<PAGE> 1
VARIABLE ACCOUNT C
OF MONARCH LIFE INSURANCE COMPANY
ANNUAL REPORT
DECEMBER 31, 1998
This is a copy of the annual report of the variable account in which your
Monarch Life Insurance Company variable life insurance policy invests. We take
pride in our continued commitment to provide prompt, courteous service to our
policy owners. For inquiries regarding your policy, please call our Variable
Life Service Center at 1-800-544-0049.
[MONARCH LIFE INSURANCE LOGO]
The investment results presented in this report are historical and are no
indication of future performance.
<PAGE> 2
REPORT OF INDEPENDENT ACCOUNTANTS
To the Receiver of Monarch Life Insurance Company
and Policyholders of Variable Account C of Monarch Life Insurance Company
In our opinion, the accompanying statements of net assets and the related
statements of operations and changes in net assets present fairly, in all
material respects, the financial position of the Money Market, Equity-Income,
Growth, Asset Manager, High Income, Overseas, and Investment Grade Bond
Divisions (constituting Variable Account C of Monarch Life Insurance Company) at
December 31, 1998 and 1997 and the results of each of their operations and
changes in their net assets for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of Monarch Life Insurance
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
financial statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits, which included
confirmation of investments at December 31, 1998, by correspondence with the
Funds, provide a reasonable basis for the opinion expressed above.
PRICEWATERHOUSECOOPERS LLP
Boston, Massachusetts
February 22, 1999
<PAGE> 3
VARIABLE ACCOUNT C
MONARCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS COST SHARES MARKET VALUE
----------- --------- ------------
<S> <C> <C> <C>
Investments in Variable
Insurance Products Fund and Fund II, at Market Value
(Note 2):
Money Market Portfolio $ 5,147,566 5,147,566 $ 5,147,566
Equity-Income Portfolio 14,833,384 617,630 15,700,144
Growth Portfolio 22,098,975 579,079 25,983,278
Asset Manager Portfolio 4,419,605 260,534 4,731,291
High Income Portfolio 2,816,379 238,264 2,747,189
Overseas Portfolio 4,677,328 248,844 4,989,321
Investment Grade Bond Portfolio 1,110,274 86,028 1,114,923
----------- -----------
Total Invested Assets $55,103,511 60,413,712
===========
Pending Trades 1,647
-----------
Total Assets 60,415,359
-----------
LIABILITIES
Payable to Monarch Life Insurance Company 77,193
-----------
Total Liabilities 77,193
-----------
Net Assets $60,338,166
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE> 4
VARIABLE ACCOUNT C
MONARCH LIFE INSURANCE COMPANY
STATEMENT OF NET ASSETS AT DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS COST SHARES MARKET VALUE
----------- --------- ------------
<S> <C> <C> <C>
Investments in Variable
Insurance Products Fund and Fund II, at Market Value
(Note 2):
Money Market Portfolio $ 5,032,950 5,032,950 $ 5,032,950
Equity-Income Portfolio 14,703,748 686,770 16,674,783
Growth Portfolio 16,828,916 492,977 18,289,435
Asset Manager Portfolio 3,639,866 213,501 3,845,155
High Income Portfolio 3,657,967 289,742 3,934,697
Overseas Portfolio 4,737,820 248,314 4,767,625
Investment Grade Bond Portfolio 984,342 80,928 1,016,454
----------- -----------
Total Invested Assets $49,585,609 53,561,099
===========
Pending Trades 11,460
-----------
Total Assets 53,572,559
-----------
LIABILITIES
Payable to Monarch Life Insurance Company 90,762
-----------
Total Liabilities 90,762
-----------
Net Assets $53,481,797
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 5
VARIABLE ACCOUNT C
MONARCH LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTALS - ALL DIVISIONS
-----------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 5,222,752 $ 3,380,612 $ 2,675,734
Expenses:
Risk Charges and Administrative Expenses (Note 3) (560,954) (511,817) (472,460)
------------ ------------ ------------
Net Investment Income 4,661,798 2,868,795 2,203,274
------------ ------------ ------------
