<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
JUNE 30, 1996
SEMI-ANNUAL REPORT
SEPARATE ACCOUNT VUL-2 FUNDING
EQUIBUILDER II-TM- AND EQUIBUILDER III-TM- FLEXIBLE PREMIUM VARIABLE
LIFE INSURANCE POLICIES
Principal office located at:
#1 Franklin Square
Springfield, Illinois 62713
SEMI-ANNUAL REPORT DATED JUNE 30, 1996
- --------------------------------------------------------------------------------
JUNE 30, 1996
SEMI-ANNUAL REPORTS
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
Principal office located at:
82 Devonshire Street
Boston, Massachusetts 02109
SEMI-ANNUAL REPORTS DATED JUNE 30, 1996
- --------------------------------------------------------------------------------
The Semi-Annual Report of Separate Account VUL-2 is prepared and provided by The
American Franklin Life Insurance Company. The Semi-Annual Reports of the
Variable Insurance Products Fund and the Variable Insurance Products
Fund II are prepared by Fidelity Investments.
- --------------------------------------------------------------------------------
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-2
STATEMENT OF NET ASSETS
JUNE 30, 1996
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Investments in Variable Insurance Products Fund and
Variable Insurance Products Fund II, at fair value:
(Cost: Money Market Division-$2,393,099
Equity-Income Division-$14,954,245
Growth Division-$22,156,913
Overseas Division-$5,506,014
High Income Division-$699,540
Investment Grade Bond Division-$1,485,591
Asset Manager Division-$15,716,376
Index 500 Division-$2,824,248
Asset Manager: Growth Division-$523,623
Contrafund Division-$2,178,167) $2,361,165 $17,334,160 $27,096,114 $6,065,042
-----------------------------------------------------------
Due (to) from General Account (23,699) (28,250) (38,528) (16,034)
-----------------------------------------------------------
NET ASSETS (NOTE 1) $2,337,466 $17,305,910 $27,057,586 $6,049,008
-----------------------------------------------------------
-----------------------------------------------------------
Unit Value, at June 30, 1996 (Note 4) $ 118.02 $ 217.16 $ 214.26 $ 146.96
-----------------------------------------------------------
-----------------------------------------------------------
Units Outstanding, at June 30, 1996 19,806 79,692 126,281 41,162
-----------------------------------------------------------
-----------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
1
<PAGE>
<CAPTION>
HIGH INVESTMENT ASSET INDEX ASSET CONTRA-
INCOME GRADE BOND MANAGER 500 MANAGER: FUND
DIVISION DIVISION DIVISION DIVISION GROWTH DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Investments in Variable Insurance Products Fund and
Variable Insurance Products Fund II, at fair value:
(Cost: Money Market Division-$2,393,099
Equity-Income Division-$14,954,245
Growth Division-$22,156,913
Overseas Division-$5,506,014
High Income Division-$699,540
Investment Grade Bond Division-$1,485,591
Asset Manager Division-$15,716,376
Index 500 Division-$2,824,248
Asset Manager: Growth Division-$523,623
Contrafund Division-$2,178,167) $719,449 $1,498,904 $18,001,582 $3,044,806 $542,188 $2,292,430
-------------------------------------------------------------------------------
Due (to) from General Account 2,096 (1,057) (6,090) (1,709) (75) 819
-------------------------------------------------------------------------------
NET ASSETS (NOTE 1) $721,545 $1,497,847 $17,995,492 $3,043,097 $542,113 $2,293,249
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Unit Value, at June 30, 1996 (Note 4) $ 134.30 $ 129.56 $ 157.41 $ 157.18 $ 124.07 $ 129.40
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
Units Outstanding, at June 30, 1996 5,373 11,561 114,323 19,360 4,370 17,722
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
MONEY EQUITY-
MARKET INCOME GROWTH OVERSEAS
DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------
<S> <C> <C> <C> <C>
INVESTMENT INCOME
Income (Note 2)
Dividends from Variable Insurance Products Fund $53,894 $620,081 $1,499,258 $124,922
and Variable Insurance Products Fund II
Expenses (Note 3)
Mortality and expense risk charge 7,454 54,145 84,737 20,045
-----------------------------------------------------------
Net Investment Income 46,440 565,936 1,414,521 104,877
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 2)
Net realized gain 0 53,330 56,825 11,785
Net unrealized appreciation (depreciation)
