<PAGE>
[LETTERHEAD OF THE FRANKLIN LIFE INSURANCE COMPANY]
Dear Contract Owner:
We are pleased to provide this 1998 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 1997 was as
follows:
<TABLE>
<CAPTION>
December 31, 1998 June 30, 1998 December 31, 1997
----------------- ------------- -----------------
<S> <C> <C> <C>
Accumulation Unit $24.59 $24.17 $23.73
Value ------ ------ ------
------ ------ ------
Percentage Change From:
December 31, 1997 +3.62%
------
------
June 30, 1998 +1.74%
------
------
</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 United States economy continued its strong growth in 1998, as measured by
the Gross Domestic Product (GDP), increasing at an annual rate of 3.9%. GDP is
expected to slow in 1999, with growth being 2.0% to 2.5%. The unemployment rate
was 4.3% in December 1998, down from 4.7% in December 1997. Inflation continues
to be under control. The Producers Price Index was down 0.2% in November 1998,
but increased 0.4% in December in light of higher tobacco prices. A decline was
recorded in six of the past twelve months, producing a decline in wholesale
prices of 0.1% in 1998, against a decline in 1997 of 1.2%. The Consumer Price
Index increased 1.7% in 1997 and increased only 1.6% in 1998.
The Federal Reserve Board lowered the Federal Funds rate by a total of 75 basis
points, over three months in late 1998, to the current level of 4.75%.
Short-term rates declined when the Federal Reserve took its action at the start
of the fourth quarter. Commercial paper (30-day) rates declined to the 5.20%
level on the first discount rate move and closed the year at 4.90%. Commercial
paper rates dropped 65 basis points from the December 1997 level of 5.55%. The
30-year United States Treasury bond yield declined 84 basis points to 5.09% at
year end. The three month United States Treasury bill yield declined 87 basis
points in 1998 to close the year with a 4.47% yield. Short term rates are
expected to remain steady during the first half of 1999.
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 and Chief Executive Officer
1
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
STATEMENT OF ASSETS AND LIABILITIES
DECEMBER 31, 1998
<TABLE>
<S> <C>
Assets
Investments-at amortized cost which approximates fair value
Corporate short-term notes $ 744,997
U.S. Government short-term note 794,773
----------
1,539,770
Cash on deposit 9,316
Interest receivable 4,987
----------
Total Assets 1,554,073
Liability-due to The Franklin Life Insurance Company 8,294
----------
Contract owners' equity
Value of 62,851.2220 accumulation units outstanding,
equivalent to $24.59426277 per unit $1,545,779
----------
----------
</TABLE>
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C> <C>
Investment Income-Interest $ 84,961
Expenses
Mortality and expense charges $ 18,050
Investment management services 6,353
----------
Total expenses 24,403
----------
Net investment income $ 60,558
----------
----------
</TABLE>
STATEMENTS OF CHANGES IN CONTRACT OWNERS' EQUITY
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
--------------------------------
<S> <C> <C>
Net investment income $ 60,558 $ 73,170
Net contract purchase payments 22,030 28,598
Reimbursement for contract guarantees - 227
Withdrawals (457,559) (177,568)
Administrative expense charges (349) (1,512)
--------------------------------
Net decrease in contract owners' equity (375,320) (77,085)
Contract owners' equity at beginning of year 1,921,099 1,998,184
--------------------------------
Contract owners' equity at end of year $ 1,545,779 $ 1,921,099
--------------------------------
--------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
FRANKLIN LIFE MONEY MARKET VARIABLE ANNUITY FUND C
PORTFOLIO OF INVESTMENTS
DECEMBER 31, 1998
<TABLE>
<CAPTION>
PRINCIPAL CARRYING
AMOUNT VALUE
------------- -------------
<S> <C> <C>
CORPORATE SHORT-TERM NOTES
(48.20%)
AUTOMOTIVE (14.46%)
$75,000 Ford Motor Credit Corporation
5.30%, due 1/5/99 $74,459
75,000 General Motors Acceptance
Corporation, 5.20%, due 2/4/99 74,599
75,000 Chrysler Financial Corporation
5.18%, due 1/14/99 74,461
--------------
223,519
FINANCE COMPANIES - CONSUMER (14.46%)
75,000 Associates Corporation of North America
5.13%, due 2/2/99 74,498
75,000 Household Finance Corporation
5.15%, due 1/12/99 74,474
75,000 Norwest Financial, Inc.
