<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
DECEMBER 31, 1999
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, 1999
- ------------------------------------------------------------------------------
DECEMBER 31, 1999
ANNUAL REPORT
EQ ADVISORS TRUST
PRINCIPAL OFFICE LOCATED AT:
1755 Broadway
New York, New York 10019
ANNUAL REPORT DATED DECEMBER 31, 1999
- ------------------------------------------------------------------------------
The Annual Report of Separate Account VUL is prepared and provided by The
American Franklin Life Insurance Company. The Annual Report of EQ Advisors Trust
is prepared by EQ Advisors 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, 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>
Investments in EQ Advisors
Trust, at fair value
(cost: see below) $ 13,669,707 $ 507,558 $ 3,819,118 $ 3,385,935 $ 249,350 $ 1,937,862
Due from (to)
general account (89) (90) 67 571 69 349
---------------------------------------------------------------------------------------------
NET ASSETS $ 13,669,618 $ 507,468 $ 3,819,185 $ 3,386,506 $ 249,419 $ 1,938,211
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Unit value $ 503.79 $ 153.03 $ 283.66 $ 415.11 $ 244.12 $ 395.26
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Units outstanding 27,133 3,316 13,464 8,158 1,022 4,904
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
Cost of investments $ 11,996,125 $ 505,066 $ 4,128,268 $ 3,673,606 $ 338,077 $ 1,347,979
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 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>
NET INVESTMENT INCOME
Income
Dividends $ 1,283,924 $ 29,788 $ 356,878 $ 81,588 $ 41,704 $ 82,359
Capital gains distributions 1,837,237 16 356,929 203,845 260 120,954
Expenses
Mortality and expense risk charge 93,234 5,086 27,280 23,779 1,938 12,832
--------------------------------------------------------------------------------------
Net investment income 3,027,927 24,718 686,527 261,654 40,026 190,481
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS
Net realized gain (loss) 1,477,592 9,717 271,401 73,692 (990) 59,530
Net unrealized appreciation
(depreciation):
Beginning of year 3,643,860 (1,153) 99,939 (539,848) (37,274) 328,405
End of year 1,673,582 2,492 (309,150) (287,671) (88,727) 589,883
--------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year (1,970,278) 3,645 (409,089) 252,177 (51,453) 261,478
--------------------------------------------------------------------------------------
Net realized and unrealized
gain (loss) on investments (492,686) 13,362 (137,688) 325,869 (52,443) 321,008
--------------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $ 2,535,241 $ 38,080 $ 548,839 $ 587,523 $ (12,417) $ 511,489
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
</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
STOCK MARKET BALANCED STOCK YIELD GLOBAL
YEAR ENDED DECEMBER 31, 1999 DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 3,027,927 $ 24,718 $ 686,527 $ 261,654 $ 40,026 $ 190,481
Net realized gain (loss)
on investments 1,477,592 9,717 271,401 73,692 (990) 59,530
Net change in unrealized appreciation
(depreciation) on investments (1,970,278) 3,645 (409,089) 252,177 (51,453) 261,478
----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from operations 2,535,241 38,080 548,839 587,523 (12,417) 511,489
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 671,415 19,548 336,986 300,610 22,079 106,726
Withdrawals (1,393,831) (404,288) (630,339) (539,670) (28,783) (170,946)
Transfers between Separate
Account VUL Divisions, net (47,034) 163,235 36,177 (205,727) (6,660) 49,743
----------------------------------------------------------------------------------
Net increase (decrease) in net assets
from policy related transactions (769,450) (221,505) (257,176) (444,787) (13,364) (14,477)
----------------------------------------------------------------------------------
Net increase (decrease) in net assets 1,765,791 (183,425) 291,663 142,736 (25,781) 497,012
Net assets, beginning of year 11,903,827 690,893 3,527,522 3,243,770 275,200 1,441,199
----------------------------------------------------------------------------------
Net assets, end of year $ 13,669,618 $ 507,468 $ 3,819,185 $ 3,386,506 $ 249,419 $1,938,211
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
<S> <C> <C> <C> <C> <C> <C>
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)
----------------------------------------------------------------------------------
Net 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
DECEMBER 31, 1999
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.
