<PAGE>
Dear Contract Owner:
We are pleased to provide this 1995 semiannual report which shows the
status of and balances in your Franklin Life Variable Annuity Fund B
contract.
<TABLE>
<CAPTION>
INVESTMENT POSITION AS OF JUNE 30, 1995
---------------------------------------
<S> <C>
Variable Unit Value $64.46
------
Fixed Portion Interest Rate on Amounts Contributed During
Most Recent Contract Year. Current Crediting Rate Not
Guaranteed For Future Years. 6.50%*
------
<FN>
*LESS A CONTRACT EXPENSE CHARGE
</TABLE>
The economy closed out strong in 1994, with inflation and the potential for
higher interest rates being strong continuing concerns. The Federal
Reserve did raise rates in February, but signs of a slowing economy soon
followed. The stock market moved up strong in the first half of 1995 and
intermediate and long-term interest rates declined. Short-term interest
rates were reduced in July to cushion an economy that was showing signs of
slowing too fast.
<TABLE>
<CAPTION>
Variable Portion: June 30, 1995 December 31, 1994 June 30, 1994
----------------- ------------- ----------------- -------------
<S> <C> <C> <C>
Net asset value per unit $64.46 $57.63 $55.94
------ ------ ------
Percentage Change From:
June 30, 1994 +15.2%
------
December 31, 1994 +11.9%
------
</TABLE>
The net asset value is based on the market price of the investments
held by the Fund. A listing of the investments held at June 30, 1995
appears on page 3.
Fixed Portion:
--------------
As noted above, if your contract anniversary was in the first half of
1995, additional units in the fixed rate portion of your annuity
arising from contributions credited during the contract year ending in
1995 were based on a 6.50% interest rate, less a contract expense
charge. If your contract anniversary is in the second half of 1995,
the interest rate for the fixed portion of your annuity applicable to
contributions made during the contract year ending in 1995 is
anticipated to be 6.50%, 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 1995 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 U. S. economy slowed in the first quarter of 1995, with Gross Domestic
Product up 2.7%, after a strong fourth quarter in 1994 of +5.1% and +4.1%
for all of 1994. The Federal Reserve increased the Fed Funds rate again in
February to 6.00% as growth and inflation worries continued to be a
concern. With the slower first quarter growth reported and the second
quarter projections being even lower, the Fed reduced rates at its July
meeting to 5.75%. Corporate profits continued to show good growth and the
stock market responded in the first half of 1995 with the best six months
performance since late 1990 and early 1991. A stock market correction
continues to be anticipated, but continuing growth in the economy,
inflation staying under control and expanding corporate profits should
support the current market level. We have been holding a higher than
average cash level in anticipation of a market correction. We will reduce
the cash position somewhat as opportunities occur.
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/ HOWARD C. HUMPHREY
-------------------------------------
Howard C. Humphrey
Chairman of the Board
and Chief Executive Officer
1
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
STATEMENT OF NET ASSETS
JUNE 30, 1995
<TABLE>
<S> <C>
Assets
Investments-at market value (cost-$1,210,820):
Common stocks $980,593
United States Treasury Bill 371,879
--------
1,352,472
Cash on deposit 50,460
Dividends and interest receivable 4,551
Miscellaneous receivables 145
---------
Total Assets 1,407,628
Liability - Due to The Franklin Life Insurance Company 2,117
---------
Contract Owners' Equity
Value of 21,804 Accumulation Units outstanding,
equivalent to $64.461123 per unit $ 1,405,511
</TABLE>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1995
<TABLE>
<S> <C> <C>
Investment Income:
Dividends $ 13,178
Interest 11,790
------
Total Income $ 24,968
Expenses:
Mortality and expense charges $ 6,942
Investment management services 3,034
--------
Total Expenses 9,976
--------
Net Investment Income 14,992
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain from investment transactions (excluding short-term
investments):
Proceeds from sales $ 49,375
Cost of investments sold (identified
cost method) 42,023
--------
Net Realized Gain 7,352
Net unrealized appreciation of investments:
Beginning of period $ 8,111
End of period 141,653
--------
Net Unrealized Appreciation 133,542
