<PAGE>
[GRAPHIC] THE
FRANKLIN
Life Insurance Company
--------------------------------
*An American General Company
#1 Franklin Square, Springfield, Illinois 62713-0001
Dear Contract Owner:
We are pleased to provide this unaudited report for the six-month period ended
June 30, 1998, which shows the status of and balances in your Franklin Life
Variable Annuity Fund A contract.
<TABLE>
<CAPTION>
Investment Position
-------------------
June 30, 1998 December 31, 1997 June 30, 1997
------------- ----------------- -------------
<S> <C> <C> <C>
Variable Portion:
-----------------
Accumulation Unit Value $108.49 $98.43 $91.56
------- ------ ------
------- ------ ------
Percentage Change From:
December 31, 1997 +10.22%
-------
-------
June 30, 1997 +18.49%
-------
-------
</TABLE>
The accumulation unit value is based on the market price of the investments
held by the Fund. A listing of the investments held at June 30, 1998 appears on
page 3.
FIXED PORTION:
Additional units in the fixed rate portion of your annuity arising from
contributions credited during the contract year ending in the first half of
1998 were based on a 6.25% interest rate, less a contract expense charge.
If your contract anniversary is in the second half of 1998, the interest
rate for the fixed portion of your annuity applicable to contributions made
during the contract year ending in 1998 is anticipated to be 6.25%, less a
contract expense charge. Amounts selected for investment in the fixed
rather than the variable portion of your annuity do not participate in the
investment experience of the Fund. Contract units resulting from interest
added or contributions made prior to the contract year ending in 1998
continue to be credited with additional interest based on investment yields
which reflect the years during which such units were purchased. Crediting
rates are not guaranteed for future years.
The United States economy continued to expand at an above average rate through
the first quarter of 1998, as measured by the Gross Domestic Product. The Gross
Domestic Product increased 3.8% in 1997 and 5.4% in the first quarter of 1998.
The economy is expected to slow from the pace of the last six quarters to a more
normal growth rate of 2.0% to 2.5% for the second quarter and balance of 1998.
Employment has continued to expand, with the unemployment rate dropping to 4.3%
in May and back up to 4.5% in June. Intermediate and long term interest rates
have declined somewhat in the first half of 1998 and short term interest rates
have held steady, with the Federal Reserve Board holding the Federal Funds rate
at 5.50% since March 25, 1997. The stock market continued to move up during the
first half of 1998 as new funds flowed into equity mutual funds. Stock prices
are currently considered to be high by most traditional measurements. The
Standard & Poor's 500 Index was up 16.8% in the first six months of the year
despite the high price/earnings ratios, the slowing growth of corporate earnings
and the economic conditions of several foreign countries.
Inflation, as measured by the Gross Domestic Product deflator, was up 1.7% in
1997, and for the first three months of 1998 inflation increased at an annual
rate of 1.1%. The Consumer Price Index increased by 1.7% in 1997, the lowest
increase since 1986, but April prices increased 0.2% and then May prices
increased 0.3%, the highest gain in 17 months. June Consumer Prices were just
announced at +0.1%, down from May in light of lower energy prices and the lower
Asian currencies which reduced import prices. The Producers Price Index
increased 0.2% in April and May after recording five straight months of
declining prices. The Producers Price Index is currently showing a decline of
0.9% from May 1997 to May 1998. Corporate profits declined 1.2% in the first
quarter of 1998 after several years of good growth. Strong flow of new money
going into equity mutual funds the first six months of this year has helped to
move equity prices higher. Continued higher stock prices are contingent upon
higher corporate profits, lower interest rates, the ability to move
price/earnings ratios higher and the ability of several foreign governments to
work through economic problems.
In today's fast-paced world, products, markets, client's needs, and individual
risk tolerance all change. In this environment, you may want to take some extra
time and review how well this product continues to meet your retirement
investment objectives. A Franklin Life representative would be happy to review
your financial situation with you and suggest the most appropriate mix of
products to provide financial security consistent with your risk tolerance.
