual agreement and shall be under no duty to take independent notice of any change in the Code and shall be without liability to the Corporation for loss, claim or expense under this paragraph except for that which may arise from State Street's failure, through negligence or bad faith, to follow the terms of the memorandum. 4.7 SUCCESSOR CUSTODIAN. Upon termination hereof the Corporation shall pay to State Street such compensation as may be due under the fee schedule in effect between the parties hereto at that time. If a successor custodian is appointed by the Corporation, State Street shall, upon termination, deliver to such successor custodian at the office of State Street, duly endorsed and in form for transfer, all Securities then held hereunder and all Moneys or other properties of the Custody Account deposited with or held by it hereunder. If no such successor custodian is appointed by the Corporation, State Street shall, upon termination, deliver all properties of the Custody Account to the Corporation pursuant to Proper Instructions. - 32 - This Agreement shall be binding on and shall inure to the benefit of the Corporation and State Street and their respective successors. Any bank or trust company into which State Street or any successor may be merged, converted or with which it or any successor may be consolidated or any bank or trust company resulting from any merger, conversion or consolidation to which State Street or any successor shall be a party or any bank or trust company succeeding to the business of State Street or any successor shall be substituted as successor under this Agreement and any amendments thereof, without the execution of any instrument or any further act on the part of the Corporation or State Street or any successor. Any such successor to State Street shall have all powers, duties and obligations of the preceding custodian under this Agreement and any amendments thereof and shall succeed to all the exemptions and privileges of the preceding custodian under this Agreement and any amendments thereof. All records regarding the Corporation's accounts will be transferred to the successor custodian, including those records relating to the Securities System. 4.8 DISCLOSURE OF INFORMATION. Unless required by this Agreement or applicable law or regulation, State Street is not authorized to disclose the Corporation's name, address and securities position to any person or any issuer of securities when requested to do so by them without the prior written approval of the Corporation. 4.9 ASSIGNMENT. This Agreement may not be assigned by State Street without the prior written consent of the Corporation. 5. MASSACHUSETTS LAW TO APPLY. THIS INSTRUMENT IS EXECUTED AND DELIVERED IN THE COMMONWEALTH OF MASSACHUSETTS AND, EXCEPT AS PROVIDED IN SECTION 4.6, - 33 - SHALL BE SUBJECT TO AND BE CONSTRUED ACCORDING TO THE LAWS OF SAID COMMONWEALTH. 6. NOTICE. Notices and other writings delivered or mailed postage prepaid to The Franklin Life Insurance Company, c/o American General Corporation, Attention: Jamileh Soufan at 2929 Allen Parkway, Houston, Texas 77019 or to State Street, Attention: Kenneth A. Bergeron at 225 Franklin Street, Boston, Massachusetts 02110 or to such address as the Corporation or State Street may hereafter specify, shall be deemed to have been properly delivered or given hereunder to the respective address. 7. EXECUTED ORIGINALS. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original. IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by duly authorized persons as of the day and year first above written. THE FRANKLIN LIFE INSURANCE COMPANY By: - - ------------------------------------- James L. Gleaves, Authorized Person By: - - ------------------------------------- Jamileh Soufan, Authorized Person STATE STREET BANK AND TRUST COMPANY ATTEST: By: By: --------------------------------- - - --------------------------------- Title: Title: ------------------------------- - - --------------------------------- - 34 - EXHIBIT A CUSTODIAN AFFIDAVIT (for securities which have not been redeposited elsewhere) STATE OF ) ) SS: COUNTY OF ) __________________________, being duly sworn deposes and says that he is __________ of __________________, a banking corporation organized under and pursuant to the laws of the _______, with a principal place of business at _______________________ (the "Bank"); That his duties involve supervision of activities of the Bank as custodian and maintenance of records relating to such custodian activities; That the Bank is custodian for certain securities of The Franklin Life Insurance Company, which has its principal place of business at ________________________ (the "Insurance Company"), pursuant to a Custodian Agreement dated as of April 17, 1995 between the Bank and the Insurance Company, as such may be amended from time to time (the "Agreement"); That the schedule attached hereto is a true and complete statement of securities (other than those caused to be deposited with the Depository Trust Company or like entity or a Federal Reserve Bank under the Federal Reserve book-entry procedure) which were in the custody of the Bank for the account of the Insurance Company as of the close of business on ______________________; that, unless otherwise indicated on the schedule, the next maturing and all subsequent coupons were then either attached to coupon bonds or in the process of collection; and that, unless otherwise shown on the schedule, all such securities were in bearer form or in registered form in the name of the Insurance Company or its nominee or a nominee of the Bank, or were in the process of being registered in such form; That the Bank as custodian has the responsibility for the safekeeping of such securities as specifically set forth in the Agreement; and That to the best of his knowledge and belief, unless otherwise shown on the schedule, said securities were the property of said Insurance Company and were free of all liens, claims or encumbrances whatsoever. Subscribed and sworn to before me this _______ day of _______ ___, 19___. (L.S.) ------------------------- Vice President or other authorized officer EXHIBIT B CUSTODIAN AFFIDAVIT (for use with securities on deposit with The Depository Trust Company or like entity) STATE OF ) ) SS: COUNTY OF ) ________________________, being duly sworn deposes and says that he is __________ of _____________________, a banking corporation organized under and pursuant to the laws of the _______, with a principal place of business at ____ __________________ (the "Bank"); That his duties involve supervision of activities of the Bank as custodian and maintenance of records relating to such custodian activities; That the Bank is custodian for certain securities of The Franklin Life Insurance Company, which has its principal place of business at _______________________ (the "Insurance Company"), pursuant to a Custodian Agreement dated as of _____ April 17, 1995 between the Bank and the Insurance Company, as such may be amended from time to time (the "Agreement"); That the Bank has caused the securities set forth on the schedule attached hereto to be deposited with _________________________, and such shcedule is a true and complete statement of the securities of the Insurance Company of which the Bank was custodian, and which were so deposited, as of the close of business on _________________________; That the Bank as custodian has the same responsibility for the safekeeping of such securities, whether