-------
Net Gain On Investments 140,894
-------
Net Increase In Contract Owners'
Equity Resulting From Operations $155,886
--------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
Six
Months Year
Ended Ended
June 30, December 31,
1995 1994
------------------------
<S> <C> <C>
Net investment income $14,992 $17,381
Net realized gain from investment transactions 7,352 133,762
Net unrealized appreciation (depreciation) of 133,542 (158,376)
investments -------- ---------
Net Increase (Decrease) In Contract
Owners' Equity Resulting From
Operations 155,886 (7,233)
Net contract purchase payments 12,549 29,286
Payment for contract guarantees (233) (153)
Withdrawal of funds on terminated contracts (97,679) (222,497)
--------- ----------
Net Increase (Decrease) in Contract Owners'
Equity 70,523 (200,597)
Contract Owners' Equity at Beginning of
Period 1,334,988 1,535,585
---------- ----------
Contract Owners' Equity At End of Period $1,405,511 $1,334,988
---------- ----------
---------- ----------
</TABLE>
See notes to financial statements
2
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PORTFOLIO OF INVESTMENTS
JUNE 30, 1995
<TABLE>
<CAPTION>
NUMBER
OF MARKET
SHARES VALUE
- ------ -------
<S> <C>
COMMON STOCKS (69.8%)
AEROSPACE/AVIATION (2.0%)
450 Boeing Company $28,181
AUTOMOTIVE (.8%)
250 General Motors Corporation 11,719
BANKING (3.7%)
1,100 Student Loan Marketing
Association 51,562
BEVERAGES (1.2%)
300 Anheuser-Busch Companies, Inc. 17,063
BUSINESS SERVICES (1.1%)
450 Equifax Inc. 15,019
COMPUTER SERVICES (3.4%)
1,300 Ceridian Corporation 47,938
COSMETICS & HOUSEHOLD PRODUCTS (3.6%)
440 Dial Corp 10,890
900 Gillette Company 40,162
-------
51,052
DRUG & HEALTH CARE (14.2%)
1,150 Eckerd Corporation* 36,800
1,150 Eli Lilly and Company 90,275
675 Merck & Company, Inc. 33,075
900 Schering-Plough Corporation 39,712
-------
199,862
ELECTRONICS & INSTRUMENTATIONS (2.4%)
450 Hewlett-Packard Company 33,525
FOOD PROCESSING (1.8%)
1,100 Ralcorp Holdings, Inc.* 25,163
FOOD - RETAIL (3.3%)
1,550 Albertson's, Inc. 46,112
MACHINERY - INDUSTRIAL &
CONSTRUCTION (1.5)
400 Fluor Corporation 20,800
MINING & MINERALS (.7%)
250 Cleveland-Cliffs Inc. 9,625
OFFICE EQUIPMENT & SERVICES (7.2%)
350 International Business Corporation 33,600
1,000 Policy Management Systems
Corporation* 46,000
300 Xerox Corporation 35,175
----------
114,775
OILS & OIL RELATED PRODUCTS (7.8%)
250 Amoco Corporation $ 16,656
575 British Petroleum Company, p.l.c. 49,234
600 Enron Corporation 21,076
800 Unocal Corporation 22,100
--------
109,066
PHOTOGRAPHY (1.1%)
250 Eastman Kodak Company 15,156
RESTAURANTS/LODGING (2.5%)
1,000 Marriott International, Inc. 35,875
RETAIL-SPECIALTY (1.6%)
1,400 Payless Cashways, Inc.* 8,925
UTILITIES-ELECTRIC (7.6%)
1,900 Baltimore Gas and Electric Company 47,500
1,400 DPL Inc. 30,975
1,200 Entergy Corporation 28,950
--------
107,425
UTILITIES - TELEPHONE (2.3%)
500 BelllSouth Corporation 31,750
--------
TOTAL COMMON STOCKS
(cost-$838,941) 980,593
PRINCIPAL U.S. TREASURY BILL (26.4%)
AMOUNT
---------
$375,000 United States Treasury Bill
due 8/3/95 (cost-$371,879) 371,879
TOTAL INVESTMENTS (96.2%) 1,352,472
(cost -$1,210,820) ---------
CASH AND RECEIVABLES, LESS
LIABILITY (3.8%) 53,039
---------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $1,405,511
<FN>
*NON-INCOME PRODUCING INVESTMENT DURING THE YEAR ENDED JUNE 30, 1995
</TABLE>
See notes to financial statements
- --------------------------------------------------------------------------
THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE
ANNUITY FUND B CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT
PROSPECTUS.
3
<PAGE>
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Variable Annuity Fund B (Fund) is a segregated investment
account of The Franklin Life Insurance Company (The Franklin) and
is registered as an open-end diversified management investment company
under the Investment Company Act of 1940, as amended. 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
market.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment
transactions are accounted for on the trade date. Dividend income is
recorded on the ex-dividend date and interest income is recorded on the
accrual basis.
FEDERAL INCOME TAXES: Operations of the Fund will form a part of, and be
taxed with those of, The Franklin, which is taxed as a "life insurance
company" under the Internal Revenue Code. Under current law, no federal
income taxes are payable with respect to the Fund.
