<PAGE>
[LETTERHEAD]
Dear Contract Owner:
We are pleased to provide this 1996 semi-annual report which shows the status of
and balances in your Franklin Life Variable Annuity Fund B contract.
Investment Position as of June 30, 1996
---------------------------------------
Accumulation Unit Value $80.05
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------
Fixed Portion Interest Rate on Amounts
Contributed During Most Recent Contract
Year. Current Crediting Rate Not
Guaranteed For Future Years. 6.25% *
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-------
*LESS A CONTRACT EXPENSE CHARGE
The U.S. economy closed out 1995 on the weak side, but the first quarter of 1996
showed growth potential with the prospects for the second quarter even stronger.
The Federal Reserve Board lowered interest rates in late January by 25 basis
points and held them at that level throughout the first half of the year and
retained that level at the July meeting. The stock market moved up at a good
pace in the first half of 1996 while short term interest rates held steady to up
slightly and longer term interest rates increased about one hundred basis
points. The Standard & Poor's Index (with dividends) was up 10.1% in the first
half of 1996.
Variable Portion: June 30, 1996 December 31, 1995 June 30, 1995
- ----------------- ------------- ----------------- -------------
Accumulation Unit Value $80.05 $73.02 $64.46
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------ ------- -------
Percentage Change From:
June 30, 1995 +24.2%
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------
December 31, 1995 + 9.6%
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------
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, 1996
appears on page 3.
FIXED PORTION:
As noted above, if your contract anniversary was in the first half of 1996,
additional units in the fixed rate portion of your annuity arising from
contributions credited during the contract year ending in 1996 were based
on a 6.25% interest rate, less a contract expense charge. If your contract
anniversary is in the second half of 1996, the interest rate for the fixed
portion of your annuity applicable to contributions made during the
contract year ending in 1996 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 1996 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 improved in the first quarter of 1996, with Gross Domestic
Product up 2.2%, after a weak fourth quarter in 1995 of +0.5% and +2.2% for all
of 1995. Second quarter Gross Domestic Product is expected to be up more than
it was in the first quarter. Inflation continues to be at an acceptable level.
The continued employment growth and the unemployment rate at 5.3%, just
announced for June 1996, is a concern that higher inflation could be
forthcoming. The Federal Reserve Board lowered the discount rate in January by
25 basis points, but it appears that short term rates could be increased later
this year if inflation and growth appear to be headed higher. Corporate
profits, while trending downward in 1995, are still at very acceptable levels
and expected to increase in the third and fourth quarters of 1996. The stock
market reflected the acceptable earnings trend in the good first half
performance. While there is no current evidence of a major stock market
correction, there also isn't any strong evidence that we will see the stock
market move much higher in the next several months.
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,
Robert J. Gibbons
President
and Chief Executive Officer
1
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1996
Assets
Investments-at fair value (cost-$1,907,338):
Common stocks $ 1,347,604
United States Treasury Bill 198,451
------------
1,546,055
Cash on deposit 21,280
Dividends and interest receivable 3,092
Miscellaneous receivables 28
------------
Total Assets 1,570,455
Liability - Due to The Franklin Life Insurance Company 1,790
------------
Contract Owners' Equity
Value of 19,597 Accumulation Units outstanding,
equivalent to $80.04662832 per unit $ 1,568,665
------------
------------
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income:
Dividends $ 11,798
Interest 6,206
--------
Total Income $ 18,004
Expenses:
Miscellaneous Expense $ 1
Mortality and expense charges 7,794
Investment management services 3,407
