<PAGE>
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THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
DECEMBER 31, 1996
ANNUAL REPORT
SEPARATE ACCOUNT VUL FUNDING
EQUIBUILDER-TM- FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICIES
Principal office located at:
#1 Franklin Square
Springfield, Illinois 62713
ANNUAL REPORT DATED DECEMBER 31, 1996
===============================================================================
DECEMBER 31, 1996
ANNUAL REPORT
THE HUDSON RIVER TRUST
PRINCIPAL OFFICE LOCATED AT:
1755 Broadway
New York, New York 10019
ANNUAL REPORT DATED DECEMBER 31, 1996
- -------------------------------------------------------------------------------
The Annual Report of Separate Account VUL is prepared and provided by
The American Franklin Life Insurance Company. The Annual Report of
The Hudson River Trust is prepared by The Hudson River Trust.
- -------------------------------------------------------------------------------
This Annual Report is not to be construed as an offering for sale of any
American Franklin Life policy. No offering is made except in conjunction with
a prospectus which must precede or accompany this report.
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
STATEMENT OF NET ASSETS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON MONEY AGGRESSIVE HIGH
STOCK MARKET BALANCED STOCK YIELD GLOBAL
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in The Hudson River Trust, at
fair value:
(Cost: Common Stock Division -$5,800,732
Money Market Division-$665,198
Balanced Division-$2,651,114
Aggressive Stock Division-$2,666,920
High Yield Division-$201,340
Global Division-$929,765) $7,424,822 $661,549 $2,776,435 $2,989,266 $208,955 $1,084,283
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Due (to) from General Account 25,965 381 (292) (784) 267 83,921
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NET ASSETS (Note 1) $7,450,787 $661,930 $2,776,143 $2,988,482 $209,222 $1,168,204
=======================================================================================
Unit Value, at December 31, 1996 (Note 4) $ 252.88 $ 134.27 $ 183.79 $ 326.62 $ 227.84 $ 217.07
=======================================================================================
Units Outstanding, at December 31, 1996 29,464 4,930 15,105 9,150 918 5,381
=======================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON MONEY AGGRESSIVE HIGH
STOCK MARKET BALANCED STOCK YIELD GLOBAL
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Income (Note 2)
Dividends from The Hudson River Trust $ 800,460 $30,679 $302,638 $530,271 $30,316 $ 71,583
Expenses (Note 3)
Mortality and expense risk charge 46,912 4,137 18,949 19,604 1,233 7,729
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Net Investment Income 753,548 26,542 283,689 510,667 29,083 63,854
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS (NOTE 2)
Net realized gain (loss) 84,785 (331) (1,079) 37,813 296 18,066
Net unrealized appreciation
(depreciation)
Beginning of year 1,019,762 (2,469) 118,943 356,871 3,883 187,214
End of year 1,624,090 (3,649) 125,321 322,346 7,615 154,518
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Net change in unrealized appreciation
(depreciation) during the year 604,328 (1,180) 6,378 (34,525) 3,732 (32,696)
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Net Realized and Unrealized Gain (Loss)
on Investments 689,113 (1,511) 5,299 3,288 4,028 (14,630)
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Net Increase in Net Assets Resulting
From Operations $1,442,661 $25,031 $288,988 $513,955 $33,111 $49,224
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
STATEMENTS OF CHANGES IN NET ASSETS
FOR THE YEAR ENDED DECEMBER 31, 1996
<TABLE>
<CAPTION>
COMMON MONEY AGGRESSIVE HIGH
STOCK MARKET BALANCED STOCK YIELD GLOBAL
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 753,548 $ 26,542 $ 283,689 $ 510,667 $ 29,083 $ 63,854
Net realized gain (loss) on investments 84,785 (331) (1,079) 37,813 296 18,066
Net change in unrealized appreciation
(depreciation) on investments 604,328 (1,180) 6,378 (34,525) 3,732 (32,696)
---------------------------------------------------------------------------------------
Net increase in net assets from operations 1,442,661 25,031 288,988 513,955 33,111 49,224
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 767,063 72,284 402,634 391,630 29,802 159,089
Transfers for policy related transactions (674,803) (65,968) (381,368) (253,417) (11,337) (38,230)
Transfers between Separate Account VUL's
Divisions, net (44,569) 78,626 (44,582) 39,552 17,112 9,951
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Net increase (decrease) in net assets
from policy related transactions 47,691 84,942 (23,316) 177,765 35,577 130,810
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Increase in Net Assets 1,490,352 109,973 265,672 691,720 68,688 180,034