possession of the Bank or deposited, as specifically set forth in the Agreement; and That, to the best of his knowledge and belief, unless otherwise shown on the schedule, said securities were the property of the Insurance Company and were free of all liens, claims or encumbrances whatsoever. Subscribed and sworn to before me this ___________ day of __________, 19__. (L.S.) ------------------------- Vice President or other authorized officer EXHIBIT C CUSTODIAN AFFIDAVIT (for use where ownership is evidenced by a book-entry account at a Federal Reserve Bank) STATE OF ) ) SS: COUNTY OF ) _______________________, being duly sworn deposes and says that he is ___________ of __________________, a banking corporation organized under and pursuant to the laws of the _______, with a principal place of business at _____________________ (the "Bank"); That his duties involve the supervision of activities of the Bank as custodian and maintenance of records relating to such custodian activities; That the Bank is custodian for certain securities of The Franklin Life Insurance Company, which has its principal place of business at _______________________ (the "Insurance Company"), pursuant to a Custodian Agreement dated as of April 17, 1995 between the Bank and the Insurance Company, as the same may be amended from time to time (the "Agreement"); That it has caused the securities set forth on the attached schedule to be credited to its book-entry account with a Federal Reserve Bank under the Federal Reserve book-entry system, and such schedule is a true and complete statement of the securities of the Insurance Company of which the Bank was custodian, and which were in a "General" book-entry account maintained in the name of the Bank on the books and records of a Federal Reserve Bank, at the close of business on __________________________________; That the Bank has the same responsibility for safekeeping such securities, whether in the possession of the Bank or in said "General" book-entry account, as specifically set forth in the Agreement. Subscribed and sworn to before me this __________ day of ____________, 19__. (L.S.) ------------------------- Vice President or other authorized officer EXHIBIT D Daily Activity and Inventory Reports DAILY 1. Cash Blotter 2. Corporate Action Report WEEKLY 1. Outstanding Security Loans (and Month-end) 2. Open Trades Report (and Month-end) 3. Corporate Action Report MONTHLY 1. Open Trades Report 2. Vaulting Report 3. Past Due Report 4. Special Deposit Report 5. Asset Master Reference Data MASTER TRUST REPORTS: Monthly 1. Computation of NAV 2. Cash Transaction Report 3. Cash Transaction Report Summary 4. Working Trial Balance 5. Account Position Appraisal 6. Purchases Report 7. Sales Report 8. Realized Gain/Loss Report 9. Principal Paydowns 10. Open Transaction Summary 11. Interest Receivable Report 12. Earned Income Detail Report EXHIBIT E STATE STREET BANK INSURANCE PROGRAM 1. COMPREHENSIVE CRIME PROGRAM LIMITS: $75,000,000 DEDUCTIBLE: 1,500,000 COVERAGES: BANKERS BLANKET BOND 1. Fidelity - Loss by reason of any dishonest or fraudulent act of any employee, including loss of property through such acts. 2. On Premises - Loss of property as defined (i.e., currency, securities, bullion, etc.) through burglary, robbery, etc. 3. Transit - Loss of property while in transit except while in the mail. 4. Forgery or Alteration - Loss by reason of forgery or alteration of checks, or other similar instruments. 5. Securities Forgery - Loss through the insured having in good faith and in the course of business given value or otherwise acted upon any securities or other written documents. 2. COMPUTER CRIME COVERAGES LIMIT: $75,000,000 DEDUCTIBLE: 1,500,000 COVERAGE: This policy covers direct financial loss sustained by the insured by reason of having transferred, paid or delivered any funds or property or established any credit or given any value as the result of certain defined criminal acts. The policy encompasses the following insuring agreements: Agreement 1 Computer Systems Agreement 2 Electronic Computer Instructions Agreement 3 Electronic Data and Media Agreement 4 Electronic Communication Agreement 5 Assured's Service Bureau Operations Agreement 6 Electronic Transmission Agreement 7 Customer Voice Initiated Transfers 3. EXCESS "ALL RISK" SECURITIES COVERAGE LIMIT: $425,000,000 DEDUCTIBLE: Bankers Professional Liability deductible applies ($10,000,000) EXHIBIT E - 2 - COVERAGE: All Risk Physical Loss on negotiable and nonnegotiable securities and all documents of value. 4. LOST INSTRUMENT BOND LIMIT: $ 1,500,000 DEDUCTIBLE: Bankers Blanket Bond deductible applies ($1,500,000) COVERAGE: This type of Bond has application where the Bank loses or misplaces a security whose value is within the deductible of the Bankers Blanket Bond. In such a case, the Bank would obtain a Lost Instrument Bond in order to facilitate the replacing of the missing security. Under such a Bond the Bank is principal and agrees to indemnify, among others, the issuer of the replacement security for any loss that it might incur by reason of the issuance of a replacement for the lost security. 5. BANKERS PROFESSIONAL LIABILITY LIMIT: $ 30,000,000 DEDUCTIBLE: 10,000,000 Corporation COVERAGE: This policy provides indemnification for all losses incurred as a result of any claim against the insured relating to wrongful acts and errors or omissions in the Bank's performance of professional services. EXHIBIT F (non-variable annuity fund matters) DELEGATION OF AUTHORITY You are to follow any and all written instructions given you jointly by any one (1) Authorized Person designated in GROUP B below AND any one (1) Authorized Person designated in GROUP C below (two signatures) (a) in respect to the delivery, transfer, sale, exchange or other disposition of any or all of the securities or other property, including income and proceeds at any time held by you for the account of the Corporation, (b) in respect to any securities transfer for the purpose of a pledge to any state provided that specific written proper instructions are furnished as to the joint tenancy or control between the Corporation and the affected state, (c) in respect to the investment of any cash at any time held by you (whether in the Corporation's checking account or otherwise), or the purchase or acquisition by exchange or otherwise, on behalf of the Corporation, of any securities or other property, and (d) in respect to any other action taken pursuant to the Agreement that you are a party of with the Corporation (the "Agreement"), hereby granting unto all of the below-named Authorized Persons full power and authority in the premises, and ratifying and confirming all that said Authorized Persons shall do, or cause to be done by virtue hereof. NOTWITHSTANDING THE FOREGOING, all deliveries of securities by you to a third party must be either conditioned upon or against receipt of funds therefor except as provided in the Agreement and unless you have previously received specific written proper instructions signed jointly by any one (1) Authorized Person designated in GROUP A below AND any one (1) Authorized Person designated in GROUP B below AND any one (1) Authorized Person designated in GROUP C below (three signatures). Under no circumstances should securities be delivered to any individual at the Corporation or any of its affiliates other than those persons listed in GROUP C below. This Delegation of Authority may be revoked only by notice in writing or