Cordially yours,
/s/ William A. Simpson
William A. Simpson
Chairman and Chief Executive Officer
1
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<S> <C> <C>
Assets
Investments-at fair value (cost-$5,942,360):
Common stocks $ 11,123,254
Short-term notes 1,166,607
-------------
12,289,861
Cash on deposit 71,414
Dividends and interest receivable 13,633
-------------
Total Assets 12,374,908
Liability -due to The Franklin Life Insurance Company 17,490
-------------
Contract owners' equity
Annuity reserves $ 19,775
Value of 113,721.261 accumulation units outstanding,
equivalent to $108.49020941 per unit 12,337,643 $ 12,357,418
------------- -------------
-------------
</TABLE>
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<S> <C> <C>
Investment income
Dividends $ 65,429
Interest 39,562
-------------
Total Income $ 104,991
Expenses
Mortality and expense charges $ 62,854
Investment management services 27,477
-------------
Total expenses 90,331
-------------
Net investment income 14,660
Realized and unrealized gain on investments:
Net realized gain from investment transactions
(excluding short-term investments):
Proceeds from sales $ 300,890
Cost of investments sold (identified cost method) 139,273
-------------
Net realized gain 161,617
Net unrealized appreciation of investments
Beginning of period $ 5,298,442
End of period 6,347,501
-------------
Net unrealized appreciation 1,049,059
-------------
Net gain on investments 1,210,676
-------------
Net increase in contract owners'
equity resulting from operations $ 1,225,336
-------------
-------------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
SIX MONTHS YEAR
ENDED JUNE 30, ENDED
1998 DECEMBER 31,
(UNAUDITED) 1997
----------------------------------
<S> <C> <C>
Net investment income $ 14,660 $ 78,567
Net realized gain from investment transactions 161,617 452,962
Net unrealized appreciation of investments 1,049,059 1,714,372
----------------------------------
Net increase in contract owners' equity resulting from operations 1,225,336 2,245,901
Net contract purchase payments 78,228 268,272
Reimbursement for contract guarantees - 172
Annuity payments (2,557) (4,568)
Withdrawals (1,238,478) (1,636,104)
----------------------------------
Net increase in contract owners' equity 62,529 873,673
Contract owners' equity at beginning of period 12,294,889 11,421,216
----------------------------------
Contract owners' equity at end of period $ 12,357,418 $ 12,294,889
----------------------------------
----------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
- ------------ -------------
<S> <C> <C>
COMMON STOCKS (90.01%)
BANKING (5.10%)
12,862 SLM Holding Corporation $ 630,238
BEVERAGES (1.47%)
4,400 PepsiCo, Incorporated 181,225
BUSINESS SERVICES (1.64%)
5,600 Equifax Inc. 203,350
CHEMICALS (2.11%)
2,700 Dow Chemical 261,056
COMPUTER SERVICES (3.85%)
8,100 Ceridian Corporation* 575,875
COSMETICS & HOUSEHOLD PRODUCTS
(3.68%)
8,000 Gillette Company 455,000
DRUGS & HEALTH CARE (26.66%)
8,000 Eli Lilly and Company 530,000
4,300 Merck & Company, Inc. 575,125
4,200 Pfizer, Incorporated 456,487
6,450 St. Jude Medical, Inc.* 237,441
6,600 Schering-Plough Corporation 604,725
6,000 Stryker Corporation 230,250
16,000 Walgreen Company 661,000
-------------
3,295,028
ELECTRONICS & INSTRUMENTATIONS
(2.81%)
5,800 Hewlett-Packard Company 347,275
FOOD PROCESSING (2.72%)
10,600 ConAgra, Inc. 335,888
FOOD - RETAIL (2.39%)
5,700 Albertson's, Inc. 295,331
FOOD - WHOLESALE ( 2.78%)
13,400 Sysco Corporation 343,375
HOUSEHOLD PRODUCTS (1.49%)
3,700 Newell Co. 184,306
MACHINERY - INDUSTRIAL & CONSTRUCTION
(.62%)
1,500 Fluor Corporation 76,500
OFFICE EQUIPMENT & SERVICES (7.92%)
15,055.75 Compaq Computers Corporation 427,207
