<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
DECEMBER 31, 1996
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
Annual Report Dated December 31, 1996
- ------------------------------------------------------------------------------
DECEMBER 31, 1996
ANNUAL REPORT
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
PRINCIPAL OFFICE LOCATED AT:
82 Devonshire Street
Boston, Massachusetts 02109
Annual Report Dated December 31, 1996
- ------------------------------------------------------------------------------
The Annual Report of Separate Account VUL-2 is prepared and provided
by The American Franklin Life Insurance Company. The Annual Reports of
the Variable Insurance Products Fund and the Variable Insurance Products
Fund II are prepared by Fidelity Investments.
- ------------------------------------------------------------------------------
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-2
STATEMENT OF NET ASSETS
DECEMBER 31, 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-$3,168,568
Equity-Income Division-$19,620,876
Growth Division-$28,191,058
Overseas Division-$5,971,802
High Income Division-$1,158,220
Investment Grade Bond Division-$1,600,173
Asset Manager Division-$17,686,621
Index 500 Division-$5,630,711
Asset Manager: Growth Division-$1,223,056
Contrafund Division-$4,398,939) $3,160,222 $23,909,248 $34,557,566 $6,758,747
-----------------------------------------------------
Due (to) from General Account (4,397) (83,398) (89,960) (16,091)
-----------------------------------------------------
NET ASSETS (NOTE 1) $3,155,825 $23,825,850 $34,467,606 $6,742,656
-----------------------------------------------------
-----------------------------------------------------
Unit Value, at December 31, 1996 (Note 4) $ 120.68 $ 236.34 $ 223.47 $ 152.96
-----------------------------------------------------
-----------------------------------------------------
Units Outstanding, at December 31, 1996 26,149 100,813 154,236 44,082
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
1
<PAGE>
<TABLE>
<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>
$1,231,360 $1,690,668 $20,618,615 $6,493,419 $1,301,826 $4,982,856
- --------------------------------------------------------------------------------------------------------------
(2,579) 2,595 (10,236) (50,458) (3,795) (12,799)
- --------------------------------------------------------------------------------------------------------------
$1,228,781 $1,693,263 $20,608,379 $6,442,961 $1,298,031 $4,970,057
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
$ 141.63 $ 135.81 $ 171.77 $ 178.33 $ 137.89 $ 145.66
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
8,676 12,468 119,978 36,130 9,413 34,121
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 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
and Variable Insurance Products Fund II $106,308 $ 620,081 $1,499,258 $124,922
Expenses (Note 3)
Mortality and expense risk charge 16,302 125,434 193,522 43,059
-----------------------------------------------------
Net Investment Income 90,006 494,647 1,305,736 81,863
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (NOTE 2)
Net realized gain - 119,363 217,472 72,428
Net unrealized appreciation (depreciation)
Beginning of year (16,651) 2,184,503 4,076,355 311,707
End of year (8,346) 4,288,372 6,366,508 786,945
-----------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the year 8,305 2,103,869 2,290,153 475,238
-----------------------------------------------------
Net Realized and Unrealized Gain (Loss) on Investments 8,305 2,223,232 2,507,625 547,666
-----------------------------------------------------
Net Increase in Net Assets Resulting From Operations $ 98,311 $2,717,879 $3,813,361 $629,529
-----------------------------------------------------
-----------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
3
<PAGE>
<TABLE>
<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>
$44,629 $ 67,329 $ 1,083,783 $ 54,322 $ 60,282 $10,025
5,331 10,936 133,141 20,338 4,120 16,235
- --------------------------------------------------------------------------------------------------------------
39,298 56,393 950,642 33,984 56,162 (6,210)
8,967 3,089 212,679 55,003 3,633 14,914
34,035 97,417 1,504,898 108,871 (5,088) 3,252
73,140 90,495 2,931,994 862,708 78,770 583,917
- --------------------------------------------------------------------------------------------------------------
39,105 (6,922) 1,427,096 753,837 83,858 580,665
- --------------------------------------------------------------------------------------------------------------
48,072 (3,833) 1,639,775 808,840 87,491 595,579
- --------------------------------------------------------------------------------------------------------------
$87,370 $ 52,560 $ 2,590,417 $ 842,824 $ 143,653 $589,369
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
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 YEAR ENDED DECEMBER 31, 1996 DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------
<S> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 90,006 $ 494,647 $ 1,305,736 $ 81,863
Net realized gain on investments - 119,363 217,472 72,428
Net change in unrealized appreciation
(depreciation) on investments 8,305 2,103,869 2,290,153 475,238
-------------------------------------------------------
Net increase in net assets from operations 98,311 2,717,879 3,813,361 629,529
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 14,105,404 8,358,063 11,727,262 2,440,157
Transfers for policy related transactions (745,614) (3,518,149) (5,082,906) (1,085,007)
Transfers between Separate Account VUL-2's
Divisions, net (12,247,504) 3,540,795 4,024,505 (158,617)
-------------------------------------------------------
Net increase in net assets from policy
related transactions 1,112,286 8,380,709 10,668,861 1,196,533
-------------------------------------------------------
Increase in Net Assets 1,210,597 11,098,588 14,482,222 1,826,062
Net Assets, Beginning of Year 1,945,228 12,727,262 19,985,384 4,916,594
-------------------------------------------------------
Net Assets, End of Year $3,155,825 $23,825,850 $34,467,606 $6,742,656
-------------------------------------------------------
-------------------------------------------------------
MONEY EQUITY
MARKET INCOME GROWTH OVERSEAS
FOR THE YEAR ENDED DECEMBER 31, 1995 DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 66,629 $ 440,894 $ (60,677) $ (7,823)
Net realized gain 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 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
-------------------------------------------------------
-------------------------------------------------------
</TABLE>
*For the period from May 1, 1995 (date of inception) to December 31, 1995.
