<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
JUNE 30, 1999
SEMI-ANNUAL REPORT
SEPARATE ACCOUNT VUL FUNDING
EQUIBUILDER -TM- FLEXIBLE PREMIUM VARIAbLE
LIFE INSURANCE POLICIES
PRINCIPAL OFFICE LOCATED AT:
#1 Franklin Square
Springfield, Illinois 62713
SEMI-ANNUAL REPORT DATED JUNE 30, 1999
- -------------------------------------------------------------------------------
JUNE 30, 1999
SEMI-ANNUAL REPORT
THE HUDSON RIVER TRUST
PRINCIPAL OFFICE LOCATED AT:
1755 Broadway
New York, New York 10019
SEMI-ANNUAL REPORT DATED JUNE 30, 1999
- -------------------------------------------------------------------------------
The Semi-Annual Report of Separate Account VUL is prepared and provided by The
American Franklin Life Insurance Company. The Semi-Annual Report of The Hudson
River Trust is prepared by The Hudson River Trust.
- -------------------------------------------------------------------------------
This Semi-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
JUNE 30, 1999
(UNAUDITED)
<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>
Investments in The Hudson River
Trust, at fair value
(cost: see below) $ 12,755,814 $ 712,158 $ 3,547,602 $ 3,368,425 $ 256,409 $ 1,569,725
Due from (to) general account 55 (28) 76 487 25 (25)
------------------------------------------------------------------------------------------------
NET ASSETS $ 12,755,869 $ 712,130 $ 3,547,678 $ 3,368,912 $ 256,434 $ 1,569,700
================================================================================================
Unit value $ 458.65 $ 149.74 $ 256.88 $ 396.55 $ 248.13 $ 320.82
================================================================================================
Units outstanding 27,812 4,756 13,811 8,496 1,033 4,893
================================================================================================
Cost of investments $ 9,767,984 $ 695,342 $ 3,744,504 $ 3,563,119 $ 312,562 $ 1,199,989
================================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999
(UNAUDITED)
<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 $1,209,543 $ 8,571 $ 255,581 $ 71,328 $ 12,615 $ 80,832
Expenses
Mortality and expense risk charge 45,917 3,770 13,925 12,543 910 5,511
--------------------------------------------------------------------------------
Net investment income 1,163,626 4,801 241,656 58,785 11,705 75,321
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) 812,078 2,598 242,028 37,566 (1,099) 31,266
Net unrealized appreciation (depreciation):
Beginning of period 3,643,860 (1,153) 99,939 (539,848) (37,274) 328,405
End of period 2,987,830 16,816 (196,902) (194,694) (56,153) 369,736
--------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period (656,030) 17,969 (296,841) 345,154 (18,879) 41,331
--------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments 156,048 20,567 (54,813) 382,720 (19,978) 72,597
--------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $1,319,674 $ 25,368 $ 186,843 $ 441,505 $ (8,273) $ 147,918
================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
COMMON MONEY AGGRESSIVE HIGH
SIX MONTHS ENDED JUNE 30, 1999 STOCK MARKET BALANCED STOCK YIELD GLOBAL
(UNAUDITED) DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 1,163,626 $ 4,801 $ 241,656 $ 58,785 $ 11,705 $ 75,321
Net realized gain (loss)
on investments 812,078 2,598 242,028 37,566 (1,099) 31,266
Net change in unrealized appreciation
(depreciation) on investments (656,030) 17,969 (296,841) 345,154 (18,879) 41,331
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations 1,319,674 25,368 186,843 441,505 (8,273) 147,918
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 351,593 10,729 198,683 162,922 9,184 52,662
Withdrawals (653,032) (284,342) (408,393) (313,499) (13,018) (81,533)
Transfers between Separate
Account VUL Divisions, net (166,193) 269,482 43,023 (165,786) (6,659) 9,454
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from policy related transactions (467,632) (4,131) (166,687) (316,363) (10,493) (19,417)
-----------------------------------------------------------------------------------
Increase (decrease) in net assets 852,042 21,237 20,156 125,142 (18,766) 128,501
Net assets, beginning of period 11,903,827 690,893 3,527,522 3,243,770 275,200 1,441,199
-----------------------------------------------------------------------------------
Net assets, end of period $ 12,755,869 $ 712,130 $ 3,547,678 $ 3,368,912 $ 256,434 $1,569,700
===================================================================================
YEAR ENDED DECEMBER 31, 1998
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 929,843 $ 22,662 $ 280,741 $ 369,210 $ 39,170 $ 113,716
Net realized gain (loss)
on investments 830,487 (8,208) 381,612 340,543 (3,090) 46,482
Net change in unrealized appreciation
(depreciation) on investments 1,025,641 (2,514) (136,844) (746,875) (53,307) 103,027
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations 2,785,971 11,940 525,509 (37,122) (17,227) 263,225
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 600,585 48,759 285,576 327,394 31,481 127,946
Withdrawals (778,678) (49,300) (371,296) (334,602) (24,258) (105,617)
Transfers between Separate
Account VUL Divisions, net 110,608 48,095 10,572 (21,748) (1,514) (116,522)
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from policy related transactions (67,485) 47,554 (75,148) (28,956) 5,709 (94,193)
-----------------------------------------------------------------------------------
Increase (decrease) in net assets 2,718,486 59,494 450,361 (66,078) (11,518) 169,032
Net assets, beginning of year 9,185,341 631,399 3,077,161 3,309,848 286,718 1,272,167
-----------------------------------------------------------------------------------
Net assets, end of year $ 11,903,827 $ 690,893 $ 3,527,522 $ 3,243,770 $ 275,200 $1,441,199
===================================================================================
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1999
(UNAUDITED)
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 in July 1987
in conformity with Illinois Insurance Law and commenced operations in
January 1990. 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 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 American Franklin business. 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
Investments in shares of the Trust are carried at fair value using 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 calculated 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>
AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
3. POLICY 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 the 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
$594,900 for the six months ended June 30, 1999.
