<PAGE>
Dear Contract Owner:
We are pleased to provide this 1996 annual report which shows the status of and
balances in your Franklin Life Variable Annuity Fund B contract.
Investment Position as of December 31, 1996
-------------------------------------------
Accumulation Unit Value $86.88
------
------
Fixed Portion Interest Rate on Amounts Contributed During
Most Recent Contract Year. Current Crediting Rate Not
Guaranteed For Future Years. 6.25%*
------
------
*LESS A CONTRACT EXPENSE CHARGE
The U.S. economy is showing somewhat stronger growth in 1996, with the Gross
Domestic Product (GDP) expected to be above the 2.2% in 1995. The unemployment
rate was 5.3% in December of 1996, with unemployment ranging from a high of 5.8%
in January to a low of 5.1% in August. The Federal Reserve Board lowered the
Federal Funds rate in January of 1996 by 25 basis points to 5.25% and then held
the rate constant for the balance of the year. The stock market had another
good year, with the Standard & Poor's Index up 20.26% in 1996.
Variable Portion: December 31, 1996 June 30, 1996 December 31, 1995
----------------- ----------------- ------------- -----------------
Accumulation
Unit Value $86.88 $80.05 $73.02
------ ------ ------
------ ------ ------
Percentage Change From:
December 31,1995 +18.98%
-------
-------
June 30, 1996 +8.53%
-------
-------
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, 1996 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 1996 were based on a 6.25% interest rate,
less a contract expense charge. If your contract anniversary is
in the first half of 1997, the interest rate for the fixed
portion of your annuity applicable to contributions made during
the contract year ending in 1997 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 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 economy expanded at a stronger pace in the first three quarters of 1996, as
indicated by the Gross Domestic Product, up 3.0%, compared to the annual 1995
increase of 2.2%. Inflation continues to be under control and corporate
profits continue to grow at a good rate. The unemployment rate continues at a
good level, but it could be an indication of higher inflation down the road.
The Federal Reserve continues to hold the Federal Funds rate at 5.25%. Short
term interest rates have held steady during 1996, while longer term rates have
increased slightly since December 1995. The strong flow of new money into the
equity mutual funds, good corporate profits and inflation remaining under
control will be needed in 1997 to allow the stock market to continue its upward
momentum.
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
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
Assets
Investments-at fair value (cost-$1,012,333):
Common stocks $1,351,192
Short-term note 198,457
----------
1,549,649
Cash on deposit 69,438
Dividends and interest receivable 3,256
----------
Total Assets 1,622,343
Liability - Due to The Franklin Life Insurance Company 2,273
----------
Contract Owners' Equity
Value of 18,648 Accumulation Units outstanding,
equivalent to $86.87564946 per unit $1,620,070
----------
----------
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
Investment Income
Dividends $ 23,341
Interest 11,058
---------
Total Income $ 34,399
Expenses
Mortality and expense charges $ 15,752
Investment management services 6,886
Miscellaneous Expenses 1
---------
Total Expenses 22,639
----------
Net Investment Income 11,760
Realized and Unrealized Gain on Investments
Net realized gain from investment transactions
Proceeds from sales $312,124
Cost of investments sold
(identified cost method) 273,200
--------
Net Realized Gain 38,924
Net unrealized appreciation of investments
Beginning of year $317,742
End of year 537,316
--------
Net Unrealized Appreciation 219,574
----------
Net Gain On Investments 258,498
----------
Net Increase In Contract Owners'
Equity Resulting From Operations $ 270,258
----------
----------
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
Year Ended December 31
------------------------
1996 1995
------------------------
<C> <S> <S>
Net investment income $ 11,760 $ 24,337
Net realized gain from investment transactions 38,924 5,359
Net unrealized appreciation of investments 219,574 309,631
------------------------
Net Increase In Contract Owners' Equity Resulting From Operations 270,258 339,327
Net contract purchase payments 10,053 22,240
Payment for contract guarantees (139) (505)
Withdrawals (197,732) (158,420)
------------------------
Net Increase in Contract Owners' Equity 82,440 202,642
Contract Owners' Equity at Beginning of Year 1,537,630 1,334,988
------------------------
Contract Owners' Equity At End of Year $1,620,070 $1,537,630
------------------------
------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1996
NUMBER
OF FAIR
SHARES VALUE
- ------ -------
COMMON STOCKS (83.4%)
AEROSPACE/AVIATION (5.04%)
450 Boeing Company $47,925
700 Raytheon Company 33,687
-------
81,612
BANKING (4.02%)
700 Student Loan Marketing Association 65,188
BEVERAGES (1.08%)
600 PepsiCo, Incorporated 17,550
BUSINESS SERVICES (1.7%)
900 Equifax Inc. 27,562
CHEMICALS (1.94%)
400 Dow Chemical 31,350
COMPUTER SERVICES (3.25%)
1,300 Ceridian Corporation 52,650
COSMETICS & HOUSEHOLD PRODUCTS (3.36%)
700 Gillette Company 54,425
DRUG & HEALTH CARE (17.26%)
668 Eckerd Corporation* 21,376
1,000 Eli Lilly and Company 73,000
675 Merck & Company, Inc. 53,747
300 Pfizer, Incorporated 24,900
900 Schering-Plough Corporation 58,275
1,200 Walgreen Company 48,300
-------
279,598
ELECTRONICS & INSTRUMENTATIONS (2.79%)
900 Hewlett-Packard Company 45,225
FOOD - RETAIL (3.41%)
1,550 Albertson's, Inc. 55,219
FOOD - WHOLESALE (1.41%)
700 Sysco Corporation 22,837
MACHINERY - INDUSTRIAL & CONSTRUCTION (2.48%)
