<PAGE>
- --------------------------------------------------------------------------------
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
JUNE 30, 1998
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, 1998
- --------------------------------------------------------------------------------
JUNE 30, 1998
SEMI-ANNUAL REPORTS
VARIABLE INSURANCE PRODUCTS FUND
VARIABLE INSURANCE PRODUCTS FUND II
- --------------------------------------------------------------------------------
PRINCIPAL OFFICE LOCATED AT:
82 Devonshire Street
Boston, Massachusetts 02109
- --------------------------------------------------------------------------------
MFS VARIABLE INSURANCE TRUST
- --------------------------------------------------------------------------------
PRINCIPAL OFFICE LOCATED AT:
500 Boylston Street
Boston, Massachusetts 02116
SEMI-ANNUAL REPORTS DATED JUNE 30, 1998
- --------------------------------------------------------------------------------
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. The Semi-Annual Report of MFS Variable
Insurance Trust is prepared by MFS Investment Management.
- --------------------------------------------------------------------------------
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, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
----------------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS - Investments in Funds at fair $ 3,164,164 $ 49,996,424 $ 67,309,719 $ 11,093,579 $ 2,926,812
value:
(cost: see below)
LIABILITIES - Due from (to) general
account (45,208) (213,674) (753,145) (111,493) 1,593
----------------------------------------------------------------------------------------
NET ASSETS $ 3,118,956 $ 49,782,750 $ 66,556,574 $ 10,982,086 $ 2,928,405
----------------------------------------------------------------------------------------
Unit value, at June 30, 1998 $ 129.28 $ 326.23 $ 320.04 $ 195.21 172.70
----------------------------------------------------------------------------------------
Units outstanding, at June 30, 1998 24,126 152,601 207,963 56,258 16,957
----------------------------------------------------------------------------------------
Cost of Investments $ 3,147,198 $ 39,547,790 $ 51,456,996 $ 9,517,161 $ 2,887,167
----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
1
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
----------------------------------------------------------------------------------------
VIPII
VIPII VIPII VIPII ASSET VIPII
INVESTMENT ASSET INDEX MANAGER: CONTRA-
GRADE BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS - Investments in Funds
at fair value: $ 2,248,590 $ 30,053,174 $ 25,474,999 $ 6,072,760 $ 19,606,492
(cost: see below)
LIABILITIES - Due from (to)
general account (9,643) (184,772) (111,420) (38,801) (145,048)
----------------------------------------------------------------------------------------
NET ASSETS $ 2,238,947 $ 29,868,402 $ 25,363,579 $ 6,033,959 $ 19,461,444
----------------------------------------------------------------------------------------
Unit value, at June 30, 1998 $ 151.41 $ 220.82 $ 268.95 $ 186.13 $ 205.19
----------------------------------------------------------------------------------------
Units outstanding, at June 30, 1998 14,787 135,262 94,306 32,418 94,847
----------------------------------------------------------------------------------------
Cost of Investments $ 2,164,990 $ 26,642,227 $ 19,810,840 $ 5,497,426 $ 15,819,010
----------------------------------------------------------------------------------------
SEE NOTES TO FINANCIAL STATEMENTS
</TABLE>
2
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF NET ASSETS (CONTINUED)
JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
--------------------------------------------------------------------------------------------
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL MFS MFS
GROWTH RESEARCH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ASSETS - Investments in Funds at fair
Value: $ 80,005 $ 60,926 $ 4,108 $ 2,875 $ 16,917 $ 24,981
(cost: see below)
LIABILITIES - Due from (to) general (488) (476) 528 (16) (208) (65)
account
NET ASSETS $ 79,517 $ 60,450 $ 4,636 $ 2,859 $ 16,709 $ 24,916
--------------------------------------------------------------------------------------------
Unit value, at June 30, 1998 $ 103.44 $ 101.20 $ 101.97 $ 100.58 $ 100.63 $ 99.90
--------------------------------------------------------------------------------------------
Units outstanding, at June 30, 1998 $ 769 $ 597 $ 45 $ 28 $ 166 $ 249