substituted Delegation of Authority delivered to you; and in the event of death or other termination of your authority by operation of law, the Corporation for the purpose of inducing you to act hereunder hereby agrees that you shall be saved harmless from any loss suffered, or liability incurred, by reason of any action taken by you prior to receipt of actual notice of such termination. All instructions relating to securities movements shall be in writing signed by the number of Authorized Persons specified herein. Each such writing shall set forth the specific transaction or type of transaction involved. Oral instructions will be considered proper instructions if the Custodian reasonably believes them to have been given by the Authorized Persons. The Corporation shall cause all oral instructions to be confirmed in writing on the same day. Any oral instructions not confirmed in writing shall be reported immediately to the Corporation, Attention: Corporate Audit. Proper instructions may include communications effected directly between electro-mechanical or electronic devices, provided that the Corporation and the Custodian are satisfied that such procedures afford adequate safeguards for the Corporation's assets. AUTHORIZED PERSONS GROUP A GROUP B GROUP C - - ------- ------- ------- Executive Investment Treasury - - --------------------- -------------------- ------------------ Nicholas R. Rasmussen Roger E. Hahn C. Jeffery Gay ---------------------- C. Scott Inglis ------------------ James L. Gleaves - - --------------------- ---------------------- Peter V. Tuters Gordon S. Massie ----------------------- ------------------ Michael L. McEachern Joy A. Kendall - - --------------------- ----------------------- ------------------ Austin P. Young Julia S. Tucker Jamileh B. Soufan Acknowledged by: --------------------------------- Custodian's Name: --------------------------------- Date: --------------------------------- EXHIBIT G (variable annuity fund matters) DELEGATION OF AUTHORITY You are to follow any and all written instructions given you jointly by any two (2) Authorized Persons designated below (a) in respect to the delivery, transfer, sale, exchange or other disposition of any or all of the securities or other property, including income and proceeds at any time held by you for the account of the Corporation, (b) in respect to any securities transfer for the purpose of a pledge to any state provided that specific written proper instructions are furnished as to the joint tenancy or control between the Corporation and the affected state, (c) in respect to the investment of any cash at any time held by you (whether in the Corporation's checking account or otherwise), or the purchase or acquisition by exchange or otherwise, on behalf of the Corporation, of any securities or other property, and (d) in respect to any other action taken pursuant to the Agreement that you are a party of with the Corporation (the "Agreement"), hereby granting unto all of the below-named Authorized Persons full power and authority in the premises, and ratifying and confirming all that said Authorized Persons shall do, or cause to be done by virtue hereof. NOTWITHSTANDING THE FOREGOING, all deliveries of securities by you to a third party must be either conditioned upon or against receipt of funds therefor except as provided in the Agreement and unless you have previously received specific written proper instructions signed jointly by any three (3) Authorized Persons designated below. Under no circumstances should securities be delivered to any individual at the Corporation or any of its affiliates other than those persons listed below. This Delegation of Authority may be revoked only by notice in writing or substituted Delegation of Authority delivered to you; and in the event of death or other termination of your authority by operation of law, the Corporation for the purpose of inducing you to act hereunder hereby agrees that you shall be saved harmless from any loss suffered, or liability incurred, by reason of any action taken by you prior to receipt of actual notice of such termination. All instructions relating to securities movements shall be in writing signed by the number of Authorized Persons specified herein. Each such writing shall set forth the specific transaction or type of transaction involved. Oral instructions will be considered proper instructions if the Custodian reasonably believes them to have been given by the Authorized Persons. The Corporation shall cause all oral instructions to be confirmed in writing on the same day. Any oral instructions not confirmed in writing shall be reported immediately to the Corporation, Attention: Corporate Audit. Proper instructions may include communications effected directly between electro-mechanical or electronic devices, provided that the Corporation and the Custodian are satisfied that such procedures afford adequate safeguards for the Corporation's assets. AUTHORIZED PERSONS ----------------------------------------- Robert J. Gibbons ----------------------------------------- Robert G. Spencer ----------------------------------------- Stephen P. Horvat, Jr. ----------------------------------------- Elizabeth E. Arthur ----------------------------------------- Jeffrey D. Pirmann Acknowledged by: ------------------------- Custodian's Name: ------------------------ Date: ------------------------ MEMORANDUM OF AGREEMENT This Memorandum of Agreement is made as of the 17th day of April, 1995 by and between the corporation listed as a signatory hereto (the "Corporation"), and STATE STREET BANK AND TRUST COMPANY, a Massachusetts banking corporation ("State Street"). The Corporation and State Street entered into a Custodian Agreement dated as of April 17, 1995 (referred to as a "Custodian Agreement") providing for the establishment of a Custody Account in the name of the Corporation with State Street as custodian. The Custody Account was established for the deposit by the Corporation of any and all of its Securities and/or Moneys and the participation by the Corporation, through State Street, in the book-entry programs or systems of any Securities System with respect to the Securities, held under the Custodian Agreement, eligible for deposit with such Securities System. Capitalized terms used but not defined herein are defined in the Custodian Agreement. Section 4.6 of the Custodian Agreement provides in part: It is also the intention of the parties hereto that the terms of this Agreement and the performance of the parties hereunder comply with the Internal Revenue Code of 1986, as amended from time to time, and all rules and regulations promulgated thereunder (the "Code"), including but not limited to the satisfaction of all conditions set forth in Treasury Regulation Section 1.165-12(c) and (d), which relate to Securities which are referred to therein as "registration-required obligations" in bearer form. State Street agrees to satisfy all applicable conditions contained therein, including the making of returns of information to the Internal Revenue Service, if required, and hereby covenants with the Corporation that it will deliver all Securities which are "registration-required obligations" in bearer form (as that term is used in applicable regulations) in accordance with the requirements set forth in Treasury Regulation Section 1.165-12(c)(1)(ii) or (iv). State Street and the Corporation shall agree on a written memorandum setting forth the material terms for State Street's compliance with the requirements of the Code referred to in this paragraph. State Street shall rely on such written memorandum until it is withdrawn or modified in writing by mutual agreement and shall be under no duty to take independent notice of any change in the Code and shall be without liability to the Corporation for loss, claim or expense under this paragraph except for that which may arise from State Street's failure, through negligence or bad faith, to follow the terms of the memorandum. Page 1 of 6 This Memorandum of Agreement sets forth the memorandum described in Section 4.6 of the Custodian Agreement. 