<PAGE>
[LOGO]
THE FRANKLIN LIFE INSURANCE COMPANY
-----------------------------------------------------
AN AMERICAN GENERAL COMPANY
#1 FRANKLIN SQUARE , SPRINGFIELD, ILLINOIS 62713-0001
Dear Contract Owner:
We are pleased to provide this 1997 annual report which shows the status of and
balances in your Franklin Life Money Market Variable Annuity Fund C contract.
The gain in the accumulation unit value of the Fund since year end 1996 was as
follows:
<TABLE>
<CAPTION>
December 31, 1997 June 30, 1997 December 31, 1996
----------------- ------------- -----------------
<S> <C> <C> <C>
Accumulation
Unit Value $23.73 $23.28 $22.87
------ ------ ------
Percentage Change From:
December 31, 1996 3.76%
------
June 30, 1997 1.93%
------
</TABLE>
As we have pointed out in past reports, the annual increase figure should not be
compared with fully taxable money market fund rates. Your annuity contract
shelters this income from Federal income taxes prior to your annuity starting
date so long as your money remains with the Fund. Also, your contract provides
that Franklin Life assumes the risk that administrative deductions may be
insufficient to cover actual administrative expenses.
The U.S. economy continued to expand at a very rapid rate in 1997. It is
estimated that the Gross Domestic Product will increase some 3.5% to 4.0% for
the year, well ahead of the expectations expressed at the beginning of 1997.
The unemployment rate was 4.7% in December 1997, down from 5.3% in December
1996, but up from 4.6% in November 1997. Inflation continues to be under
control as the Producers Price Index was down 0.2% in December and down 1.2% for
the year. This is the first decline in the Producers Price Index since 1991 and
the largest decline since 1986. The Producers Price Index declined in nine of
the twelve months of 1997. The Consumers Price Index increased 3.3% in 1996,
while the annual increase for 1997 is 1.7%, the smallest increase since 1986.
The Federal Reserve Board has kept the Federal Funds rate steady the last half
of 1997 after raising the rate from 5.25% to 5.50% on March 25, 1997. Short-
term rates have held fairly steady throughout 1997, with commercial paper rates
up in early December to accommodate short-term borrowers, then falling back to
close the year at 5.55%. Commercial paper rates are some 20 basis points higher
now than in late December 1996. Long-term interest rates are some 80 basis
points lower than in December 1996. Short-term interest rates are expected to
remain fairly steady during the first half of 1998, with lower rates possible if
the economy shows signs of slowing too much.
Franklin Life Money Market Variable Annuity Fund C, like other money market
funds, offers preservation of capital, liquidity and a return that reflects
prevailing short-term interest rates. In today's interest rate environment, you
may want to take some extra time and review what role this product should play
in your retirement financial planning. Franklin Life and your registered
representative would appreciate the opportunity to discuss with you this and
other products which will help you find financial security.
Cordially yours,
/s/ William A. Simpson
William A. Simpson
Chairman, Chief Executive Officer
and President
1
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1997
<TABLE>
<S> <C>
Assets
Investments-at amortized cost which approximates fair value
Corporate short-term notes $ 933,287
U.S. Government short-term note 917,547
----------
1,850,834
Cash on deposit 60,830
Interest receivable 9,585
----------
Total Assets 1,921,249
Liability-due to The Franklin Life Insurance Company 150
----------
Contract owners' equity
Value of 80,944.385 accumulation units outstanding,
equivalent to $23.73356211 per unit $1,921,099
----------
----------
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<S> <C> <C>
Investment Income-Interest $ 101,478
Expenses
Mortality and expense charges $20,938
Investment management services 7,370
---------
Total expenses 28,308
---------
Net investment income $ 73,170
---------
---------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
--------------------------
<S> <C> <C>
Net investment income $ 73,170 $ 80,603
Net contract purchase payments 28,598 38,349
Reimbursement for contract guarantees 227 51
Withdrawals (177,568) (425,220)
Administrative expense charges (1,512) (820)
--------------------------
Net decrease in contract owners' equity (77,085) (307,037)
Contract owners' equity at beginning of year 1,998,184 2,305,221
--------------------------
Contract owners' equity at end of year $1,921,099 $ 1,998,184
--------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1997
<TABLE>
<CAPTION>
PRINCIPAL CARRYING
AMOUNT VALUE
- --------- --------
<S> <C> <C>
CORPORATE SHORT-TERM NOTES
(48.58%)
AUTOMOTIVE (14.73%)
$95,000 Ford Motor Credit Corporation
5.70%, due 1/12/98 $94,263
95,000 General Motors Acceptance
Corporation, 5.82%, due 1/20/98 94,247
95,000 Chrysler Financial Corporation
5.83%, due 1/22/98 94,339
-------
282,849
FINANCE COMPANIES - CONSUMER (14.21%)
95,000 Associates Corporation of North America
5.75%, due 2/3/98 94,287
95,000 Household Finance Corporation
5.72%, due 1/29/98 94,336
85,000 Norwest Financial, Inc.