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)
JUNE 30, 1999
(UNAUDITED)
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
SIX MONTHS ENDED JUNE 30, 1999
<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 period $412.53 $146.89 $244.11 $347.58 $255.21 $292.09
=====================================================================================
Unit value, end of period $458.65 $149.74 $256.88 $396.55 $248.13 $320.82
=====================================================================================
Number of units outstanding,
beginning of period 28,856 4,704 14,451 9,332 1,078 4,934
Net contract purchase payments 866 135 799 445 36 173
Withdrawals (1,504) (1,852) (1,611) (835) (54) (245)
Transfers between Separate
Account VUL Divisions, net (406) 1,769 172 (446) (27) 31
-------------------------------------------------------------------------------------
Number of units outstanding,
end of period 27,812 4,756 13,811 8,496 1,033 4,893
=====================================================================================
</TABLE>
5. REMUNERATION OF MANAGEMENT
The Account incurs no liability or expense for payment 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. YEAR 2000
INTERNAL SYSTEMS. American 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 have been
performed by its key business units with centralized oversight. Each
business unit, including American Franklin, has executed a plan to
minimize the risk of a significant negative impact on its operations.
While the specifics of the plans varied, the plans included the following
activities: (1) perform an inventory of American Franklin's information
technology and non-information technology systems; (2) assess which items
in the inventory may expose American Franklin to business interruptions
due to Year 2000 issues; (3) reprogram or replace systems that are not
Year 2000 ready; (4) test systems to
7
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
prove that they will function into the next century as they do currently;
and (5) return the systems to operations.
As of June 30, 1999, these activities had been substantially completed,
making American Franklin's critical systems Year 2000 ready. American
Franklin will continue to test its systems throughout 1999 to maintain
Year 2000 readiness. In addition, American Franklin currently is
developing plans for the century transition, which will restrict systems
modifications from November 1999 through January 2000, create rapid
response teams to address problems, and limit vacations for key technical
personnel.
THIRD PARTY RELATIONSHIPS. American 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) American
Franklin and include organizations with which American 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 American Franklin exercises
less, or no, control over Year 2000 readiness.
American Franklin assessed and mitigated the risks associated with the
potential failure of third parties to achieve Year 2000 readiness.
American Franklin's activities included the following: (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 June 30,
1999, these activities have been substantially completed. Where
necessary, critical third party dependencies have been included in
American Franklin's contingency plans. Due to the various stages of Year
2000 readiness for these critical third party dependencies, American
Franklin's testing activities related to critical third parties will
extend throughout 1999.
CONTINGENCY PLANS. American Franklin has undertaken contingency planning
to reduce the risk of Year 2000-related business failures. The
contingency plans, which address both internal systems and third party
relationships, included the following activities: (1) evaluate the
consequences of failure of critical business processes with significant
exposure to Year 2000 risk; (2) determine the probability of a Year
2000-related failure for those critical processes that have a high
consequence of failure; (3) develop an action plan to complete
contingency plans for critical processes that rank high in consequence
and probability of failure; and (4) complete the applicable contingency
plans. As of June 30, 1999, these activities have been substantially
completed. The contingency plans will continue to be tested and updated
throughout 1999.
RISKS AND UNCERTAINTIES. Based on the Year 2000 readiness of internal
systems, century transition plans, plans to deal with third party
relationships, and contingency plans, American 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 American 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 American Franklin is not able to predict a most reasonably likely
worst case scenario. If Year 2000 readiness is not achieved due to
American Franklin's failure to maintain critical systems as Year 2000
ready, failure of critical third parties to
8
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1999
(UNAUDITED)
achieve Year 2000 readiness on a timely basis, failure of contingency
plans to reduce Year 2000-related business failures, or other unforeseen
circumstances in completing American Franklin's plans, the Year 2000
issues could have a material adverse impact on American Franklin's
operations following the turn of the century.
COSTS. In 1999, American Franklin has incurred and 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 Account.
The cost of activities related to Year 2000 readiness has not had a
material adverse effect on American Franklin's results of operations or
financial condition. In addition, American 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 American Franklin's
normal accounting policies.
9