1. Treasury Regulation Section 1.165-12(a) provides that the term "registration-required obligation" has the meaning given to that term in section 163(f)(2) of the Code, except that section 163(f)(2)(A)(iv) of the Code shall not apply. Section 163(f)(2)(A)(i) through (iii) of the Code provides that the term "registration-required obligation" means any obligation (including any obligation issued by a governmental entity) other than an obligation which (i) is issued by a natural person, (ii) is not of a type offered to the public, or (iii) has a maturity (at issue) of not more than one year. 2. Treasury Regulation Section 1.165-12(b)(1) provides that with respect to any obligation originally issued after September 21, 1984, the term "registered form" has the meaning given that term in section 103(j)(3) of the Code and the regulations thereunder. Therefore, an obligation that would otherwise be in registered form is not considered to be in registered form if it can be transferred at that time or at any time until its maturity by any means not described in Treasury Regulation Section 5f.103-1(c). An obligation that, as of a particular time, is not considered to be in registered form because it can be transferred by any means not described in Treasury Regulation Section 5f.103-1(c) is considered to be in registered form at all times during the period beginning with a later time and ending with the maturity of the obligation in which the obligation can be transferred only by a means described in Treasury Regulation Section 5f.103-1(c). Treasury Regulation Section 5f.103-1(c) provides that an obligation is in registered form if (i) the obligation is registered both as to principal and any stated interest with the issuer (or its agent) and transfer of the obligation may be effected only by surrender of the old instrument and either the reissuance by the issuer of the old instrument to the new holder or the issuance by the issuer of a new instrument to the new holder, (ii) the right to the principal of, and stated interest on, the obligation may be transferred only through a book-entry system maintained by the issuer (or its agent) as described in Treasury Regulation Section 5f.103-1(c)(2), or (iii) the obligation is registered as to both principal and any stated interest with the issuer (or its agent) and may be transferred through both of the methods described in (i) and (ii) above. Treasury Regulation Section 5f.103-1(c)(2) provides that an obligation shall be considered transferable through a book-entry system if the ownership of an interest in the obligation is required to be reflected in a book-entry, whether or not physical securities are issued; a book-entry is a record of ownership that identifies the owner of an interest in the obligation. 3. Treasury Regulation Section 1.165-12(b)(2) provides that with respect to any obligation originally issued after December 31, 1982 and on or before September 21, 1984 (or an obligation originally issued after September 21, 1984 pursuant to the exercise of a warrant or the conversion of a convertible obligation, which warrant or obligation (including conversion privilege) was issued after December 31, 1982 and on or before September 21, 1984), that obligation will be considered in registered form if it satisfies either the provisions of Treasury Regulation Section 5f.103-1 (set forth in part in paragraph 2 above) or the proposed regulations provided in Treasury Regulation Section 1.163-5(c) published in the Federal Register on September 2, 1983 (48 FR 39953). Page 2 of 6 4. Treasury Regulation Section 1.165-12(c) sets forth the conditions under which the holder of a registration-required obligation will not be subject to certain tax sanctions notwithstanding the fact that the obligation is not in registered form. Treasury Regulation Section 1.165-12(c)(3) provides that the holder of a registration-required obligation that is not in registered form will not be subject to such tax sanctions if the holder purchases and holds the registration-required obligation in bearer form through a financial institution with which the holder maintains a customer, custodial or nominee relationship and such institution agrees to satisfy, and does in fact satisfy, the following conditions: (i) The financial institution makes a return of information to the Internal Revenue Service with respect to any interest payments received. The financial institution must report original issue discount includable in the holder's gross income for the taxable year on any obligation so held, but only if the obligation appears in an Internal Revenue Service publication of obligations issued at an original issue discount and only in an amount determined in accordance with information contained in that publication. An information return for any interest payment shall be made on a Form 1099 for the calendar year. It shall indicate the aggregate amount of the payment received, the name, address and taxpayer identification number of the holder, and such other information as is required by the form. (ii) The financial institution makes a return of information on Form 1099B with respect to any disposition by the holder of such obligation. The return shall show the name, address, and taxpayer identification number of the holder of the obligation, the Committee on Uniform Security Information Procedures (CUSIP), gross proceeds, sale date, and such other information as may be required by the form. (iii) In the case of a bearer obligation offered for resale or resold in the United States, the financial institution may resell the obligation only to another financial institution for its own account or for the account of an exempt organization. (iv) The financial institution covenants with the holder that the financial institution will deliver the obligation in bearer form in accordance with the requirements set forth in Treasury Regulation Section 1.165-12(c)(1)(ii) and (iv). (v) The financial institution delivers the obligation in bearer form in accordance with Treasury Regulation Section 1.165-12(c)(1)(ii) and (iv) as if the financial institution delivering the obligation were the holder referred to in such regulation. 