400 Fluor Corporation 25,100
400 Trinity Industry 15,000
-------
40,100
OFFICE EQUIPMENT & SERVICES (7.57%)
300 Compaq Computers Corporation* 22,312
350 International Business Machines Corporation 53,025
900 Xerox Corporation 47,363
-------
122,700
NUMBER
OF FAIR
SHARES VALUE
- ------ ---------
OILS & OIL RELATED PRODUCTS (7.86%)
250 Amoco Corporation $ 20,156
575 British Petroleum Company, p.l.c. 81,291
600 Enron Corporation 25,875
---------
127,322
PACKAGING - CONTAINERS (1.75%)
800 Avery-Dennison Corporation 28,300
PHOTOGRAPHY (1.24%)
250 Eastman Kodak Company 20,063
RESTAURANTS/LODGING (4.53%)
1,000 Marriott International, Inc. 55,250
400 McDonald's Corporation 18,150
---------
73,400
TECHNOLOGY (7.08%)
700 AMP, Incorporated 26,863
450 Diebold, Incorporated 28,294
350 Intel Corporation 45,828
450 Marshall, Incorporated* 13,781
---------
114,766
UTILITIES-ELECTRIC (3.14%)
1,900 Baltimore Gas and Electric Company 50,825
UTILITIES - TELEPHONE (2.5%)
1,000 BellSouth Corporation 40,500
---------
TOTAL COMMON STOCKS
(COST-$813,876) 1,351,192
PRINCIPAL FAIR
AMOUNT VALUE
- --------- ---------
SHORT-TERM NOTE (12.3%)
$200,000 United States Treasury Bill
due 1/16/97 (cost-$198,457) 198,457
TOTAL INVESTMENTS (95.7%)
(COST -$1,012,333) 1,549,649
CASH AND RECEIVABLES, LESS
LIABILITY (4.3%) 70,421
---------
TOTAL CONTRACT OWNERS'
EQUITY (100.0%) $1,620,070
---------
---------
*Non-income producing investment in 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 NOT AUTHORIZED FOR DISTRIBUTION TO
PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
3
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
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 1996 aggregated $43,780 and
$163,265, 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 $1,002 and $2,141 were deducted
from the proceeds of the sales of accumulation units and retained by Franklin
Financial Services Corporation and The Franklin during 1996 and 1995,
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>
Year Ended Year Ended
December 31, 1996 December 31, 1995
-----------------------------------------------------------------
UNITS AMOUNT UNITS AMOUNT
<S> <C> <C> <C> <C>
Balance at
beginning of
year 21,059 $1,537,630 23,165 $1,334,988
Purchases 200 10,053 366 22,240
Net investment
income - 11,760 - 24,337
Net realized gain
from investment
transactions - 38,924 - 5,359
Net unrealized
appreciation
of investments - 219,574 - 309,631
Withdrawals (2,611) (197,732) (2,472) (158,420)
Payment for
contract
guarantees - (139) - (505)
-----------------------------------------------------------------
Balance at end of
year 18,648 $1,620,070 21,059 $1,537,630
-----------------------------------------------------------------
-----------------------------------------------------------------
</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 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 December 31, 1996 and 1995 was
as follows:
DECEMBER 31 DECEMBER 31
1996 1995
------------------------
Gross unrealized appreciation $539,392 $322,151
Gross unrealized depreciation 2,076 4,409
------------------------
Net unrealized appreciation
of Investments $537,316 $317,742
------------------------
------------------------
4
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
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
1996 1995 1994 1993 1992
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $1.777 $2.043 $1.569 $1.305 $1.120
Expenses 1.169 .935 .850 .841 .766
------------------------------------------------------------------
Net investment income
.608 1.108 .719 .464 .354
Net realized and unrealized gain (loss) on investments 13.251 14.278 (.943) 1.697 1.236
------------------------------------------------------------------
Net increase (decrease) in accumulation unit value 13.859 15.386 (.224) 2.161 1.590
Accumulation unit value:
Beginning of year 73.016 57.630 57.854 55.693 54.103
------------------------------------------------------------------
End of year $86.875 $73.016 $57.630 $57.854 $55.693
------------------------------------------------------------------
------------------------------------------------------------------
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
.75% 1.71% 1.22% .80% .67%
Portfolio turnover rate
3.35% 22.26% 82.18% 61.50% 60.64%
Number of accumulation units outstanding at end of year 18,648 21,059 23,165 26,542 29,973
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>
Matter Votes:
- ------------------------- -------------------------------------------
For Against Abstain
<S> <C> <C> <C>
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 - 212
</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, 1996, the related statement of operations for the year then ended
and the statements of changes in contract owners' equity, and the table of per-
unit income and changes in accumulation unit value for each of the two years
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 audits. The table of per-unit income and changes in
accumulation unit value for each of the three years in the period ended December
31, 1994 was audited by other auditors whose report dated February 1, 1995,
expressed an unqualified opinion on that table.
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 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,
1996. 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 statements and the 1996 and 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, 1996, and the results of its operations for the
year then ended, and the changes in its contract owners' equity, and per-unit
income and changes in accumulation unit value for each of the two years then
ended in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
January 31, 1997
6