Beginning of Period (16,651) 2,184,503 4,076,355 311,707
End of period (31,934) 2,379,914 4,939,201 559,029
-----------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period (15,283) 195,411 862,846 247,322
-----------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on
Investments (15,283) 248,741 919,671 259,107
-----------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
From Operations $31,157 $814,677 $2,334,192 $363,984
-----------------------------------------------------------
-----------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
<CAPTION>
HIGH INVESTMENT ASSET INDEX ASSET CONTRA-
INCOME GRADE BOND MANAGER 500 MANAGER: FUND
DIVISION DIVISION DIVISION DIVISION GROWTH DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INVESTMENT INCOME
Income (Note 2)
Dividends from Variable Insurance Products Fund $44,629 $67,329 $57,978 $54,322 $10,025 $10,080
and Variable Insurance Products Fund II
Expenses (Note 3)
Mortality and expense risk charge 2,091 5,142 63,923 5,897 2,632 3,560
-----------------------------------------------------------------------------
Net Investment Income 42,538 62,187 (5,945) 48,425 7,393 6,520
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 2)
Net realized gain 3,040 1,837 108,329 7,117 7,708 465
Net unrealized appreciation (depreciation)
Beginning of Period 34,035 97,417 1,504,898 108,871 (5,088) 3,252
End of period 19,909 13,315 2,285,206 220,558 18,565 114,262
-----------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period (14,126) (84,102) 780,308 111,687 23,653 111,010
-----------------------------------------------------------------------------
Net Realized and Unrealized Gain (Loss) on
Investments (11,086) (82,265) 888,637 118,804 31,361 111,475
-----------------------------------------------------------------------------
Net Increase (Decrease) in Net Assets Resulting
From Operations $31,452 $(20,078) $882,692 $167,229 $38,754 $117,995
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENTS OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
MONEY EQUITY
MARKET INCOME GROWTH OVERSEAS
FOR THE PERIOD ENDED JUNE 30, 1996 DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 46,440 $ 565,936 $ 1,414,521 $ 104,877
Net realized gain on investments -0- 53,330 56,825 11,785
Net change in unrealized appreciation
(depreciation) on investments (15,283) 195,411 862,846 247,322
----------------------------------------------------
Net increase in net assets from operations 31,157 814,677 2,334,192 363,984
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 6,116,471 3,652,924 5,160,608 1,184,000
Transfers for policy related transactions (350,103) (1,554,682) (2,249,547) (504,256)
Transfers between Separate Account VUL-2's
Divisions, net (5,405,287) 1,665,729 1,826,949 88,686
----------------------------------------------------
Net increase in net assets from policy related
transactions 361,081 3,763,971 4,738,010 768,430
----------------------------------------------------
Increase in Net Assets 392,238 4,578,648 7,072,202 1,132,414
Net Assets, Beginning of Period 1,945,228 12,727,262 19,985,384 4,916,594
----------------------------------------------------
Net Assets, End of Period $2,337,466 $17,305,910 $27,057,586 $6,049,008
----------------------------------------------------
----------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 66,629 $ 440,894 $ (60,677) $ (7,823)
Net realized gain (loss) on investments - 40,704 151,058 66,933
Net change in unrealized appreciation
(depreciation) on investments (16,634) 2,014,215 3,739,989 333,802
----------------------------------------------------
Net increase (decrease) in net assets from
operations 49,995 2,495,813 3,830,370 392,912
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 9,553,276 4,440,835 6,313,439 2,213,517
Transfers for policy related transactions (1,532,534) (1,949,178) (3,063,501) (971,018)
Transfers between Separate Account VUL-2's
Divisions, net (7,343,769) 2,161,554 3,028,169 194,533
----------------------------------------------------
Net increase in net assets from policy related
transactions 676,973 4,653,211 6,278,107 1,437,032
----------------------------------------------------
Increase in Net Assets 726,968 7,149,024 10,108,477 1,829,944
Net Assets, Beginning of Year 1,218,260 5,578,238 9,876,907 3,086,650
----------------------------------------------------
Net Assets, End of Year $1,945,228 $12,727,262 $19,985,384 $4,916,594