5. Treasury Regulation Section 1.165-12(c)(1)(ii) provides that the holder must offer to sell, sell and deliver the obligation in bearer form only outside of the United States except that a holder that is a registered broker-dealer (registered under Federal or State law or exempted from registration by the provisions of such law because it is a bank) that holds the obligation for sale to customers in the ordinary course of its trade or business may offer to sell and sell the obligation in bearer form inside the United States to a financial institution for its own account or for the account of another financial institution or exempt organization as defined in section 501(c)(3) of the Code if the transaction consists of the purchase of a block of obligations the total denominations of which are at least $1,000,000. Page 3 of 6 6. Treasury Regulation Section 1.165-12(c)(1)(iv) provides that the holder may deliver an obligation in bearer form that is offered or sold inside the United States only if the holder delivers it to a financial institution that states that it is a financial institution as defined in Treasury Regulation Section 1.165-12(c)(1)(v) that is purchasing for its own account or for the account of another financial institution or exempt organization, that will comply with the requirements of section 165(j)(3)(A), (B), or (C) of the Code and the regulations thereunder and the holder has no actual knowledge that the statement is false. The statement must contain the name and address of the person entitled to delivery and must be signed by such person under penalties of perjury. A form of such statement is attached hereto as Exhibit A. The holder may deliver an obligation in bearer form that is offered and sold outside the United States to a financial institution if it delivers to such person a confirmation stating that any United States taxpayer who holds this obligation in bearer form and who is not exempt under section 165(j)(3)(A), (B), or (C) of the Code and the regulations thereunder will, for purposes of the United States income tax, be denied a deduction for any loss incurred with respect to the obligation and will be denied capital gain treatment with respect to the obligation. The holder may deliver a registration-required obligation in bearer form that is offered and sold outside the United States to a person other than a financial institution only if the holder has documentary evidence as described in Treasury Regulation Section 35a.9999-4T, A-5(iii) that the person is not a United States person. For this purpose, "deliver" includes the transfer of an obligation evidenced by a book-entry including a book-entry notation by a clearing organization evidencing transfer of the obligation from one member of the organization to another member, but does not include a transfer of an obligation to the issuer or its agent for cancellation or extinguishment. If a holder that is a member of a clearing organization (as defined in Treasury Regulation Section 1.163-5(c)(2)(i)(B)(4)) delivers an obligation to another member of the same or another clearing organization by transfer of the obligation between the clearing organization accounts of such members, the selling member shall receive the statement from the purchasing member (in the case of obligations offered or sold inside the United States) or send the confirmation to the purchasing member (in the case of obligations offered or sold outside the United States). 7. Treasury Regulation Section 1.165-12(c)(1)(v) defines the term "financial institution" to mean a person which itself is, or more than 50% of the total combined voting power of all classes of whose stock entitled to vote is owned by a person which is, (A) engaged in the conduct of a banking, financing, or similar business within the meaning of section 954(c)(3)(B) of the Code as in effect before the Tax Reform Act of 1986, and the regulations thereunder; (B) engaged in business as a broker or dealer in securities; (C) an insurance company; (D) a person that provides pensions or other similar benefits to retired employees; (E) primarily engaged in the business of rendering investment advice; (F) a regulated investment company or other mutual fund; or (G) a finance corporation a substantial part of the business of which consists of making loans (including the acquisition of obligations under a lease which is entered into primarily as a financing transaction), acquiring accounts receivable, notes or installment obligations arising out of the sale of tangible personal property or the performance of services, or servicing debt obligations. 8. Treasury Regulation Section 1.163-5(c)(2)(i)(B)(4) defines a clearing organization as an entity which is in the business of holding obligations for member organizations and transferring obligations among such members by credit or debit to the account of a member without the necessity of physical delivery of the obligation. Page 4 of 6 9. With respect to any registration-required obligation (as defined in paragraph 1 above) which is not in registered form (as defined in paragraph 2 or 3 above), which is held by State Street as custodian under the Custodian Agreement, State Street shall: (i) make the return of information described in paragraph 4(i) above; (ii) make the return of information described in paragraph 4(ii) above; and (iii) in connection with the offer for resale, resale, or delivery of the obligation, comply with the requirements set forth in paragraph 4(iii), (iv) and (v) and paragraph 5 or 6 above. This Memorandum of Agreement may be executed in any number of counterparts, each of which shall be deemed an original and all of which together shall be deemed one and the same document. Page 5 of 6 IN WITNESS WHEREOF, the Corporation and State Street have executed this Memorandum of Agreement. THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY By: ---------------------------------------- James L. Gleaves, Authorized Person By: ---------------------------------------- Jamileh Soufan, Authorized Person STATE STREET BANK AND TRUST COMPANY ATTEST: By: By: ---------------------- -------------------------------------- Title: -------------------------------------- Page 6 of 6 Exhibit A , 19 --------------------- -- State Street Bank and Trust Company 225 Franklin Street Boston, Massachusetts 02110 Attention: -------------------- Re: Purchase of $ face amount of obligations issued by ---------- ------------------------------------------------------------ Gentlemen: In connection with our purchase of the above-referenced obligations, the undersigned hereby certifies under penalties of perjury that: (i) the undersigned is a financial institution as defined in section 1.165-12(c)(1)(v) of the United States Treasury regulations, (ii) the undersigned is purchasing the obligations for its own account or for the account of another financial institution or exempt organization (within the meaning of section 1.165-12(c)(1)(iv) of the regulations), and (iii) the undersigned will comply with the requirements of section 165(j)(3)(A), (B), or (C) of the United States Internal Revenue Code of 1986, as amended, and the regulations thereunder. Very truly yours, ---------------------------------------- (Name of Financial Institution) ---------------------------------------- (Address) ---------------------------------------- (City, State and Zip Code) By: ----------------------------------- (Signature of Responsible Officer) ----------------------------------- (Title) EX-8.