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[LOGO]
THE FRANKLIN
LIFE INSURANCE COMPANY
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*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 B contract.
<TABLE>
<CAPTION>
Investment Position
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June 30, 1998 December 31, 1997 June 30, 1997
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<S> <C> <C> <C>
VARIABLE PORTION:
Accumulation Unit Value $125.10 $110.59 $100.21
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------- ------- -------
Percentage Change From:
December 31, 1997 +13.12%
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-------
June 30, 1997 +24.84%
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-------
</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
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FRANKLIN LIFE VARIABLE ANNUITY FUND B
STATEMENT OF ASSETS AND LIABILITIES
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<S> <C>
Assets
Investments-at fair value (cost-$792,118):
Common stocks $1,675,184
Short-term notes 148,892
----------
1,824,076
Cash on deposit 25,709
Dividends and interest receivable 1,677
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Total Assets 1,851,462
Liability - due to The Franklin Life Insurance Company 3,893
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Contract owners' equity
Value of 14,768.716 accumulation units outstanding,
equivalent to $125.10019897 per unit $1,847,569
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----------
<CAPTION>
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<S> <C> <C>
Investment income:
Dividends $ 9,417
Interest 4,389
----------
Total income $ 13,806
Expenses:
Investment management services $ 4,117
Mortality and expense charges 9,387
----------
Total expenses 13,504
----------
Net investment income 302
Realized and unrealized gain on
investments:
Net realized gain from investment transactions
(excluding short-term investments):
Proceeds from sales $ 132,387
Cost of investments sold (identified cost method) 62,595
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Net realized gain 69,792
Net unrealized appreciation of investments:
Beginning of period $ 868,864
End of period 1,031,958
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Net unrealized appreciation 163,094
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Net gain on investments 232,886
----------
Net increase in contract owners'
equity resulting from operations $ 233,188
----------
----------
</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 $ 302 $ 10,202
Net realized gain from investment transactions 69,792 84,638
Net unrealized appreciation of investments 163,094 331,548
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Net increase in contract owners' equity resulting
from operations 233,188 426,388
Net contract purchase payments 7,513 15,336
Payment for contract guarantees - (10,114)
Withdrawals (198,310) (246,502)
----------------------------
Net increase in contract owners' equity 42,391 185,108
Contract owners' equity at beginning of period 1,805,178 1,620,070
----------------------------
Contract owners' equity at end of period $1,847,569 $1,805,178
----------------------------
----------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
FRANKLIN LIFE VARIABLE ANNUITY FUND B
PORTFOLIO OF INVESTMENTS
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
NUMBER
OF FAIR
SHARES VALUE
------ -----
<S> <C> <C>
COMMON STOCKS (90.67%)
AEROSPACE/AVIATION (2.24%)
700 Raytheon Company $ 41,387
BANKING (6.50%)
2,450 SLM Holding Corporation 120,050
BEVERAGES (1.34%)
600 PepsiCo, Incorporated 24,712
BUSINESS SERVICES (1.77%)
900 Equifax Inc. 32,681
CHEMICALS (2.09%)
400 Dow Chemical 38,675
COMPUTER SERVICES (4.13%)
1,300 Ceridian Corporation* 76,375
COSMETICS & HOUSEHOLD PRODUCTS (4.31%)
1,400 Gillette Company 79,625
DRUG & HEALTH CARE (29.88%)
2,000 Eli Lilly and Company 132,500
675 Merck & Company, Inc. 90,281
600 Pfizer, Incorporated 65,212
1,800 Schering-Plough Corporation 164,925
2,400 Walgreen Company 99,150
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552,068
ELECTRONICS & INSTRUMENTATIONS (2.92%)
900 Hewlett-Packard Company 53,888
FOOD - RETAIL (4.35%)
1,550 Albertson's, Inc. 80,309
FOOD - WHOLESALE (1.94%)
1,400 Sysco Corporation 35,875
MACHINERY - INDUSTRIAL & CONSTRUCTION
(1.10%)
400 Fluor Corporation 20,400
OFFICE EQUIPMENT & SERVICES (11.60%)
1,500 Compaq Computers Corporation* 42,562
700 International Business Machines
Corporation 80,369
900 Xerox Corporation 91,463
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214,394