Net Assets, Beginning of Year 5,960,435 551,957 2,510,471 2,296,762 140,534 988,170
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Net Assets, End of Year $ 7,450,787 $661,930 $2,776,143 $2,988,482 $209,222 $1,168,204
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FOR THE YEAR ENDED DECEMBER 31, 1995
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 381,028 $ 26,246 $ 132,300 $ 257,666 $ 11,928 $ 38,785
Net realized gain (loss) on investments 4,578 132 (17,457) 5,122 (1,524) (2,108)
Net change in unrealized appreciation
(depreciation) on investments 1,030,788 (2,007) 283,472 238,498 8,741 109,580
Net increase in net assets from operations 1,416,394 24,371 398,315 501,286 19,145 146,257
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 731,922 85,339 416,754 351,528 31,118 154,471
Transfers for policy related transactions (695,315) (68,844) (447,187) (291,514) (24,243) (130,688)
Transfers between Separate Account VUL's
Divisions, net 31,326 (16,320) 5,206 46,823 12,548 (36,084)
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Net increase (decrease) in net assets from
policy related transactions 67,933 175 (25,227) 106,837 19,423 (12,301)
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Increase in Net Assets 1,484,327 24,546 373,088 608,123 38,568 133,956
Net Assets, Beginning of Year 4,476,108 527,411 2,137,383 1,688,639 101,966 854,214
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Net Assets, End of Year $5,960,435 $551,957 $2,510,471 $2,296,762 $140,534 $988,170
=======================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. NATURE OF OPERATIONS
The American Franklin Life Insurance Company (American Franklin) is a
wholly-owned subsidiary of The Franklin Life Insurance Company. American
Franklin established Separate Account VUL (Account) as a unit investment
trust registered under the Investment Company Act of 1940. The Account,
which consists of six investment divisions, was established on July 22,
1987 in conformity with Illinois Insurance Law. The assets in each
division are invested in units of beneficial interest (shares) of a
designated portfolio (Portfolio) of a mutual fund, The Hudson River Trust
(Trust). The Account's financial statements should be read in
conjunction with the financial statements of the Trust. The Account
commenced operations on January 5, 1990.
The Account was established by American Franklin to support the
operations of American Franklin's EquiBuilder-TM- Flexible Premium
Variable Life Insurance Policies (Policies). Franklin Financial Services
Corporation, a wholly-owned subsidiary of The Franklin Life Insurance
Company, acts as the principal underwriter, as defined in the Investment
Company Act of 1940, of the Policies. The assets of the Account are the
property of American Franklin. The portion of the Account's assets
applicable to the Policies is not chargeable with liabilities arising out
of any other business American Franklin may conduct. The Policies are no
longer being sold.
The net assets of the Account may not be less than the reserves
applicable to the Policies. Assets may also be set aside in American
Franklin's General Account based on the amounts allocated under the
Policies to American Franklin's Guaranteed Interest Division and for
policy loans. Additional assets are set aside in American Franklin's
General Account to provide for (i) the unearned portion of the monthly
charges for mortality costs and administrative expenses made under the
Policies and (ii) other policy benefits.
2. SIGNIFICANT ACCOUNTING POLICIES
The significant accounting policies of the Account are as follows:
Investments in shares of the Trust are carried at fair value. Investments
in shares of the Trust are valued at the net asset values of the
respective Portfolios of the Trust corresponding to the investment
divisions of the Account. Investment transactions are recorded on the
trade date. Dividends are recorded as received. Realized gains and
losses on sales of the Trust shares are determined based on the specific
identification method.
The operations of the Account are included in the federal income tax
return of American Franklin. Under the provisions of the Policies,
American Franklin has the right to charge the Account for federal income
tax attributable to the Account. No charge is currently being made
against the Account for such tax since, under current tax law, American
Franklin pays no tax on investment income and capital gains reflected in
variable life insurance policy reserves. However, American Franklin
retains the right to charge for any federal income tax incurred which is
attributable to the Account if the law is changed. Charges for state and
local taxes, if any, attributable to the Account may also be made.