(B) 3 EXHIBIT 8(B) EXHIBIT 8(b) B Y L A W S O F THE FRANKLIN LIFE INSURANCE COMPANY SPRINGFIELD, ILLINOIS (AMENDED FEBRUARY 22, 1995) A R T I C L E I MEETING OF STOCKHOLDERS SECTION 1. The regular annual meeting of the stockholders of the Company shall be held at the Home Office of the Company, in the City of Springfield, Illinois, on the second Tuesday in January of each year at the hour of nine- thirty a.m. SECTION 2. Special meetings of the stockholders may be called at any time by the President and Secretary or by the holders of not less than a majority of the then outstanding stock by mailing to each stockholder a written notice (stating the time, place and object of the meeting) at least five (5) days prior to the date fixed therefor. SECTION 3. At any meeting of stockholders the holders of the majority of the capital stock issued and outstanding present in person or represented by proxy, shall constitute a quorum for all purposes. If the holders of the amount of stock necessary to constitute a quorum shall fail to attend in person or by proxy at the time and place fixed by these Bylaws for an annual meeting, or fixed by notice as provided for a special meeting, a majority in interest (although less than a quorum) of the stockholders present in person or by proxy may adjourn, from time to time, without notice other than by announcement at the meeting. At any such adjourned meeting at which a quorum shall be present any business may be transacted which might have been transacted at the meeting as originally fixed or modified. A R T I C L E I I DIRECTORS SECTION 1. The Board of Directors of the Company shall consist of fifteen (15) members. They shall be elected by the stockholders at their regular annual meeting for the term of one year each or until their successors are elected. SECTION 2. Vacancies in the Board of Directors may be filled by the stockholders at any regular meeting of stockholders, or at any special meeting called for that purpose. SECTION 3. A regular meeting of the board of Directors shall be held on the second Tuesday in the months of January, April, July and October at 9:30 a.m. Notice of each meeting shall be given to each member of the Board by the President or Secretary at least three days prior to the meeting date. A majority of all of the Directors shall constitute a quorum for the transaction of business but when a quorum is not present, one or more Directors present may adjourn and continue to adjourn such meeting from time to time, but not to a time beyond the date of the next regular meeting. SECTION 4. Special meetings of the Board of Directors may be called by the Chairman or President and Secretary, or by a majority of the Directors, by mailing to each Director a written notice (stating the time, place, and object of the meeting) at least three days prior to the date fixed therefor. A majority of all Directors shall constitute a quorum. SECTION 5. The Board of Directors, at its first meeting following the regular annual meeting of stockholders in each year, shall elect one of its members as Chairman of the Board to serve for one year or until his successor is elected and shall elect one of its members as Vice Chairman of the Board to serve for one year or until his successor is elected. The Chairman shall preside at all meetings of the stockholders and of the Board of Directors and shall perform such other duties as may be required of him by the Board or by the Executive Committee. In case of a vacancy in the office of Chairman, the same may be filled for the unexpired term by the Board of Directors at any regular meeting or at any special meeting called for that purpose. In the event of the absence or inability of the Chairman, his duties shall be performed by the Vice Chairman, and the Vice Chairman 2 shall perform such other duties as may be required of him by the Board or by the Executive committee. In the event of the absence or inability of the Chairman and the Vice Chairman, the duties of the Chairman shall be performed by the President. SECTION 6. The Board of Directors shall have the power to elect or appoint, and to remove at pleasure, all officers, committees and members of committees, and shall fix the salaries of all officers and committee members and prescribe their duties. A R T I C L E I I I STANDING COMMITTEES SECTION 1. The Board of Directors shall, at its first meeting following the regular annual meeting of the stockholders in each year, appoint the following standing committees: an Executive Committee of not less than three members or more than eight members; an Operations Committee of not less than five members or more than twelve members; an Investment Committee of not less than four members or more than nine members; a Claims Committee of not less than three members or more than ten members, a Marketing Committee of not less than five members or more than twelve members; an Auditing Committee of not less than three members or more than seven members; an Underwriting Committee of not less than three members or more than ten members; a Benefits Committee of not less than three members or more than five members; and Consumer Affairs Committee of not less than four members and not more than twelve members. All members shall serve for a term of one year or until their successors may be appointed. Vacancies may be filled by the Board of Directors at any regular meeting, or at any special meeting called for that purpose. Said Committees shall make written reports of their transactions to the Board, and their acts shall be subject to review by the Board of Directors. A majority of the members of any committee shall be a quorum for the transactions of business, except that it will not be necessary for the Underwriting Committee to have a quorum to pass on the insurability of any applicant for insurance. SECTION 2. The Executive Committee shall have the custody of all books, papers, and records of the Company, and shall have general control and direction of all the affairs and business of the Company not delegated 3 in these Bylaws to other persons, officers, or committees or reserved to the Board of Directors. SECTION 3. The Operations Committee shall have general supervision of the administrative activities of the Company. SECTION 4. The Investment Committee shall have authority to make all investments of the Company (except loans to policyholders when provided for by their policies) and all such investments shall be made in the name of the Company. Said Committee shall have control of all real estate belonging to the Company, and when in their judgment it is expedient to do so, may authorize any proper officer or employee to sell and/or transfer any of the Company's properties, securities, or investments and to manage any of the Company's properties. No investments shall be made or any assets sold unless the investment or sale is authorized or ratified by all members of said committee present at the meeting when such investment or sale is considered. SECTION 5. The Claims Committee shall supervise the administration of all claims arising from the death or disability of policyholders of the Company and formulate such rules and regulations covering the administration of claims as it deems necessary. SECTION 6. The Marketing Committee shall have general supervision of the agency activities of the Company. SECTION 7. The Auditing Committee shall audit the receipts and disbursements of the Company each month, and shall perform such other duties as may be required of it by the Board of Directors. SECTION 8. The Underwriting Committee shall (a) supervise the underwriting of applications for new insurance and reinstatement of lapsed policies and promulgate such rules and regulations regarding the eligibility for insurance of such applicants as it deems necessary, and (b) perform such other duties as may be required of them by the Board of Directors. SECTION 9. The Benefits Committee shall administer any Retirement and Welfare Plan of the Company. SECTION 10. The Consumer Affairs Committee shall have general supervision of the Company's relations with the insuring public. 