OILS & OIL RELATED PRODUCTS (2.89%)
500 Amoco Corporation $ 20,875
600 Enron Corporation 32,438
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53,313
PACKAGING - CONTAINERS (2.33%)
800 Avery-Dennison Corporation 43,000
PHOTOGRAPHY (.99%)
250 Eastman Kodak Company 18,266
RESTAURANTS/LODGING (1.49%)
400 McDonald's Corporation 27,600
TECHNOLOGY (5.17%)
700 AMP, Incorporated 24,063
675 Diebold, Incorporated 19,491
700 Intel Corporation 51,887
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95,441
UTILITIES - TELEPHONE (3.63%)
1,000 BellSouth Corporation 67,125
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TOTAL COMMON STOCKS
(COST-$643,226) 1,675,184
<CAPTION>
PRINCIPAL
AMOUNT
- ---------
<S> <C> <C>
SHORT-TERM NOTES (8.06%)
$150,000 United States Treasury Bill
4.75%, due 7/23/98 (cost-$148,892)
148,892
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TOTAL SHORT-TERM NOTES
148,892
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TOTAL INVESTMENTS (98.73%)
(COST-$792,118) 1,824,076
CASH AND RECEIVABLES, LESS
LIABILITY (1.27%) 23,493
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TOTAL CONTRACT OWNERS'
EQUITY (100.0%)
$1,847,569
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------------
</TABLE>
*Non-income producing investment during the six-month period ending June 30,
1998.
SEE NOTES TO FINANCIAL STATEMENTS
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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 (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.
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 $14,441 and $132,387, 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 $481 and $1,091 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 Year ended
ended June 30, 1998 December 31,
(unaudited) 1997
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UNITS AMOUNT UNITS AMOUNT
<S> <C> <C> <C> <C>
Balance at
beginning of
period 16,323 $1,805,178 18,648 $1,620,070
Purchases 63 7,513 157 15,336
Net investment
Income - 302 - 10,202
Net realized gain
from investment
transactions - 69,793 - 84,638
Net unrealized
appreciation
of investments - 163,093 - 331,548
Withdrawals (1,617) (198,310) (2,482) (246,502)
Payment for
contract
guarantees - - - (10,114)
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Balance at end of
period 14,769 $1,847,569 16,323 $1,805,178
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</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 OF INVESTMENTS
Net unrealized appreciation of investments at June 30, 1998 and December 31,
1997 was as follows:
<TABLE>
<CAPTION>
June 30, 1998 December
(unaudited) 31, 1997
--------------------------
<S> <C> <C>
Gross unrealized appreciation $ 1,036,563 $874,684
Gross unrealized depreciation 4,605 5,820
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Net unrealized appreciation
of investments $ 1,031,958 $868,864
--------------------------
--------------------------
</TABLE>
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 PERIOD)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
1998 YEAR ENDED DECEMBER 31,
---------------------------------------------------
(UNAUDITED) 1997 1996 1995 1994
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<S> <C> <C> <C> <C> <C>
Investment income $ .888 $ 2.025 $ 1.777 $ 2.043 $ 1.569
Expenses .869 1.447 1.169 .935 .850
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Net investment income .019 .578 .608 1.108 .719
Net realized and unrealized gain (loss) on investments 14.492 23.136 13.251 14.278 (.943)
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Net increase (decrease) in accumulation unit value 14.511 23.714 13.859 15.386 (.224)
Accumulation unit value:
Beginning of period 110.589 86.875 73.016 57.630 57.854
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End of period $125.100 $110.589 $86.875 $73.016 $57.630
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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) .03% .58% .75% 1.71% 1.22%
Portfolio turnover rate (annualized) .87% .67% 3.35% 22.26% 82.18%
Number of accumulation units outstanding at end of period 14,769 16,323 18,648 21,059 23,165
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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 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 7,408 366 0
Election of
Dr. Robert C. Spencer as
Member, Board of Managers 7,408 366 0
Election of
James W. Voth as
Member, Board of Managers 7,408 366 0
Election of Clifford L. Greenwalt as
Member, Board of Managers 7,408 366 0
Ratification of Selection
of Ernst & Young LLP as
independent auditors 7,154 0 620
</TABLE>
5
