<PAGE>
[THE FRANKLIN LIFE INSURANCE COMPANY LETTERHEAD]
Dear Contract Owner:
We are pleased to provide this 1995 annual report which shows the status of and
balances in your Franklin Life Variable Annuity Fund B contract.
<TABLE>
<CAPTION>
INVESTMENT POSITION AS OF DECEMBER 31, 1995
<S> <C>
Accumulation Unit Value $73.02
------
------
Fixed Portion Interest Rate on Amounts Contributed During
Most Recent Contract Year. Current Crediting Rate Not
Guaranteed For Future Years. 6.50%*
------
------
</TABLE>
*LESS A CONTRACT EXPENSE CHARGE
The economy showed reasonable growth in 1995, with unemployment staying around
the 5.6% level and corporate profits continuing to show good growth. The stock
market continued its strong performance in the second half of 1995, with the
Standard & Poor's 500 Index up 13.1%. The Standard & Poor's 500 Index was up
34.1% for the year.
<TABLE>
<CAPTION>
Variable Portion: December 31, 1995 June 30, 1995 December 31, 1994
----------------- ----------------- ------------- -----------------
<S> <C> <C> <C>
Accumulation Unit Value $73.02 $64.46 $57.63
------ ------ ------
------ ------ ------
Percentage Change From:
December 31, 1994 +26.7%
------
------
June 30, 1995 +13.3%
------
------
</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 December 31, 1995
appears on page 3.
FIXED PORTION:
As noted above, 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 first 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 during or prior to the contract year ending in
1994 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, for the first three quarters of 1995, slowed to a more
normal 2.5% to 3.0% growth pace, after being up 4.1% in 1994, as indicated by
the Gross Domestic Product. The Federal Reserve has changed its interest
rate position and lowered the Fed Funds rate in July and December. This rate
currently stands at 5.50%. Congress is working on a budget plan that would
eliminate the deficit in seven years. This proposed action has created a
positive force for both the fixed income and equity markets. Inflation
continues to be at an acceptable level. Short term interest rates could stay
around the current level, with the possibility of slightly lower rates during
the year. The stock market has some potential for an upward move, but many
factors will need to be positive for this to happen in 1996.
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/Robert J. Gibbons
Robert J. Gibbons
President
and Chief Executive Officer
1
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Investments-at fair value (cost-$1,191,968):
Common stocks $1,212,179
Short-term note 297,531
----------
1,509,710
Cash on deposit 28,364
Dividends and interest receivable 5,461
----------
Total Assets 1,543,535
Liability - Due to The Franklin Life Insurance Company 5,905
----------
Contract Owners' Equity
Value of 21,059 Accumulation Units outstanding,
equivalent to $73.016375 per unit $1,537,630
----------
----------
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
<S> <C> <C>
Investment Income
Dividends $ 24,478
Interest 20,372
---------
Total Income $ 44,850
Expenses
Mortality and expense charges $ 14,273
Investment management services 6,240
---------
Total Expenses 20,513
----------
Net Investment Income 24,337
Realized and Unrealized Gain on Investments
Net realized gain from investment transactions
Proceeds from sales $ 225,610
Cost of investments sold (identified cost method) 220,251
---------
Net Realized Gain 5,359
Net unrealized appreciation of investments
Beginning of year $ 8,111
End of year 317,742
---------
Net Unrealized Appreciation 309,631
----------
Net Gain On Investments 314,990
----------
Net Increase In Contract Owners'
Equity Resulting From Operations $ 339,327
----------
----------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1995 1994
------------------------
<S> <C> <C>
Net investment income $ 24,337 $ 17,381
Net realized gain from investment transactions 5,359 133,762
Net unrealized appreciation (depreciation) of investments 309,631 (158,376)
------------------------
Net Increase (Decrease) In Contract Owners' Equity Resulting From Operations 339,327 (7,233)
Net contract purchase payments 22,240 29,286
Payment for contract guarantees (505) (153)
Withdrawals (158,420) (222,497)
------------------------
Net Increase (Decrease) in Contract Owners' Equity 202,642 (200,597)
Contract Owners' Equity at Beginning of Year 1,334,988 1,535,585
------------------------
Contract Owners' Equity At End of Year $1,537,630 $1,334,988
------------------------
------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1995
<TABLE>
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
- -------- ----------
<S> <C> <C>
COMMON STOCKS (78.8%)
AEROSPACE/AVIATION (4.4%)
450 Boeing Company $ 35,269
700 Raytheon Company 33,075
----------
68,344
AUTOMOTIVE (.9%)
250 General Motors Corporation 13,219
BANKING (3.0%)
700 Student Loan Marketing Association 46,200
BEVERAGES (2.4%)
300 Anheuser-Busch Companies, Inc. 20,062
300 PepsiCo, Incorporated 16,763
----------
36,825
BUSINESS SERVICES (1.2%)
900 Equifax Inc. 19,237
CHEMICALS (1.8%)
400 Dow Chemical 28,100
COMPUTER SERVICES (3.5%)
1,300 Ceridian Corporation 53,625
COSMETICS & HOUSEHOLD PRODUCTS (3.9%)
440 Dial Corp. 13,035
900 Gillette Company 46,913
----------
59,948
DRUG & HEALTH CARE (15.8%)
850 Eckerd Corporation* 37,931