Net Realized Gains 3,537,524 4,138,897 3,464,550
Net Unrealized Gains (Losses) 1,334,711 1,751,432 (707,998)
------------ ------------ ------------
Net Realized and Unrealized Gains 4,872,235 5,890,329 2,756,552
------------ ------------ ------------
Net Increase in Net Assets
Resulting from Operations 9,534,033 8,759,124 4,959,826
------------ ------------ ------------
Transfers of Net Premiums 5,000 3,000 2,750
Transfers Due to Deaths (9,351) -- (11,874)
Transfers Due to Terminations (2,007,903) (2,778,058) (1,964,558)
Transfers Due to Policy Loans (374,068) (198,831) (934,471)
Transfers of Cost of Insurance (176,963) (210,842) (219,457)
Transfers of Loan Processing Charges (114,379) (108,207) (95,919)
Transfers Among Investment Divisions -- -- --
------------ ------------ ------------
Net Decrease in Net Assets
Resulting from Principal Transactions (2,677,664) (3,292,938) (3,223,529)
------------ ------------ ------------
Total Increase in Net Assets 6,856,369 5,466,186 1,736,297
Net Assets - Beginning of Year 53,481,797 48,015,611 46,279,314
------------ ------------ ------------
Net Assets - End of Year $ 60,338,166 $ 53,481,797 $ 48,015,611
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 6
VARIABLE ACCOUNT C
MONARCH LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Equity-
Market Income Growth
Total Division Division Division
------------- ------------ --------------- -------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 5,222,752 $ 336,264 $ 1,024,082 $ 2,434,738
------------- ------------ --------------- -------------
Expenses:
Risk Charges and Administrative Expenses (Note 3) (560,954) (62,806) (159,884) (195,771)
------------- ------------ --------------- -------------
Net Investment Income 4,661,798 273,458 864,198 2,238,967
------------- ------------ --------------- -------------
Net Realized Gains (Losses) 3,537,524 -- 1,718,876 2,058,211
Net Unrealized Gains (Losses) 1,334,711 -- (1,104,275) 2,423,784
------------- ------------ --------------- -------------
Net Realized and Unrealized Gains (Losses) 4,872,235 -- 614,601 4,481,995
------------- ------------ --------------- -------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 9,534,033 273,458 1,478,799 6,720,962
------------- ------------ --------------- -------------
Transfers of Net Premiums 5,000 -- -- 2,000
Transfers Due to Deaths (9,351) -- -- --
Transfers Due to Other Terminations (2,007,903) (352,025) (512,374) (822,188)
Transfers Due to Policy Loans (374,068) 59,633 (263,572) 35,725
Transfers of Cost of Insurance (176,963) (22,818) (49,319) (56,922)
Transfers of Loan Processing Charges (114,379) (18,447) (19,217) (45,385)
Transfers Among Investment Divisions -- 207,062 (1,420,151) 1,610,864
------------- ------------ --------------- -------------
Net Increase (Decrease) in Net Assets
Resulting from Principal Transactions (2,677,664) (126,595) (2,264,633) 724,094
------------- ------------ --------------- -------------
Total Increase (Decrease) in Net Assets 6,856,369 146,863 (785,834) 7,445,056
Net Assets - Beginning of Year 53,481,797 4,925,157 16,676,483 18,311,287
------------- ------------ --------------- -------------
Net Assets - End of Year $ 60,338,166 $ 5,072,020 $ 15,890,649 $ 25,756,343
============= ============ =============== =============
</TABLE>
<TABLE>
<CAPTION>
Investment
Asset High Grade
Manager Income Overseas Bond
Division Division Division Division
----------- ------------- ------------ ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 525,511 $ 450,266 $ 385,058 $ 66,833
----------- ------------- ------------ ------------
Expenses:
Risk Charges and Administrative Expenses (Note 3) (40,962) (35,704) (52,249) (13,578)
----------- ------------- ------------ ------------
Net Investment Income 484,549 414,562 332,809 53,255
----------- ------------- ------------ ------------
Net Realized Gains (Losses) (34,541) (247,945) (37,432) 80,355
Net Unrealized Gains (Losses) 106,397 (345,920) 282,188 (27,463)
----------- ------------- ------------ ------------