--------------------------------------------------------------------------------------------
Cost of Investments $ 77,433 $ 59,294 $ 4,526 $ 2,846 $ 16,389 $ 24,760
--------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
3
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
----------------------------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Dividends $ 55,247 $ 2,655,378 $ 7,473,038 $ 738,344 $ 285,271
Expenses
Mortality and expense risk charge 13,069 188,049 244,370 42,928 10,944
----------------------------------------------------------------------------------------
Net investment income (expense) 42,178 2,467,329 7,228,668 695,416 274,327
NET REALIZED AND UNREALIZED GAIN (LOSS)
ON INVESTMENTS
Net realized gain - 190,622 572,440 95,708 27,548
Net unrealized appreciation
(depreciation)
Beginning of period (14,560) 8,098,752 11,954,335 928,734 243,620
End of period 16,966 10,448,634 15,852,723 1,576,418 39,645
----------------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period 31,526 2,349,882 3,898,388 647,684 (203,975)
----------------------------------------------------------------------------------------
Net realized and unrealized gain (loss) on
investments 31,526 2,540,504 4,470,828 743,392 (176,427)
----------------------------------------------------------------------------------------
Net increase in net assets resulting from
operations $ 73,704 $ 5,007,833 $ 11,699,496 $ 1,438,808 $ 97,900
----------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
4
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
----------------------------------------------------------------------
VIPII VIPII
INVESTMENT VIPII VIPII ASSET VIPII
GRADE ASSET INDEX MANAGER: CONTRA-
BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Dividends $ 106,859 $ 3,425,567 $ 730,351 $ 524,070 $ 830,942
Expenses
Mortality and expense risk charge 8,584 118,484 86,228 20,622 66,227
----------------------------------------------------------------------
Net investment income (expense) 98,275 3,307,083 644,123 503,448 764,715
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain 22,538 99,852 338,596 5,265 67,533
Net unrealized appreciation
(depreciation)
Beginning of period 134,208 4,103,907 3,002,532 508,809 1,890,354
End of period 83,600 3,410,947 5,664,159 575,334 3,787,482
----------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period (50,608) (692,960) 2,661,627 66,525 1,897,128
----------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments (28,070) (593,108) 3,000,223 71,790 1,964,661
----------------------------------------------------------------------
Net increase in net assets resulting from
operations $ 70,205 $ 2,713,975 $ 3,644,346 $ 575,238 $ 2,729,376
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
5
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF OPERATIONS (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
-----------------------------------------------------------------------------------
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL MFS MFS
GROWTH RESEARCH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET INVESTMENT INCOME
Income
Dividends $ - $ - $ - $ - $ - $ -
Expenses
Mortality and expense risk charge - - - - - -
-----------------------------------------------------------------------------------
Net investment income (expense) - - - - - -
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS
Net realized gain 216 18 - - - -
Net unrealized appreciation
(depreciation)
Beginning of period - - - - - -
End of period 2,572 1,632 (418) 29 528 221
-----------------------------------------------------------------------------------
Net change in unrealized appreciation
(depreciation) during the period 2,572 1,632 (418) 29 528 221
-----------------------------------------------------------------------------------
Net realized and unrealized gain (loss)
on investments 2,788 1,650 (418) 29 528 221
-----------------------------------------------------------------------------------
Net increase (decrease) in net assets
resulting from operations $ 2,788 $ 1,650 $ (418) $ 29 $ 528 $ 221
-----------------------------------------------------------------------------------
-----------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
6
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF CHANGES IN NET ASSETS
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND
-----------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