1,000 Eli Lilly and Company 56,250
675 Merck & Company, Inc. 44,297
300 Pfizer, Incorporated 18,900
900 Schering-Plough Corporation 49,275
1,200 Walgreen Company 35,850
----------
242,503
ELECTRONICS & INSTRUMENTATIONS (2.45%)
450 Hewlett-Packard Company 37,688
FOOD - RETAIL (3.3%)
1,550 Albertson's, Inc. 50,956
MACHINERY - INDUSTRIAL & CONSTRUCTION (2.5)
400 Fluor Corporation 26,400
400 Trinity Industry 12,600
----------
39,000
MINING & MINERALS (.7%)
250 Cleveland-Cliffs Inc. 10,250
OFFICE EQUIPMENT & SERVICES (8.8%)
300 Compaq Computers Corporation* 14,400
350 International Business Machines Corporation 31,981
1,000 Policy Management Systems Corporation* 47,625
300 Xerox Corporation 41,100
----------
135,106
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
- -------- ----------
<S> <C> <C>
OILS & OIL RELATED PRODUCTS (8.0%)
250 Amoco Corporation $ 17,875
575 British Petroleum Company, p.l.c. 58,722
600 Enron Corporation 22,875
800 Unocal Corporation 23,300
----------
PHOTOGRAPHY (1.1%) 122,772
250 Eastman Kodak Company 16,750
RESTAURANTS/LODGING (3.7%)
1,000 Marriott International, Inc. 38,250
400 McDonald's Corporation 18,050
----------
56,300
TECHNOLOGY (5.1%)
700 AMP, Incorporated 26,775
300 Diebold, Incorporated 16,613
350 Intel Corporation 19,862
450 Marshall, Incorporated* 14,456
----------
77,706
UTILITIES-ELECTRIC (3.5%)
1,900 Baltimore Gas and Electric Company 54,150
UTILITIES - TELEPHONE (2.8%)
1,000 BellSouth Corporation 43,500
----------
TOTAL COMMON STOCKS
(COST-$894,437) 1,212,179
</TABLE>
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
- --------
<S> <C> <C>
SHORT-TERM NOTE (19.4%)
$300,000 United States Treasury Bill
due 1/4/96 (cost-$297,531) 297,531
----------
TOTAL INVESTMENTS (98.2%)
(COST -$1,191,968) 1,509,710
CASH AND RECEIVABLES, LESS
LIABILITY (1.8%) 27,920
----------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $1,537,630
----------
----------
</TABLE>
*Non-income producing investment in 1995
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. 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 1995 aggregated $304,061 and $225,610,
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 $2,141 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>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1995 DECEMBER 31, 1994
UNITS AMOUNT UNITS AMOUNT
---------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
beginning of
year 23,165 $1,334,988 26,542 $1,535,585
Purchases 366 22,240 505 29,286
Net investment
income - 24,337 - 17,381
Net realized gain
from investment
transactions - 5,359 - 133,762
Net unrealized
appreciation
(depreciation) of
investments - 309,631 - (158,376)
Withdrawals (2,472) (158,420) (3,882) (222,497)
Payment for
contract
guarantees - (505) - (153)
---------------------------------------------------
Balance at end of
year 21,059 $1,537,630 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 OF INVESTMENTS
Net unrealized appreciation/depreciation of investments at December 31, 1995 and
1994 was as follows:
<TABLE>
<CAPTION>
DECEMBER 31 DECEMBER 31
1995 1994
-------------------------------
<S> <C> <C>
Gross unrealized appreciation $322,151 $67,236
Gross unrealized depreciation 4,409 59,125
-------------------------------
Net unrealized appreciation of
investments $317,742 $ 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 YEAR)
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------------------------
1995 1994 1993 1992 1991
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $2.043 $1.569 $1.305 $1.120 $1.197
Expenses .935 .850 .841 .766 .691
------------------------------------------------------------------------
Net investment income 1.108 .719 .464 .354 .506
Net realized and unrealized gain (loss) on investments 14.278 (.943) 1.697 1.236 13.776
------------------------------------------------------------------------
Net increase (decrease) in accumulation unit value 15.386 (.224) 2.161 1.590 14.282
Accumulation unit value:
Beginning of year 57.630 57.854 55.693 54.103 39.821
------------------------------------------------------------------------
End of year $73.016 $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 1.71% 1.22% .80% .67% 1.05%
Portfolio turnover rate 22.26% 82.18% 61.50% 60.64% 24.18%
Number of accumulation units outstanding at end of year 21,059 23,165 26,542 29,973 31,205
- ------------------------------------------------------------------------------------------------------------------------------------
</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 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 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 auditors 12,398 50 946
</TABLE>
5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Franklin Life Variable Annuity Fund B
We have audited the accompanying statement of assets and liabilities of
Franklin Life Variable Annuity Fund B, including the portfolio of
investments, as of December 31, 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. 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,
were audited by other auditors whose report dated February 1, 1995, expressed
an unqualified opinion on that statement and table.
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 B at 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.
Ernst & Young LLP
Chicago, Illinois
February 2, 1996
6