Net Realized and Unrealized Gains (Losses) 71,856 (593,865) 244,756 52,892
----------- ------------- ------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Operations 556,405 (179,303) 577,565 106,147
----------- ------------- ------------ ------------
Transfers of Net Premiums -- 3,000 -- --
Transfers Due to Deaths -- -- (9,351) --
Transfers Due to Other Terminations (94,124) (62,953) (84,527) (79,712)
Transfers Due to Policy Loans 25,683 (31,052) (122,144) (78,341)
Transfers of Cost of Insurance (15,456) (12,137) (15,556) (4,755)
Transfers of Loan Processing Charges (11,713) (4,506) (14,201) (910)
Transfers Among Investment Divisions 425,341 (898,098) (112,059) 187,041
----------- ------------- ------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Principal Transactions 329,731 (1,005,746) (357,838) 23,323
----------- ------------- ------------ ------------
Total Increase (Decrease) in Net Assets 886,136 (1,185,049) 219,727 129,470
Net Assets - Beginning of Year 3,845,155 3,934,697 4,772,564 1,016,454
----------- ------------- ------------ ------------
Net Assets - End of Year $ 4,731,291 $ 2,749,648 $ 4,992,291 $ 1,145,924
=========== ============= ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE> 7
VARIABLE ACCOUNT C
MONARCH LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Equity-
Market Income Growth
Total Division Division Division
------------- ------------ ------------- -------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 3,380,612 $ 317,007 $ 1,261,041 $ 616,516
Expenses:
Risk Charges and Administrative Expenses (Note 3) (511,817) (58,837) (143,221) (170,160)
-------------- ------------- -------------- --------------
Net Investment Income 2,868,795 258,170 1,117,820 446,356
-------------- ------------- -------------- --------------
Net Realized Gains 4,138,897 -- 1,181,554 1,970,530
Net Unrealized Gains (Losses) 1,751,432 -- 1,012,708 891,938
-------------- ------------- -------------- --------------
Net Realized and Unrealized Gains 5,890,329 -- 2,194,262 2,862,468
-------------- ------------- -------------- --------------
Net Increase in Net Assets
Resulting from Operations 8,759,124 258,170 3,312,082 3,308,824
-------------- ------------- -------------- --------------
Transfers of Net Premiums 3,000 -- 1,000 1,000
Transfers Due to Deaths -- -- -- --
Transfers Due to Other Terminations (2,778,058) (685,847) (863,116) (573,094)
Transfers Due to Policy Loans (198,831) 69,371 (29,315) (63,053)
Transfers of Cost of Insurance (210,842) (25,645) (59,439) (67,353)
Transfers of Loan Processing Charges (108,207) (20,654) (24,293) (31,872)
Transfers Among Investment Divisions -- (944,788) 1,811,395 (631,407)
-------------- ------------- -------------- --------------
Net Increase (Decrease) in Net Assets
Resulting from Principal Transactions (3,292,938) (1,607,563) 836,232 (1,365,779)
-------------- ------------- -------------- --------------
Total Increase (Decrease) in Net Assets 5,466,186 (1,349,393) 4,148,314 1,943,045
Net Assets - Beginning of Year 48,015,611 6,274,550 12,528,169 16,368,242
-------------- ------------- -------------- --------------
Net Assets - End of Year $ 53,481,797 $ 4,925,157 $ 16,676,483 $ 18,311,287
-------------- ------------- -------------- --------------
</TABLE>
<TABLE>
<CAPTION>
Investment
Asset High Grade
Manager Income Overseas Bond
Division Division Division Division
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 414,211 $ 279,600 $ 430,852 $ 61,385
Expenses:
Risk Charges and Administrative Expenses (Note 3) (36,408) (37,590) (54,951) (10,650)
------------ ------------ ------------ ------------
Net Investment Income 377,803 242,010 375,901 50,735
------------ ------------ ------------ ------------
Net Realized Gains 183,532 243,278 528,488 31,515
Net Unrealized Gains (Losses) 78,103 87,699 (319,003) (13)
------------ ------------ ------------ ------------
Net Realized and Unrealized Gains 261,635 330,977 209,485 31,502
------------ ------------ ------------ ------------
Net Increase in Net Assets