5
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
3. SALES AND ADMINISTRATIVE CHARGES
Certain jurisdictions require that deductions be made from premium
payments for taxes. The amount of such deductions varies and may be up
to 5% of the premium. The balance remaining after any such deduction, the
net premium, is placed by American Franklin in a Policy Account
established for each policyowner. Each month American Franklin makes a
charge against each Policy Account for: administrative expenses
(currently $6 per month plus an additional charge of $24 per month for
each of the first 12 months a policy is in effect); cost of insurance,
which is based on the insured person's age, sex, risk class, amount of
insurance and additional benefits, if any. In addition, American
Franklin will make charges for the following: a partial withdrawal of
net cash surrender value (currently $25 or 2% of the amount withdrawn,
whichever is less); an increase in the face amount of insurance
(currently a $1.50 administrative charge for each $1,000 increase up to a
maximum charge of $300); and a transfer between investment divisions in
any policy year in which four transfers have already been made (up to $25
for each additional transfer in a given policy year). Charges may also
be made for providing more than one illustration of policy benefits to a
given policyowner. American Franklin assumes mortality and expense risks
related to the operations of the Account and deducts a charge from the
assets of the Account at an effective annual rate of .75% of the
Account's net assets to cover these risks. The total charges paid by the
Account to American Franklin were $983,000 in 1996.
During the first ten years a Policy is in effect, a surrender charge may
be deducted from a Policy Account by American Franklin if: the Policy is
surrendered for its net cash surrender value, the face amount of the
Policy is reduced or the Policy is permitted to lapse. The maximum total
surrender charge applicable to a particular Policy is specified in the
Policy and is equal to 50% of one "target" premium which is based on
the annual premium for a fixed whole life insurance policy on the life of
the insured person. This maximum will not vary based on the amount of
premiums paid or when they are paid. At the end of the sixth policy year
and at the end of each of the four succeeding policy years, the maximum
surrender charge is reduced by an amount equal to 20% of the initial
maximum surrender charge until, after the end of the tenth policy year,
there is no surrender charge. Subject to the maximum surrender charge,
the surrender charge will equal 30% of actual premiums paid during the
first policy year up to one target premium, plus 9% of all other premiums
actually paid during the first ten policy years.
6
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1996
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1996
COMMON MONEY AGGRESSIVE HIGH
STOCK MARKET BALANCED STOCK YIELD GLOBAL
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unit value, beginning of year $203.33 $128.48 $164.98 $268.39 $187.52 $191.62
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Unit value, end of year $252.88 $134.27 $183.79 $326.62 $227.84 $217.07
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Number of units outstanding, beginning
of year 29,315 4,296 15,216 8,558 749 5,157
Net contract purchase payments 3,483 549 2,343 1,269 142 780
Transfers for policy related transactions (3,178) (503) (2,214) (810) (55) (602)
Transfers between Separate Account
VUL's Divisions, net (156) 588 (240) 133 82 46
------------------------------------------------------------------------------------
Number of units outstanding, end of year 29,464 4,930 15,105 9,150 918 5,381
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</TABLE>
5. REMUNERATION OF MANAGEMENT
Separate Account VUL incurs no liability for remuneration to directors,
members of advisory boards, officers or any other person who might provide
a service for the Account, except as described in Note 3.
7
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The American Franklin Life Insurance Company
Policyowners of Separate Account VUL
We have audited the accompanying statement of net assets of Separate Account
VUL (comprising, respectively, the Common Stock, Money Market, Balanced,
Aggressive Stock, High Yield, and Global Divisions) as of December 31, 1996,
and the related statement of operations for the year then ended, and the
statement of changes in net assets for each of the two years in the period
then ended. These financial statements are the responsibility of Separate
Account VUL management. Our responsibility is to express an opinion on these
financial statements based on our audits.
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 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 securities owned as of December 31,
1996 by correspondence with the custodian. 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 referred to above present fairly, in
all material respects, the financial position of each of the respective
Divisions constituting Separate Account VUL at December 31, 1996, and the
results of their operations for the year then ended, and the changes in net
assets for each of the two years in the period then ended in conformity with
generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 7, 1997
8