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Total Expenses 11,202
---------
Net Investment Income 6,802
---------
Realized and Unrealized Gain (Loss) on Investments:
Net realized gain from investment transactions
(excluding short-term investments):
Proceeds from sales $ 45,106
Cost of investments sold (identified cost method) 39,280
--------
Net Realized Gain 5,826
Net unrealized appreciation of investments:
Beginning of period $317,742
End of period 448,667
--------
Net Unrealized
Appreciation 130,925
---------
Net Gain On
Investments 136,751
---------
Net Increase In
Contract Owners'
Equity Resulting
From Operations $ 143,553
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---------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
Six Months Year
Ended Ended
June 30, December 31,
1996 1995
----------------------------
<S> <C> <C>
Net investment income $ 6,802 $ 24,337
Net realized gain from investment transactions 5,826 5,359
Net unrealized appreciation (depreciation) of investments 130,925 309,631
----------------------------
Net Increase In Contract Owners' Equity Resulting From Operations 143,553 339,327
Net contract purchase payments 1,163 22,240
Payment for contract guarantees (503) (505)
Withdrawals (113,178) (158,420)
----------------------------
Net Increase in Contract Owners' Equity 31,035 202,642
Contract Owners' Equity at Beginning of Period 1,537,630 1,334,988
----------------------------
Contract Owners' Equity At End of Period $1,568,665 $1,537,630
----------------------------
----------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PORTFOLIO OF INVESTMENTS
JUNE 30, 1996
NUMBER
OF FAIR
SHARES VALUE
- -------- ---------
COMMON STOCKS (85.9%)
AEROSPACE/AVIATION (4.8%)
450 Boeing Company $39,206
700 Raytheon Company 36,138
---------
75,344
AUTOMOTIVE (0.8%)
250 General Motors Corporation 13,094
BANKING (3.3%)
700 Student Loan Marketing Association 51,800
BEVERAGES (1.4%)
600 PepsiCo, Incorporated 21,300
BUSINESS SERVICES (1.5%)
900 Equifax Inc. 23,625
CHEMICALS (1.9%)
400 Dow Chemical 30,400
COMPUTER SERVICES (4.2%)
1,300 Ceridian Corporation* 65,650
COSMETICS & HOUSEHOLD PRODUCTS (4.4%)
440 Dial Corp. 12,595
900 Gillette Company 56,137
---------
68,732
DRUG & HEALTH CARE (16.9%)
1,700 Eckerd Corporation* 38,463
1,000 Eli Lilly and Company 65,000
675 Merck & Company, Inc. 43,622
300 Pfizer, Incorporated 21,412
900 Schering-Plough Corporation 56,475
1,200 Walgreen Company 40,200
---------
265,172
ELECTRONICS & INSTRUMENTATIONS (2.9%)
450 Hewlett-Packard Company 44,831
FOOD - RETAIL (4.1%)
1,550 Albertson's, Incorporated 64,131
FOOD - WHOLESALE (1.5%)
700 Sysco Corporation 23,975
MACHINERY - INDUSTRIAL & CONSTRUCTION (2.5%)
400 Fluor Corporation 26,150
400 Trinity Industry 13,600
---------
39,750
MINING & MINERALS (0.6%)
250 Cleveland-Cliffs Inc. 9,781
OFFICE EQUIPMENT & SERVICES (9.4%)
300 Compaq Computers Corporation* 14,737
350 International Business Machines 34,650
Corporation
1,000 Policy Management Systems Corporation* 50,000
900 Xerox Corporation 48,150
---------
147,537
NUMBER
OF FAIR
SHARES VALUE
- -------- ---------
OILS & OIL RELATED PRODUCTS (6.6%)
250 Amoco Corporation $ 18,031
575 British Petroleum Company, p.l.c. 61,453
600 Enron Corporation 24,525
---------
104,009
PACKAGING - CONTAINERS (1.4%)
400 Avery-Dennison Corporation 21,950
PHOTOGRAPHY (1.3%)
250 Eastman Kodak Company 19,438
RESTAURANTS/LODGING (4.6%)
1,000 Marriott International, Inc. 53,750
400 McDonald's Corporation 18,700
---------
72,450
TECHNOLOGY (5.7%)
700 AMP, Incorporated 28,088
450 Diebold, Incorporated 21,712
350 Intel Corporation 25,703
450 Marshall, Incorporated* 13,219
---------
88,722
UTILITIES-ELECTRIC (3.4%)
1,900 Baltimore Gas and Electric Company 53,913
UTILITIES - TELEPHONE (2.7%)
1,000 BellSouth Corporation 42,000
---------
TOTAL COMMON STOCKS
(COST-$898,937)
1,347,604
PRINCIPAL
AMOUNT U.S. TREASURY BILL (12.7%)
------
$200,000 United States Treasury Bill
due 8/08/96 (cost-$198,451) 198,451
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TOTAL INVESTMENTS (98.6%)
(COST -$1,097,388) 1,546,055
CASH AND RECEIVABLES, LESS
LIABILITY (1.4%) 22,610
-----------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $1,568,665
-----------
-----------
*Non-income producing investment during the semi-annual period ending June 30,
1996.