4 A R T I C L E I V EXECUTIVE OFFICERS SECTION 1. The Executive Officers of the Company shall consist of a Chief Executive Officer, a President, one or more Vice Presidents, a Secretary, one or more Assistant Secretaries, Treasurer, and one or more Assistant Treasurers, who shall be elected by the Board of Directors at their first meeting after the annual meeting of the stockholders, and they shall, subject to these Bylaws, serve for a term of one year each or until their successors are duly elected. In case of a vacancy in any of the offices named in this Section, the same may be filled for the unexpired term by the Board of Directors at any regular meeting, or at a special meeting called for that purpose. SECTION 2. The Chief Executive Officer shall perform such duties as usually pertain to his office or as may be required of him by the Board of Directors or by the Executive Committee. SECTION 3. The President shall perform such duties as usually pertain to his office or as may be required of him by the Board of Directors or by the Executive Committee. SECTION 4. The Vice Presidents, in the order designated by the President, shall perform the duties of the President in case of his absence or inability to act. In event the President shall fail to make such designations, the order shall be designated by the Board of Directors, and in event of the absence or inability of the President and the Vice Presidents, the Board of Directors may select one of its members as President Pro Tem. The Vice Presidents shall perform such other duties as may be required of them by the Board of Directors or by the Executive Committee. SECTION 5. The Secretary shall keep a record of the meetings of the stockholders and of the Board of Directors, and shall perform such duties as usually pertain to his office, or as may be required of him by the Board of Directors or by the Executive Committee. SECTION 6. The Assistant Secretaries, in the order designated by the Secretary, shall perform the duties of the Secretary in case of his 5 absence or inability to act. In event the Secretary shall fail to make such designation, the order shall be designated by the Board of Directors, and in the event of the absence or inability of the Secretary and the Assistant Secretaries, the Board of Directors may select one of its members as Secretary Pro Tem. The Assistant Secretaries shall perform such other duties as may be required of them by the Board of Directors or by the Executive Committee SECTION 7. The Treasurer shall perform such duties as may be required of him by the Board of Directors, or by the Executive Committee. SECTION 8. The Assistant Treasurers, in the order designated by the Treasurer, shall perform the duties of the Treasurer in case of his absence or inability to act. In event the Treasurer shall fail to make such designation, the order shall be designated by the Board of Directors and in the event of the absence or inability of the Treasurer and the Assistant Treasurers the Board of Directors may select one of its members as Treasurer Pro Tem. The Assistant Treasurers shall perform such other duties as may be required of them by the Board of Directors or by the Executive Committee. A R T I C L E V TRANSFERRING REAL ESTATE, SECURITIES, ETC. SECTION 1. The President, or a Vice President, or an Assistant Vice President, or the General Counsel, or the Treasurer, or the Assistant Treasurer and the Secretary or an Assistant Secretary, are authorized for and on behalf of the Company. (a) To execute, acknowledge, and deliver deeds to real estate when such real estate has been sold. (b) To assign, transfer, and cancel evidence of indebtedness and notes secured by mortgage upon real estate when such notes have been paid or sold. (c) To execute releases of mortgages upon real estate when the notes such mortgages were given to secure have been paid, and to execute partial releases, easements, and subordinations. 6 (d) To transfer bonds, stocks, and/or other securities held as collateral security for loans when such loans have been paid or sold. (e) To transfer bonds, stocks, and/or other assets or securities when such bonds, stocks, and/or other assets or securities have been sold or called for payments. (f) To execute such other instruments from time to time as may be necessary or expedient to carry on the business of the Company. SECTION 2. For the purpose of deposit under the provisions of Section 1 of "An Act to Provide for the Deposit of Reserve and the Registration of Policies and Annuity Bonds by Life Insurance Companies of this State" (approved April 18, 1899, in force July 1, 1899, as amended), the President, or a Vice President, or an Assistant Vice President, or the General Counsel and the Secretary, or an Assistant Secretary, are hereby authorized to execute, acknowledge, and deliver from time to time and for and on behalf of and in the name of this Company, a deed or deeds conveying to the Director of Insurance of the State of Illinois, his successor, or successors, in office, in trust for the purpose and objects specified in said Act, such parcels of real estate as said officers may deem advisable. SECTION 3. The President, a Vice President, an Assistant Vice President, the General Counsel, or the Secretary is authorized to negotiate and enter into any leasing agreement for any real estate owned by the Company and to execute the same for and on behalf of the Company, and to do and perform any and all other acts that may be necessary to effectively accomplish the purposes mentioned. A R T I C L E V I ACTUARIES, MEDICAL DIRECTORS, ETC. SECTION 1. The Board of Directors may appoint one or more Actuaries, one or more Associate Actuaries, and one or more Assistant Actuaries, one or more Medical Directors, one or more Associate Medical Directors and one or more Assistant Medical Directors, and such other officers and department heads as it may deem necessary and expedient, who shall perform such duties as may be required of them by the Board of Directors or by the Executive Committee. 7 A R T I C L E V I I INDEMNIFICATION FOR OFFICERS AND DIRECTORS SECTION 1. The Company shall indemnify and hold harmless each person who shall serve at any time hereafter as a director or officer of the Company or who is serving at the request of the Company as a director or officer of any other corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise from and against any and all claims and liabilities to which such person shall become subject by reason of his having heretofore or hereafter been a director or officer of the Company, or such other organization with respect to which such director or officer serves at the request of the Company, or by reason of any action alleged to have been heretofore or hereafter taken or omitted by him as such director or officer, and shall reimburse each such person for all legal and other expenses reasonably incurred by him in connection with any such claim or liability; provided, however, that no such person shall be indemnified against, or be reimbursed for, any expense incurred in connection with any claim or liability arising out of his own willful misconduct. A R T I C L E V I I I SALARIES SECTION 1. All salaries, compensations, or emolument to be paid to any officer or director of the Company, and all salaries, compensations or emolument amounting in any year to more than forty thousand dollar ($40,000.00) to any person, firm, or corporation, shall be first authorized by a vote of the Board of Directors, which vote shall be by roll call at a regular meeting of said Board, and which vote shall be duly recorded in the records of the Company. A R T I C L E I X SEAL SECTION 1. The Corporate Seal of the Company shall be that now in use, consisting of two concentric circles between which shall be the 8 words "The Franklin Life Insurance Company, Springfield, Ill." and in the center shall be inserted the words "Corporate Seal" and such seal is impressed on the margin hereof. A R T I C L E X AMENDMENTS Section 1. These Bylaws may be amended, repealed, or altered in whole or in part by the Board of Directors at any regular meeting, or at any special meeting called for that purpose. * * * * * * * * * * 9 EX-13.