4,800 International Business Machines
Corporation 551,100
-------------
978,307
OIL SERVICES & DRILLING ( 2.23%)
6,200 Halliburton Company 275,513
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
- ------------ -------------
<S> <C> <C>
OILS & OIL RELATED PRODUCTS (4.69%)
5,400 Amoco Corporation 225,450
2,600 Atlantic Richfield Company 203,125
2,600 Kerr-McGee Corporation 150,475
-------------
579,050
PACKAGING - CONTAINERS ( 3.65%)
8,400 Avery-Dennison Corporation 451,500
PHOTOGRAPHY ( 2.42%)
4,100 Eastman Kodak Company 299,556
RETAIL-SPECIALTY (2.84%)
7,200 NIKE, Inc. 350,550
TECHNOLOGY (6.22%)
5,000 AMP, Incorporated 171,875
4,950 Diebold, Incorporated 142,931
4,800 Intel Corporation 355,800
3,600 Millipore Corporation 98,100
-------------
768,706
UTILITIES - TELEPHONE (2.72%)
5,000 BellSouth Corporation 335,625
-------------
TOTAL COMMON STOCKS
(COST-$4,775,753) 11,123,254
<CAPTION>
PRINCIPAL
AMOUNT
------
<S> <C> <C>
SHORT-TERM NOTES (9.44%)
$1,075,000 United States Treasury Bill
4.75%, due 7/23/98 (cost-$1,067,057) 1,067,057
$ 100,000 United States Treasury Bill
4.76%, due 7/23/98 (cost-$99,550) 99,550
-----------
TOTAL SHORT-TERM NOTES 1,166,607
-----------
TOTAL INVESTMENTS (99.45%)
(COST-$5,942,360) 12,289,861
CASH AND RECEIVABLES, LESS
LIABILITY (.55 %) 67,557
-----------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $12,357,418
-----------
-----------
</TABLE>
*NON-INCOME PRODUCING INVESTMENT DURING THE SIX-MONTH PERIOD ENDING
JUNE 30, 1998.
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE
ANNUITY FUND A CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
3
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND A
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Variable Annuity Fund A (the Fund) is a segregated investment
account of The Franklin Life Insurance Company (The Franklin) and is registered
as an open-end diversified management investment company under the Investment
Company Act of 1940, as amended. The Fund no longer issues new contracts.
Significant accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS: Investments in common stocks listed on national stock
exchanges are valued at closing sales prices. Unlisted common stocks are valued
at the most recent bid prices, as supplied by broker-dealers. Short-term notes
are valued at cost, which approximates fair value.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions
are accounted for on the trade date. Dividend income is recorded on the
ex-dividend date and interest income is recorded on the accrual basis.
FEDERAL INCOME TAXES: Operations of the Fund will form a part of, and be taxed
with those of, The Franklin which is taxed as a "life insurance company" under
the Internal Revenue Code. Under current law, no federal income taxes are
payable with respect to the Fund.
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 the six-month period ended June 30, 1998
aggregated $153,637 and $300,890, respectively.
NOTE C-EXPENSES
Amounts are paid to The Franklin for investment management services at the rate
of .0012% of the current value of the Fund per day (.438% on an annual basis)
and for mortality and expense risk assurances at the rate of .002745% of the
current value of the Fund per day (1.002% on an annual basis).
NOTE D-SALES AND ADMINISTRATIVE CHARGES
Sales and administrative charges aggregating $7,448 and $16,926 were deducted
from the proceeds of the sales of accumulation units and retained by Franklin
Financial Services Corporation and The Franklin for the six-month period ended
June 30, 1998 and the year ended December 31, 1997, respectively. Franklin
Financial Services Corporation is a wholly-owned subsidiary of The Franklin and
principal underwriter for the Fund.