Resulting from Operations 639,438 572,987 585,386 82,237
------------ ------------ ------------ ------------
Transfers of Net Premiums -- 1,000 -- --
Transfers Due to Deaths -- -- -- --
Transfers Due to Other Terminations (92,063) (260,581) (77,309) (226,048)
Transfers Due to Policy Loans (111,738) 40,429 (96,571) (7,954)
Transfers of Cost of Insurance (15,869) (15,331) (22,641) (4,564)
Transfers of Loan Processing Charges (9,491) (6,785) (14,465) (647)
Transfers Among Investment Divisions 10,374 69,987 (411,654) 96,093
------------ ------------ ------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Principal Transactions (218,787) (171,281) (622,640) (143,120)
------------ ------------ ------------ ------------
Total Increase (Decrease) in Net Assets 420,651 401,706 (37,254) (60,883)
Net Assets - Beginning of Year 3,424,504 3,532,991 4,809,818 1,077,337
------------ ------------ ------------ ------------
Net Assets - End of Year $ 3,845,155 $ 3,934,697 $ 4,772,564 $ 1,016,454
------------ ------------ ------------ ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE> 8
VARIABLE ACCOUNT C
MONARCH LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS AND CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Money Equity-
Market Income Growth
Total Division Division Division
------------- ------------ -------------- --------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) $ 2,675,734 $ 330,714 $ 565,198 $ 1,069,454
Expenses:
Risk Charges and Administrative Expenses (Note 3) (472,460) (62,714) (125,490) (161,744)
------------- ------------ -------------- --------------
Net Investment Income 2,203,274 268,000 439,708 907,710
------------- ------------ -------------- --------------
Net Realized Gains 3,464,550 -- 1,905,900 858,806
Net Unrealized Gains (Losses) (707,998) -- (847,825) 108,153
------------- ------------ -------------- --------------
Net Realized and Unrealized Gains (Losses) 2,756,552 -- 1,058,075 966,959
------------- ------------ -------------- --------------
Net Increase in Net Assets
Resulting from Operations 4,959,826 268,000 1,497,783 1,874,669
------------- ------------ -------------- --------------
Transfers of Net Premiums 2,750 1,750 1,000 --
Transfers Due to Deaths (11,874) -- -- --
Transfers Due to Other Terminations (1,964,558) (543,798) (413,390) (693,513)
Transfers Due to Policy Loans (934,471) (486,411) (69,169) (241,668)
Transfers of Cost of Insurance (219,457) (30,268) (58,335) (74,111)
Transfers of Loan Processing Charges (95,919) (27,628) (14,488) (28,302)
Transfers Among Investment Divisions -- 978,418 (1,312,971) 305,340
------------- ------------ -------------- --------------
Net Increase (Decrease) in Net Assets
Resulting from Principal Transactions (3,223,529) (107,937) (1,867,353) (732,254)
------------- ------------ -------------- --------------
Total Increase (Decrease) in Net Assets 1,736,297 160,063 (369,570) 1,142,415
Net Assets - Beginning of Year 46,279,314 6,114,487 12,897,739 15,225,827
------------- ------------ -------------- --------------
Net Assets - End of Year $ 48,015,611 $ 6,274,550 $ 12,528,169 $ 16,368,242
============= ============ ============== ==============
</TABLE>
<TABLE>
<CAPTION>
Investment
Asset High Grade
Manager Income Overseas Bond
Division Division Division Division
---------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
Investment Income:
Dividends (Note 2) 234,749 $ 289,717 $ 122,802 $ 63,100
Expenses:
Risk Charges and Administrative Expenses (Note 3) (30,806) (31,119) (50,779) (9,808)
---------- ------------ ------------ ------------
Net Investment Income 203,943 258,598 72,023 53,292
---------- ------------ ------------ ------------
Net Realized Gains 337,872 17,689 331,648 12,635
Net Unrealized Gains (Losses) (150,718) 99,323 138,181 (55,112)
---------- ------------ ------------ ------------
Net Realized and Unrealized Gains (Losses) 187,154 117,012 469,829 (42,477)
---------- ------------ ------------ ------------
Net Increase in Net Assets
Resulting from Operations 391,097 375,610 541,852 10,815