(A) 4 EXHIBIT 13(A) 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 Messrs. Chadbourne & Parke LLP appears as Exhibit 13(d) hereto. Consent of Stephen P. Horvat, Jr., Esq., Senior Vice President and General Counsel of The Franklin Life Insurance Company, appears as Exhibit 13(e) hereto. EX-13.(B) 5 EXHIBIT 13(B) 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 February 2, 1996, with respect to the financial statements and table of per-unit income and changes in accumulation unit value of Franklin Life Variable Annuity Fund A for the year ended December 31, 1995, and our report dated February 12, 1996, with respect to the consolidated financial statements of The Franklin Life Insurance Company and subsidiaries as of December 31, 1995 and for the eleven months ended December 31, 1995 and one month ended January 31, 1995, in this Post-Effective Amendment to the Registration Statement on Form N-3 (No. 2-36394) under the Securities Act of 1933 and Registration Statement (No. 811-1990) under the Investment Company Act of 1940 and related Prospectus and Statement of Additional Information of Franklin Life Variable Annuity Fund A. /s/ Ernst & Young LLP ERNST & YOUNG LLP Chicago, Illinois April 29, 1996 EX-13.(C) 6 EXHIBIT 13(C) Exhibit 13(c) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this registration statement on Form N-3 (File No. 2-36394) and related Prospectus and Statement of Additional Information of Franklin Life Variable Annuity Fund A of: (1) Our report dated February 1, 1995, accompanying the statement of changes in contract owners' equity of Franklin Life Variable Annuity Fund A for the year ended December 31, 1994 and the table of per-unit income and changes in accumulation unit value for each of the four years in the period then ended; and (2) Our report dated February 1, 1995, accompanying the consolidated financial statements of The Franklin Life Insurance Company and Subsidiaries as of December 31, 1994 and for the years ended December 31, 1994 and 1993. 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 29, 1996 EX-13.(D) 7 EXHIBIT 13(D) Exhibit 13(d) CONSENT OF COUNSEL We consent to the reference to our firm under the caption "Legal Opinions'' in the Statement of Additional Information constituting a part of this Post- Effective Amendment No. 42 to the Registration Statement under the Securities Act of 1933 and Amendment No. 18 to the Registration Statement under the Investment Company Act of 1940. /s/ Chadbourne & Parke LLP -------------------------- CHADBOURNE & PARKE LLP New York, New York April 18, 1996 EX-13.(E) 8 EXHIBIT 13(E) Exhibit 13(e) CONSENT OF COUNSEL I hereby consent to the use of my name under the caption "Legal Opinions'' in the Statement of Additional Information constituting a part of this Post- Effective Amendment No. 42 to the Registration Statement under the Securities Act of 1933 and Amendment No. 18 to the Registration Statement under the Investment Company Act of 1940 and to the incorporation herein by reference of my opinion dated October 24, 1988 filed as part of Post-Effective Amendment No. 33 to the Registration Statement under the Securities Act of 1933 (File No. 2-36394) on Form N-3, filed October 27, 1988. /s/ Stephen P. Horvat, Jr. -------------------------- STEPHEN P. HORVAT, JR. Senior Vice President and General Counsel The Franklin Life Insurance Company Springfield, Illinois April 18, 1996 EX-17 9 EXHIBIT 17 Conformed Copy Exhibit 17 POWER OF ATTORNEY The undersigned, acting in the capacity or capacities stated opposite their respective names below, hereby constitute and appoint STEPHEN P. HORVAT, JR., RAYMOND P. WEBER, EDWARD P. SMITH and PETER K. INGERMAN, and each of them, singularly, attorneys-in-fact of the undersigned with full power to each of them to sign for and in the name of the undersigned in the capacities indicated below (a) Post-Effective Amendment No. 42 to the Registration Statement under the Securities Act of 1933, as amended (the "1933 Act"), and Amendment No. 18 to the Registration Statement under the Investment Company Act of 1940, as amended (the "1940 Act"), on Form N-3 (1933 Act File No. 2-36394 and 1940 Act File No. 811- 1990) of Franklin Life Variable Annuity Fund A of The Franklin Life Insurance Company ("The Franklin")and (b) any and all amendments (including further Post- Effective Amendments and Amendments) thereto, and to give any certification which may be required in connection therewith pursuant to Rule 485 under the 1933 Act. Signature Title Date --------- ----- ---- /s/ R.M. Beuerlein Senior Vice President- 1/16, 1996 - - ------------------------ Actuarial and Director of The R.M. Beuerlein Franklin /s/ T.J. Byerly Executive Vice President and 1/16, 1996 - - ------------------------ Chief Marketing Officer and T.J. Byerly Director of The Franklin Senior Chairman and ,1996 - - ------------------------ Director of The Franklin R.M. Devlin /s/ Robert J. Gibbons President, Chief Executive 1/16, 1996 - - ------------------------ Officer (principal executive R.J. Gibbons officer) and Director of The Franklin /s/ C.L. Greenwalt Member, Board of Managers of 1/15, 1996 - - ------------------------ the Fund C.L. Greenwalt Senior Chairman and ,1996 - - ------------------------ Director of The Franklin H.S. Hook /s/ S.P. Horvat, Jr. Senior Vice President, 1/16, 1996 - - ------------------------ General Counsel, Secretary S.P. Horvat, Jr. and Director of The Franklin; Secretary, Board of Managers of the Fund /s/ H.C. Humphrey Chairman of the Board 1/22, 1996 - - ------------------------ of The Franklin H.C. Humphrey Signature Title Date --------- ----- ---- /s/ J.D. Pirmann Vice President and Treasurer 1/16, 1996 - - ------------------------ (principal financial J.D. Pirmann officer and principal accounting officer) of The Franklin /s/ Gary D. Reddick Executive Vice President- 1/16, 1996 - - ------------------------ Administration and Director G.D. Reddick of The Franklin /s/ R.C. Spencer Member, Board of Managers 1/15, 1996 - - ------------------------ of the Fund R.C. Spencer /s/ Robert G. Spencer Member, Board of Managers 1/29 1996 - - ------------------------ of the Fund R.G. Spencer Vice President, Chief ,1996 - - ------------------------ Investment Officer and P.V. Tuters of the Fund /s/ James W. Voth Member, Board of Managers of 1/15 ,1996 - - ------------------------ the Fund J.W. Voth EX-27 10 FINANCIAL DATA SCHEDULE
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM REGISTRANT'S FINANCIAL STATEMENTS FOR THE YEAR ENDING 12-31-95 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 8,118,227 10,295,535 31,435 114,797 0 10,441,767 0 0 12,854 12,854 0 0 0 0 0 0 0 0 0 10,428,913 167,553 145,370 0 140,567 172,356 16,856 2,255,131 2,444,343 0 0 0 0 5,872 27,905 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----