5.55%, due 1/5/98 84,384
-------
273,007
FINANCIAL SAVINGS & SERVICE (4.91%)
95,000 American Express Credit Corporation
5.70%, due 1/21/98 94,338
MACHINERY - INDUSTRIAL & CONSTRUCTION
(4.91%)
$95,000 John Deere Capital Corporation
5.70%, due 1/27/98 $94,353
OILS & OIL RELATED PRODUCTS (4.91%)
95,000 Chevron USA, Inc.
5.50%, due 2/11/98 94,376
RETAIL (4.91%)
95,000 Sears Roebuck Acceptance
Corporation 5.74%, due
2/19/98 94,364
---------
TOTAL CORPORATE SHORT-TERM
NOTES (COST-$933,287) 933,287
U.S. GOVERNMENT SHORT-TERM NOTE
(47.76%)
925,000 United States Treasury Bill
5.18%, due 1/8/98 (cost-$917,547) 917,547
---------
TOTAL INVESTMENTS (96.34%)
(COST-$1,850,834) 1,850,834
CASH AND RECEIVABLE, LESS LIABILITY
(3.66%) 70,265
---------
TOTAL CONTRACT OWNERS' EQUITY (100%) $1,921,099
----------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
THIS REPORT HAS BEEN PREPARED FOR THE INFORMATION OF FRANKLIN LIFE MONEY MARKET
VARIABLE ANNUITY FUND C CONTRACT OWNERS. IT IS NOT AUTHORIZED FOR DISTRIBUTION
TO PROSPECTIVE INVESTORS UNLESS PRECEDED OR ACCOMPANIED BY A CURRENT PROSPECTUS.
3
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE
ANNUITY FUND C
NOTES TO FINANCIAL STATEMENTS
NOTE A-SIGNIFICANT ACCOUNTING POLICIES
Franklin Life Money Market Variable Annuity Fund C (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: Securities with remaining maturities of 60 days or
less are valued at amortized cost, which is equivalent to fair value.
Securities purchased with more than 60 days to maturity are valued at fair value
until the 61st day prior to maturity. Thereafter, any discount or premium from
that fair value to maturity value is recognized by constant, proportionate
amortization until maturity.
INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME: Investment transactions
are accounted for on the trade date. 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-EXPENSES
Amounts are paid to The Franklin for investment management services at the rate
of .001027% of the current value of the Fund per day (.375% on an annual basis)
and for mortality and expense risk assurances at the rate of .002918% of the
current value of the Fund per day (1.065% on an annual basis). The investment
management service charge and the mortality and expense risk charge may be
increased to maximum rates, on an annual basis, of .500% and 1.750%,
respectively.
Certain other deductions are made from the Fund and paid to The Franklin
including administrative fees and contingent deferred sales charges on certain
amounts withdrawn. These deductions are more fully described in the Fund's
prospectus.
NOTE C-SUMMARY OF CHANGES IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1997 DECEMBER 31, 1996
------------------------------------------------------
Units Amount Units Amount
------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
beginning of
year 87,386 $1,998,184 104,641 $2,305,221
Purchases 1,238 28,598 1,740 38,349
Net
investment
income - 73,170 - 80,603
Withdrawals (7,651) (177,568) (18,962) (425,220)
Reimbursement
for contract
guarantees - 227 - 51
Administrative
expense charges (29) (1,512) (33) (820)
-------------------------------------------------------
Balance at end
of year 80,944 $1,921,099 87,386 $1,998,184
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
NOTE D-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.
4
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
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
1997 1996 1995 1994 1993
-----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $1.204 $1.162 $1.203 $.846 $.617
Expenses .337 .326 .309 .303 .294
-----------------------------------------------------------------------------------------
Net investment income .867 .836 .894 .543 .323
Accumulation unit value:
Beginning of year 22.866 22.030 21.136 20.593 20.270
End of year $23.733 $22.866 $22.030 $21.136 $20.593
-----------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------
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 3.73% 3.71% 4.17% 2.58% 1.58%
Number of accumulation units
outstanding at end of year 80,944 87,386 104,641 132,646 159,929
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
MATTERS SUBMITTED TO VOTE OF CONTRACT OWNERS
An annual meeting of Contract Owners of the Fund was held on April 21, 1997. 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 44,045 1,210 0
Election of
Dr. Robert C. Spencer as
Member, Board of Managers 44,045 1,210 0
Election of
James W. Voth as
Member, Board of Managers 44,045 1,210 0
Election of
Clifford L. Greenwalt as
Member, Board of Managers 44,045 1,210 0
Ratification of Selection
of Ernst & Young LLP as
independent auditors 43,545 870 840
</TABLE>
5
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Managers and Contract Owners
Franklin Life Money Market Variable Annuity Fund C
We have audited the accompanying statement of assets and liabilities of Franklin
Life Money Market Variable Annuity Fund C, including the portfolio of
investments, as of December 31, 1997, the related statement of operations for
the year then ended, the statements of changes in contract owners' equity for
each of the two years then ended, and the table of per-unit income and changes
in accumulation unit value for each of the three 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 two 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,
1997. 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 1997, 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 Money
Market Variable Annuity Fund C at December 31, 1997 and the results of its
operations for the year then ended, and the changes in its contract owners'
equity for each of the two years then ended, and per-unit income and changes in
accumulation unit value for each of the three years then ended in conformity
with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 30, 1998
6