<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPERATE ACCOUNT VUL
DECEMBER 31, 1997
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, 1997
- -------------------------------------------------------------------------------
DECEMBER 31, 1997
ANNUAL REPORT
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THE HUDSON RIVER TRUST
PRINCIPAL OFFICE LOCATED AT:
1755 Broadway
New York, New York 10019
ANNUAL REPORT DATED DECEMBER 31, 1997
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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, 1997
<TABLE>
<CAPTION>
COMMON MONEY AGGRESSIVE HIGH
STOCK MARKET BALANCED STOCK YIELD GLOBAL
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
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<S> <C> <C> <C> <C> <C> <C>
ASSETS - Investments in the Hudson
River Trust, at fair value
(Cost: see below) $ 9,240,272 $ 635,050 $ 3,093,726 $ 3,326,873 $ 287,603 $ 1,278,382
LIABILITIES - Due to General Account (54,931) (3,651) (16,565) (17,025) (885) (6,215)
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NET ASSETS $ 9,185,341 $ 631,399 $ 3,077,161 $ 3,309,848 $ 286,718 $ 1,272,167
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Unit value, at December 31, 1997 $ 314.47 $ 140.51 $ 206.71 $ 349.91 $ 269.33 $ 237.70
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Units outstanding, at December 31, 1997 29,209 4,494 14,886 9,459 1,065 5,352
---------------------------------------------------------------------------------------
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Cost of Investments $ 6,622,053 $ 633,689 $ 2,856,943 $ 3,119,846 $ 271,570 $ 1,053,004
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
1
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE
SEPARATE ACCOUNT VUL
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
<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>
NET INVESTMENT INCOME
Income
Dividends from The Hudson
River Trust $ 758,224 $ 32,161 $ 252,194 $ 293,522 $ 34,683 $ 107,450
Expenses
Mortality and expense risk charge 60,956 4,582 21,848 24,242 1,811 9,178
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Net investment income 697,268 27,579 230,346 269,280 32,872 98,272
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) 194,024 (587) 16,127 81,700 1,465 28,841
Net unrealized appreciation
(depreciation):
Beginning of year 1,624,090 (3,649) 125,321 322,346 7,615 154,518
End of year 2,618,219 1,361 236,783 207,027 16,033 225,378
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Net change in unrealized appreciation
(depreciation) during the year 994,129 5,010 111,462 (115,319) 8,418 70,860
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Net realized and unrealized
gain (loss) on investments 1,188,153 4,423 127,589 (33,619) 9,883 99,701
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Net increase in net assets
resulting from operations $ 1,885,421 $ 32,002 $ 357,935 $ 235,661 $ 42,755 $ 197,973
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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE
SEPARATE ACCOUNT VUL
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
COMMON MONEY AGGRESSIVE HIGH
STOCK MARKET BALANCED STOCK YIELD GLOBAL
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
FOR THE YEAR ENDED DECEMBER 31, 1997 --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 697,268 $ 27,579 $ 230,346 $ 269,280 $ 32,872 $ 98,272
Net realized gain (loss)
on investments 194,024 (587) 16,127 81,700 1,465 28,841
Net change in unrealized appreciation
(depreciation) on investments 994,129 5,010 111,462 (115,319) 8,418 70,860
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Net increase in net assets
from operations 1,885,421 32,002 357,935 235,661 42,755 197,973
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 663,142 82,823 369,804 385,137 27,060 126,875
Transfers for policy related
transactions (864,643) (69,454) (363,569) (379,212) (18,151) (224,769)
Transfers between Separate
Account VUL's Divisions, net 50,634 (75,902) (63,152) 79,780 25,832 3,884
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Net increase (decrease) in net assets
from policy related transactions (150,867) (62,533) (56,917) 85,705 34,741 (94,010)
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Increase (decrease) in net assets 1,734,554 (30,531) 301,018 321,366 77,496 103,963
Net assets, beginning of year 7,450,787 661,930 2,776,143 2,988,482 209,222 1,168,204
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Net assets, end of year $ 9,185,341 $ 631,399 $ 3,077,161 $ 3,309,848 $ 286,718 $ 1,272,167
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<CAPTION>
COMMON MONEY AGGRESSIVE HIGH
STOCK MARKET BALANCED STOCK YIELD GLOBAL
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
FOR THE YEAR ENDED DECEMBER 31, 1996 --------------------------------------------------------------------------------------
<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)
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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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</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997
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. New Policies are no longer being issued.
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
and expense risk charges 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.
4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
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); and 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 $1,036,000 and
$983,000 in 1997 and 1996, respectively.
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.
5
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
FOR THE YEAR ENDED DECEMBER 31, 1997
<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>
Unit value, beginning of year $ 252.88 $ 134.27 $ 183.79 $ 326.62 $ 227.84 $ 217.07
---------------------------------------------------------------------------------------
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Unit value, end of year $ 314.47 $ 140.51 $ 206.71 $ 349.91 $ 269.33 $ 237.70
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Number of units outstanding, 29,464 4,930 15,105 9,150 918 5,381
beginning of year
Net contract purchase payments 2,366 589 1,900 1,092 109 548
Transfers for policy related (2,813) (477) (1,766) (1,029) (65) (581)
transactions
Transfers between Separate
Account VUL's Divisions, Net 192 (548) (353) 246 103 4
---------------------------------------------------------------------------------------
Number of units outstanding, end of year 29,209 4,494 14,886 9,459 1,065 5,352
---------------------------------------------------------------------------------------
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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.
6
<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, 1997, 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 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, 1997 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, 1997, and the
results of their operations for the year then ended, and the changes in net
assets for each of the two years then ended in conformity with generally
accepted accounting principles.
/s/ Ernst & Young LLP
Chicago, Illinois
January 30, 1998
7