---------- ------------ ------------ ------------
Transfers of Net Premiums -- -- -- --
Transfers Due to Deaths (11,874) -- -- --
Transfers Due to Other Terminations (72,587) (137,054) (78,678) (25,538)
Transfers Due to Policy Loans (130,585) (8,961) 14,771 (12,448)
Transfers of Cost of Insurance (14,208) (13,795) (24,007) (4,733)
Transfers of Loan Processing Charges (6,206) (5,051) (13,534) (710)
Transfers Among Investment Divisions (452,631) 231,698 394,900 (144,754)
---------- ------------ ------------ ------------
Net Increase (Decrease) in Net Assets
Resulting from Principal Transactions (688,091) 66,837 293,452 (188,183)
---------- ------------ ------------ ------------
Total Increase (Decrease) in Net Assets (296,994) 442,447 835,304 (177,368)
Net Assets - Beginning of Year 3,721,498 3,090,544 3,974,514 1,254,705
---------- ------------ ------------ ------------
Net Assets - End of Year 3,424,504 $ 3,532,991 $ 4,809,818 $ 1,077,337
========== ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
7
<PAGE> 9
VARIABLE ACCOUNT C
OF MONARCH LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 1-ORGANIZATION
Variable Account C of Monarch Life Insurance Company (the Account), is a
segregated account of Monarch Life Insurance Company (Monarch Life) and is
registered as, The Fidelity Variable Account, a unit investment trust registered
under the Investment Company Act of 1940, as amended (1940 Act), and is
currently comprised of seven investment divisions. Five of the divisions invest
solely in the shares of the five corresponding portfolios of the Variable
Insurance Products Fund, and the remaining two divisions invest solely in the
shares of the two corresponding portfolios of the Variable Insurance Products
Fund II (the Funds). Both are no-load, open-end, diversified, series management
investment companies registered under the 1940 Act. The Funds' investment
advisor is Fidelity Management & Research Company. Under applicable insurance
law, the assets and liabilities of the Account are clearly identified and
distinguished from the other assets and liabilities of Monarch Life. The portion
of the Account's assets applicable to the variable life insurance policies is
not chargeable with liabilities arising out of any other business Monarch Life
may conduct.
The change in net assets maintained in the Account provides the basis for the
periodic determination of the amount of increased or decreased benefits under
the policies. The net assets may not be less than the amount required under
state insurance law to provide for death benefits (without regard to the minimum
death benefit guarantee) and other policy benefits.
Monarch Life is a wholly-owned subsidiary of Regal Reinsurance Company (Regal
Re). On June 9, 1994, the Insurance Commissioner of the Commonwealth of
Massachusetts (the Commissioner) was appointed receiver (the Receiver) of
Monarch Life in a rehabilitation proceeding pending before the Supreme Judicial
Court for Suffolk County, Massachusetts (the Court). A term sheet dated July 19,
1994 (the Term Sheet) among the Commissioner (in her capacity as Commissioner
and Receiver) and certain Regal Re shareholders and noteholders and holders of
Monarch Life's surplus notes (representing approximately 85% of both the total
outstanding Regal Re notes and common stock) (the Holders) was approved by the
Court on September 1, 1994. Pursuant to the Term Sheet, the Holders transferred
their notes and stock into voting trusts for which the Commissioner is the sole
trustee, which effectively vests control of Monarch Life and Regal Re in the
Commissioner.
Some Insurance Departments have either suspended Monarch Life's certificate of
authority, ordered Monarch Life to cease writing new business, or have requested
a voluntary suspension of sales. In addition, Monarch Life's certificate of
authority has been revoked by the insurance departments of the states of Idaho
(1998), Louisiana (1994), Michigan (1995), Missouri (1994), Nevada (1997), and
Wyoming (1992).