NOTE B-INVESTMENTS
Exclusive of short-term investments, the cost of investments purchased and
the proceeds from investments sold during the six months ended June 30,
1995 aggregated $70,337 and $49,376, 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 six months ended June 30, 1995, sales and administrative
charges aggregating $1,306 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
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEAR ENDED
JUNE 30, 1995 DECEMBER 31, 1994
- ----------------------------------------------------------------------------------------------
UNITS AMOUNT UNITS AMOUNT
------- ---------- --------- ----------
<S> <C> <C> <C> <C>
Balance at beginning of period 23,165 $1,334,988 26,542 $1,535,585
Purchases 212 12,549 505 29,286
Net investment income -- 14,992 -- 17,381
Net realized gain from investment
transactions -- 7,352 -- 133,762
Net unrealized appreciation
(depreciation) of investments -- 133,542 -- (158,376)
Withdrawals (1,573) (97,679) (3,882) (222,497)
Payment for contract guarantees -- (233) -- (153)
-------- ---------- --------- ----------
Balance at End of Period 21,804 $1,405,511 23,165 $1,334,988
-------- ---------- --------- ----------
-------- ---------- --------- ----------
</TABLE>
NOTE F-REMUNERATION OF MANAGEMENT
No person receives any remuneration from the Fund because The Franklin pays
the fees of members of the Board of Managers and officers and employees of
the Fund pursuant to expense assurances. Certain members of the Board of
Managers and officers of the Fund are also directors, officers or employees
of The Franklin or Franklin Financial Services Corporation. Amounts paid by
the Fund to The Franklin and to Franklin Financial Services Corporation are
disclosed in this report.
NOTE G-NET UNREALIZED APPRECIATION/DEPRECIATION
Unrealized Appreciation/Depreciation on investment securities at June 30,
1995 and December 31, 1994 were as follows:
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1995 1994
-------- -------------
<S> <C> <C>
Gross unrealized appreciation $172,780 $67,236
Gross unrealized depreciation 31,127 59,125
-------- --------
Net $141,653 $8,111
-------- --------
-------- --------
</TABLE>
4
<PAGE>
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,
1995 1994 1993 1992 1991
--------------- ------- ---------- ---------- ------------
<S> <C> <C> <C> <C> <C>
Investment Income $1.116 $1.569 $1.305 $1.120 $1.197
Expenses .446 .850 .841 .766 .691
--------- ------- ------ ------- -------
Net investment income .670 .719 .464 .354 .506
Net realized and unrealized
gain (loss) on securities 6.161 (.943) 1.697 1.236 13.776
--------- ------- ------ ------- -------
Net increase (decrease) in
accumulation unit value 6.831 (.224) 2.161 1.590 14.282
Accumulation unit value:
Beginning of period 57.630 57.854 55.693 54.103 39.821
--------- ------- ------ ------- -------
End of Period $64.461 $57.630 $57.854 $55.693 $54.103
--------- ------- ------ ------- -------
--------- ------- ------ ------- -------
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 2.16%* 1.22% .80% .67% 1.05%
Portfolio turnover rate 5.44% 82.18% 61.50% 60.64% 24.18%
Number of accumulation units
outstanding at end of period 21,804 23,165 26,542 29,973 31,205
--------- ------- ------ ------- -------
<FN>
*Annualized
</TABLE>
MATTERS SUBMITTED TO VOTE OF CONTRACT OWNERS
An annual meeting of Contract Owners of the Fund was held on April 17,
1995. At the meeting, the individuals named below were elected as Members
of the Board of Managers of the Fund, a new Investment Management Agreement
between The Franklin and the Fund was approved and Ernst & Young LLP was
ratified as the Fund's independent accountants 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 12,242 1,152 0
Election of
Dr. Robert C. Spencer as
Member, Board of Managers 11,984 1,410 0
Election of
James W. Voth as
Member, Board of Managers 12,242 1,152 0
Election of
Clifford L. Greenwalt as
Member, Board of Managers 12,242 1,152 0
Approval of new Investment
Management Agreement
between the Fund and
The Franklin 12,084 584 726
Ratification of Selection
of Ernst & Young LLP as
independent accountants 12,398 50 946
</TABLE>
5
<PAGE>
CHANGE OF INDEPENDENT AUDITORS
The Board of Managers has selected the firm of Ernst & Young LLP, Chicago,
Illinois, as the independent auditors for the Fund to serve for 1995. That
firm has also been selected as the independent auditors for The Franklin
and its parents and subsidiaries, for two other separate accounts of The
Franklin, and for two separate accounts of The American Franklin Life
Insurance Company, a wholly-owned subsidiary of The Franklin. Ernst &
Young LLP has no direct or indirect interest in the Fund or in The Franklin
or its subsidiaries.
On February 22, 1995, the Fund terminated the engagement of Coopers &
Lybrand L.L.P. as the independent auditors for the Fund for periods
beginning on or after January 1, 1995. Ernst & Young LLP has been selected
to audit the financial statements of The Franklin and the Board of Managers
decided to retain Ernst & Young LLP as a matter of efficiency.
During the audits of the Fund's financial statements for the years ended
December 31, 1993 and 1994, there was no disagreement between the Fund and
Coopers & Lybrand L.L.P. on any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure
which disagreement, if not resolved to the satisfaction of Coopers &
Lybrand L.L.P., would have caused Coopers & Lybrand L.L.P. to make
reference in connection with its reports to the subject matter of the
disagreement.
6