SEE NOTES TO FINANCIAL STATEMENTS.
5
<PAGE>
<TABLE>
<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>
$ 39,298 $ 56,393 $ 950,642 $ 33,984 $ 56,162 $ (6,210)
8,967 3,089 212,679 55,003 3,633 14,914
39,105 (6,922) 1,427,096 753,837 83,858 580,665
- --------------------------------------------------------------------------------------------------------------
87,370 52,560 2,590,417 842,824 143,653 589,369
533,704 486,742 5,498,237 2,673,909 654,319 2,330,711
(192,712) (275,951) (3,080,444) (790,840) (178,249) (624,350)
360,417 107,298 (498,477) 2,664,359 437,562 1,823,964
- --------------------------------------------------------------------------------------------------------------
701,409 318,089 1,919,316 4,547,428 913,632 3,530,325
- --------------------------------------------------------------------------------------------------------------
788,779 370,649 4,509,733 5,390,252 1,057,285 4,119,694
440,002 1,322,614 16,098,646 1,052,709 240,746 850,363
- --------------------------------------------------------------------------------------------------------------
$1,228,781 $1,693,263 $20,608,379 $6,442,961 $1,298,031 $4,970,057
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
HIGH INVESTMENT ASSET INDEX ASSET CONTRA-
INCOME GRADE BOND MANAGER 500 MANAGER: FUND
DIVISION DIVISION DIVISION DIVISION GROWTH DIVISION* DIVISION*
- --------------------------------------------------------------------------------------------------------------
$ 9,157 $ 22,030 $ 116,822 $ (49) $ 9,993 $ 9,511
1,720 6,701 46,591 5,233 850 3,999
35,612 127,405 1,835,083 108,269 (5,088) 3,252
- --------------------------------------------------------------------------------------------------------------
46,489 156,136 1,998,496 113,453 5,755 16,762
147,592 357,309 5,308,184 387,804 91,291 362,528
(67,407) (189,702) (2,682,494) (102,537) (10,306) (51,008)
175,345 135,745 1,269,576 525,783 154,006 522,081
- --------------------------------------------------------------------------------------------------------------
255,530 303,352 3,895,266 811,050 234,991 833,601
- --------------------------------------------------------------------------------------------------------------
302,019 459,488 5,893,762 924,503 240,746 850,363
137,983 863,126 10,204,884 128,206 - -
- --------------------------------------------------------------------------------------------------------------
$ 440,002 $1,322,614 $16,098,646 $1,052,709 $ 240,746 $ 850,363
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
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-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).
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
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 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)
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. 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); 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 $12,166,000 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. 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)
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:
FOR THE YEAR ENDED DECEMBER 31, 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 year $ 115.39 $ 204.85 $ 193.51 $ 137.53 $ 125.33
-------------------------------------------------------------------
-------------------------------------------------------------------
Unit value, end of year $ 120.68 $ 236.34 $ 223.47 $ 152.96 $ 141.63
-------------------------------------------------------------------
-------------------------------------------------------------------
Number of units outstanding,
beginning of year 16,857 62,130 103,278 35,749 3,511
Net contract purchase payments 119,189 38,276 55,708 16,835 3,958
Transfers for policy related
transactions (6,315) (15,932) (23,903) (7,415) (1,439)
Transfers between Separate Account
VUL-2's Divisions, Net (103,582) 16,339 19,153 (1,087) 2,646
-------------------------------------------------------------------
Number of units outstanding, end of year 26,149 100,813 154,236 44,082 8,676
-------------------------------------------------------------------
-------------------------------------------------------------------
INVESTMENT ASSET
GRADE ASSET INDEX MANAGER: CONTRA-
BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION
-------------------------------------------------------------------
Unit value, beginning of year $ 131.55 $ 148.96 $ 142.98 $ 113.51 $ 119.19
-------------------------------------------------------------------
-------------------------------------------------------------------
Unit value, end of year $ 135.81 $ 171.77 $ 178.33 $ 137.89 $ 145.66
-------------------------------------------------------------------
-------------------------------------------------------------------
Number of units outstanding,
beginning of year 10,054 108,073 7,362 2,121 7,135
Net contract purchase payments 3,721 34,874 16,773 5,194 17,720
Transfers for policy related transactions (2,118) (19,791) (4,606) (1,375) (4,631)
Transfers between Separate Account
VUL-2's Divisions, Net 811 (3,178) 16,601 3,473 13,897
-------------------------------------------------------------------
Number of units outstanding, end of year 12,468 119,978 36,130 9,413 34,121
-------------------------------------------------------------------
-------------------------------------------------------------------
</TABLE>
9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES FO FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 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
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The American Franklin Life Insurance Company
Policyowners of Separate Account VUL-2
We have audited the accompanying statement of net assets of Separate Account
VUL-2 (comprising, respectively, the Money Market, Equity-Income, Growth,
Overseas, High Income, Investment Grade Bond, Asset Manager, Index 500, Asset
Manager: Growth and Contrafund 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 the Money Market, Equity-Income, Growth, Overseas,
High Income, Investment Grade Bond, Asset Manager, and Index 500 Divisions
for each of the two years in the period then ended and for the Asset Manager:
Growth and Contrafund Divisions for the year ended December 31, 1996 and for
the period from May 1, 1995 (date of inception) to December 31, 1995. These
financial statements are the responsibility of Separate Account VUL-2
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-2 at December 31, 1996, and the
results of their operations and changes in net assets for the periods
referred to above in conformity with generally accepted accounting principles.
Ernst & Young LLP
Chicago, Illinois
February 7, 1997
11