SIX MONTHS ENDED JUNE 30, 1998 DIVISION DIVISION DIVISION DIVISION DIVISION
(UNAUDITED) -----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 42,178 $ 2,467,329 $ 7,228,668 $ 695,416 $ 274,327
Net realized gain on investments - 190,622 572,440 95,708 27,548
Net change in unrealized appreciation
(depreciation) on investments 31,526 2,349,882 3,898,388 647,684 (203,975)
-----------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 73,704 5,007,833 11,699,496 1,438,808 97,900
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 8,973,265 7,010,638 8,165,223 1,504,050 559,479
Transfers for policy related transactions (494,546) (4,252,534) (6,491,009) (1,081,062) (250,928)
Transfers between Separate Account
VUL-2 divisions, net (8,543,631) 2,174,119 1,464,825 (93,988) 107,056
-----------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions (64,912) 4,932,223 3,139,039 329,000 415,607
-----------------------------------------------------------------------
Net increase in net assets 8,792 9,940,056 14,838,535 1,767,808 513,507
Net assets, beginning of period 3,110,164 39,842,694 51,718,039 9,214,278 2,414,898
-----------------------------------------------------------------------
Net assets, end of period $ 3,118,956 $ 49,782,750 $ 66,556,574 $ 10,982,086 $ 2,928,405
-----------------------------------------------------------------------
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 158,416 $ 2,318,177 $ 988,029 $ 545,926 $ 96,953
Net realized gain on investments - 241,758 381,365 61,268 16,743
Net change in unrealized appreciation
(depreciation) on investments (6,214) 3,810,380 5,587,827 141,789 170,480
-----------------------------------------------------------------------
Net increase in net assets from operations 152,202 6,370,315 6,957,221 748,983 284,176
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 15,768,314 12,119,616 14,879,501 2,855,311 936,633
Transfers for policy related transactions (1,274,078) (5,951,910) (7,325,640) (1,502,429) (374,337)
Transfers between Separate Account
VUL-2 divisions, net (14,692,099) 3,478,823 2,739,351 369,757 339,645
-----------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions (197,863) 9,646,529 10,293,212 1,722,639 901,941
-----------------------------------------------------------------------
Net Increase in net assets (45,661) 16,016,844 17,250,433 2,471,622 1,186,117
Net assets, beginning of year 3,155,825 23,825,850 34,467,606 6,742,656 1,228,781
-----------------------------------------------------------------------
Net assets, end of year $ 3,110,164 $ 39,842,694 $ 51,718,039 $ 9,214,278 $ 2,414,898
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
7
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
VARIABLE INSURANCE PRODUCTS FUND II
-----------------------------------------------------------------------
VIPII VIPII
INVESTMENT VIPII VIPII ASSET VIPII
GRADE ASSET INDEX MANAGER: CONTRA-
BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ 98,275 $ 3,307,083 $ 644,123 $ 503,448 $ 764,715
Net realized gain on investments 22,538 99,852 338,596 5,265 67,533
Net change in unrealized appreciation
(depreciation) on investments (50,608) (692,960) 2,661,627 66,525 1,897,128
-----------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 70,205 2,713,975 3,644,346 575,238 2,729,376
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 217,062 3,053,524 4,757,487 1,439,852 3,883,539
Transfers for policy related transactions (184,648) (2,387,568) (2,967,237) (662,765) (1,839,872)
Transfers between Separate Account
VUL-2 divisions, net 125,818 6,860 2,578,583 606,073 1,511,949
-----------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 158,232 672,816 4,368,833 1,383,160 3,555,616
-----------------------------------------------------------------------
Net Increase in net assets 228,437 3,386,791 8,013,179 1,958,398 6,284,992
Net assets, beginning of period 2,010,510 26,481,611 17,350,400 4,075,561 13,176,452
-----------------------------------------------------------------------
Net assets, end of period $ 2,238,947 $ 29,868,402 $ 25,363,579 $ 6,033,959 $ 19,461,444
-----------------------------------------------------------------------
-----------------------------------------------------------------------
YEAR ENDED DECEMBER 31, 1997
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income (expense) $ 87,142 $ 2,345,559 $ 165,303 $ (15,396) $ 111,472
Net realized gain on investments 11,679 150,118 203,061 18,249 65,136
Net change in unrealized appreciation