5.36%, due 1/28/99 74,509
--------------
223,481
FINANCIAL SAVINGS & SERVICE (4.82 %)
75,000 American Express Credit Corporation
5.05%, due 1/7/99 74,484
MACHINERY - INDUSTRIAL & CONSTRUCTION
(4.82%)
$75,000 Deere & Company
5.15%, due 1/21/99 $74,474
OILS & OIL RELATED PRODUCTS (4.82%)
75,000 Chevron USA, Inc.
5.10%, due 1/26/99 74,501
RETAIL (4.82%)
75,000 Sears Roebuck Acceptance
Corporation 5.28%, due 1/19/99 74,538
--------------
TOTAL CORPORATE SHORT-TERM
NOTES (COST-$744,997) 744,997
U.S. GOVERNMENT SHORT-TERM NOTE
(51.41%)
800,000 United States Treasury Bill
4.20%, due 2/4/99 (cost-$794,773) 794,773
--------------
TOTAL INVESTMENTS (99.61%)
(COST-$1,539,770) 1,539,770
CASH AND RECEIVABLE, LESS LIABILITY
(.39%) 6,009
--------------
TOTAL CONTRACT OWNERS' EQUITY (100%) $1,545,779
--------------
--------------
</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 form a part of, and are 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.
Beginning in October 1998, The Franklin began waiving all sales and
administrative charges specified in each Contract in anticipation of the Funds'
proposed reorganization (See Note E-Subsequent Event).
NOTE C-SUMMARY OF CHANGES IN ACCUMULATION UNITS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, 1998 DECEMBER 31, 1997
-----------------------------------------------------
UNITS AMOUNT UNITS AMOUNT
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at
beginning of
year 80,944 $1,921,099 87,386 $1,998,184
Purchases 930 22,030 1,238 28,598
Net
investment
income - 60,558 - 73,170
Withdrawals (19,003) (457,559) (7,651) (177,568)
Reimbursement
for contract
guarantees - - - 227
Administrative
expense
charges (20) (349) (29) (1,512)
-----------------------------------------------------
Balance at end
of year 62,851 $1,545,779 80,944 $1,921,099
-----------------------------------------------------
-----------------------------------------------------
</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.
NOTE E-SUBSEQUENT EVENT
The Fund's Board of Managers has approved resolutions whereby Contract Owners
will be asked during 1999 to approve a reorganization under which the Fund,
together with Franklin Life Variable Annuity Fund A and Franklin Life Variable
Annuity Fund B, will be restructured into a unit investment trust investing
exclusively in shares of specified mutual fund portfolios. Contract Owners will
be provided with a proxy statement describing the reorganization in detail.
4
<PAGE>
NOTE F-YEAR 2000 (UNAUDITED)
INTERNAL SYSTEMS. The Franklin's ultimate parent, American General
Corporation (AGC), has numerous technology systems that are managed on a
decentralized basis. AGC's Year 2000 readiness efforts are therefore being
undertaken by its key business units with centralized oversight. Each business
unit, including The Franklin, has developed and is implementing a plan to
minimize the risk of a significant negative impact on its operations.
While the specifics of the plans vary, the plans include the following
activities: (1) perform an inventory of The Franklin's information technology
and non-information technology systems; (2) assess which items in the inventory
may expose The Franklin to business interruptions due to Year 2000 issues; (3)
reprogram or replace systems that are not Year 2000 ready; (4) test systems to
prove that they will function into the next century as they do currently; and
(5) return the systems to operations. As of December 31, 1998, substantially
all of The Franklin's critical systems are Year 2000 ready and have been
returned to operations. However, activities (3) through (5) for certain systems
are ongoing, with vendor upgrades expected to be received during the first half
of 1999.