SEE NOTES TO FINANCIAL STATEMENTS.
- --------------------------------------------------------------------------------
THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE VARIABLE
ANNUITY FUND B CONTRACT OWNERS. IT IS NOTE 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. The Fund no longer issues new contracts. Significant
accounting policies of the Fund are as follows:
VALUATION OF INVESTMENTS: Investments in common stocks listed on national stock
exchanges are valued at closing sales prices. Unlisted common stocks are valued
at the most recent bid prices, as supplied by broker-dealers. Short-term notes
are valued at cost, which approximates fair value.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions
are accounted for on the trade date. Dividend income is recorded on the ex-
dividend date and interest income is recorded on the accrual basis.
FEDERAL INCOME TAXES: Operations of the Fund will form a part of, and be taxed
with those of, The Franklin, which is taxed as a "life insurance company" under
the Internal Revenue Code. Under current law, no federal income taxes are
payable with respect to the Fund.
NOTE B-INVESTMENTS
Exclusive of short-term investments, the cost of investments purchased and the
proceeds from investments sold during the six months ended June 30, 1996
aggregated $43,780 and $45,106, 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, 1996, sales and administrative charges
aggregating $463.28 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
Six Months Year Ended
Ended June 30, 1996 December 31, 1995
--------------------------------------------------
UNITS AMOUNT UNITS AMOUNT
----- ------ ----- ------
Balance at
beginning of
period 21,059 $1,537,630 23,165 $1,334,988
Purchases 102 1,162 366 22,240
Net investment
income - 6,802 - 24,337
Net realized gain
from investment
transactions - 5,826 - 5,359
Net unrealized
appreciation
(depreciation) of
investments - 130,926 - 309,631
Withdrawals (1,564) (113,178) (2,472) (158,420)
Payment for
contract
guarantees - (503) - (505)
--------------------------------------------------
Balance at end of
year 19,597 $1,568,665 21,059 $1,537,630
--------------------------------------------------
--------------------------------------------------
NOTE F-REMUNERATION OF MANAGEMENT
No person receives any remuneration from the Fund because The Franklin pays the
fees of members of the Board of Managers and officers and employees of the Fund
pursuant to expense assurances. Certain members of the Board of Managers and
officers of the Fund are also 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 OF INVESTMENTS
Net unrealized appreciation/depreciation of investments at June 30, 1996 and
December 31, 1995 was as follows:
June 30, December 31,
1996 1995
-------------------------
Gross unrealized appreciation $450,081 $322,151
Gross unrealized depreciation 1,414 4,409
-------------------------
Net unrealized appreciation of investments $448,667 $317,742
-------------------------
-------------------------
4
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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,
1996 1995 1994 1993 1992
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<S> <C> <C> <C> <C> <C>
Investment income $ .907 $ 2.043 $ 1.569 $ 1.305 $ 1.120
Expenses .564 .935 .850 .841 .766
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Net investment income .343 1.108 .719 .464 .354
Net realized and unrealized gain (loss) on investments 6.688 14.278 (.943) 1.697 1.236
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Net increase (decrease) in accumulation unit value 7.031 15.386 (.224) 2.161 1.590
Accumulation unit value:
Beginning of period 73.016 57.630 57.854 55.693 54.103
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End of period $80.047 $ 73.016 $ 57.630 $ 57.854 $ 55.693
---------------------------------------------------------------------
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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
.88% 1.71% 1.22% .80% .67%
Portfolio turnover rate
3.40% 22.26% 82.18% 61.50% 60.64%
Number of accumulation units outstanding at end of period 19,597 21,059 23,165 26,542 29,973
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</TABLE>
MATTERS SUBMITTED TO VOTE OF CONTRACT OWNERS
An annual meeting of Contract Owners of the Fund was held on April 15, 1996. 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.
Matter Votes:
- -------------------------- -------------------------------------------
For Against Abstain
--- ------- -------
Election of
Robert G. Spencer as
Member, Board of Managers 9,774 215 0
Election of
Dr. Robert C. Spencer as
Member, Board of Managers 9,774 215 0
Election of
James W. Voth as
Member, Board of Managers 9,662 327 0
Election of
Clifford L. Greenwalt as
Member, Board of Managers 9,774 215 0
Ratification of Selection
of Ernst & Young LLP as
independent auditors 9,777 0 212
5