----------------------------------------------------
----------------------------------------------------
*For the period from May 1, 1995 (date of inception) to December 31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
<CAPTION>
HIGH INVESTMENT ASSET INDEX ASSET CONTRA-
INCOME GRADE BOND MANAGER 500 MANAGER: FUND
FOR THE PERIOD ENDED JUNE 30, 1996 DIVISION DIVISION DIVISION DIVISION GROWTH DIVISION DIVISION
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 42,538 $ 62,187 $ (5,945) $ 48,425 $ 7,393 $ 6,520
Net realized gain on investments 3,040 1,837 108,329 7,117 7,708 465
Net change in unrealized appreciation
(depreciation) on investments (14,126) (84,102) 780,308 111,687 23,653 111,010
-------------------------------------------------------------------------------
Net increase in net assets from operations 31,452 (20,078) 882,692 167,229 38,754 117,995
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 218,054 267,523 2,756,529 937,648 173,885 832,679
Transfers for policy related transactions (67,390) (150,182) (1,409,314) (255,798) (52,002) (198,361)
Transfers between Separate Account VUL-2's
Divisions, net 99,427 77,970 (333,061) 1,141,309 140,730 690,573
-------------------------------------------------------------------------------
Net increase in net assets from policy related
transactions 250,091 195,311 1,014,154 1,823,159 262,613 1,324,891
-------------------------------------------------------------------------------
Increase in Net Assets 281,543 175,233 1,896,846 1,990,388 301,367 1,442,886
Net Assets, Beginning of Period 440,002 1,322,614 16,098,646 1,052,709 240,746 850,363
-------------------------------------------------------------------------------
Net Assets, End of Period $ 721,545 $1,497,847 $17,995,492 $3,043,097 $542,113 $2,293,249
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1995
CHANGE IN NET ASSETS
FROM OPERATIONS: * *
Net investment income $ 9,157 $ 22,030 $ 116,822 $ (49) $ 9,993 $ 9,511
Net realized gain (loss) on investments 1,720 6,701 46,591 5,233 850 3,999
Net change in unrealized appreciation
(depreciation) on investments 35,612 127,405 1,835,083 108,269 (5,088) 3,252
-------------------------------------------------------------------------------
Net increase (decrease) in net assets from 46,489 156,136 1,998,496 113,453 5,755 16,762
operations
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 147,592 357,309 5,308,184 387,804 91,291 362,528
Transfers for policy related transactions (67,407) (189,702) (2,682,494) (102,537) (10,306) (51,008)
Transfers between Separate Account VUL-2's
Divisions, net 175,345 135,745 1,269,576 525,783 154,006 522,081
-------------------------------------------------------------------------------
Net increase in net assets from policy related
transactions 255,530 303,352 3,895,266 811,050 234,991 833,601
-------------------------------------------------------------------------------
Increase in Net Assets 302,019 459,488 5,893,762 924,503 240,746 850,363
Net Assets, Beginning of Year 137,983 863,126 10,204,884 128,206 - -
-------------------------------------------------------------------------------
Net Assets, End of Year $ 440,002 $1,322,614 $16,098,646 $1,052,709 $240,746 $ 850,363
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
</TABLE>
*For the period from May 1, 1995 (date of inception) to December 31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
6
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 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-2 (Account) as a unit investment
trust registered under the Investment Company Act of 1940. The Account,
which consists of ten investment divisions, was established on April 9,
1991 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 two mutual funds, sponsored by Fidelity
Investments, Variable Insurance Products Fund and Variable Insurance
Products Fund II (Funds). The Money Market, Equity-Income, Growth,
Overseas, and High Income Divisions of the Account are invested in shares
of a corresponding Portfolio of Variable Insurance Products Fund, while the
Investment Grade Bond, Asset Manager, Index 500, Asset Manager: Growth and
Contrafund Divisions of the Account are invested in shares of a
corresponding Portfolio of Variable Insurance Products Fund II. The
Account's financial statements should be read in conjunction with the
financial statements of the Funds. The Account commenced operations on
September 30, 1991.