(depreciation) on investments 43,713 1,171,913 2,139,824 430,039 1,306,437
-----------------------------------------------------------------------
Net increase in net assets from operations 142,534 3,667,590 2,508,188 432,892 1,483,045
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 525,371 5,954,601 6,747,739 1,946,149 6,031,891
Transfers for policy related transactions (329,478) (3,858,162) (2,283,537) (707,474) (1,947,161)
Transfers between Separate Account
VUL-2 divisions, net (21,180) 109,203 3,935,049 1,105,963 2,638,620
-----------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 174,713 2,205,642 8,399,251 2,344,638 6,723,350
-----------------------------------------------------------------------
Net increase in net assets 317,247 5,873,232 10,907,439 2,777,530 8,206,395
Net assets, beginning of year 1,693,263 20,608,379 6,442,961 1,298,031 4,970,057
-----------------------------------------------------------------------
Net assets, end of year $ 2,010,510 $ 26,481,611 $ 17,350,400 $ 4,075,561 $ 13,176,452
-----------------------------------------------------------------------
-----------------------------------------------------------------------
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS
8
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
MFS VARIABLE INSURANCE TRUST
---------------------------------------------------------------------------------
MFS
MFS GROWTH MFS
EMERGING MFS WITH TOTAL MFS MFS
GROWTH RESEARCH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
CHANGE IN NET ASSETS
FROM OPERATIONS:
Net investment income $ - $ - $ - $ - $ - $ -
Net realized gain on investments 216 18 - - - -
Net change in unrealized appreciation
(depreciation) on investments 2,572 1,632 (418) 29 528 221
---------------------------------------------------------------------------------
Net increase (decrease) in net assets from
operations 2,788 1,650 (418) 29 528 221
FROM POLICY RELATED TRANSACTIONS:
Net contract purchase payments 30,685 26,112 1,067 2,104 6,281 3,173
Transfers for policy related transactions (1,446) (994) (100) (120) (406) (296)
Transfers between Separate Account
VUL-2 divisions, net 47,490 33,682 4,087 846 10,306 21,818
---------------------------------------------------------------------------------
Net increase (decrease) in net assets from
policy related transactions 76,729 58,800 5,054 2,830 16,181 24,695
---------------------------------------------------------------------------------
Net increase in net assets 79,517 60,450 4,636 2,859 16,709 24,916
Net assets, beginning of period - - - - - -
---------------------------------------------------------------------------------
Net assets, end of period $ 79,517 $ 60,450 $ 4,636 $ 2,859 $ 16,709 $ 24,916
---------------------------------------------------------------------------------
---------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
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 sixteen 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 three mutual funds: Variable Insurance
Products Fund, Variable Insurance Products Fund II and MFS Variable
Insurance Trust (Funds). The VIP Money Market, VIP Equity-Income, VIP
Growth, VIP Overseas, and VIP High Income Divisions of the Account are
invested in shares of a corresponding Portfolio of Variable Insurance
Products Fund; the VIPII Investment Grade Bond, VIPII Asset Manager, VIPII
Index 500, VIPII Asset Manager: Growth and VIPII Contrafund Divisions of
the Account are invested in shares of a corresponding Portfolio of Variable
Insurance Products Fund II; and the MFS Emerging Growth, MFS Research, MFS
Growth With Income, MFS Total Return, MFS Utilities, and MFS Value
Divisions of the Account are invested in shares of a corresponding
Portfolio of MFS Variable Insurance Trust. 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
initial unit value for each investment division was set at $100.
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). American Franklin no longer
offers new 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, 1998, American Franklin had
obtained the necessary state insurance department approvals for the sale of
the EquiBuilder III Policies in 46 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.
10
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS
JUNE 30, 1998
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.
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 $12,007,000 for
the six months ended June 30, 1998.
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.