Prior to October 1999, the shares were invested in Portfolios of The Hudson
River Trust (HRT). On October 18, 1999, after receipt of Securities and
Exchange Commission approval, new Portfolios of the EQ Advisors Trust
(Trust) were substituted for the HRT Portfolios. At the time of the
substitution, the value of the Account's investments in the new EQ Advisors
Trust Portfolios was the same as immediately before the substitution. 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
5
<PAGE>
AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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.
3. POLICY CHARGES
Certain jurisdictions require deductions from premium payments for premium
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 $1,174,000 and $1,118,000 for the years ended December 31,
1999, and 1998, 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.
6
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
YEAR ENDED DECEMBER 31, 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 year $412.53 $146.89 $244.11 $347.58 $255.21 $292.09
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Unit value, end of year $503.79 $153.03 $283.66 $415.11 $244.12 $395.26
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
Number of units outstanding,
beginning of year 28,856 4,704 14,451 9,332 1,078 4,934
Net contract purchase payments 1,557 193 1,323 810 89 331
Withdrawals (3,123) (2,646) (2,404) (1,441) (118) (512)
Transfers between Separate
Account VUL Divisions, net (157) 1,065 94 (543) (27) 151
------------------------------------------------------------------------------------
Number of units outstanding,
end of year 27,133 3,316 13,464 8,158 1,022 4,904
------------------------------------------------------------------------------------
------------------------------------------------------------------------------------
</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 CONSIDERATIONS (unaudited)
INTERNAL SYSTEMS. American Franklin's ultimate parent, American General
Corporation ("AGC"), has numerous technology and non-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, executed a plan
to minimize the risk of a significant negative impact on its operations.
7
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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 prove that they will function into the next
century; and (5) return the systems to operations. As of December 31, 1999,
these activities had been completed, making American Franklin's critical
systems Year 2000 ready.
American Franklin continued to test its systems throughout 1999 to maintain
Year 2000 readiness. In addition, American Franklin implemented plans for
the century transition. These plans included a freeze on system
modifications from November 1999 through January 2000, the creation of
rapid response teams to address problems and limiting vacations for certain
business and technical personnel. In addition, AGC established Y2K command
centers in Houston and each of its locations across the country. Each
command center monitored all major business processing activities during
the century transition and reported progress to the Houston command center
which coordinated the company's nationwide Year 2000 effort. The command
centers continued to operate 24 hours a day until January 7, 2000.
On January 1, 2000, AGC announced that its Year 2000 command centers
reported that all major technology systems, programs, and applications were
operating smoothly following the transition into the 21st century. As of
February 11, 2000, American Franklin has experienced no interruptions to
normal business operations, including the processing of customer account
data and transactions. American Franklin will continue to monitor its
technology systems and maintain quality customer service throughout the
transition period.
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 such parties' Year 2000 readiness.
American Franklin developed plans to assess and mitigate the risks
associated with the potential failure of third parties to achieve Year 2000
readiness. These plans included 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, and, where feasible,
American Franklin has taken reasonable precautions to protect against the
receipt of non-Year 2000 ready data. Where necessary, critical third party
dependencies have been included in American Franklin's contingency plans.
CONTINGENCY PLANS. American Franklin's contingency planning process was
designed to reduce the risk of Year 2000-related business failures related
to both internal systems and third party relationships. The contingency
plans included the following activities: (1) evaluate the consequences
8
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999
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. The contingency plans were 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, contingency plans and the reports from the AGC command
centers described above, American Franklin believes that American Franklin
will experience at most isolated and minor disruptions of business
processes due to the Year 2000 transition. 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 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. Through December 31, 1999, American Franklin has incurred, and
anticipates that American Franklin will continue to incur, costs relative
to achieving and maintaining Year 2000 readiness. 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.
None of the costs associated with Year 2000 readiness are passed to
divisions of the Account.
9
<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, 1999, 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 auditing standards generally accepted
in the United States. 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, 1999 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, 1999, 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 accounting
principles generally accepted in the United States.
/s/ Ernst & Young LLP
Chicago, Illinois
February 11, 2000
10