The Account was established by American Franklin to support the operations
of American Franklin's EquiBuilder II-TM- Flexible Premium Variable Life
Insurance Policies (EquiBuilder II Policies). The Account also supports the
operations of American Franklin's EquiBuilder III-TM- Flexible Premium
Variable Life Insurance Policies (EquiBuilder III Policies) (the
EquiBuilder II Policies and the EquiBuilder III Policies are referred to
collectively as the Policies). At June 30, 1996, American Franklin had
obtained the necessary state insurance department approvals for the sale of
the EquiBuilder III Policies in 44 states.
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 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 Funds are carried at fair value. Investments
in shares of the Funds are valued at the net asset values of the respective
Portfolios of the Funds 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 Funds' 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.
7
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 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. With respect to the EquiBuilder III Policies, American Franklin
makes a sales expense deduction equal to 5% of each premium paid during any
policy year up to a "target" premium, which is based on the annual premium
for a fixed whole life insurance policy on the life of the insured person
(no sales expense deduction is made for premiums in excess of the target
premium paid during that policy year). 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 policyholder. 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 $5,401,800 for
the six months ended June 30, 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. 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 with respect to the EquiBuilder II
Policies 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, and the surrender charge with respect to
the EquiBuilder III Policies will equal 25% 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.
8
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 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:
FOR THE SIX MONTHS ENDED JUNE 30, 1996
<TABLE>
<CAPTION>
MONEY EQUITY- HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period $115.39 $204.85 $193.51 $137.53 $125.33
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unit value, end of period $118.02 $217.16 $214.26 $146.96 $134.30
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of units outstanding,
beginning of period 16,857 62,130 103,278 35,749 3,511
Net contract purchase payments 52,531 17,177 25,044 8,338 1,670
Transfers for policy related
transactions (2,868) (7,423) (11,087) (3,537) (574)
Transfers between Separate Account
VUL-2's Divisions, Net (46,715) 7,808 9,047 612 766
-------------------------------------------------------------------------
Number of units outstanding, end of period 19,805 79,692 126,282 41,162 5,373
-------------------------------------------------------------------------
-------------------------------------------------------------------------
<CAPTION>
INVESTMENT ASSET
GRADE ASSET INDEX MANAGER: CONTRA-
BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period $131.55 $148.96 $142.98 $113.51 $119.19
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Unit value, end of period $129.56 $157.41 $157.18 $124.07 $129.40
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Number of units outstanding,
beginning of period 10,054 108,073 7,362 2,121 7,135
Net contract purchase payments 2,068 18,055 6,206 1,504 6,664
Transfers for policy related transactions (1,156) (9,699) (1,681) (437) (1,620)
Transfers between Separate Account
VUL-2's Divisions, Net 595 (2,106) 7,472 1,181 5,543
-------------------------------------------------------------------------
Number of units outstanding, end of
period 11,561 114,323 19,359 4,369 17,722
-------------------------------------------------------------------------
-------------------------------------------------------------------------
</TABLE>
9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1996
5. REMUNERATION OF MANAGEMENT
The Account 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.
10