11
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1998
(UNAUDITED)
VARIABLE INSURANCE PRODUCTS FUND
----------------------------------------------------------------------
VIP VIP VIP
MONEY EQUITY- VIP VIP HIGH
MARKET INCOME GROWTH OVERSEAS INCOME
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Unit value, beginning of period $ 126.37 $ 291.45 $ 264.35 $ 170.08 $ 165.81
----------------------------------------------------------------------
Unit value, end of period $ 129.28 $ 326.23 $ 320.04 $ 195.21 $ 172.70
----------------------------------------------------------------------
Number of units outstanding, 24,611 136,705 195,644 54,175 14,564
beginning of period
Net contract purchase payments 70,288 22,096 27,691 8,034 3,244
Transfers for policy related (3,591) (12,786) (19,640) (5,150) (1,446)
transactions
Transfers between Separate Account
VUL-2 divisions, net (67,182) 6,586 4,268 (801) 595
----------------------------------------------------------------------
Number of units outstanding,
end of period 24,126 152,601 207,963 56,258 16,957
----------------------------------------------------------------------
----------------------------------------------------------------------
VARIABLE INSURANCE PRODUCTS FUND II
----------------------------------------------------------------------
VIPII
VIPII VIPII VIPII ASSET VIPII
INVESTMENT ASSET INDEX MANAGER: CONTRA-
GRADE BOND MANAGER 500 GROWTH FUND
DIVISION DIVISION DIVISION DIVISION DIVISION
----------------------------------------------------------------------
Unit value, beginning of period $ 146.29 $ 200.91 $ 226.02 $ 165.92 $ 174.12
----------------------------------------------------------------------
Unit value, end of period $ 151.41 $ 220.82 $ 268.95 $ 186.13 $ 205.19
----------------------------------------------------------------------
Number of units outstanding, 13,744 131,808 76,766 24,563 75,672
beginning of period
Net contract purchase payments 1,525 14,339 18,924 8,004 20,121
Transfers for policy related
transactions (1,217) (10,419) (11,467) (3,472) (8,798)
Transfers between Separate Account
VUL-2 divisions, net 735 (466) 10,083 3,323 7,852
----------------------------------------------------------------------
Number of units outstanding,
end of period 14,787 135,262 94,306 32,418 94,847
----------------------------------------------------------------------
----------------------------------------------------------------------
</TABLE>
12
<PAGE>
THE AMERICAN FRANKLIN LIFE INSURANCE COMPANY
SEPARATE ACCOUNT VUL-2
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
JUNE 30, 1998
4. SUMMARY OF UNIT VALUES AND CHANGES IN OUTSTANDING UNITS
Unit value information and a summary of changes in outstanding units is
shown below:
<TABLE>
<CAPTION>
PERIOD FROM MAY 1, 1998 (DATE OF INCEPTION) TO JUNE 30, 1998
(UNAUDITED)
MFS VARIABLE INSURANCE TRUST
------------------------------------------------------------------------------------
MFS MFS MFS
EMERGING MFS GROWTH WITH TOTAL MFS MFS
GROWTH RESEARCH INCOME RETURN UTILITIES VALUE
DIVISION DIVISION DIVISION DIVISION DIVISION DIVISION
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Unit value, at inception (May 1, 1998) $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00 $ 100.00
------------------------------------------------------------------------------------
Unit value, end of period $ 103.44 $ 101.20 $ 101.97 $ 100.58 $ 100.63 $ 99.90
------------------------------------------------------------------------------------
Number of units outstanding, - - - - - -
beginning of period
Net contract purchase payments 303 262 11 21 64 32
Transfers for policy related (9) (5) (1) (1) (2) (2)
transactions
Transfers between Separate
Account VUL-2 divisions, net 475 340 35 8 104 219
------------------------------------------------------------------------------------
Number of units outstanding,
end of period 769 597 45 28 166 249
------------------------------------------------------------------------------------
</TABLE>
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.
13