NOTE E-SUMMARY OF CHANGES IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
-----------------------------------------------------------
UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ------
<S> <C> <C> <C> <C>
Balance at
beginning of
period 124,714 $12,275,509 139,945 $11,403,341
Purchases 726 78,228 2,945 268,272
Net investment
income* - 4,625 - 78,354
Net realized gain
from investment
transactions* - 161,226 - 451,738
Net unrealized
appreciation
of investments* - 1,046,533 - 1,709,736
Withdrawals (11,719) (1,238,478) (18,176) (1,636,104)
Reimbursement
for contract
guarantees* - - - 172
-----------------------------------------------------------
Balance at end
of period 113,721 $12,337,643 124,714 $12,275,509
-----------------------------------------------------------
-----------------------------------------------------------
</TABLE>
*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 Franklin Financial Services Corporation are disclosed in this
report.
NOTE G-NET UNREALIZED APPRECIATION OF INVESTMENTS
Net unrealized appreciation of investments at June 30, 1998 and December 31,
1997 was as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31,
(UNAUDITED) 1997
----------------------------
<S> <C> <C>
Gross unrealized appreciation $6,379,664 $5,387,633
Gross unrealized depreciation 32,163 89,191
Net unrealized appreciation ----------------------------
of investments $6,347,501 $5,298,442
----------------------------
----------------------------
</TABLE>
4
<PAGE>
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 PERIOD)
<TABLE>
<CAPTION>
SIX
MONTHS
ENDED
JUNE 30, YEAR ENDED DECEMBER 31,
1998 --------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $.881 $1.910 $1.685 $1.948 $1.408
Expenses .758 1.312 1.090 .875 .773
-----------------------------------------------------------------
Net investment income .123 .598 .595 1.073 .635
Net realized and unrealized gain (loss) on investments 9.938 16.346 11.690 14.139 (.240)
-----------------------------------------------------------------
Net increase in accumulation unit value 10.061 16.944 12.285 15.212 .395
Accumulation unit value:
Beginning of period 98.429 81.485 69.200 53.988 53.593
-----------------------------------------------------------------
End of period $108.490 $98.429 $81.485 $69.200 $53.988
-----------------------------------------------------------------
-----------------------------------------------------------------
Ratio of expenses to average net assets (annualized) 1.44% 1.44% 1.44% 1.44% 1.44%
Ratio of net investment income to average net assets
(annualized) .23% .66% .79% 1.76% 1.18%
Portfolio turnover rate (annualized) 1.40% .70% 4.77% 14.66% 88.99%
Number of accumulation units outstanding at end of period 113,721 124,714 139,945 150,474 172,507
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
MATTERS SUBMITTED TO VOTE OF CONTRACT OWNERS
An annual meeting of Contract Owners of the Fund was held on April 20, 1998. At
the meeting, the individuals named below were elected as Members of the Board of
Managers of the Fund, and Ernst & Young LLP was ratified as the Fund's
independent auditors for the ensuing fiscal year. The number of votes cast for,
against or withheld, as well as the number of abstentions and broker non-votes,
if applicable, as to each matter is set forth in the table below.
<TABLE>
<CAPTION>
Matter Votes:
----------------------- ---------------------------------
For Against Abstain
------ ------- -------
<S> <C> <C> <C>
Election of
Robert G. Spencer as
Member, Board of Managers 52,846 683 0
Election of
Dr. Robert C. Spencer as
Member, Board of Managers 52,751 778 0
Election of
James W. Voth as
Member, Board of Managers 52,846 683 0
Election of
Clifford L. Greenwalt as
Member, Board of Managers 52,846 683 0
Ratification of Selection
of Ernst & Young LLP as
independent auditors 52,200 573 756
</TABLE>
5