THIRD PARTY RELATIONSHIPS. The Franklin has relationships with various
third parties who must also be Year 2000 ready. These third parties provide (or
receive) resources and services to (or from) The Franklin and include
organizations with which The Franklin exchanges information. Third parties
include vendors of hardware, software, and information services; providers of
infrastructure services such as voice and data communications and utilities for
office facilities; investors; customers; distribution channels; and joint
venture partners. Third parties differ from internal systems in that The
Franklin exercises less, or no, control over Year 2000 readiness. The Franklin
has developed a plan to assess and attempt to mitigate the risks associated with
the potential failure of third parties to achieve Year 2000 readiness. The plan
includes the following activities: (1) identify and classify third party
dependencies; (2) research, analyze, and document Year 2000 readiness for
critical third parties; and (3) test critical hardware and software products and
electronic interfaces. As of December 31, 1998, AGC has identified and assessed
approximately 700 critical third party dependencies, including those relating to
The Franklin. A more detailed evaluation will be completed during first quarter
1999 as part of The Franklin's contingency planning efforts. Due to the various
stages of third parties' Year 2000 readiness, The Franklin's testing activities
will extend through 1999.
CONTINGENCY PLANS. The Franklin has commenced contingency planning to
reduce the risk of Year 2000-related business failures. The contingency plans,
which address both internal systems and third party relationships, include the
following activities: (1) evaluate the consequences of failure of business
processes with significant exposure to Year 2000 risk; (2) determine the
probability of a Year 2000-related failure for those processes that have a high
consequence of failure; (3) develop an action plan to complete contingency plans
for those processes that rank high in consequence and probability of failure;
and (4) complete the applicable action plans. The Franklin is currently
developing contingency plans and expects to substantially complete all
contingency planning activities by April 30, 1999.
RISKS AND UNCERTAINTIES. Based on its plans to make internal systems ready
for Year 2000, to deal with third party relationships, and to develop
contingency actions, The Franklin believes that it will experience at most
isolated and minor disruptions of business processes following the turn of the
century. Such disruptions are not expected to have a material effect on The
Franklin's future results of operations, liquidity, or financial condition.
However, due to the magnitude and complexity of this project, risks and
uncertainties exist and The Franklin is not able to predict a most reasonably
likely worst case scenario. If conversion of The Franklin's internal systems is
not completed on a timely basis (due to non-performance by significant third
party-vendors, lack of qualified personnel to perform the Year 2000 work, or
other unforeseen circumstances in completing The Franklin's plans), or if
critical third parties fail to achieve Year 2000 readiness on a timely basis,
the Year 2000 issues could have a material adverse impact on The Franklin's
operations following the turn of the century.
COSTS. Through December 31, 1998, The Franklin has incurred, and anticipates
that it will continue to incur, costs for internal staff, third party vendors,
and other expenses to achieve Year 2000 readiness. These costs are not passed
to the Fund. The cost of activities related to Year 2000 readiness has not had
a material adverse effect on The Franklin's results of operations or financial
condition. In addition, The Franklin has elected to accelerate the planned
replacement of certain systems as part of the Year 2000 plans. Costs of the
replacement systems are being capitalized and amortized over their useful lives,
in accordance with The Franklin's normal accounting policies.
5
<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
1998 1997 1996 1995 1994
------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Investment income $1.205 $1.204 $1.162 $1.203 $.846
Expenses .344 .337 .326 .309 .303
------------------------------------------------------------
Net investment income .861 .867 .836 .894 .543
Accumulation unit value:
Beginning of year 23.733 22.866 22.030 21.136 20.593
------------------------------------------------------------
End of year $24.594 $23.733 $22.866 $22.030 $21.136
------------------------------------------------------------
------------------------------------------------------------
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) 3.57% 3.73% 3.71% 4.17% 2.58%
Number of accumulation units
outstanding at end of year 62,851 80,944 87,386 104,641 132,646
- ----------------------------------------------------------------------------------------------
</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 26,443 1,459 0
Election of
Dr. Robert C. Spencer as
Member, Board of Managers 26,443 1,459 0
Election of
James W. Voth as
Member, Board of Managers 26,443 1,459 0
Election of
Clifford L. Greenwalt as
Member, Board of Managers 26,443 1,459 0
Ratification of Selection
of Ernst & Young LLP as
independent auditors 26,387 573 942
</TABLE>
6
<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, 1998, 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 four 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
the year 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,
1998. 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 1998, 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, 1998 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 four years then ended in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 29, 1999
7