Monarch Life currently limits its business to maintaining its existing blocks of
disability income insurance, variable life, and annuity businesses. Monarch Life
ceased issuing new variable life insurance policies and new annuity contracts
effective May 1, 1992, and new disability income insurance policies effective
June 15, 1993.
The assets of the Account are not available to meet the general obligations of
Monarch Life or Regal Re and are held for the exclusive benefit of the
policyholders participating in the Account.
8
<PAGE> 10
VARIABLE ACCOUNT C
OF MONARCH LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 2-SIGNIFICANT ACCOUNTING POLICIES
The following is a summary of significant accounting policies consistently
followed by the Account in preparation of its financial statements. Preparation
of financial statements requires the use of estimates made by management. Actual
results may differ from these estimates. The policies are in conformity with
generally accepted accounting principles.
INVESTMENTS: The investments in shares of the Funds are stated at
market value which is the net asset value per share of the respective
portfolios of the Funds. Investment transactions are accounted for on
the date the shares are purchased or sold. The cost of shares redeemed
is determined on the first-in, first-out method. Dividends and capital
gain distributions received from the Funds are reinvested in additional
shares of the Funds and are recorded as income by the Account on the
ex-dividend date. Capital gains distributions are included in dividend
income in the Statements of Operations and Changes in Net Assets.
FEDERAL INCOME TAXES: For federal income tax purposes, operations of
the Account are combined with those of Monarch Life which is taxed as a
life insurance company. Under existing federal income tax law,
investment income (dividends) and capital gains attributable to the
Account are not taxed.
NOTE 3-EXPENSES
Monarch Life assumes mortality and expense risks, minimum death benefit
guarantee risks and annual administrative expenses related to the operations of
the Account. Monarch Life deducts a daily charge from the assets of the Account
to cover these risks. The charge is equal to a rate of 1% (on an annual basis)
of the policyholders' investment base.
During each of the first ten policy years, Monarch Life deducts a charge for the
first year administrative expenses and state premium taxes. It is deducted each
quarter and is equal to 0.0815% of the policyholder's investment base as of the
previous quarter. This charge is designed to be approximately .35% annually of
the policyholder's investment base. These charges are included in transfers of
cost of insurance in the Statement of Operations and Changes in Net Assets.
NOTE 4-PRINCIPAL UNDERWRITER AND GENERAL DISTRIBUTOR
Baystate Capital Services, Inc. (BCSI), is the principal underwriter and general
distributor of the policies maintained in the Account. BCSI is a wholly-owned
subsidiary of Monarch Life.
NOTE 5-PURCHASES AND SALES OF SECURITIES
Total cost of purchases and proceeds from sales of shares of the Funds by the
Account during the year ended December 31, 1998, are shown below:
<TABLE>
<CAPTION>
PURCHASES SALES
----------- -----------
<S> <C> <C>
Money Market Portfolio $33,659,900 $33,545,285
Equity-Income Portfolio 10,591,487 12,180,729
Growth Portfolio 29,746,105 26,534,230
Asset Manager Portfolio 6,450,333 5,636,053
High Income Portfolio 3,418,902 4,012,545
Overseas Portfolio 6,360,658 6,383,718
Investment Grade Bond Portfolio 3,702,228 3,656,781
----------- -----------
Totals $93,929,613 $91,949,341
=========== ===========
</TABLE>
9
<PAGE> 11
VARIABLE ACCOUNT C
OF MONARCH LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
NOTE 6-DIVERSIFICATION REQUIREMENTS
Under the provisions of Section 817(h) of the Internal Revenue Code (the Code),
a variable life insurance policy, other than a policy issued in connection with
certain types of employee benefit plans, will not be treated as a life insurance
policy for federal tax purposes for any period for which the investments of the
segregated asset account, on which the policy is based, are not adequately
diversified. The Code provides that the "adequately diversified" requirement may
be met if the underlying investments satisfy either a statutory safe harbor test
or diversification requirements set forth in regulations issued by the Secretary
of the Treasury.
The Internal Revenue Service has issued regulations under Section 817(h) of the
Code. Monarch Life believes, based on assurances from the Funds, that the
Account satisfies the current requirements of the regulations.
10
